Edgar Filing: PennyMac Mortgage Investment Trust

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

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

For the transition period from to

Commission file number: 001-34416

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)


Maryland		27-0186273
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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

(818) 224-7442

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

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


Class		Outstanding at August 7, 2014
Common Shares of Beneficial Interest, $0.01 par value		74,139,570

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

June 30, 2014

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION			1
Item 1.	Financial Statements (Unaudited):		1
	Consolidated Balance Sheets		1
	Consolidated Statements of Income		3
	Consolidated Statements of Changes in Shareholders’ Equity		4
	Consolidated Statements of Cash Flows		5
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		58
	Observations on Current Market Opportunities		59
	Results of Operations		61
	Net Investment Income		62
	Expenses		84
	Balance Sheet Analysis		87
	Asset Acquisitions		88
	Investment Portfolio Composition		89
	Cash Flows		94
	Liquidity and Capital Resources		96
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		99
	Quantitative and Qualitative Disclosures About Market Risk		105
	Factors That May Affect Our Future Results		107
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		110
Item 4.	Controls and Procedures		110
PART II. OTHER INFORMATION			110
Item 1.	Legal Proceedings		110
Item 1A.	Risk Factors		110
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		110
Item 3.	Defaults Upon Senior Securities		110
Item 4.	Mine Safety Disclosures		111
Item 5.	Other Information		111
Item 6.	Exhibits and Financial Statement Schedules		112

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	June 30,		December 31,
	2014		2013
	(in thousands, except share data)
ASSETS
Cash	$	37,902	$	27,411
Short-term investments		104,453		92,398
Mortgage-backed securities at fair value pledged to secure assets sold under agreements to repurchase		218,725		197,401
Mortgage loans acquired for sale at fair value (includes $905,044 and $454,210 pledged to secure assets sold under agreements to repurchase)		909,085		458,137
Mortgage loans at fair value (includes $2,407,512 and $1,963,266 pledged to secure assets sold under agreements to repurchase)		2,697,821		2,600,317
Mortgage loans under forward purchase agreements at fair value pledged to secure borrowings under forward purchase agreements		—		218,128
Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value		190,244		138,723
Derivative assets		14,594		7,976
Real estate acquired in settlement of loans (includes $107,684 and $89,404 pledged to secure assets sold under agreements to repurchase)		240,471		138,942
Real estate acquired in settlement of loans under forward purchase agreements pledged to secure forward purchase agreements		—		9,138
Mortgage servicing rights (includes $46,802 and $26,452 carried at fair value)		315,484		290,572
Servicing advances		63,993		59,573
Due from PennyMac Financial Services, Inc.		4,137		6,009
Other assets		72,836		66,192

Total assets	$	4,869,745	$	4,310,917

LIABILITIES
Assets sold under agreements to repurchase	$	2,701,755	$	2,039,605
Borrowings under forward purchase agreements		—		226,580
Asset-backed secured financing of the variable interest entity at fair value		170,201		165,415
Exchangeable senior notes		250,000		250,000
Derivative liabilities		6,347		1,961
Accounts payable and accrued liabilities		69,552		71,561
Due to PennyMac Financial Services, Inc.		19,636		18,636
Income taxes payable		63,218		59,935
Liability for losses under representations and warranties		11,876		10,110

Total liabilities		3,292,585		2,843,803

Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 74,139,070 and 70,458,082 common shares, respectively		741		705
Additional paid-in capital		1,468,791		1,384,468
Retained earnings		107,628		81,941

Total shareholders’ equity		1,577,160		1,467,114

Total liabilities and shareholders’ equity	$	4,869,745	$	4,310,917

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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


	June 30,		December 31,
	2014		2013
	(in thousands)
ASSETS
Mortgage loans at fair value	$	541,320	$	523,652
Other assets - interest receivable		1,702		1,584

	$	543,022	$	525,236

LIABILITIES
Asset-backed secured financing at fair value	$	170,201	$	165,415
Accounts payable and accrued expenses - interest payable		492		497

	$	170,693	$	165,912

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands, except per share data)
Net investment income
Net gain on mortgage loans acquired for sale	$	10,222		$	44,438		$	20,193		$	73,717
Loan origination fees		4,485			4,752			6,841			10,225
Net interest income:
Interest income		48,518			26,797			87,864			43,672
Interest expense		21,865			14,144			41,640			25,380

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

Net gain on investments		73,134			46,834			115,719			110,814
Net loan servicing fees		8,758			7,892			16,179			13,903
Results of real estate acquired in settlement of loans		(5,348	)		(1,929	)		(11,974	)		(5,182	)
Other		2,652			913			3,969			1,600

Net investment income		120,556			115,553			197,151			223,369

Expenses
Expenses payable to PennyMac Financial Services, Inc.:
Loan servicing fees		14,180			8,787			28,771			16,513
Loan fulfillment fees		12,433			22,054			21,335			50,298
Management fees		8,912			8,455			16,986			14,947
Professional services		2,690			1,339			4,421			3,723
Compensation		1,883			1,438			4,825			3,527
Other		7,154			5,571			11,221			10,517

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

Income before provision for income taxes		73,304			67,909			109,592			123,844
(Benefit from) provision for income taxes		(1,907	)		13,412			(3,492	)		16,051

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

Earnings per share
Basic	$	1.01		$	0.92		$	1.54		$	1.81
Diluted	$	0.93		$	0.86		$	1.44		$	1.75
Weighted-average shares outstanding
Basic		74,065			59,035			72,803			58,981
Diluted		82,750			65,104			81,535			62,217
Dividends declared per share	$	0.59		$	0.57		$	1.18		$	1.14

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)


	Number of shares		Par value		Additional paid-in capital			Retained earnings			Total
	(in thousands)
Balance at December 31, 2012		58,904	$	589	$	1,129,858		$	70,889		$	1,201,336
Net income		—		—		—			107,793			107,793
Share-based compensation		173		2		2,468			—			2,470
Dividends, $1.14 per share		—		—		—			(67,249	)		(67,249	)
Underwriting and offering costs		—		—		(169	)		—			(169	)

Balance at June 30, 2013		59,077	$	591	$	1,132,157		$	111,433		$	1,244,181

Balance at December 31, 2013		70,458	$	705	$	1,384,468		$	81,941		$	1,467,114
Net income		—		—		—			113,084			113,084
Share-based compensation		234		2		2,956			—			2,958
Dividends, $1.18 per share		—		—		—			(87,397	)		(87,397	)
Proceeds from offerings of common shares		3,447		34		82,419			—			82,453
Underwriting and offering costs		—		—		(1,052	)		—			(1,052	)

Balance at June 30, 2014		74,139	$	741	$	1,468,791		$	107,628		$	1,577,160

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six months ended June 30,
	2014			2013
	(in thousands)
Cash flows from operating activities
Net income	$	113,084		$	107,793
Adjustments to reconcile net income to net cash used by operating activities:
Net gain on mortgage loans acquired for sale at fair value		(20,193	)		(73,717	)
Accrual of unearned discounts and amortization of premiums on mortgage-backed securities, mortgage loans at fair value, and asset-backed secured financing		(537	)		—
Capitalization of interest on mortgage loans at fair value		(30,353	)		(11,814	)
Accrual of interest on excess servicing spread		(6,001	)		—
Amortization of credit facility commitment fees and debt issuance costs		4,879			4,036
(Reversal) accrual of costs related to forward purchase agreements		(168	)		251
Net gain on investments		(115,719	)		(110,814	)
Change in fair value, amortization and impairment of mortgage servicing rights		20,518			9,321
Results of real estate acquired in settlement of loans		11,974			5,182
Share-based compensation expense		2,958			2,471
Purchases of mortgage loans acquired for sale at fair value		(12,347,365	)		(17,759,140	)
Sales of mortgage loans acquired for sale at fair value to nonaffiliates		4,789,444			9,044,480
Sales of mortgage loans acquired for sale to PennyMac Financial Services, Inc.		7,085,859			8,282,163
(Increase) decrease in servicing advances		(15,218	)		7,481
Decrease in due from PennyMac Financial Services, Inc.		2,812			1,766
(Increase) decrease in other assets		(25,427	)		41,379
Decrease in accounts payable and accrued liabilities		(45,366	)		(11,016	)
Increase in payable to PennyMac Financial Services, Inc.		1,036			4,509
Increase in income taxes payable		3,283			15,088

Net cash used by operating activities		(570,500	)		(440,581	)

Cash flows from investing activities
Net increase in short-term investments		(12,055	)		(34,219	)
Purchases of mortgage-backed securities at fair value		(19,638	)		—
Repayments of mortgage-backed securities at fair value		5,419			—
Purchases of mortgage loans at fair value		(283,017	)		(200,486	)
Repayments and sales of mortgage loans at fair value		397,643			135,242
Repayments of mortgage loans under forward purchase agreements at fair value		6,413			—
Purchase of excess servicing spread from PennyMac Financial Services, Inc.		(73,393	)		—
Repayment of excess spread investment		16,494			—
Settlements of derivative financial instruments used for hedging		(9,785	)		—
Purchase of real estate acquired in settlement of loans		(3,049	)		—
Sales of real estate acquired in settlement of loans		76,903			63,017
Sales of real estate acquired in settlement of loans under forward purchase agreements		5,365			—
Purchase of mortgage servicing rights		—			(185	)
Decrease (increase) in margin deposits and restricted cash		5,454			(13,426	)

Net cash provided (used) by investing activities		112,754			(50,057	)

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six months ended June 30,
	2014			2013
	(in thousands)
Cash flows from financing activities
Sales of assets under agreement to repurchase		15,938,914			16,841,470
Repurchases of assets sold under agreements to repurchase		(15,276,762	)		(16,516,020	)
Repurchases of real estate acquired in settlement of loans financed under agreement to repurchase		—			(15,656	)
Repayments of borrowings under forward purchase agreements		(227,866	)		—
Repayments of asset-backed secured financing at fair value		(3,372	)		—
Issuance of exchangeable senior notes		—			250,000
Payment of exchangeable senior notes issuance costs		—			(7,425	)
Proceeds from issuance of common shares		82,453			—
Payment of common share underwriting and offering costs		(1,052	)		(169	)
Payment of contingent underwriting fees payable		(424	)		(427	)
Payment of dividends		(43,654	)		(67,249	)

Net cash provided by financing activities		468,237			484,524

Net increase (decrease) in cash		10,491			(6,114	)
Cash at beginning of period		27,411			33,756

Cash at end of period	$	37,902		$	27,642

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

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization and Basis of Presentation

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

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

•

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

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

•

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

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

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

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

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by U.S. GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “Annual Report”). Intercompany accounts and transactions have been eliminated.

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

Reclassification of previously presented balances

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

•

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

•

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

Following is a summary of the reclassifications:


	As reported				As previously reported				Reclassification
	Quarter ended June 30, 2013		Six months ended June 30, 2013		Quarter ended June 30, 2013		Six months ended June 30, 2013		Quarter ended June 30, 2013			Six months ended June 30, 2013
	(in thousands)
Net interest income (new caption):
Interest income	$	26,797	$	43,672	$	26,797	$	43,672	$	—		$	—
Interest expense		14,144		25,380		—		—		14,144			25,380

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

Net investment income	$	115,553	$	223,369	$	129,697	$	248,749	$	(14,144	)	$	(25,380	)
Expenses:
Interest expense	$	—	$	—	$	14,144	$	25,380	$	(14,144	)	$	(25,380	)
Total expenses	$	47,644	$	99,525	$	61,788	$	124,905	$	(14,144	)	$	(25,380	)

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

Note 2—Concentration of Risks

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

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Investment portfolio purchases:
Mortgage loans	$	27,203	$	243,109	$	284,403	$	443,582
REO		30		89		3,117		89

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

Investment portfolio purchases above through one or more subsidiaries of Citigroup Inc.:
Mortgage loans	$	26,737	$	242,886	$	26,737	$	443,183
REO		30		89		68		89

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

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


	June 30,		December 31,
	2014		2013
	(in thousands)
Mortgage loans at fair value	$	1,067,099	$	1,138,131
Mortgage loans under forward purchase agreements at fair value		—		218,128
REO		111,946		84,726
REO under forward purchase agreements		—		8,705

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

Total mortgage loans and REO held at period end	$	2,938,292	$	2,966,525

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

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Statements of income:
Interest income	$	1,430		$	260		$	3,584		$	260
Interest expense	$	783		$	251		$	2,364		$	251
Net gain on investments	$	1,743		$	(690	)	$	803		$	(690	)
Net loan servicing fees	$	201		$	—		$	517		$	—
Results of REO	$	(72	)	$	—		$	(473	)	$	—
Statements of cash flows:
Repayments of mortgage loans	$	1,084		$	—		$	3,463		$	—
Sales of REO	$	3,743		$	—		$	5,365		$	—
Repayments of borrowings under forward purchase agreements	$	(214,742	)	$	—		$	(227,866	)	$	—

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

Note 3—Transactions with Related Parties

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Management fee:
Base	$	5,838	$	4,575	$	11,359	$	8,940
Performance incentive		3,074		3,880		5,627		6,007

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

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

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base	$	29	$	90	$	46	$	169
Activity-based		51		111		77		183

		80		201		123		352

Distressed mortgage loans:
Base		4,975		3,699		9,941		7,572
Activity-based		5,746		2,447		12,132		4,324

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

MSRs:
Base		3,323		2,363		6,471		4,126
Activity-based		56		77		104		139

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

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

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Fulfillment fee expense payable to PFSI	$	12,433	$	22,054	$	21,335	$	50,298
Unpaid principal balance of loans fulfilled by PFSI	$	2,991,764	$	4,323,885	$	4,911,342	$	9,110,711

Sourcing fees received from PFSI	$	1,125	$	1,349	$	2,017	$	2,359
Fair value of loans sold to PFSI	$	3,955,329	$	4,733,767	$	7,085,859	$	8,282,163

At period end:
Mortgage loans included in mortgage loans acquired for sale pending sale to PFSI	$	304,707	$	290,567

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Purchases of excess servicing spread	$	52,867	$	—	$	73,393	$	—
Interest income from excess servicing spread	$	3,138	$	—	$	6,001	$	—
Excess servicing spread recapture recognized	$	2,525	$	—	$	4,415	$	—
MSR recapture recognized	$	1	$	367	$	9	$	499

Other Transactions

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

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

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

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Reimbursement of:
Common overhead incurred by PFSI	$	2,691	$	3,201	$	5,269	$	5,807
Expenses incurred on the Company’s behalf		104		585		549		1,834

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

Payments and settlements during the period (1)	$	14,894	$	32,616	$	33,280	$	65,290

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

Amounts due to PFSI are summarized below:


	June 30,		December 31,
	2014		2013
	(in thousands)
Servicing fees	$	5,208	$	5,915
Management fees		8,912		8,924
Allocated expenses		3,764		2,009
Contingent underwriting fees		1,752		1,788

	$	19,636	$	18,636

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

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

Note 4—Earnings Per Share

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

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

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

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands except per share amounts)
Basic earnings per share:
Net income	$	75,211		$	54,497		$	113,084		$	107,793
Effect of participating securities—share-based compensation awards		(433	)		(444	)		(841	)		(961	)

Net income attributable to common shareholders	$	74,778		$	54,053		$	112,243		$	106,832

Weighted-average shares outstanding		74,065			59,035			72,803			58,981
Basic earnings per share	$	1.01		$	0.92		$	1.54		$	1.81

Diluted earnings per share:
Net income	$	75,211		$	54,497		$	113,084		$	107,793
Interest on exchangeable senior notes, net of income taxes		2,079			1,382			4,156			1,382

Net income attributable to diluted shareholders	$	77,290		$	55,879		$	117,240		$	109,175

Weighted-average shares outstanding		74,065			59,035			72,803			58,981

Potentially dilutive securities:
Shares issuable pursuant exchange of the Notes		8,393			5,709			8,393			2,870
Shares issuable under share-based compensation plan		292			360			338			366

Diluted weighted-average number of shares outstanding		82,750			65,104			81,534			62,217

Diluted earnings per share	$	0.93		$	0.86		$	1.44		$	1.75

Note 5—Loan Sales

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

Unconsolidated VIEs with Continuing Involvement

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Cash flows:
Proceeds from sales	$	2,763,138	$	3,909,744	$	4,789,444		9,044,480
Servicing fees received (1)	$	19,019	$	11,772	$	34,907	$	20,908
Period end information:
Unpaid principal balance of mortgage loans outstanding	$	29,268,039	$	19,850,609
Unpaid principal balance of delinquent mortgage loans:
30-89 days delinquent	$	90,091	$	44,436
90 or more days delinquent
Not in foreclosure		13,325		2,485
In foreclosure or bankruptcy		11,306		3,163

		24,631		5,648

	$	114,722	$	50,084

(1)	Net of guarantee fees.

Consolidated VIE

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

Note 6—Netting of Financial Instruments

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

Offsetting of Derivative Assets

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


	June 30, 2014								December 31, 2013
	Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet			Gross amounts of recognized assets		Gross amounts offset in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet
	(in thousands)
Derivatives subject to master netting arrangements:
MBS put options	$	471	$	—		$	471		$	272	$	—		$	272
MBS call options		519		—			519			—		—			—
Forward purchase contracts		14,723		—			14,723			1,229		—			1,229
Forward sale contracts		314		—			314			16,385		—			16,385
Treasury futures		545		—			545			—		—			—
Put options on Eurodollar futures		181		—			181			566		—			566
Call options on Eurodollar futures		214		—			214			—		—			—
Netting		—		(13,855	)		(13,855	)		—		(12,986	)		(12,986	)

		16,967		(13,855	)		3,112			18,452		(12,986	)		5,466
Derivatives not subject to master netting arrangements:
Interest rate lock commitments		11,482		—			11,482			2,510		—			2,510

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

Derivative Assets and Collateral Held by Counterparty

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


	June 30, 2014								December 31, 2013
			Gross amounts not offset in the consolidated balance sheet								Gross amounts not offset in the consolidated balance sheet
	Net amount of assets presented in the consolidated balance sheet		Financial instruments		Cash collateral received		Net amount		Net amount of assets presented in the consolidated balance sheet		Financial instruments		Cash collateral received		Net amount
	(in thousands)
Interest rate lock commitments	$	11,482	$	—	$	—	$	11,482	$	2,510	$	—	$	—	$	2,510
RBS Securities		433		—		—		433		133		—		—		133
RJ O’Brien		940		—		—		940		566		—		—		566
Nomura		284		—		—		284		273						273
JP Morgan		252		—		—		252		—						—
Cantor Fitzgerald LP		210		—		—		210		613		—		—		613
Credit Suisse First Boston Mortgage Capital LLC		138		—		—		138		196		—		—		196
Bank of America, N.A.		—		—		—		—		1,024		—		—		1,024
Other		855		—		—		855		2,661		—		—		2,661

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

Offsetting of Derivative Liabilities and Financial Liabilities

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


	June 30, 2014								December 31, 2013
	Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet
	(in thousands)
Derivatives subject to master netting arrangements:
Forward purchase contracts	$	266	$	—		$	266		$	7,420	$	—		$	7,420
Forward sales contracts		23,236		—			23,236			1,295		—			1,295
Netting		—		(17,550	)		(17,550	)		—		(8,015	)		(8,015	)

		23,502		(17,550	)		5,952			8,715		(8,015	)		700
Derivatives not subject to master netting arrangements:
Interest rate lock commitments		395		—			395			1,261		—			1,261

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

Assets sold under agreements to repurchase		2,701,755		—			2,701,755			2,039,605		—			2,039,605

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

Derivative Liabilities, Financial Liabilities and Collateral Held by Counterparty

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


	June 30, 2014									December 31, 2013
			Gross amounts not offset in the consolidated balance sheet									Gross amounts not offset in the consolidated balance sheet
	Net amount of liabilities presented in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount		Net amount of liabilities presented in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount
	(in thousands)
Interest rate lock commitments	$	395	$	—		$	—	$	395	$	1,261	$	—		$	—	$	1,261
Citibank		843,000		(842,377	)		—		623		945,015		(944,856	)		—		159
Credit Suisse First Boston Mortgage Capital LLC		734,416		(734,416	)		—		—		523,546		(523,546	)		—		—
Bank of America, N.A.		610,966		(610,218	)		—		748		408,452		(408,452	)		—		—
RBS Securities		229,153		(229,153	)		—		—		—		—			—		—
Morgan Stanley Bank, N.A.		155,189		(154,457	)		—		732		30,226		(30,226	)		—		—
Daiwa Capital Markets		131,334		(131,134	)		—		200		132,525		(132,525	)		—		—
Fannie Mae Capital Markets		1,021		—			—		1,021		—		—			—		—
Other		2,628		—			—		2,628		541		—			—		541

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

Note 7—Fair Value

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

Fair Value Accounting Elections

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

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

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

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

Financial Statement Items Measured at Fair Value on a Recurring Basis

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


	June 30, 2014
	Level 1		Level 2			Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	104,453	$	—		$	—	$	104,453
Mortgage-backed securities at fair value		—		218,725			—		218,725
Mortgage loans acquired for sale at fair value		—		909,085			—		909,085
Mortgage loans at fair value		—		541,320			2,156,501		2,697,821
Excess servicing spread purchased from PFSI		—		—			190,244		190,244
Derivative assets:
Interest rate lock commitments		—		—			11,482		11,482
MBS put options		—		471			—		471
MBS call options		—		519			—		519
Forward purchase contracts		—		14,723			—		14,723
Forward sales contracts		—		314			—		314
Treasury futures		—		545			—		545
Put options on Eurodollar futures		—		181			—		181
Call options on Eurodollar futures		—		214			—		214

Total derivative assets before netting		—		16,967			11,482		28,449
Netting (1)		—		(13,855	)		—		(13,855	)

Total derivative assets after netting		—		3,112			11,482		14,594

Mortgage servicing rights at fair value		—		—			46,802		46,802

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

Liabilities:
Asset-backed secured financing of the variable interest entity at fair value	$	—	$	170,201		$	—	$	170,201
Derivative liabilities:
Interest rate lock commitments		—		—			395		395
Forward purchase contracts		—		266			—		266
Forward sales contracts		—		23,236			—		23,236

Total derivative liabilities before netting		—		23,502			395		23,897
Netting (1)		—		(17,550	)		—		(17,550	)

Total derivative liabilities after netting		—		5,952			395		6,347

Total liabilities	$	—	$	176,153		$	395	$	176,548

(1)

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


	December 31, 2013
	Level 1		Level 2			Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	92,398	$	—		$	—	$	92,398
Mortgage-backed securities at fair value		—		197,401			—		197,401
Mortgage loans acquired for sale at fair value		—		458,137			—		458,137
Mortgage loans at fair value		—		523,652			2,076,665		2,600,317
Mortgage loans under forward purchase agreements at fair value		—		—			218,128		218,128
Excess servicing spread purchased from PFSI		—		—			138,723		138,723
Derivative assets:
Interest rate lock commitments		—		—			2,510		2,510
MBS put options		—		272			—		272
Forward purchase contracts		—		1,229			—		1,229
Forward sales contracts		—		16,385			—		16,385
Options on Eurodollar futures		—		566			—		566

Total derivative assets		—		18,452			2,510		20,962
Netting (1)		—		(12,986	)		—		(12,986	)

Total derivative assets after netting		—		5,466			2,510		7,976

Mortgage servicing rights at fair value		—		—			26,452		26,452

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

Liabilities:
Asset-backed secured financing of the variable interest entity at fair value	$	—	$	165,415		$	—	$	165,415
Derivative liabilities:
Interest rate lock commitments		—		—			1,261		1,261
Forward purchase contracts		—		7,420			—		7,420
Forward sales contracts		—		1,295			—		1,295

Total derivative liabilities		—		8,715			1,261		9,976
Netting (1)		—		(8,015	)		—		(8,015	)

Total derivative liabilities		—		700			1,261		1,961

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

(1)

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


	Quarter ended June 30, 2014
	Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Excess servicing spread			Interest rate lock commitments(1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, March 31, 2014	$	2,079,020		$	202,661		$	151,019		$	3,271		$	36,181		$	2,472,152
Purchases		26,737			466			52,867			—			—			80,070
Repayments and sale		(140,807	)		(1,084	)		(9,080	)		—			—			(150,971	)
Accrual of interest		—			—			3,138			—			—			3,138
ESS received pursuant to a recapture agreement with PFSI		—			—			2,362			—			—			2,362
Interest rate lock commitments issued, net		—			—			—			19,158			—			19,158
Capitalization of interest		17,042			1,057			—			—			—			18,099
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			15,385			15,385
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		19,326			1,236												20,562
Other factors		52,525			507			(10,062	)		9,563			(4,764	)		47,769

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

Transfers of mortgage loans under forward purchase agreements to mortgage loans		201,443			(201,443	)		—			—			—			—
Transfers of mortgage loans to REO		(98,785	)		—			—			—			—			(98,785	)
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			(3,400	)		—			—			—			(3,400	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale at fair value		—			—			—			(20,905	)		—			(20,905	)

Balance, June 30, 2014	$	2,156,501		$	—		$	190,244		$	11,087		$	46,802		$	2,404,634

Changes in fair value recognized during the period relating to assets still held at June 30, 2014	$	50,613		$	—		$	(10,062	)	$	11,088		$	(4,764	)	$	46,875

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


	Quarter ended June 30, 2013
	Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Net interest rate lock commitments(1)			Mortgage servicing rights		Total
	(in thousands)
Assets:
Balance, March 31, 2013	$	1,366,922		$	—		$	11,052		$	1,305	$	1,379,279
Purchases		13			243,309			—			186		243,508
Repayments		(73,820	)		—			—			—		(73,820	)
Interest rate lock commitments issued, net		—			—			22,240			—		22,240
Capitalization of interest		6,584			—			—			—		6,584
Servicing received as proceeds from sales of mortgage loans		—			—			—			77		77
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		11,050			—								11,050
Other factors		36,473			(689	)		(20,678	)		260		15,366

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

Transfers of mortgage loans to REO		(37,457	)		(89	)							(37,546	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(29,581	)		—		(29,581	)

Balance, June 30, 2013	$	1,309,765		$	242,531		$	(16,967	)	$	1,828	$	1,537,157

Changes in fair value recognized during the period relating to assets still held at June 30, 2013	$	33,292		$	(689	)	$	(16,967	)	$	260	$	15,896

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


	Six months ended June 30, 2014
	Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Excess servicing spread			Interest rate lock commitments(1)			Mortgage servicing rights			Total
	(in thousands)
Assets:
Balance, December 31, 2013	$	2,076,665		$	218,128		$	138,723		$	1,249		$	26,452		$	2,461,217
Purchases		283,017			1,386			73,393			—			—			357,796
Repayments and sale		(387,430	)		(6,413	)		(16,494	)		—			—			(410,337	)
Accrual of interest		—			—			6,001			—			—			6,001
ESS received pursuant to a recapture agreement with PFSI		—			—			3,475			—			—			3,475
Interest rate lock commitments issued, net		—			—			—			31,754			—			31,754
Capitalization of interest		28,553			1,801			—			—			—			30,354
Servicing received as proceeds from sales of mortgage loans		—			—			—			—			27,142			27,142
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		42,629			2,269			—			—						44,898
Other factors		70,080			(1,466	)		(14,854	)		11,993			(6,792	)		58,961

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

Transfers of mortgage loans under forward purchase agreements to mortgage loans		205,902			(205,902	)		—			—			—			—
Transfers of mortgage loans to REO		(162,915	)		—			—			—			—			(162,915	)
Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements		—			(9,803	)		—			—			—			(9,803	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			—			(33,909	)		—			(33,909	)

Balance, June 30, 2014	$	2,156,501		$	—		$	190,244		$	11,087		$	46,802		$	2,404,634

Changes in fair value recognized during the period relating to assets still held at June 30, 2014	$	73,951		$	—		$	(14,854	)	$	11,087		$	(6,792	)	$	63,392

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


	Six months ended June 30, 2013
	Mortgage loans at fair value			Mortgage loans under forward purchase agreements			Net interest rate lock commitments(1)			Mortgage servicing rights		Total
	(in thousands)
Assets:
Balance, December 31, 2012	$	1,189,971		$	—		$	19,479		$	1,346	$	1,210,796
Purchases		200,486			243,309			—			186		443,981
Repayments		(135,242	)		—			—			—		(135,242	)
Interest rate lock commitments issued, net		—			—			57,654			—		57,654
Capitalization of interest		11,814			—			—			—		11,814
Servicing received as proceeds from sales of mortgage loans		—			—			—			104		104
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		19,495			—			—			—		19,495
Other factors		92,008			(689	)		(20,678	)		192		70,833

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

Transfers of mortgage loans to REO		(68,767	)		(89	)		—			—		(68,856	)
Transfers of interest rate lock commitments to mortgage loans acquired for sale		—			—			(73,422	)		—		(73,422	)

Balance, June 30, 2013	$	1,309,765		$	242,531		$	(16,967	)	$	1,828	$	1,537,157

Changes in fair value recognized during the period relating to assets still held at June 30, 2013	$	77,771		$	(689	)	$	(16,967	)	$	192	$	60,307

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

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


	June 30, 2014
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	909,085	$	866,821	$	42,264
90 or more days delinquent (1)
Not in foreclosure		—		—		—
In foreclosure		—		—		—

		—		—		—

		909,085		866,821		42,264

Mortgage loans and mortgage loans under forward purchase agreements at fair value:
Current through 89 days delinquent		1,151,747		1,442,755		(291,008	)
90 or more days delinquent (1)
Not in foreclosure		629,021		1,002,407		(373,386	)
In foreclosure		917,053		1,437,698		(520,645	)

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

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

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

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


	December 31, 2013
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans acquired for sale:
Current through 89 days delinquent	$	457,968	$	447,224	$	10,744
90 or more days delinquent (1)
Not in foreclosure		169		162		7
In foreclosure		—		—		—

		169		162		7

		458,137		447,386		10,751

Mortgage loans and mortgage loans under forward purchase agreements at fair value:
Current through 89 days delinquent		1,170,918		1,495,961		(325,043	)
90 or more days delinquent (1)
Not in foreclosure		738,043		1,190,403		(452,360	)
In foreclosure		909,484		1,493,644		(584,160	)

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

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

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

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

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


	Quarter ended June 30, 2014
	Net gain on mortgage loans acquired for sale			Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			155			4,081			—			4,236
Mortgage loans acquired for sale at fair value		31,202						—			—			31,202
Mortgage loans at fair value		—			223			88,029			—			88,252
Mortgage loans under forward purchase agreements at fair value		—			—			1,743			—			1,743
Excess servicing spread at fair value		—			—			(7,537	)		—			(7,537	)
Mortgage servicing rights at fair value		—			—			—			(4,764	)		(4,764	)

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

Liabilities:
Asset-backed secured financing at fair value	$	(5,175	)	$	(80	)	$	—		$	—		$	(5,255	)

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


	Quarter ended June 30, 2013
	Net gain on mortgage loans acquired for sale			Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage loans acquired for sale at fair value		(56,951	)		—			—			—			(56,951	)
Mortgage loans at fair value		—			—			47,523			—			47,523
Mortgage loans under forward purchase agreements at fair value		—			—			(689	)		—			(689	)
Mortgage servicing rights at fair value		—			—			—			260			260

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


	Six months ended June 30, 2014
	Net gain on mortgage loans acquired for sale			Net interest income			Net gain on investments			Net loan servicing fees			Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—		$	—		$	—		$	—
Mortgage-backed securities at fair value		—			188			6,734			—			6,922
Mortgage loans acquired for sale at fair value		49,834			—			—			—			49,834
Mortgage loans at fair value		—			553			140,194			—			140,747
Mortgage loans under forward purchase agreements at fair value		—			—			803			—			803
Excess servicing spread at fair value		—			—			(10,438	)		—			(10,438	)
Mortgage servicing rights at fair value		—			—			—			(6,792	)		(6,792	)

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

Liabilities:
Asset-backed secured financing at fair value	$	(7,954	)	$	(204	)	$	—		$	—		$	(8,158	)

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


	Six months ended June 30, 2013
	Net loss on mortgage loans acquired for sale			Net interest income		Net gain (loss) on investments			Net loan servicing fees		Total
	(in thousands)
Assets:
Short-term investments	$	—		$	—	$	—		$	—	$	—
Mortgage loans acquired for sale at fair value		(32,180	)		—		—			—		(32,180	)
Mortgage loans at fair value		—			—		111,503			—		111,503
Mortgage loans under forward purchase agreements at fair value		—			—		(689	)		—		(689	)
Mortgage servicing rights at fair value		—			—		—			192		192

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

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

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


	June 30, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate asset acquired in settlement of loans	$	—	$	—	$	102,660	$	102,660
Mortgage servicing rights at lower of amortized cost or fair value		—		—		56,171		56,171

	$	—	$	—	$	158,831	$	158,831


	December 31, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Real estate asset acquired in settlement of loans	$	—	$	—	$	63,043	$	63,043
Real estate asset acquired in settlement of loans under forward purchase agreements		—		—		7,760		7,760
Mortgage servicing rights at lower of amortized cost or fair value		—		—		184,067		184,067

	$	—	$	—	$	254,870	$	254,870

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Real estate asset acquired in settlement of loans	$	(7,942	)	$	(4,095	)	$	(12,525	)	$	(6,594	)
Mortgage servicing rights at lower of amortized cost or fair value		(2,224	)		1,222			(2,851	)		3,708

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

Real Estate Acquired in Settlement of Loans

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

Mortgage Servicing Rights at Lower of Amortized Cost or Fair Value

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

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

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

Fair Value of Financial Instruments Carried at Amortized Cost

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

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

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

Valuation Techniques and Inputs

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

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

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

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

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

Mortgage-Backed Securities

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

Mortgage Loans

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

•

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

•

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

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

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

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

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


	Range
	(Weighted average)
Key inputs	June 30, 2014	December 31, 2013
Mortgage loans at fair value
Discount rate	7.1% – 16.9%	8.7% –16.9%
	(11.8%)	(12.7%)
Twelve-month projected housing price index change	3.5% – 9.1%	2.5% – 4.3%
	(4.7%)	(3.7%)
Prepayment speed (1)	0.0% – 6.6%	0.0% – 3.9%
	(2.5%)	(2.0%)
Total prepayment speed (2)	0.8% – 27.4%	0.3% – 33.9%
	(21.8%)	(24.3%)

Mortgage loans under forward purchase agreements
Discount rate	—	9.5% – 13.5%
	—	(11.9%)
Twelve-month projected housing price index change	—	3.3% – 4.2%
	—	(3.8%)
Prepayment speed (1)	—	1.1% – 2.9%
	—	(2.2%)
Total prepayment speed (2)	—	13.4% – 27.9%
	—	(22.8%)

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

(2)	Total prepayment speed is measured using Life Total CPR.

Excess Servicing Spread Purchased from PennyMac Financial Services, Inc.

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

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

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

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


	Range
	(Weighted average)
Key inputs	June 30, 2014		December 31, 2013
Unpaid principal balance of underlying mortgage loans (in thousands)	$	27,445,826	$	20,512,659
Average servicing fee rate (in basis points)		31		32
Average ESS rate (in basis points)		16		16
Pricing spread (1)		1.7% – 14.6%		2.8% - 14.4%
		(5.1%)		(5.4%)
Life (in years)		0.5 - 7.3		0.9 - 8.0
		(5.9)		(6.1)
Annual total prepayment speed (2)		7.6% – 67.0%		7.7% - 48.6%
		(10.3%)		(9.7%)

(1)

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

(2)	Prepayment speed is measured using Life Total CPR.

Derivative Financial Instruments

The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the mortgage loan will be purchased as a percentage of the commitments it has made (the “pull-through rate”). The Company categorizes IRLCs as “Level 3” financial statement items.

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

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


	Range (Weighted average)
Key inputs	June 30, 2014		December 31, 2013
Pull-through rate		49.0% - 98.0%		64.8% - 98.0%
		(81.6%)		(86.4%)
MSR value expressed as:
Servicing fee multiple		1.7 - 5.0		1.4 - 5.1
		(3.9)		(4.1)
Percentage of unpaid principal balance		0.4% - 1.3%		0.4% - 1.3%
		(1.0%)		(1.0%)

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

Real Estate Acquired in Settlement of Loans

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

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

Mortgage Servicing Rights

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

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

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


	Quarter ended June 30,
	2014				2013
	Range (Weighted average)
Key inputs	Amortized cost		Fair value		Amortized cost		Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$	13,356	$	15,385	$	50,978	$	77
Unpaid principal balance of underlying mortgage loans	$	1,244,538	$	1,458,400	$	3,840,110	$	27,346
Weighted-average annual servicing fee rate (in basis points)		25		25		28		27
Pricing spread (1)		6.3% – 14.3%		8.5% – 10.3%		5.4% – 13.5%		6.6% – 11.9%
		(8.7%)		(9.1%)		(6.5%)		(7.5%)
Life (in years)		1.3 – 7.3		3.2 – 7.3		2.6 – 6.9		6.3 – 6.9
		(6.1)		(7.1)		(6.4)		(6.8)
Annual total prepayment speed (2)		7.6% – 50.9%		8.1% – 25.4%		8.5% –23.6%		8.8% – 13.6%
		(10.4%)		(9.6%)		(9.1%)		(9.3%)
Annual per-loan cost of servicing		$68 – $100		$68 – $68		$68 – $140		$68 – $68
		($68)		($68)		($68)		($68)


	Six months ended June 30,
	2014				2013
	Range (Weighted average)
Key inputs	Amortized cost		Fair value		Amortized cost		Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$	22,474	$	27,142	$	107,167	$	104
Unpaid principal balance of underlying mortgage loans	$	2,095,087	$	2,550,114	$	8,843,667	$	29,946
Weighted-average annual servicing fee rate (in basis points)		25		25		26		27
Pricing spread (1)		6.3% – 14.3%		8.5% – 12.3%		5.4% – 14.4%		6.6% – 14.4%
		(8.6%)		(9.0%)		(6.8%)		(7.6%)
Life (in years)		1.1 – 7.3		2.8 –7.3		2.6 – 6.9		2.8 – 6.9
		(6.0)		(7.1)		(6.4)		(6.7)
Annual total prepayment speed (2)		7.6% – 56.4%		8.0% – 25.4%		8.5% – 23.6%		8.8% – 27.0%
		(10.4%)		(9.5%)		(9.1%)		(9.7%)
Annual per-loan cost of servicing		$68 – $100		$68 – $68		$68 – $140		$68 – $68
		($68)		($68)		($68)		($68)

(1)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

(2)	Prepayment speed is measured using Life Total CPR.

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


	June 30, 2014						December 31, 2013
	Range (Weighted average)
	Amortized cost			Fair value			Amortized cost			Fair value
	(Carrying value, unpaid principal balance and effect on value amounts in thousands)
Carrying value	$	268,682		$	46,802		$	264,120		$	26,452

Key inputs:
Unpaid principal balance of underlying mortgage loans	$	24,639,750		$	4,758,331		$	23,399,612		$	2,393,321
Weighted-average annual servicing fee rate (in basis points)		26			25			26			26
Weighted-average note interest rate		3.72%			4.79%			3.68%			4.78%
Pricing spread (1) (2)		6.3% –17.5%			7.6% –15.3%			6.3% –17.5%			7.3% –15.3%
		(7.4%)			(9.2%)			(6.7%)			(8.6%)
Effect on fair value of a:
5% adverse change	$	(5,302	)	$	(827	)	$	(5,490	)	$	(488	)
10% adverse change	$	(10,427	)	$	(1,627	)	$	(10,791	)	$	(959	)
20% adverse change	$	(20,177	)	$	(3,149	)	$	(20,861	)	$	(1,855	)
Weighted average life (in years)		1.1 – 7.2			2.4 – 7.2			1.3 – 7.3			2.8 – 7.3
		(6.4)			(7.0)			(6.7)			(7.2)
Prepayment speed (1) (3)		7.7% – 58.9%			8.0% – 30.6%			7.7% – 51.9%			8.0% – 20.0%
		(8.6%)			(10.2%)			(8.2%)			(8.9%)
Effect on fair value of a:
5% adverse change	$	(5,495	)	$	(1,160	)	$	(5,467	)	$	(568	)
10% adverse change	$	(10,821	)	$	(2,277	)	$	(10,765	)	$	(1,117	)
20% adverse change	$	(20,993	)	$	(4,390	)	$	(20,886	)	$	(2,160	)
Annual per-loan cost of servicing		$68 – $140			$68 – $140			$68 – $140			$68 – $140
		($68)			($68)			($68)			($68)
Effect on fair value of a:
5% adverse change	$	(1,761	)	$	(290	)	$	(1,695	)	$	(158	)
10% adverse change	$	(3,522	)	$	(580	)	$	(3,390	)	$	(316	)
20% adverse change	$	(7,043	)	$	(1,159	)	$	(6,780	)	$	(633	)

(1)	The effect on value of an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of impairment recognized will depend on the relationship of fair value to the carrying value of MSRs.

(2)

Pricing spread represents a margin that is added to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans and purchased MSRs not backed by pools of distressed mortgage loans.

(3)	Prepayment speed is measured using Life Total CPR.

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

Note 8—Mortgage Loans Acquired for Sale at Fair Value

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


	June 30, 2014				December 31, 2013
	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
Loan type	(in thousands)
Conventional:
Agency-eligible	$	507,887	$	485,096	$	311,162	$	304,749
Jumbo		96,491		93,110		34,615		35,050
Government-insured or guaranteed		304,707		288,616		112,360		107,587

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

Loans pledged to secure assets sold under agreements to repurchase	$	905,044			$	454,210

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

Note 9—Derivative Financial Instruments

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

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

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

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

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

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


	June 30, 2014								December 31, 2013
			Fair value								Fair value
	Notional		Derivative			Derivative			Notional		Derivative			Derivative
Instrument	amount		assets			liabilities			amount		assets			liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Free-standing derivatives:
Interest rate lock commitments		1,291,181	$	11,482		$	395			557,343	$	2,510		$	1,261
Forward sales contracts		4,185,633		314			23,236			3,588,027		16,385			1,295
Forward purchase contracts		3,058,604		14,723			266			2,781,066		1,229			7,420
MBS put options		392,500		471			—			55,000		272			—
MBS call options		95,000		519			—			110,000		—			—
Eurodollar futures		5,562,000		—			—			8,779,000		—			—
Treasury futures		85,000		545			—			105,000		—			—
Call options on Eurodollar futures		230,000		214						—		—			—
Put options on Eurodollar futures		125,000		181			—			52,500		566			—

Total derivative instruments before netting				28,449			23,897					20,962			9,976
Netting				(13,855	)		(17,550	)				(12,986	)		(8,015	)

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

Margin deposits with (collateral received from) derivatives counterparties			$	3,695							$	(4,971	)

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


	Quarter ended June 30, 2014
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		1,777,353		11,967,081		(10,685,830	)		3,058,604
Forward sales contracts		2,497,960		15,282,582		(13,594,909	)		4,185,633
MBS put option		235,000		290,000		(255,000	)		270,000
MBS call option		—		25,000		—			25,000


	Quarter ended June 30, 2013
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		1,890,960		15,323,298		(11,802,474	)		5,411,784
Forward sales contracts		3,224,190		20,418,956		(15,915,080	)		7,728,066
MBS put options		225,000		1,545,000		(1,310,000	)		460,000
MBS call options		350,000		1,000,000		(625,000	)		725,000


	Six months ended June 30, 2014
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		2,781,066		18,364,898		(18,087,360	)		3,058,604
Forward sales contracts		3,463,027		24,051,521		(23,328,915	)		4,185,633
MBS put option		55,000		695,000		(480,000	)		270,000
MBS call option		110,000		25,000		(110,000	)		25,000


	Six months ended June 30, 2013
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		2,206,539		27,765,642		(24,560,397	)		5,411,784
Forward sales contracts		4,266,983		38,269,229		(34,808,146	)		7,728,066
MBS put options		495,000		3,025,000		(3,060,000	)		460,000
MBS call options		—		1,900,000		(1,175,000	)		725,000

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

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


	Quarter ended June 30, 2014
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Quarter ended June 30, 2014
Forward purchase contracts		—		70,000		(70,000	)		—
Forward sales contracts		—		35,000		(35,000	)		—
MBS put option		—		25,000		—			25,000
MBS call option		35,000		70,000		(35,000	)		70,000
Treasury Future sale contracts		—		4,000		(4,000	)		—
Treasury Future purchase contracts		—		4,000		(4,000	)		—
Put option on Eurodollar futures		325,000		40,000		(325,000	)		40,000
Call option on Eurodollar futures		90,000		130,000		(90,000	)		130,000


	Six months ended June 30, 2014
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Six months ended June 30, 2014
Forward purchase contracts		—		70,000		(70,000	)		—
Forward sales contracts		—		60,000		(60,000	)		—
MBS put option		—		25,000		—			25,000
MBS call option		—		130,000		(60,000	)		70,000
Treasury Future sale contracts		—		32,800		(32,800	)		—
Treasury Future purchase contracts		—		25,600		(25,600	)		—
Put option on Eurodollar futures		—		365,000		(325,000	)		40,000
Call option on Eurodollar futures		—		280,000		(150,000	)		130,000

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

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


	Quarter ended June 30, 2014
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Quarter ended June 30, 2014
Eurodollar Future sale contracts		6,084,000		336,000		(858,000	)		5,562,000
Eurodollar Future purchase contracts		—		400,000		(400,000	)		—
Treasury Future sale contracts		75,000		113,000		(103,000	)		85,000
Treasury Future purchase contracts		—		93,000		(93,000	)		—
Put options on Eurodollar futures		55,000		85,000		(55,000	)		85,000
Call option on Eurodollar futures		—		100,000		—			100,000
MBS put option purchase contracts		25,000		97,500		(25,000	)		97,500


	Six months ended June 30, 2014
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Six months ended June 30, 2014
Eurodollar Future sale contracts		8,779,000		462,000		(3,679,000	)		5,562,000
Eurodollar Future purchase contracts		—		2,997,000		(2,997,000	)		—
Treasury Future sale contracts		105,000		188,000		(208,000	)		85,000
Treasury Future purchase contracts		—		168,000		(168,000	)		—
Put options on Eurodollar futures		52,500		197,000		(164,500	)		85,000
Call option on Eurodollar futures		—		100,000		—			100,000
MBS put option purchase contracts		15,000		122,500		(40,000	)		97,500

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

Note 10—Mortgage Loans at Fair Value

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

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


	June 30, 2014				December 31, 2013
Loan type	Fair value		Unpaid principal balance		Fair value		Unpaid principal balance
	(in thousands)
Distressed lending
Nonperforming loans	$	1,546,074	$	2,440,105	$	1,469,686	$	2,415,446
Performing loans:
Fixed interest rate		320,212		475,586		310,607		475,568
Adjustable-rate mortgage (“ARM”)/hybrid		113,271		152,158		165,327		207,553
Interest rate step-up		176,794		281,758		130,906		215,702
Balloon		150		210		139		213

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

Mortgage loans held in a VIE securing asset-backed financing
Fixed interest rate jumbo		541,320		533,043		523,652		543,257

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

Mortgage loans at fair value pledged to secure borrowings at period end:
Assets sold under agreements to repurchase	$	2,407,512			$	1,963,266

Mortgage loans held in a consolidated subsidiary whose stock is pledged to secure financings of such loans	$	309			$	989

Mortgage loans held in a VIE securing an asset-backed financing	$	541,320			$	523,652

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


Concentration	June 30, 2014			December 31, 2013
Portion of mortgage loans originated between 2005 and 2007		72	%		72	%
Percentage of fair value of mortgage loans with unpaid-principal-balance-to-current-property-value in excess of 100%		59	%		61	%
Percentage of mortgage loans secured by California real estate		21	%		24	%
Additional states contributing 5% or more of mortgage loans		New York Florida New Jersey			New York Florida New Jersey

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

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


	June 30, 2014				December 31, 2013
			Unpaid				Unpaid
	Fair		principal		Fair		principal
Loan type	value		balance		value		balance
	(in thousands)
Nonperforming loans	$	—	$	—	$	177,841	$	268,600
Performing loans:
Fixed		—		—		19,292		29,496
ARM/hybrid		—		—		19,510		31,933
Interest rate step-up		—		—		1,485		2,455

		—		—		40,287		63,884

	$	—	$	—	$	218,128	$	332,484

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


	June 30,		December 31,
	2014		2013
Portion of mortgage loans originated between 2005 and 2007		—		72	%
Percentage of mortgage loans secured by California real estate		—		25	%
Additional states contributing 5% or more of mortgage loans				New Jersey
				Washington
				New York
				Maryland

Note 12—Real Estate Acquired in Settlement of Loans

Following is a summary of financial information relating to REO:


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Balance at beginning of period	$	172,987		$	84,487		$	138,942		$	88,078
Purchases		—			—			3,049			—
Transfers from mortgage loans at fair value and advances		105,245			37,117			174,147			68,803
Transfers from REO under forward purchase agreements		12,645			—			12,737			—
Results of REO:
Valuation adjustments, net		(8,865	)		(4,978	)		(17,273	)		(11,067	)
Gain on sale, net		3,590			3,049			5,772			5,885

		(5,275	)		(1,929	)		(11,501	)		(5,182	)
Proceeds from sales		(45,131	)		(30,993	)		(76,903	)		(63,017	)

Balance at end of period	$	240,471		$	88,682		$	240,471		$	88,682

At period end:
REO pledged to secure assets sold under agreements to repurchase	$	76,258		$	9,253

REO held in a consolidated subsidiary whose stock is pledged to secure financings of such properties	$	31,426		$	43,131

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

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


	Quarter ended June 30,					Six months ended June 30,
	2014			2013		2014			2013
	(in thousands)
Balance at beginning of period	$	13,890		$	—	$	9,138		$	—
Purchases		29			—		68			—
Transfers from mortgage loans under forward purchase agreements at fair value and advances		2,542			89		9,369			89
Transfers to REO		(12,646	)		—		(12,737	)		—
Results of REO under forward purchase agreements:
Valuation adjustments, net		(294	)		—		(779	)		—
Gain on sale, net		222			—		306			—

		(72	)		—		(473	)		—
Proceeds from sales		(3,743	)		—		(5,365	)		—

Balance at end of period	$	—		$	89	$	—		$	89

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

Note 14—Mortgage Servicing Rights

Carried at Fair Value:

Following is a summary of MSRs carried at fair value:


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Balance at beginning of period	$	36,181		$	1,305		$	26,452		$	1,346
Additions:
Purchases		—			186			—			186
MSRs resulting from loan sales		15,385			77			27,142			104

Total additions		15,385			263			27,142			290

Change in fair value:
Due to changes in valuation inputs or assumptions used in valuation model(1)		(3,636	)		312			(4,868	)		302
Other changes in fair value(2)		(1,128	)		(52	)		(1,924	)		(110	)

		(4,764	)		260			(6,792	)		192

Sales		—			—			—			—

Balance at end of period	$	46,802		$	1,828		$	46,802		$	1,828

(1)	Principally reflects changes in pricing spread (discount rate) and prepayment speed inputs, primarily due to changes in interest rates.

(2)	Represents changes due to realization of expected cash flows.

Carried at Lower of Amortized Cost or Fair Value:

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Amortized Cost:
Balance at beginning of period	$	268,450		$	184,197		$	266,697		$	132,977
Additions:
MSRs resulting from loan sales		13,356			50,978			22,474			107,167
Purchases		—			—			—			—

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

Sales		—			—			—			—
Amortization		(7,696	)		(6,263	)		(15,061	)		(11,232	)
Application of valuation allowance to write down
MSRs with other-than temporary impairment		—			—			—			—

Balance at end of period		274,110			228,912			274,110			228,912

Valuation Allowance:
Balance at beginning of period		(3,204	)		(5,061	)		(2,577	)		(7,547	)
(Additions) reversals		(2,224	)		1,222			(2,851	)		3,708
Application of valuation allowance to write down
MSRs with other-than temporary impairment		—			—			—			—

Balance at end of period		(5,428	)		(3,839	)		(5,428	)		(3,839	)

MSRs, net	$	268,682		$	225,073		$	268,682		$	225,073

Fair value at end of period	$	289,226		$	242,104		$	289,226		$	242,104

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


	Estimated MSR
Year ended June 30,	amortization
	(in thousands)
2015	$	27,836
2016		27,188
2017		25,767
2018		24,080
2019		22,044
Thereafter		147,195

Total	$	274,110

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Contractually-specified servicing fees	$	18,234	$	11,534	$	35,051	$	20,471

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

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(dollars in thousands)
During the period:
Weighted-average interest rate (1)		2.20	%		2.45	%		2.21	%		2.57	%
Average balance	$	2,253,127		$	1,385,350		$	2,025,678		$	1,304,010
Total interest expense	$	15,143		$	10,814		$	27,682		$	21,526
Maximum daily amount outstanding	$	2,814,572		$	2,108,956		$	2,587,434		$	2,108,956
Period end:
Balance	$	2,701,755		$	2,039,605
Weighted-average interest rate		2.09	%		2.16	%
Available borrowing capacity:
Committed	$	344,923		$	1,242,189
Uncommitted	$	828,885		$	50,000

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

Margin deposits placed with counterparties	$	4,469		$	19,755
Fair value of assets securing agreements to repurchase:
Mortgage-backed securities	$	198,899		$	—
Mortgage loans acquired for sale at fair value	$	905,044		$	1,305,009
Mortgage loans at fair value	$	2,407,821		$	1,252,561
Real estate acquired in settlement of loans	$	107,684		$	52,384

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

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

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


Remaining Maturity at June 30, 2014	Balance
	(in thousands)
Within 30 days	$	393,215
Over 30 to 90 days		899,290
Over 90 days to 180 days		820,116
Over 180 days to 1 year		589,134

	$	2,701,755

Weighted average maturity (in months)		3.4

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

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

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


Counterparty	Amount at risk		Mortgage loans acquired for sale Weighted-average repurchase agreement maturity		Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	238,695		September 20, 2014		October 31, 2014
Bank of America, N.A.	$	55,314		September 12, 2014		January 30, 2015
Morgan Stanley	$	10,832		August 20, 2014		December 18, 2014
The Royal Bank of Scotland Group	$	80,264		—		February 17, 2015
Citibank, N.A.	$	539,745		—		July 24, 2014

Securities sold under agreements to repurchase


Counterparty	Amount at risk		Maturity
	(in thousands)
Daiwa Capital Markets America, Inc	$	7,412		August 2, 2014
Credit Suisse First Boston Mortgage Capital LLC	$	4,770		July 15, 2014
Bank of America, N.A.	$	2,401		July 15, 2014

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

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

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


	Quarter ended June 30,					Six months ended June 30,
	2014			2013		2014			2013
	(dollars in thousands)
Period end:
Balance	$	170,201		$	—
Interest rate		3.50	%		—
During the period:
Weighted-average balance	$	165,495		$	—	$	166,190		$	—
Interest expense	$	1,561		$	—	$	3,178		$	—
Weighted-average effective interest rate		3.73	%		—		3.80	%		—

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

Note 17—Exchangeable Senior Notes

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

Following is financial information relating to the Notes:


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014		2013
	(dollars in thousands)
Period end:
Balance	$	250,000		$	250,000
Unamortized issuance costs (1)	$	6,388		$	7,281
Interest rate		5.38	%		5.38	%
During the period:
Weighted-average balance	$	250,000		$	170,330		$	250,000	$	85,635
Interest expense (2)	$	3,588		$	2,384		$	7,172	$	2,384

(1)	Unamortized issuance costs are included in Other assets in the consolidated balance sheets.

(2)	Total interest expense includes amortization of debt issuance costs of $228,000 and $453,000 during the quarter and six months ended June 30, 2014, respectively, and $144,000 during the quarter and six months ended June 30, 2013.

Note 18—Borrowings under Forward Purchase Agreements

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(dollars in thousands)
Period end:
Balance	$	—		$	244,047
Interest rate		0.00	%		3.00	%
Fair value of underlying loans and REO	$	—		$	242,621
During the period:
Weighted-average effective interest rate		2.82	%		3.00	%		2.84	%		3.00	%
Weighted-average balance	$	109,793		$	33,097		$	165,471		$	16,640
Interest expense	$	783		$	251		$	2,364		$	251
Maximum daily amount outstanding	$	226,847		$	244,047		$	226,847		$	244,047

Note 19—Liability for Losses Under Representations and Warranties

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Balance, beginning of period	$	10,854	$	6,231	$	10,110	$	4,441
Provision for losses		1,022		1,437		1,766		3,227
Incurred losses		—		—		—		—

Balance, end of period	$	11,876	$	7,668	$	11,876	$	7,668

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
During the period:
Unpaid principal balance of mortgage loans repurchased	$	2,623	$	292	$	4,411	$	1,208
Unpaid principal balance of repurchased mortgage loans repurchased by correspondent lenders	$	1,922	$	394	$	2,811	$	1,104
At end of period:
Unpaid principal balance of mortgage loans subject to pending claims for repurchase	$	19,805	$	824
Unpaid principal balance of mortgage loans subject to representations and warranties	$	29,806,058	$	19,829,437

Note 20—Commitments and Contingencies

Litigation

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

Mortgage Loan Commitments

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


	June 30, 2014
	(in thousands)
Commitments to purchase mortgage loans:
Correspondent production	$	1,443,612

Note 21—Shareholders’ Equity

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

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

Note 22—Net Gain on Mortgage Loans Acquired for Sale

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Cash gain (loss):
Sales proceeds, net	$	(3,173	)	$	(71,706	)	$	(6,067	)	$	(98,952	)
Hedging activities		(18,749	)		32,092			(22,299	)		45,705

		(21,922	)		(39,614	)		(28,366	)		(53,247	)
Non cash gain:
Receipt of MSRs in loan sale transactions		28,741			51,055			49,616			107,271
Provision for losses relating to representations and warranties provided in loan sales		(1,022	)		(1,437	)		(1,766	)		(3,227	)
Change in fair value relating to IRLCs, mortgage loans and hedging derivatives held at period end:
IRLCs		7,816			(28,020	)		9,838			(36,446	)
Mortgage loans		6,660			(34,572	)		8,073			(36,994	)
Hedging derivatives		(10,051	)		97,026			(17,202	)		96,360

		4,425			34,434			709			22,920

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

Note 23—Net Interest Income

Net interest income is summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Interest income:
Short-term investments	$	172	$	57	$	324	$	88
Mortgage-backed securities		1,961		—		3,722		—
Mortgage loans acquired for sale at fair value		5,574		9,292		9,199		15,615
Mortgage loans at fair value		36,231		17,052		65,012		27,549
Mortgage loans under forward purchase agreements at fair value		1,430		260		3,584		260
Excess servicing spread purchased from PFSI, at fair value		3,138		—		6,001		—
Other		12		136		22		160

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

Interest expense:
Assets sold under agreements to repurchase		15,143		10,814		27,682		21,526
Borrowings under forward purchase agreements		783		251		2,363		251
Asset-backed secured financing		1,561		—		3,178		—
Exchangeable senior notes		3,587		2,384		7,171		2,384
Other		791		695		1,246		1,219

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

Net interest income	$	26,653	$	12,653	$	46,224	$	18,292

Note 24—Net Gain on Investments

Net gain on investments is summarized below:


	Quarter ended June 30,					Six months ended June 30,
	2014			2013		2014			2013
	(in thousands)
Net gain (loss) on investments:
Mortgage-backed securities	$	1,467		$	—	$	2,176		$	—
Mortgage loans		84,379			46,834		131,935			110,814
Asset-backed secured financing		(5,175	)		—		(7,954	)		—
Excess servicing spread purchased from PFSI, at fair value		(7,537	)		—		(10,438	)		—

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

Note 25—Net Loan Servicing Fees

Net loan servicing fees are summarized below:


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Servicing fees (1)	$	19,156		$	12,307		$	36,688		$	22,724
MSR recapture fee receivable from PFSI		1			367			9			499
Effect of MSRs:
Carried at lower of amortized cost or fair value
Amortization		(7,697	)		(6,264	)		(15,061	)		(11,232	)
(Provision for) reversal of impairment		(2,224	)		1,222			(2,851	)		3,707
Carried at fair value - change in fair value		(4,764	)		260			(6,792	)		193
Gains (losses) on hedging derivatives		4,286			—			4,186			(1,988	)

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

Net loan servicing fees	$	8,758		$	7,892		$	16,179		$	13,903

(1)	Includes contractually specified servicing and ancillary fees.

Note 26—Share-Based Compensation Plans

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

Note 27—Other Expenses

Other expenses are summarized below:


	Quarter ended June 30,					Six months ended June 30,
	2014		2013			2014		2013
	(in thousands)
Common overhead allocation from PFSI	$	2,638	$	2,974		$	5,216	$	5,266
Servicing and collection costs		3,114		(30	)		3,745		333
Loan origination		397		1,468			435		2,446
Insurance		252		218			491		429
Technology		227		235			474		354
Other expenses		526		706			860		1,689

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

Note 28—Income Taxes

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

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

Note 29—Segments and Related Information

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

•

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

•

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

Financial highlights by operating segment are summarized below:


Quarter ended June 30, 2014	Correspondent production			Investment activities			Intersegment elimination & other			Total
	(in thousands)
Net investment income:
Net gain on mortgage loans acquired for sale	$	10,222		$	—		$	—		$	10,222
Net gain on investments		—			73,134			—			73,134
Interest income		5,585			44,434			(1,501	)		48,518
Interest expense		(4,881	)		(18,485	)		1,501			(21,865	)

		704			25,949			—			26,653
Net loan servicing fees		—			8,758						8,758
Other investment income (loss)		4,485			(2,696	)		—			1,789

		15,411			105,145			—			120,556

Expenses:
Loan fulfillment, Servicing and Management fees payable to PennyMac Financial Services, Inc.		12,749			22,776			—			35,525
Other		265			11,462			—			11,727

		13,014			34,238			—			47,252

Pre-tax income	$	2,397		$	70,907		$	—		$	73,304

Total assets at period end	$	927,849		$	3,941,896		$	—		$	4,869,745


Quarter ended June 30, 2013	Correspondent production			Investment activities			Intersegment elimination & other			Total
	(in thousands)
Net investment income:
Net gain on mortgage loans acquired for sale	$	44,438		$	—		$	—		$	44,438
Net gain on investments		—			46,834			—			46,834
Interest income		9,291			19,260			(1,754	)		26,797
Interest expense		(7,536	)		(8,362	)		1,754			(14,144	)

		1,755			10,898			—			12,653
Net loan servicing fees		—			7,892						7,892
Other investment income (loss)		4,752			(1,016	)		—			3,736

		50,945			64,608			—			115,553

Expenses:
Loan fulfillment, Servicing and Management fees payable to PennyMac Financial Services, Inc.		22,773			16,523			—			39,296
Other		69			8,279			—			8,348

		22,842			24,802			—			47,644

Pre-tax income	$	28,103		$	39,806		$	—		$	67,909

Total assets at period end	$	1,384,084		$	2,260,883		$	(201,583	)	$	3,443,384


Six months ended June 30, 2014	Correspondent production			Investment activities			Intersegment elimination & other			Total
	(in thousands)
Net investment income:
Net gain on mortgage loans acquired for sale	$	20,193		$	—		$	—		$	20,193
Net gain on investments		—			115,719			—			115,719
Interest income		9,220			81,032			(2,388	)		87,864
Interest expense		(8,536	)		(35,492	)		2,388			(41,640	)

		684			45,540			—			46,224
Net loan servicing fees		—			16,179			—			16,179
Other investment income (loss)		6,841			(8,005	)		—			(1,164	)

		27,718			169,433			—			197,151

Expenses:
Loan fulfillment, Servicing and Management fees payable to PennyMac Financial Services, Inc.		21,821			45,271			—			67,092
Other		353			20,114			—			20,467

		22,174			65,385			—			87,559

Pre-tax income	$	5,544		$	104,048		$	—		$	109,592

Total assets at period end	$	927,849		$	3,941,896		$	—		$	4,869,745


Six months ended June 30, 2013	Correspondent production			Investment activities			Intersegment elimination & other			Total
	(in thousands)
Net investment income:
Net gain on mortgage loans acquired for sale	$	73,717		$	—		$	—		$	73,717
Net gain on investments		—			110,814			—			110,814
Interest income		15,615			29,852			(1,795	)		43,672
Interest expense		(13,224	)		(13,951	)		1,795			(25,380	)

		2,391			15,901			—			18,292
Net loan servicing fees		—			13,903			—			13,903
Other investment income (loss)		10,225			(3,582	)		—			6,643

		86,333			137,036			—			223,369

Expenses:
Loan fulfillment, Servicing and Management fees payable to PennyMac Financial Services, Inc.		48,227			30,247			3,284	(1)		81,758
Other		1,123			16,644			—			17,767

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

Pre-tax income	$	36,983		$	90,145		$	(3,284	)	$	123,844

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

Note 30—Supplemental Cash Flow Information


	Six months ended June 30,
	2014			2013
	(in thousands)
Cash paid for interest	$	50,926		$	25,543
Income tax (refund) payment	$	(6,775	)	$	962
Non-cash investing activities:
Transfer of mortgage loans and advances to real estate acquired in settlement of loans	$	174,147		$	68,627
Purchase of mortgage loans financed through forward purchase agreements	$	1,386		$	243,096
Transfer of mortgage loans under forward purchase agreements to mortgage loans at fair value	$	205,903		$	—
Transfer of mortgage loans under forward purchase agreements and advances to REO under forward purchase agreements	$	9,369		$	—
Receipt of MSRs as proceeds from sales of loans	$	49,616		$	107,271
Purchase of REO financed through forward purchase agreements	$	68		$	89
Receipt of ESS pursuant to recapture agreement with PFSI	$	3,475		$	—
Transfer of REO under forward purchase agreements to REO	$	12,737		$	—
Non-cash financing activities:
Purchase of mortgage loans financed through forward purchase agreements	$	1,386		$	243,096
Purchase of REO financed through forward purchase agreements	$	68		$	89
Transfer of mortgage loans at fair value financed through agreements to repurchase to REO financed under agreements to repurchase	$	2,123		$	16,350
Dividends payable	$	43,743		$	—

Note 31—Regulatory Net Worth

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

Note 32—Recently Issued Accounting Pronouncements

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

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

Note 33—Subsequent Events

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

•

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

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

•

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

•

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

Item 2.

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

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

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

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

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

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

•

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

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

•

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

•

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

•

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

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

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

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

Observations on Current Market Opportunities

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

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

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

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

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

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

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

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

Results of Operations

The following is a summary of our key performance measures:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands except per share amounts)
Net investment income	$	120,556	$	115,553	$	197,151	$	223,369

Income before provision for income taxes by segment:
Correspondent production	$	2,397	$	28,103	$	5,544	$	36,983
Investment activities		70,907		39,806		104,048		90,145
Other (1)		—		—		—		(3,284	)

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

Net income	$	75,211	$	54,497	$	113,084	$	107,793
Earnings per share:
Basic	$	1.01	$	0.92	$	1.54	$	1.81
Diluted	$	0.93	$	0.86	$	1.44	$	1.75
Dividends per share:
Declared	$	0.59	$	0.57	$	1.18	$	1.14
Paid	$	0.59	$	0.57	$	1.18	$	1.14
Investment activities:
Distressed mortgage loans and REO:
Purchases	$	27,233	$	243,198	$	287,520	$	443,671
Cash proceeds from liquidation activities	$	200,764	$	104,814	$	486,324	$	198,259
MBS:
Purchases	$	19,638	$	—	$	19,638	$	—
Cash proceeds from repayment and sales	$	3,441	$	—	$	5,419	$	—
ESS:
Purchases from PFSI	$	52,867	$	—	$	73,393	$	—
Cash proceeds from repayments	$	9,081	$	—	$	16,494	$	—

Per share prices during the period:
High	$	24.15	$	26.07	$	24.44	$	28.73
Low	$	20.78	$	19.17	$	20.78	$	16.75
At period end	$	21.94	$	22.95	$	21.94	$	19.73
At period end:
Total assets	$	4,869,745	$	3,443,384
Book value per share	$	21.27	$	21.06

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

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

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

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

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

Net Investment Income

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

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

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Net gain on mortgage loans acquired for sale
Mortgage loans acquired for sale	$	6,660		$	(34,572	)	$	8,073		$	(36,994	)
IRLCs		7,816			(28,020	)		9,838			(36,446	)
Hedging derivatives		(10,051	)		97,026			(17,202	)		96,360

		4,425			34,434			709			22,920

Net interest income
Capitalization of interest pursuant to mortgage loan modifications		17,883			6,584			30,353			11,814
Accrual of unearned discounts relating to loans held in a variable interest entity		223			—			553			—

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

Net gain (loss) on investments
Mortgage-backed securities:
Agency		4,081			—			6,734			—
Non Agency		184			—			184			—
Mortgage loans:
at fair value		72,871			39,484			115,951			95,100
at fair value under forward purchase agreements		1,842			(690	)		463			(690	)

		74,713			38,794			116,414			94,410
ESS		(7,537	)		—			(10,438	)		—

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

Net loan servicing fees - MSR valuation adjustments		(5,860	)		1,534			(7,720	)		4,010

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

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

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Proceeds	$	191,129	$	104,351	$	476,584	$	198,259
Accumulated net gains (1)	$	30,809	$	11,844	$	87,024	$	19,884
Net gains on liquidation (2)	$	13,694	$	11,088	$	22,707	$	22,289

Average investment in mortgage loans and REO	$	2,785,185	$	1,272,947	$	2,727,750	$	1,264,067

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

(2)	Represents the gain or loss recognized upon sale or repayment of the respective asset.

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

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

Net Gain on Mortgage Loans Acquired for Sale

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


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Cash gain (loss):
Sales proceeds, net	$	(3,173	)	$	(71,706	)	$	(6,067	)	$	(98,952	)
Hedging activities		(18,749	)		32,092			(22,299	)		45,705

		(21,922	)		(39,614	)		(28,366	)		(53,247	)
Non cash gain:
Receipt of MSRs in loan sale transactions		28,741			51,055			49,616			107,271
Provision for losses relating to representations and warranties provided in loan sales		(1,022	)		(1,437	)		(1,766	)		(3,227	)
Change in fair value relating to IRLCs, mortgage loans and hedging derivatives held at period end:
IRLCs		7,816			(28,020	)		9,838			(36,446	)
Mortgage loans		6,660			(34,572	)		8,073			(36,994	)
Hedging derivatives		(10,051	)		97,026			(17,202	)		96,360

		4,425			34,434			709			22,920

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

Notional (Loan) amount of IRLCs issued	$	3,784,024		$	5,543,256		$	6,015,404		$	9,893,621
Purchases of mortgage loans acquired for sale
At fair value	$	7,302,157		$	8,904,708		$	12,345,381		$	17,753,860
Unpaid principal balance	$	6,986,131		$	8,585,531		$	11,815,719		$	17,111,151
Proceeds from sales of mortgage loans acquired for sale:
Cash:
Sales to nonaffiliated investors	$	2,763,138		$	3,909,743		$	4,789,444		$	9,044,479
Sales of government-insured and guaranteed loans to PFSI		3,955,329			4,733,767			7,085,859			8,282,163

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

Increase (decrease) in gain on mortgage loans acquired for sale due to:
Change in fair value of IRLCs	$	35,836		$	(36,645	)	$	46,284		$	(43,608	)
Change in volume of loans sold		(16,376	)		25,223			(35,437	)		73,574
Change in gain margin		(53,452	)		36,926			(64,029	)		10,677
Change in sourcing fees received from PFSI		(224	)		888			(342	)		1,658

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

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

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

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

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

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

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


	Range (Weighted average)
Key inputs	June 30, 2014	December 31, 2013
Pull-through rate	49.0% - 98.0%	64.8% - 98.0%
	(81.6%)	(86.4%)
MSR value expressed as:
Servicing fee multiple	1.7 - 5.0	1.4 - 5.1
	(3.9)	(4.1)
Percentage of unpaid principal balance	0.4% - 1.3%	0.4% - 1.3%
	(1.0%)	(1.0%)

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

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


	Quarter ended June 30,
	2014				2013
	Range (Weighted average)
Key inputs	Amortized cost		Fair value		Amortized cost		Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$	13,356	$	15,385	$	50,978	$	77
Unpaid principal balance of underlying mortgage loans	$	1,244,538	$	1,458,400	$	3,840,110	$	27,346
Weighted-average annual servicing fee rate (in basis points)		25		25		28		27
Pricing spread (1)		6.3% – 14.3%		8.5% – 10.3%		5.4% – 13.5%		6.6% - 11.9%
		(8.7%)		(9.1%)		(6.5%)		(7.5%)
Life (in years)		1.3 – 7.3		3.2 – 7.3		2.6 – 6.9		6.3 - 6.9
		(6.1)		(7.1)		(6.4)		(6.8)
Annual total prepayment speed (2)		7.6% – 50.9%		8.1% – 25.4%		8.5% – 23.6%		8.8% - 13.6%
		(10.4%)		(9.6%)		(9.1%)		(9.3%)
Annual per-loan cost of servicing		$68 – $100		$68 – $68		$68 – $140		$68 - $68
		($68)		($68)		($68)		($68)


	Six months ended June 30,
	2014				2013
	Range (Weighted average)
Key inputs	Amortized cost		Fair value		Amortized cost		Fair value
	(MSR recognized and unpaid principal balance of underlying loan amounts in thousands)
MSR recognized	$	22,474	$	27,142	$	107,167	$	104
Unpaid principal balance of underlying mortgage loans	$	2,095,087	$	2,550,114	$	8,843,667	$	29,946
Weighted-average annual servicing fee rate (in basis points)		25		25		26		27
Pricing spread (1)		6.3% – 14.3%		8.5% – 12.3%		5.4% – 14.4%		6.6% - 14.4%
		(8.6%)		(9.0%)		(6.8%)		(7.6%)
Life (in years)		1.1 – 7.3		2.8 – 7.3		2.6 - 6.9		2.8 - 6.9
		(6.0)		(7.1)		(6.4)		(6.7)
Annual total prepayment speed (2)		7.6% – 56.4%		8.0% – 25.4%		8.5% – 23.6%		8.8% - 27.0%
		(10.4%)		(9.5%)		(9.1%)		(9.7%)
Annual per-loan cost of servicing		$68 - $100		$68 - $68		$68 – $140		$68 - $68
		($68)		($68)		($68)		($68)

(1)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

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

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

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

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
During the period:
Unpaid principal balance of mortgage loans repurchased	$	2,623	$	292	$	4,411	$	1,208
Unpaid principal balance of repurchased mortgage loans repurchased by correspondent lenders	$	1,922	$	394	$	2,811	$	1,104
At end of period:
Unpaid principal balance of mortgage loans subject to pending claims for repurchase	$	19,805	$	824
Unpaid principal balance of mortgage loans subject to representations and warranties	$	29,806,058	$	19,829,437

During the quarter and six months ended June 30, 2014, we repurchased mortgage loans with unpaid principal balances totaling $2.6 million and $4.4 million, respectively, and incurred no losses relating to such repurchases primarily as a result of our ability to recover any losses inherent in the repurchased loan from the selling correspondent lender. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases and the loans sold season, we expect the level of repurchase activity to increase.

As economic fundamentals change, and as investor and Agency evaluation of their loss mitigation strategies (including claims under representations and warranties) change and as the mortgage market and general economic changes affect our correspondent lenders, the level of repurchase activity and ensuing losses will change, which may be material to our financial condition and results of operations.

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

Following is a summary of our liability for representations and warranties in the consolidated balance sheets:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Balance, beginning of period	$	10,854	$	6,231	$	10,110	$	4,441
Provision for losses		1,022		1,437		1,766		3,227
Incurred losses		—		—		—		—

Balance, end of period	$	11,876	$	7,668	$	11,876	$	7,668

The level of the recourse liability is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses inherent in the repurchased loan from the selling correspondent lender and other external conditions that may change over the lives of the underlying loans. Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current unpaid principal balance of loans sold by us to date represents the maximum exposure to repurchases related to representations and warranties. We believe the amount and range of reasonably possible losses in relation to the recorded liability is not material to our financial condition or results of operations.

Our hedging activities relating to correspondent production primarily involve forward sales and purchases of our IRLCs and mortgage loans acquired for sale as well as purchases of put and call MBS options.

Following is a summary of the notional activity in our hedging derivatives for our investment activities related to our IRLCs and inventory of mortgage loans acquired for sale:


	Quarter ended June 30, 2014
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		1,777,353		11,967,081		(10,685,830	)		3,058,604
Forward sales contracts		2,497,960		15,282,582		(13,594,909	)		4,185,633
MBS put option		235,000		290,000		(255,000	)		270,000
MBS call option		—		25,000		—			25,000


	Quarter ended June 30, 2013
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		1,890,960		15,323,298		(11,802,474	)		5,411,784
Forward sales contracts		3,224,190		20,418,956		(15,915,080	)		7,728,066
MBS put options		225,000		1,545,000		(1,310,000	)		460,000
MBS call options		350,000		1,000,000		(625,000	)		725,000


	Six months ended June 30, 2014
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		2,781,066		18,364,898		(18,087,360	)		3,058,604
Forward sales contracts		3,463,027		24,051,521		(23,328,915	)		4,185,633
MBS put option		55,000		695,000		(480,000	)		270,000
MBS call option		110,000		25,000		(110,000	)		25,000


	Six months ended June 30, 2013
Period/Instrument	Balance, beginning of period		Additions		Dispositions/ expirations			Balance, end of period
	(in thousands)
Forward purchase contracts		2,206,539		27,765,642		(24,560,397	)		5,411,784
Forward sales contracts		4,266,983		38,269,229		(34,808,146	)		7,728,066
MBS put options		495,000		3,025,000		(3,060,000	)		460,000
MBS call options		—		1,900,000		(1,175,000	)		725,000

Loan Origination Fees

Loan origination fees represent fees we charge correspondent lenders relating to our purchase of loans from those lenders. The decrease in fees during 2014 compared to 2013 is due to a decrease in production volume.

Net Gain on Investments

During the quarter and six months ended June 30, 2014, we recognized net gains on MBS, mortgage loans and ESS totaling $73.1 million and $115.7 million, respectively. This compares to recognized net gains on investments totaling $46.8 million and $110.8 million during the quarter and six months ended June 30, 2013, respectively. The increase is primarily due to increased valuation gains in our portfolio of mortgage loans, including mortgage loans under forward purchase agreements.

The average portfolio balance of distressed mortgage loan investments (mortgage loans at fair value excluding mortgage loans at fair value held in a VIE and mortgage loans under forward purchase agreements at fair value) increased $1.4 billion, or 111%, and $1.4 billion, or 115%, during the quarter and six months ended June 30, 2014 as compared to the same period in 2013.

Net gains on mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value are summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Valuation changes:
Performing loans	$	39,123	$	4,700	$	38,882	$	27,684
Nonperforming loans		24,587		34,094		58,001		66,726

		63,710		38,794		96,883		94,410
Payoffs		7,490		8,040		13,109		16,404
Sales		2,395		—		3,520		—

	$	73,595	$	46,834	$	113,512	$	110,814

Average portfolio balance	$	2,570,533	$	1,219,196	$	2,537,168	$	1,177,454

Because we have elected to record our mortgage loans and mortgage loans under forward purchase agreements at fair value, a substantial portion of the income we record with respect to such loans results from changes in fair value. Valuation changes amounted to $63.7 million and $38.8 million in the quarters ended June 30, 2014 and 2013, respectively, and $96.9 million and $94.4 million in the six months ended June 30, 2014 and 2013, respectively.

The valuation changes on performing loans is affected by the capitalization of delinquent interest on loans we modify. When we capitalize interest in a loan modification, we increase the carrying value of the loan. However, the modification may not result in an immediate increase in the loan’s fair value. As a result, the interest income we recognize is generally offset by a valuation loss. Valuation gains on loans with capitalized interest generally accrue as the borrower demonstrates performance in the periods following the capitalization. During the quarter and six months ended June 30, 2014, we capitalized interest totaling $18.1 million and $30.4 million compared to $6.6 and $11.8 for the quarter and six months ended June 30, 2013.

The increase in valuation gains reflects portfolio growth and observed and realized increases in demand for performing mortgage loans that resulted in a reduction of the discount rate we apply to our estimate of cash flows to be generated by our performing loans and an increase in such loans’ valuations. The increase in the valuation gains for performing loans was partially tempered by an increase in the projected loss severity for long-held severely delinquent loans.

Cash is generated when mortgage loans and mortgage loans under forward purchase agreements are monetized through payoffs or sales, when we receive payments of principal and interest on such loans, generally after they are modified, or when the property securing a mortgage loan that has been settled through transfer of the

property to us has been sold.

During the quarters ended June 30, 2014 and 2013, we received proceeds from liquidation of mortgage loans and REO of $191.1 million and $104.4 million, respectively, and during the six-month periods ended June 30, 2014 and 2013, we received proceeds from liquidation of mortgage loans and REO of $476.6 million and $198.3 million, respectively. These proceeds include $70.3 million and $264.3 million from the sale of $81.3 million and $313.4 million in unpaid principal balance of mortgage loans during the quarter and six months ended June 30, 2014, respectively. For each period’s liquidations, we had recorded accumulated gains on the liquidated assets during the period we held those assets totaling $30.8 million and $11.8 million for the quarters ended June 30, 2014 and 2013, respectively, and $87.0 million and $19.9 million for the six-month periods ended June 30, 2014 and 2013, respectively, and we recorded additional gains of $13.7 million and $11.1 million for the quarters ended June 30, 2014 and 2013, respectively, and $22.7 million and $22.3 million for the six months ended June 30, 2014 and 2013, respectively, when the assets were liquidated.

During the quarters ended June 30, 2014 and 2013, we recognized gains on mortgage loan payoffs as summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(dollars in thousands)
Number of loans		353		349		681		642
Unpaid principal balance	$	98,360	$	94,313	$	178,076	$	174,956
Gain recognized at payoff	$	7,489	$	8,040	$	13,109	$	16,404

Gains on sales of distressed mortgage loans are summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(dollars in thousands)
Number of loans		396		—		1,362		—
Unpaid principal balance	$	81,294	$	—	$	313,420	$	—
Gain recognized at sale	$	2,395	$	—	$	3,520	$	—

The following tables present a summary of loan modifications completed:


	Quarter ended June 30,										Six months ended June 30,
	2014					2013					2014					2013
Modification type (1)	Number of loans		Balance of loans (2)			Number of loans		Balance of loans (2)			Number of loans		Balance of loans (2)			Number of loans		Balance of loans (2)
	(dollars in thousands)
Rate reduction		412	$	100,752			149	$	32,226			766	$	180,641			272	$	59,131
Term extension		482		122,371			127		28,816			870		216,040			238		51,396
Capitalization of interest and fees		615		155,083			250		54,442			1,116		273,352			468		100,627
Principal forbearance		218		65,245			60		16,157			369		112,172			109		25,088
Principal reduction		288		73,228			122		28,056			542		137,046			196		48,397
Total		615		155,083			250		54,442			1,116		273,352			468		100,627

Defaults of mortgage loans modified in the prior year period			$	2,388				$	2,796				$	6,197				$	7,134
As a percentage of balance of loans before modification				6	%				10	%				9	%				9	%
Defaults during the period of mortgage loans modified since acquisitions(3)			$	21,140				$	11,060				$	49,648				$	20,983
As a percentage of balance of loans before modification				7	%				6	%				18	%				11	%
Repayments and sales of mortgage loans modified in the prior year period			$	13,153				$	6,438				$	36,654				$	17,997
As a percentage of balance of loans before modification				25	%				18	%				37	%				18	%

(1)	Modification type categories are not mutually exclusive and a modification of a single loan may be counted in multiple categories, if applicable. The total number of modifications noted in the table is therefore lower than the sum of all of the categories.

(2)	Before modification.

(3)	Represents defaults of mortgage loans during the period that have been modified by us at any point since acquisition.

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


	Quarter ended June 30,												Six months ended June 30,
	2014						2013						2014						2013
Category	Before modification			After modification			Before modification			After modification			Before modification			After modification			Before modification			After modification
	(dollars in thousands)
Loan balance	$	252		$	256		$	218		$	197		$	245		$	246		$	215		$	197
Remaining term (months)		327			417			311			447			323			417			312			445
Interest rate		5.30	%		3.68	%		5.89	%		4.18	%		5.44	%		3.71	%		5.93	%		4.17	%
Forbeared principal	$	—		$	15		$	—		$	7		$	—		$	13		$	—		$	6

Implementing long-term, sustainable loan modification is one means by which we endeavor to increase the value of the distressed mortgage loans which we have typically purchased at discounts to their unpaid principal balance. Before the disruption of the mortgage securitization markets in 2008, an active market in securitizations of reperforming and modified mortgage loans existed. As a result of the disruptions that occurred in 2008, the market for securities backed by such loans has become illiquid.

As discussed above, during the quarter and six months ended June 30, 2014, we had our first significant sales of reperforming mortgage assets. We received proceeds of $70.3 million and $264.3 million from the sale of $81.3 million and $313.4 million in unpaid principal balance of mortgage loans during the quarter and six months ended June 30, 2014, respectively. There can be no assurance that this form of monetization will continue to be a reliable means of liquidating reperforming mortgage assets in the future. We continue to monitor and explore the market for loan sales or securitizations backed by reperforming and modified mortgage loans as a means of recovering our investment in such loans in the future.

Absent sale or securitization of reperforming and modified mortgage loans, and unlike liquidation of a defaulted mortgage loan, we expect that recovery of our investment in a performing modified mortgage loan will take place generally over a period of several years, during which we earn and collect interest income on the loan. Our current expectations are that we will receive cash on modified mortgage loans through monthly borrower payments, HAMP incentive payments, payoffs or acquisition of the property securing the loans and liquidation of the property in the event the borrower subsequently defaults. Due to the recent addition of new modification programs, both through HAMP and proprietary programs, trends in default performance are difficult to discern. However, the addition of these new modification programs resulted in an increase in the volume of our modification activity to date during 2014.

Large-scale refinancing of modified mortgage loans is not expected to occur for several years. Borrowers who have recently modified their mortgage loans typically have credit profiles that do not qualify them for refinancing or have loans on properties whose loan-to-value ratios exceed current underwriting guidelines for new mortgage loans. Further, modified mortgage loans require a period of acceptable borrower performance, generally 12 months of timely mortgage payments, for consideration in most Agency refinance programs.

Certain programs such as the FHA’s Negative Equity Refinance Program allow homeowners whose modified mortgage amount exceeds the fair value of the property securing the loan to refinance immediately following a modification. Our utilization of this program remains consistent in 2014 as compared to 2013. We continue to explore methods of accelerating recovery of our investment of modified mortgage loans through solicitations of refinancings of such loans into Agency-eligible loans which result in a full or partial repayment of our investment.

During the quarter and six months ended June 30, 2014, we recognized gains on MBS of $1.5 million and $2.2 million, respectively, net of hedging activities. The gains we recognized were due to decreases in market yields during the quarter. We did not hold any MBS during the six-month period ended June 30, 2013.

Net Interest Income

Net interest income is summarized below:


	Quarter ended June 30, 2014
	Interest income/expense									Annualized %
	Coupon		Discount/			Total		Average		interest
	Coupon		fees (1)			Total		balance		yield/cost
	(dollars in thousands)
Assets:
Correspondent production:
Mortgage loans acquired for sale at fair value	$	5,574	$	—		$	5,574	$	514,344		4.29	%
Investment activities:
Short-term investments		172		—			172		136,116		0.50	%
Mortgage -backed securities:
Agency		1,712		83			1,795		193,802		3.66	%
Non-Agency prime jumbo		95		71			166		19,668		3.34	%

		1,807		154			1,961		213,470		3.63	%

Mortgage loans:
at fair value		36,008		223			36,231		2,472,804		5.80	%
under forward purchase agreements at fair value		1,430		—			1,430		97,729		5.79	%

		37,438		223			37,661		2,570,533		5.79	%

ESS		3,139		—			3,139		155,515		7.98	%
Total investment activities		42,556		377			42,933		3,075,634		5.52	%

Other interest		11		—			11		—

	$	48,141	$	377		$	48,518	$	3,589,978		5.35	%

Liabilities:
Assets sold under agreements to repurchase	$	12,547	$	2,596		$	15,143	$	2,253,127		2.66	%
Borrowings under forward purchase agreements		783		—			783		109,793		2.82	%
Asset backed secured financing		1,481		80			1,561		165,495		3.73	%
Exchangeable senior notes		3,359		228			3,587		250,000		5.68	%

		18,170		2,904			21,074		2,778,415		3.03	%

Other interest - Servicing		791		—			791		—

		18,961		2,904			21,865		2,778,415		3.10	%

Net interest income	$	29,180	$	(2,527	)	$	26,653

Net interest margin											2.97	%
Net interest spread											2.25	%

(1)	Amounts in this column represent accrual of unearned discounts and amortization of facility commitment fees for liabilities.


	Quarter ended June 30, 2013
	Interest income/expense									Annualized %
	Coupon		Discount/			Total		Average		interest
	Coupon		fees (1)			Total		balance		yield/cost
	(dollars in thousands)
Assets:
Correspondent production:
Mortgage loans acquired for sale at fair value	$	9,292	$	—		$	9,292	$	1,042,735		3.52	%
Investment activities:
Short-term investments		57		—			57		82,450		0.27	%
Mortgage loans:
at fair value		17,052		—			17,052		1,186,186		5.69	%
under forward purchase agreements at fair value		260		—			260		33,010		3.12	%

		17,312		—			17,312		1,219,196		5.62	%

Total investment activities		17,369		—			17,369		1,301,646		5.34	%

Other Interest		136		—			136		—

	$	26,797	$	—		$	26,797	$	2,344,381		4.52	%

Liabilities:
Assets sold under agreements to repurchase	$	8,561	$	2,253		$	10,814	$	1,385,350		3.12	%
Borrowings under forward purchase agreements		251		—			251		33,096		3.00	%
Exchangeable senior notes		2,240		144			2,384		170,330		3.39	%

		11,052		2,397			13,449		1,588,776		3.39	%
Other interest - Servicing		695		—			695		—

		11,747		2,397			14,144		1,588,776		3.52	%

Net interest income	$	15,050	$	(2,397	)	$	12,653

Net interest margin											2.16	%
Net interest spread											1.00	%

(1)	Amounts in this column represent accrual of unearned discounts and amortization of facility commitment fees for liabilities.


	Six months ended June 30, 2014
	Interest income/expense									Annualized %
	Coupon		Discount/			Total		Average		interest
	Coupon		fees (1)			Total		balance		yield/cost
	(dollars in thousands)
Assets:
Correspondent production:
Mortgage loans acquired for sale at fair value	$	9,199	$	—		$	9,199	$	424,890		4.31	%
Investment activities:
Short-term investments		324		—			324		116,458		0.55	%
Mortgage -backed securities:
Agency		3,440		116			3,556		194,977		3.63	%
Non-Agency prime jumbo		95		71			166		19,668		5.45	%

		3,535		187			3,722		214,645		3.45	%

Mortgage loans:
at fair value		64,459		553			65,012		2,386,352		5.42	%
under forward purchase agreements at fair value		3,584		—			3,584		150,816		4.73	%

		68,043		553			68,596		2,537,168		5.42	%
ESS		6,001		—			6,001		145,891		8.18	%

Total investment activities		77,903		740			78,643		3,014,162		5.19	%
Other interest		22		—			22		—

	$	87,124	$	740		$	87,864	$	3,439,052		5.08	%

Liabilities:
Assets sold under agreements to repurchase	$	22,462	$	5,220		$	27,682	$	2,025,678		2.72	%
Borrowings under forward purchase agreements		2,363		—			2,363		165,471		2.84	%
Asset backed secured financing		2,974		204			3,178		166,190		3.80	%
Exchangeable senior notes		6,718		453			7,171		250,000		5.71	%

		34,517		5,877			40,394		2,607,339		3.08	%

Other interest - Servicing		1,246		—			1,246		—

		35,763		5,877			41,640		2,607,339		3.18	%

Net interest income	$	51,361	$	(5,137	)	$	46,224

Net interest margin											2.67	%
Net interest spread											1.91	%

(1)	Amounts in this column represent accrual of unearned discounts and amortization of facility commitment fees for liabilities.


	Six months ended June 30, 2013
	Interest income/expense									Annualized %
	Coupon		Discount/			Total		Average		interest
	Coupon		fees (1)			Total		balance		yield/cost
	(dollars in thousands)
Assets:
Correspondent production:
Mortgage loans acquired for sale at fair value	$	15,615	$	—		$	15,615	$	937,707		3.33	%
Investment activities:
Short-term investments		88		—			88		73,224		0.24	%
Mortgage loans:
at fair value		27,549		—			27,549		1,160,858		4.75	%
under forward purchase agreements at fair value		260		—			260		16,596		3.12	%

		27,809		—			27,809		1,177,454		4.72	%

Total investment activities		27,897		—			27,897		1,250,678		4.46	%


Other Interest		160		—			160		—

	$	43,672	$	—		$	43,672	$	2,188,385		3.97	%

Liabilities:
Assets sold under agreements to repurchase	$	16,862	$	4,664		$	21,526	$	1,304,010		3.30	%
Borrowings under forward purchase agreements		251		—			251		16,640		3.00	%
Exchangeable senior notes		2,240		144			2,384		85,635		5.54	%

		19,353		4,808			24,161		1,406,285		3.42	%
Other interest - Servicing		1,219		—			1,219		—

		20,572		4,808			25,380		1,406,285		3.59	%

Net interest income	$	23,100	$	(4,808	)	$	18,292

Net interest margin											1.67	%
Net interest spread											0.38	%

(1)	Amounts in this column represent accrual of unearned discounts and amortization of facility commitment fees for liabilities.

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


	Quarter ended June 30, 2014 vs. Quarter ended June 30, 2013									Six months ended June 30, 2014 vs. Six months ended June 30, 2013
	Increase (decrease) due to changes in									Increase (decrease) due to changes in
							Total									Total
	Rate			Volume			change			Rate			Volume			change
	(in thousands)
Correspondent production:
Mortgage loans acquired for sale at fair value	$	1,704		$	(5,422	)	$	(3,718	)	$	3,778		$	(10,194	)	$	(6,416	)
Investment activities:
Money market investment		64			51			115			163			73			236
Mortgage -backed securities:
Agency		—			1,795			1,795			—			3,556			3,556
Non-Agency prime jumbo		—			166			166			—			166			166

		—			1,961			1,961			—			3,722			3,722
Mortgage loans:
at fair value		334			18,845			19,179			4,606			32,857			37,463
under forward purchase agreements		356			814			1,170			200			3,124			3,324

Total mortgage loans		690			19,659			20,349			4,806			35,981			40,787
ESS		—			3,139			3,139			—			6,001			6,001

Total investment activities		754			24,810			25,564			4,969			45,777			50,746
Other interest		—			(125	)		(125	)		—			(138	)		(138	)

		2,458			19,263			21,721			8,747			35,445			44,192

Assets sold under agreements to repurchase:		(843	)		5,172			4,329			(1,161	)		7,317			6,156
Borrowings under forward purchase agreement		(16	)		548			532			(14	)		2,126			2,112
Asset backed secured financing		—			1,561			1,561			—			3,178			3,178
Exchangeable senior notes		61			1,142			1,203			75			4,712			4,787

Interest bearing liabilities		(798	)		8,423			7,625			(1,100	)		17,333			16,233

Other interest - servicing		—			96			96			—			27			27

		(798	)		8,519			7,721			(1,100	)		17,360			16,260

Net interest income	$	3,256		$	10,744		$	14,000		$	9,847		$	18,085		$	27,932

In the quarter and six months ended June 30, 2014, we earned net interest income of $26.7 million and $46.2 million, respectively, compared to $12.7 million and $18.3 million for the same periods in 2013. The increase in net interest income between the quarters was primarily due to an increase in average interest-earning assets for the quarter and six months ended June 30, 2014 as compared to the same periods in 2013 supplemented by a 53% and 65% increase in our yield-cost spread.

We earned interest income on our portfolio of Agency MBS totaling $2.0 million and $3.7 million for the quarter and six months ended June 30, 2014, respectively. We did not hold Agency MBS during the quarter ended June 30, 2013.

In the quarter and six months ended June 30, 2014, we recognized interest income on mortgage loans at fair value and mortgage loans under forward purchase agreements at fair value totaling $37.7 million and $68.6 million, respectively, including $18.1 million and $30.4 million, respectively, of interest capitalized pursuant to loan modifications, which compares to $17.3 million and $27.8 million, including $6.6 million and $11.8 million of interest capitalized pursuant to loan modifications, in the quarter and six months ended June 30, 2013. The increases in interest income are due primarily to growth in the average balance of our mortgage loan portfolio of $1.4 billion, or 111%, and $1.4 billion, or 115%, for the quarter and six months ended June 30, 2014 when compared to the same period in 2013.

At June 30, 2014, approximately 72% of the fair value of our distressed mortgage loan portfolio was nonperforming, as compared to 67% at June 30, 2013. We do not accrue interest on nonperforming loans and generally do not recognize revenues during the period we hold REO. We calculate the yield on our mortgage loan portfolio based on the portfolio’s average fair value, which most closely reflects our investment in the mortgage loans. Accordingly, the yield we realize on our distressed mortgage loans is substantially higher than would be recorded based on the loans’ unpaid principal balances as we typically purchase our distressed mortgage loans at substantial discounts to their UPB.

Nonperforming loans and REO generally take longer to generate cash flow than performing loans due to the time required to work with borrowers to resolve payment issues through our modification programs and to acquire and liquidate the property securing the mortgage loans. The value and returns we realize from these assets are determined by our ability to assist borrowers in curing defaults, or when curing of borrower defaults is not a viable solution, by our ability to effectively manage the liquidation process. As a participant in HAMP, we are required to comply with the process specified by the HAMP program before liquidating a loan, and this may extend the resolution process. At June 30, 2014, we held $1.5 billion in fair value of nonperforming loans and $240.5 million in carrying value of REO.

During the quarter and six months ended June 30, 2014, we incurred interest expense totaling $21.9 million and $41.6 million, respectively, as compared to $14.1 million and $25.4 million, respectively, during the quarter and six months ended June 30, 2013. Our interest cost on interest bearing liabilities was 3.03% and 3.08% for the quarter and six months ended June 30, 2014 as compared to 3.39% and 3.42% during the quarter and six months ended June 30, 2013. The increase in interest expense reflects our increased use of borrowings in support of growth of our balance sheet, partially offset by the effect of lower borrowing costs relating to our mortgage loans at fair value during 2014 as compared to 2013.

Net Loan Servicing Fees

When we sell mortgage loans, we generally enter into a contract to service the mortgage loans and recognize the fair value of such contracts as MSRs. Under these contracts, we are required to perform loan servicing functions in exchange for fees and the right to other compensation. The servicing functions, which are performed on our behalf by PLS, typically include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions.

Net loan servicing fees are summarized below:


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)
Servicing fees (1)	$	19,156		$	12,307		$	36,688		$	22,724
MSR recapture fee receivable from PFSI		1			367			9			498
Effect of MSRs:
Carried at lower of amortized cost or fair value
Amortization		(7,697	)		(6,264	)		(15,061	)		(11,232	)
(Provision for) reversal of impairment		(2,224	)		1,222			(2,851	)		3,708
Carried at fair value - change in fair value		(4,764	)		260			(6,792	)		193
Gains (losses) on hedging derivatives		4,286			—			4,186			(1,988	)

		(10,399	)		(4,782	)		(20,518	)		(9,319	)

Net loan servicing fees	$	8,758		$	7,892		$	16,179		$	13,903

(1)	Includes contractually specified servicing and ancillary fees.

Net loan servicing fees increased $900,000 and $2.3 million during the quarter and six months ended June 30, 2014 compared to the same periods in 2013. The increase was primarily due to a $6.8 million and $14.0 million increase, respectively, in servicing fees, offset by a $5.6 million and $11.2 million increase, respectively, in the effect of MSRs on net loan servicing fees. The increase in servicing fees is attributable to continued growth in our mortgage loan servicing portfolio. Offsetting the increase in servicing fees was MSR activity which included increased amortization arising from growth in the MSR asset along with the recognition of fair value decreases and impairment as compared to net increases in fair value in the prior period.

Effective February 1, 2013, we entered into an MSR recapture agreement that requires PLS to transfer to us the increases MSRs with respect to new mortgage loans originated in refinancing transactions where PLS refinances a mortgage loan for which we previously held the MSRs. PLS is generally required to transfer MSRs relating to such mortgage loans (or, under certain circumstances, other mortgage loans) that have an aggregate unpaid principal balance that is not less than 30% of the aggregate unpaid principal balance of all the loans so originated. Where the fair value of the aggregate MSRs to be transferred for the applicable month is less than $200,000, PLS may, at its option, settle in cash with PMT in an amount equal to such fair market value in lieu of transferring such MSRs. We recognized approximately $9,000 of such income during the six months ended June 30, 2014.

As our investment in MSRs grows, we expect that the effect of amortization, impairment and changes in fair value will have an increasing influence on our net income. MSRs have a significant effect on net loan servicing fees, driven primarily by our monthly re-measurement of the fair value of MSRs. The fair value of MSRs is difficult to determine because MSRs are not actively traded in observable standalone markets and are sensitive to changes in interest rate levels and marketplace expectations of future interest rates. Considerable judgment is required to estimate the fair values of these assets and the exercise of such judgment can significantly affect our income.

Our MSR valuation process combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value at each balance sheet date. The cash flow and prepayment assumptions used in our Manager’s discounted cash flow model are based on market factors and include the historical performance of its managed MSRs, which our Manager believes are consistent with assumptions and data used by market participants valuing similar MSRs.

The key inputs used in the valuation of MSRs include mortgage prepayment speeds and discount rates. These variables can, and generally do, change from period to period as market conditions change. Therefore, the fair value of MSRs changes from period to period. PCM’s valuation committee reviews and approves the fair value estimates of our MSRs.

We account for MSRs either at the asset’s fair value with changes in fair value recorded in current period earnings or by using the amortization method with the MSRs carried at the lower of amortized cost or fair value based on whether we view the underlying mortgages as being sensitive to prepayments resulting from changing market interest rates. We have identified an initial mortgage interest rate of 4.5% as the threshold for whether such mortgage loans are sensitive to changes in interest rates:

•

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

•

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

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


	June 30,			December 31,
	2014			2013
	(in thousands)
MSRs carried at fair value	$	46,802		$	26,452

MSR carried at lower of amortized cost or fair value:
Amortized cost	$	274,110		$	266,697
Valuation allowance		(5,428	)		(2,577	)

Carrying value	$	268,682		$	264,120

Fair value	$	289,226		$	289,737

Total MSR:
Carrying value	$	315,484		$	290,572

Fair value	$	336,028		$	316,189

Unpaid principal balance of mortgage loans underlying MSRs	$	29,268,039		$	25,792,933

Average servicing fee rate (in basis points)
MSRs carried at lower of amortized cost or fair value		26			26
MSRs carried at fair value		25			26
Average note interest rate
MSRs carried at lower of amortized cost or fair value		3.72	%		3.68	%
MSRs carried at fair value		4.79	%		4.78	%

Key assumptions used in determining the fair value of MSRs and estimates of the sensitivity of MSR values to changes in these assumptions are as follows:


	June 30, 2014						December 31, 2013
	Range (Weighted average)
	Amortized cost			Fair value			Amortized cost			Fair value
	(Carrying value, unpaid principal balance and effect on value amounts in thousands)
Carrying value	$	268,682		$	46,802		$	264,120		$	26,452
Key inputs:
Unpaid principal balance of underlying mortgage loans	$	24,639,750		$	4,758,331		$	23,399,612		$	2,393,321

Weighted-average annual servicing fee rate (in basis points)		26			25			26			26
Weighted-average note interest rate		3.72%			4.79%			3.68%			4.78%


Pricing spread (1) (2)		6.3% – 17.5%			7.6% – 15.3%			6.3% – 17.5%			7.3% – 15.3%
		(7.4%)			(9.2%)			(6.7%)			(8.6%)
Effect on fair value of a:
5% adverse change	$	(5,302	)	$	(827	)	$	(5,490	)	$	(488	)
10% adverse change	$	(10,427	)	$	(1,627	)	$	(10,791	)	$	(959	)
20% adverse change	$	(20,177	)	$	(3,149	)	$	(20,861	)	$	(1,855	)

Weighted average life (in years)		1.1 - 7.2			2.4 - 7.2			1.3 - 7.3			2.8 - 7.3
		(6.4)			(7.0)			(6.7)			(7.2)
Prepayment speed (1) (3)		7.7% – 58.9%			8.0% – 30.6%			7.7% - 51.9%			8.0% - 20.0%
		(8.6%)			(10.2%)			(8.2%)			(8.9%)
Effect on fair value of a:
5% adverse change	$	(5,495	)	$	(1,160	)	$	(5,467	)	$	(568	)
10% adverse change	$	(10,821	)	$	(2,277	)	$	(10,765	)	$	(1,117	)
20% adverse change	$	(20,993	)	$	(4,390	)	$	(20,886	)	$	(2,160	)

Annual per-loan cost of servicing		$68 – $140			$68 – $140			$68 – $140			$68 – $140
		($68)			($68)			($68)			($68)
Effect on fair value of a:
5% adverse change	$	(1,761	)	$	(290	)	$	(1,695	)	$	(158	)
10% adverse change	$	(3,522	)	$	(580	)	$	(3,390	)	$	(316	)
20% adverse change	$	(7,043	)	$	(1,159	)	$	(6,780	)	$	(633	)

(1)	The effect on value of an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of impairment recognized will depend on the relationship of fair value to the carrying value of MSRs.

(2)

(3)	Prepayment speed is measured using Life Total CPR.

Significant changes to any of the key assumptions shown above in isolation could result in a significant change in the MSR fair value measurement. Changes in these key assumptions are not necessarily directly related. The preceding sensitivity analyses are limited in that they were performed as of a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes in the variables in relation to other variables; are subject to the accuracy of various models and inputs used; and do not take into account other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by our Manager to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Results of Real Estate Acquired in Settlement of Loans

Results of REO includes the gains or losses we record upon sale of the properties as well as valuation adjustments we record during the period we hold those properties. During the quarter and six months ended June 30, 2014, we recorded net losses of $5.3 million and $12.0 million, respectively, in Results of real estate acquired in settlement of loans as compared to net losses of $1.9 million and $5.2 million, respectively, for the quarter and six months ended June 30, 2013.

Results of REO are summarized below:


	Quarter ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(dollars in thousands)
During the period:
Proceeds from sales of REO	$	48,874		$	30,993		$	82,268		$	63,017
Results of real estate acquired in settlement of loans:
Valuation adjustments, net		(9,159	)		(4,978	)		(18,052	)		(11,067	)
Gain on sale, net		3,811			3,049			6,078			5,885

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

Number of properties sold		489			288			813			546
Average carrying value of REO	$	214,652		$	86,761		$	190,582		$	86,613

Period end:
Carrying value	$	240,471		$	88,771
Number of properties in inventory		1,619			640

The increase in losses from REOs during the quarter and six months ended June 30, 2014 compared to the same periods in 2013 was due to slower property value appreciation during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013, along with growth in the inventory of properties held between the periods. Since REO is carried at the lower of cost or fair value, we recognize valuation losses on properties where decreases in fair value are indicated but are generally unable to record fair value increases until the date of sale of properties.

Expenses

Our expenses are summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Expenses payable to PFSI:
Loan fulfillment fees	$	12,433	$	22,054	$	21,335	$	50,298
Loan servicing fees		14,180		8,787		28,771		16,513
Management fees		8,912		8,455		16,986		14,947
Professional services		2,690		1,339		4,421		3,723
Compensation		1,883		1,438		4,825		3,527
Other		7,154		5,571		11,221		10,517

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

Expenses decreased $392,000, or 1%, and $12.0 million, or 12%, during the quarter and six months ended June 30, 2014, respectively, compared to the same periods in 2013. This decrease was primarily a result of lower fulfillment fees, reflecting decreased correspondent production activities, partially offset by increased servicing fees reflecting growth in both our investments in mortgage loans at fair value and our MSR portfolio.

Loan Fulfillment Fees

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


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Fulfillment fee expense	$	12,433	$	22,054	$	21,335	$	50,298
UPB of loans fulfilled by PFSI	$	2,991,764	$	4,323,885	$	4,911,342	$	9,110,711

The decrease in loan fulfillment fees of $9.6 million and $29.0 million during the quarter and six months ended June 30, 2014, respectively, compared to the same periods in 2013 is primarily due to the decrease in the volume of Agency-eligible and jumbo mortgage loans we purchased in our correspondent production activities.

Loan Servicing Fees

Loan servicing fees increased by $5.4 million, or 61%, and $12.3 million, or 74%, during the quarter and six months ended June 30, 2014, respectively, compared to the same periods in 2013. Loan servicing fees increase as our investment in mortgage loans and MSRs increases. During the quarter ended June 30, 2014, our average investment in mortgage loans increased by 111%, compared to the quarter ended June 30, 2013. Our servicing portfolio increased to $29.3 billion at June 30, 2014 from $19.9 billion at June 30, 2013.

Included in loan servicing fees are activity-based fees, which increased by $3.2 million during the quarter ended June 30, 2014, generally relating to the increase in loan resolution activities during the quarter and six months ended June 30, 2014. We amended our servicing agreement with PFSI effective January 1, 2014, to limit the supplemental fees we pay PFSI to no more than $700,000 per quarter. During the quarter and six months ended June 30, 2014, we paid PFSI $700,000 and $1.4 million, respectively, in supplemental servicing fees relating to our MSR servicing portfolio. Supplemental servicing fees are a component of the total base servicing fee and compensate PFSI for providing certain services that servicers generally do not provide but are required by us because we have no employees or infrastructure.

Loan servicing fees payable to PFSI and subsidiaries are summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base	$	29	$	90	$	46	$	169
Activity-based		51		111		77		183

		80		201		123		352

Distressed mortgage loans:
Base		4,975		3,699		9,941		7,572
Activity-based		5,746		2,447		12,132		4,324

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

MSRs:
Base		3,323		2,363		6,471		4,126
Activity-based		56		77		104		139

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

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

The components of our management fee payable to PFSI are summarized below:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Management fee:
Base	$	5,838	$	4,575	$	11,359	$	8,940
Performance incentive		3,074		3,880		5,627		6,007

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

Management Fees

Management fees increased by $457,000 and $2.0 million during the quarter and six months ended June 30, 2014, respectively, due to the effect of growth in shareholders’ equity on the base management fee we pay to PFSI and recognition of performance incentive fees in 2014, which only were incurred beginning February 1, 2013. The increase in performance incentive fees resulted in part from a change in our management agreement with PFSI. Effective February 1, 2013, the management agreement was amended to adjust the basis on which both the base management fee and performance incentive fee are determined. Specifically, we amended:

•

The base management fee rate from 1.5% per year of shareholders’ equity to a base management fee schedule based on tiered management fee rates beginning with a rate of 1.5% per year of shareholders’ equity for the first $2.0 billion of shareholders’ equity and reduced rates as the balance of shareholders’ equity increases. Our shareholders’ equity did not reach a level that would have resulted in a reduced base management fee rate.

•

The definition of “net income” for purposes of determining the performance incentive fee to net income as determined in compliance with U.S. GAAP. Previously, “net income” for purposes of determining the performance incentive fee began with net income as determined in compliance with U.S. GAAP and was adjusted for non-cash gains and losses included in our income.

We expect our management fees to fluctuate in the future based on: (1) changes in our shareholders’ equity with respect to our base management fee; and (2) the level of our profitability in excess of the return thresholds specified in our management agreement with respect to the performance incentive fee.

Professional Services

Professional services expense increased during the quarter and six months ended June 30, 2014 as compared to the quarter and six months ended June 30, 2013 by $1.4 million and $698,000, respectively, due to increased legal fees including those relating to the sales of reperforming loans during the quarter and six months ended June 30, 2014, partially offset by reduced due diligence expenses reflecting reduced distressed mortgage loan acquisition activity.

Other Expenses

Other expenses are summarized below:


	Quarter ended June 30,					Six months ended June 30,
	2014		2013			2014		2013
	(in thousands)
Common overhead allocation from PFSI	$	2,638	$	2,974		$	5,216	$	5,266
Servicing and collection costs		3,114		(30	)		3,745		333
Loan origination		397		1,468			435		2,446
Insurance		252		218			491		429
Technology		227		235			474		354
Other expenses		526		706			860		1,689

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

Other expenses increased during the quarter and six months ended June 30, 2014 as compared to the quarter and six months ended June 30, 2013 by $1.6 million and $704,000, respectively, primarily due to higher servicing and collection costs associated with the administration and sale of seasoned distressed loans, partially offset by decreased expenses associated with certain of our correspondent production activities.

Income Taxes

We have elected to treat PMC as a TRS. Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to the REIT. No such dividend distributions have been made to date.

A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying Consolidated Statements of Income.

The provision for income taxes decreased by $15.3 million and $19.5 million for the quarter and six months ended June 30, 2014 compared to the same periods in 2013. The Company had a tax benefit of $1.9 million and $3.5 million for the quarter and six months ended June 30, 2014 and a tax expense of $13.4 million and $16.1 million for the quarter and six months ended June 30, 2013. The Company’s effective tax rate was (2.6)% and (3.2)% for the quarter and six months ended June 30, 2014 compared to 19.8% and 13.0% for the same periods in 2013. The decrease in the Company’s effective tax rate for the quarter and six months ended June 30, 2014 compared to the prior periods in 2013 is due primarily to a loss in the company’s taxable REIT subsidiary for the quarter and six months ended June 30, 2014 compared to income in that entity for the same periods in 2013. The primary difference between the Company’s effective tax rate and the statutory tax rate is non-taxable REIT income resulting from the deduction for dividends paid.

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

Balance Sheet Analysis

Following is a summary of key balance sheet items:


	June 30,		December 31,
	2014		2013
	(in thousands)
Assets
Cash	$	37,902	$	27,411
Investments:
Short-term investments		104,453		92,398
Mortgage-backed securities		218,725		197,401
Mortgage loans acquired for sale at fair value		909,085		458,137
Mortgage loans at fair value		2,697,821		2,818,445
Excess servicing spread		190,244		138,723
Derivative assets		14,594		7,976
Real estate acquired in settlement of loans		240,471		148,080
Mortgage servicing rights		315,484		290,572

		4,690,877		4,151,732
Other assets		140,966		131,774

Total assets	$	4,869,745	$	4,310,917

Liabilities
Borrowings:
Assets sold under agreements to repurchase	$	2,701,755	$	2,039,605
Borrowings under forward purchase agreements		—		226,580
Asset-backed secured financing of the variable interest entity		170,201		165,415
Exchangeable senior notes		250,000		250,000

		3,121,956		2,681,600
Other liabilities		170,629		162,203

Total liabilities		3,292,585		2,843,803
Shareholders’ equity		1,577,160		1,467,114

Total liabilities and shareholders’ equity	$	4,869,745	$	4,310,917

Total assets increased by approximately $558.8 million, or 13%, during the period from December 31, 2013 through June 30, 2014, primarily due to an increase in mortgage loans acquired for sale at fair value of $450.9 million, a $51.5 million increase in ESS and an increase in REO of $92.4 million, partly offset by a $120.6 million decrease in mortgage loans at fair value. Our asset acquisitions are summarized below.

Asset Acquisitions

Correspondent Production

Following is a summary of our correspondent production acquisitions:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Correspondent production loan purchases:

Government-insured or guaranteed	$	4,209,932	$	4,480,570	$	7,276,142	$	8,417,013
Agency-eligible		3,010,028		4,315,652		4,974,383		9,220,206
Jumbo		82,197		108,486		94,856		116,641

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

Fair value of correspondent production loans in inventory at period end	$	909,085	$	1,309,830
Gain on mortgage loans acquired for sale	$	10,222	$	44,438	$	20,193	$	73,717

During the quarter and six months ended June 30, 2014, we purchased for sale $7.3 billion and $12.3 billion, respectively, in fair value of correspondent production loans compared to $8.9 billion and $17.8 billion, respectively, in fair value of correspondent production loans during the quarter and six months ended June 30, 2013. The decrease in correspondent purchases is a result of the effects of increasing interest rates on the size of the mortgage market during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013.

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

Investment Portfolio

Following is a summary of our acquisitions of mortgage investments other than correspondent production acquisitions as shown in the preceding table:


	Quarter ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(in thousands)
Distressed mortgage loans (1)(2)
Performing	$	735	$	43,923	$	735	$	57,084
Nonperforming		26,002		198,787		282,282		386,099

		26,737		242,710		283,017		443,183
REO (2)		29		—		3,117		—
MSRs		28,741		51,241		49,616		107,457
ESS purchased from PennyMac Financial Services, Inc.		52,867		—		73,393		—

	$	108,375	$	293,951	$	409,143	$	550,640

(1)	Performance status as of the date of acquisition.

(2)

$26.8 million of distressed assets were acquired from or through one or more subsidiaries of Citigroup Inc. during the quarter and six months ended June 30, 2014 compared to $243.0 million and $443.3 million distressed assets so acquired during the quarter and six months ended June 30, 2013, respectively.

Our acquisitions during the quarters ended June 30, 2014 and June 30, 2013 were financed through the use of a combination of equity and borrowings. We continue to identify additional means of increasing our investment portfolio through cash flow from our business operations, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment activities portfolio growth will depend on our ability to raise additional equity capital.

Investment Portfolio Composition

Mortgage-Backed Securities

Our portfolio of MBS is backed by 30-year fixed interest rate mortgage loans. Following is a summary of our MBS portfolio.


	June 30, 2014												December 31, 2013
					Average												Average
	Fair				Life					Market			Fair				Life					Market
	value		Principal		(in years)		Coupon			yield			value		Principal		(in years)		Coupon			yield
	(dollars in thousands)
Agency:
Freddie Mac	$	142,486	$	138,637		5.20		3.50	%		2.85	%	$	141,106	$	142,186		7.23		3.50	%		3.63	%
Fannie Mae		58,342		56,669		5.70		3.50	%		2.86	%		56,295		56,593		7.49		3.50	%		3.57	%
Prime jumbo		17,897		19,624		7.01		2.13	%		3.65	%		—		—		—		0.00	%		0.00	%

	$	218,725	$	214,930		5.50		3.37	%		2.97	%	$	197,401	$	198,779		7.30		3.50	%		3.59	%

Mortgage Loans

The relationship of the fair value of our mortgage loans at fair value and mortgage loans under forward purchase agreements (excluding mortgage loans acquired for sale at fair value and mortgage loans at fair value held by VIE) to the fair value of the real estate collateral underlying the loans is summarized below:


	June 30, 2014				December 31, 2013
	Loan		Collateral		Loan		Collateral
	(in thousands)
Fair values:
Performing loans	$	610,427	$	899,574	$	647,266	$	986,075
Nonperforming loans		1,546,074		2,190,461		1,647,527		2,331,605

	$	2,156,501	$	3,090,035	$	2,294,793	$	3,317,680

The collateral values presented above do not represent our assessment of the amount of future cash flows to be realized from the mortgage loans and/or underlying collateral. Future cash flows will be influenced by, among other considerations, changes in borrower performance, our asset disposition strategies with respect to individual loans, the costs and expenses we incur in the disposition process and changes in the underlying collateral values.

The collateral values summarized above are estimated and may change over time due to various factors including our level of access to the properties securing the loans, changes in the real estate market or the condition of individual properties. The collateral values presented do not include any costs that would typically be incurred in obtaining the property in settlement of the loan, readying the property for sale or in the sale of a property.

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


	June 30, 2014																December 31, 2013
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
Loan type	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)																(dollars in thousands)
Fixed	$	320,212		52	%		4.85	%	$	656,592		42	%		5.97	%	$	329,899		51	%		5.00	%	$	751,611		46	%		6.03	%
ARM/Hybrid		113,271		19	%		3.24	%		861,988		56	%		5.13	%		184,837		29	%		3.46	%		877,086		53	%		5.07	%
Interest rate step-up		176,794		29	%		2.31	%		26,137		2	%		2.49	%		132,391		20	%		2.32	%		18,830		1	%		3.31	%
Balloon		150		0	%		2.00	%		1,357		0	%		5.18	%		139		0	%		2.00	%		—		0	%		0.00	%

	$	610,427		100	%		3.79	%	$	1,546,074		100	%		5.45	%	$	647,266		100	%		4.01	%	$	1,647,527		100	%		5.50	%


	June 30, 2014																December 31, 2013
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
Lien position	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)																(dollars in thousands)
1st lien	$	609,733		100	%		3.79	%	$	1,545,893		100	%		5.44	%	$	646,703		100	%		4.01	%	$	1,647,457		100	%		5.50	%
2nd lien		694		0	%		4.50	%		181		0	%		10.30	%		563		0	%		4.97	%		70		0	%		10.62	%
Unsecured		—		0	%		0.00	%		—		0	%		0.00	%		—		0	%		0.00	%		—		0	%		0.00	%

	$	610,427		100	%		3.79	%	$	1,546,074		100	%		5.45	%	$	647,266		100	%		4.01	%	$	1,647,527		100	%		5.50	%


	June 30, 2014																December 31, 2013
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
Occupancy	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)																(dollars in thousands)
Owner occupied	$	500,855		83	%		3.88	%	$	820,745		53	%		5.42	%	$	543,633		84	%		4.02	%	$	915,279		56	%		5.47	%
Investment property		106,805		17	%		3.39	%		723,257		47	%		5.47	%		95,181		15	%		3.95	%		729,558		44	%		5.54	%
Other		2,767		0	%		4.24	%		2,072		0	%		5.55	%		8,452		1	%		4.13	%		2,690		0	%		5.10	%

	$	610,427		100	%		3.79	%	$	1,546,074		100	%		5.45	%	$	647,266		100	%		4.01	%	$	1,647,527		100	%		5.50	%


	June 30, 2014																December 31, 2013
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
Loan age	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)																(dollars in thousands)
Less than 12 months	$	393		0	%		4.17	%	$	—		0	%		0.42	%	$	444		0	%		3.54	%	$	—		0	%		0.42	%
12 - 35 months		801		0	%		3.47	%		792		0	%		4.64	%		11,063		2	%		2.64	%		3,075		0	%		4.07	%
36 - 59 months		30,486		5	%		3.52	%		32,754		2	%		3.74	%		54,150		8	%		3.49	%		55,669		3	%		4.25	%
60 months or more		578,747		95	%		3.81	%		1,512,528		98	%		5.49	%		581,609		90	%		4.09	%		1,588,783		97	%		5.55	%

	$	610,427		100	%		3.79	%	$	1,546,074		100	%		5.45	%	$	647,266		100	%		4.01	%	$	1,647,527		100	%		5.50	%


	June 30, 2014																December 31, 2013
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
Origination	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
FICO score	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)																(dollars in thousands)
Less than 600	$	167,594		28	%		4.22	%	$	277,497		18	%		5.79	%	$	159,814		25	%		4.51	%	$	306,375		19	%		5.93	%
600-649		130,152		21	%		4.01	%		290,815		19	%		5.43	%		130,561		20	%		4.33	%		303,402		18	%		5.60	%
650-699		153,180		25	%		3.66	%		454,703		29	%		5.41	%		157,600		24	%		3.85	%		469,526		28	%		5.42	%
700-749		116,660		19	%		3.21	%		370,378		24	%		5.31	%		131,930		20	%		3.40	%		399,819		24	%		5.26	%
750 or greater		42,841		7	%		3.41	%		152,681		10	%		5.27	%		67,361		11	%		3.52	%		168,405		11	%		5.29	%

	$	610,427		100	%		3.79	%	$	1,546,074		100	%		5.45	%	$	647,266		100	%		4.01	%	$	1,647,527		100	%		5.50	%


	June 30, 2014																December 31, 2013
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
Current loan-to-value (1)	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)																(dollars in thousands)
Less than 80%	$	120,517		20	%		4.35	%	$	224,811		15	%		5.53	%	$	145,449		23	%		4.49	%	$	223,442		14	%		5.60	%
80% - 99.99%		161,093		26	%		3.96	%		372,155		24	%		5.38	%		188,505		29	%		4.00	%		355,451		22	%		5.34	%
100% - 119.99%		177,543		29	%		3.64	%		369,731		24	%		5.43	%		174,830		27	%		3.83	%		413,316		25	%		5.50	%
120% or greater		151,274		25	%		3.54	%		579,377		37	%		5.46	%		138,482		21	%		3.89	%		655,318		39	%		5.54	%

	$	610,427		100	%		3.79	%	$	1,546,074		100	%		5.45	%	$	647,266		100	%		4.01	%	$	1,647,527		100	%		5.50	%

(1)	Current loan-to-value is calculated based on the unpaid principal balance of the mortgage loan and our estimate of the value of the mortgaged property.



	June 30, 2014																December 31, 2013
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
Geographic	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
distribution	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)																(dollars in thousands)
California	$	156,001		26	%		3.15	%	$	305,846		20	%		4.61	%	$	184,457		28	%		3.37	%	$	370,347		23	%		4.60	%
New York		58,318		10	%		3.45	%		282,566		18	%		5.89	%		37,944		6	%		4.29	%		188,021		11	%		5.97	%
Florida		41,146		7	%		3.73	%		192,870		13	%		5.88	%		55,115		9	%		3.68	%		234,362		14	%		5.91	%
New Jersey		29,429		5	%		3.23	%		171,553		11	%		5.66	%		*		*			*			161,344		10	%		5.65	%
Other		325,533		52	%		4.22	%		593,239		38	%		5.40	%		369,750		57	%		4.47	%		693,453		42	%		5.68	%

	$	610,427		100	%		3.79	%	$	1,546,074		100	%		5.45	%	$	647,266		100	%		4.01	%	$	1,647,527		100	%		5.50	%

*	Not included in the states representing the largest percentages as of the dates presented.



	June 30, 2014																December 31, 2013
	Performing loans								Nonperforming loans								Performing loans								Nonperforming loans
						Average								Average								Average								Average
	Fair		%			note			Fair		%			note			Fair		%			note			Fair		%			note
Payment status	value		total			rate			value		total			rate			value		total			rate			value		total			rate
	(dollars in thousands)																(dollars in thousands)
Current	$	456,512		75	%		3.69	%	$	—		0	%		0.00	%	$	501,218		77	%		3.90	%	$	—		0	%		0.00	%
30 days delinquent		104,164		17	%		4.14	%		—		0	%		0.00	%		100,395		16	%		4.32	%		—		0	%		0.00	%
60 days delinquent		49,751		8	%		4.01	%		—		0	%		0.00	%		45,653		7	%		4.40	%		—		0	%		0.00	%
90 days or more days delinquent				0	%		0.00	%				0	%		0.00	%
Not in foreclosure		—		0	%		0.00	%		629,021		41	%		5.00	%		—		0	%		0.00	%		738,043		45	%		5.11	%
In foreclosure		—		0	%		0.00	%		917,053		59	%		5.76	%		—		0	%		0.00	%		909,484		55	%		5.82	%

	$	610,427		100	%		3.79	%	$	1,546,074		100	%		5.45	%	$	647,266		100	%		4.01	%	$	1,647,527		100	%		5.50	%

We believe that our current fair value estimates are representative of fair value at the reporting date. However, the market for distressed mortgage assets is illiquid with a limited number of participants. Furthermore, our business strategy is to enhance value during the period in which the loans are held. Therefore, any resulting appreciation or depreciation in the fair value of the loans is recorded during such holding period and ultimately realized at the end of the holding period.

Following is a comparison of the valuation techniques and key inputs we use in the valuation of our financial assets using “Level 3” inputs:


	Range
	(Weighted average)
Key inputs	June 30, 2014	December 31, 2013
Mortgage loans at fair value
Discount rate	7.1% – 16.9%	8.7% – 16.9%
	(11.8%)	(12.7%)
Twelve-month projected housing price index change	3.5% – 9.1%	2.5% – 4.3%
	(4.7%)	(3.7%)
Prepayment speed (1)	0.0% – 6.6%	0.0% – 3.9%
	(2.5%)	(2.0%)
Total prepayment speed (2)	0.8% – 27.4%	0.3% – 33.9%
	(21.8%)	(24.3%)

Mortgage loans under forward purchase agreements
Discount rate	—	9.5% – 13.5%
	—	(11.9%)
Twelve-month projected housing price index change	—	3.3% – 4.2%
	—	(3.8%)
Prepayment speed (1)	—	1.1% – 2.9%
	—	(2.2%)
Total prepayment speed (2)	—	13.4% – 27.9%
	—	(22.8%)

(1)

Prepayment speed is measured using Life Voluntary CPR.

(2)

Total prepayment speed is measured using Life Total CPR.

We monitor and value our investments in pools of distressed mortgage loans either by acquisition date or by payment status of the loans. Most of the measures we use to value and monitor the loan portfolio, such as projected prepayment and default speeds and discount rates, are applied or output at the pool level. The characteristics of the individual loans, such as loan size, loan-to-value ratio and current delinquency status, can vary widely within a pool.

The weighted average discount rate used in the valuation of mortgage loans at fair value decreased from 12.7% at December 31, 2013 to 11.8% at June 30, 2014 as market returns for similar assets decreased during the period.

The weighted average twelve-month projected housing price index (“HPI”) change increased from 3.7% at December 31, 2013 to 4.7% at June 30, 2014 due to slightly different expectations in various geographies and different state composition of the portfolio.

The total prepayment speed of our portfolio of mortgage loans at fair value decreased from 24.3% at December 31, 2013 to 21.8% at June 30, 2014, largely due to our revised expectations of run off compared to our estimate at December 31, 2013.

Real Estate Acquired in Settlement of Loans

Following is a summary of our REO by attribute:


	June 30, 2014					December 31, 2013
Property type	Fair value		% total			Fair value		% total
	(dollars in thousands)
1 - 4 dwelling units	$	169,825		71	%	$	108,341		73	%
Planned unit development		24,241		10	%		23,106		15	%
Condominium/Co-op		29,716		12	%		9,805		7	%
5+ dwelling units		16,689		7	%		6,828		5	%

	$	240,471		100	%	$	148,080		100	%


	June 30, 2014					December 31, 2013
Geographic distribution	Fair value		% total			Fair value		% total
	(dollars in thousands)
California	$	44,720		19	%	$	25,224		17	%
Florida		38,793		16	%		21,659		15	%
Maryland		23,304		10	%		7,688		5	%
Illinois		12,408		5	%		*		*
Other		121,246		50	%		93,509		63	%

	$	240,471		100	%	$	148,080		100	%

*	Not included in the states representing the largest percentages as of the dates presented.

Following is a summary of the status of our portfolio of acquisitions by quarter acquired (excluding acquisitions for the quarter ended June 30, 2014 due to close proximity of current status to quarter-end):


	Acquisitions for the quarter ended
	March 31, 2014
	At			June 30,
	purchase			2014
	(dollars in millions)
Unpaid principal balance	$	439.0		$	424.9
Pool factor (1)		1.00			0.97
Collection status:
Delinquency
Current		6.2	%		10.3	%
30 days		0.7	%		1.5	%
60 days		0.7	%		1.6	%
over 90 days		37.5	%		28.6	%
In foreclosure		53.8	%		51.8	%
REO		1.1	%		6.3	%


	Acquisitions for the quarter ended
	December 31, 2013						September 30, 2013						June 30, 2013						March 31, 2013
	At			June 30,			At			June 30,			At			June 30,			At			June 30,
	purchase			2014			purchase			2014			purchase			2014			purchase			2014
	(dollars in millions)
Unpaid principal balance	$	507.3		$	486.1		$	929.5		$	828.4		$	397.3		$	345.6		$	366.2		$	272.6
Pool factor (1)		1.00			0.96			1.00			0.89			1.00			0.87			1.00			0.74
Collection status:
Delinquency
Current		1.4	%		6.9	%		0.8	%		11.1	%		4.8	%		20.4	%		1.6	%		36.7	%
30 days		0.2	%		0.9	%		0.3	%		1.4	%		7.4	%		6.0	%		1.5	%		7.9	%
60 days		0.0	%		0.2	%		0.7	%		0.8	%		7.6	%		3.7	%		3.5	%		4.1	%
over 90 days		38.3	%		30.4	%		58.6	%		34.8	%		45.3	%		25.3	%		82.2	%		22.1	%
In foreclosure		60.0	%		54.1	%		39.6	%		42.8	%		34.9	%		35.0	%		11.2	%		19.4	%
REO		0.0	%		7.6	%		0.0	%		9.2	%		0.0	%		9.6	%		0.0	%		9.7	%

	Acquisitions for the quarter ended
	December 31, 2012						September 30, 2012						June 30, 2012						March 31, 2012
	At			June 30,			At			June 30,			At			June 30,			At			June 30,
	purchase			2014			purchase			2014			purchase			2014			purchase			2014
	(dollars in millions)
Unpaid principal balance	$	290.3		$	211.9		$	357.2		$	234.5		$	402.5		$	176.0		$	0.0		$	0.0
Pool factor (1)		1.00			0.73			1.00			0.66			1.00			0.44			—			—
Collection status:
Delinquency
Current		3.1	%		25.6	%		0.0	%		21.1	%		45.0	%		35.5	%		0.0	%		0.0	%
30 days		1.3	%		7.2	%		0.0	%		1.8	%		4.0	%		10.5	%		0.0	%		0.0	%
60 days		5.4	%		4.4	%		0.1	%		1.9	%		4.3	%		4.8	%		0.0	%		0.0	%
over 90 days		57.8	%		18.4	%		49.1	%		17.5	%		31.3	%		23.4	%		0.0	%		0.0	%
In foreclosure		32.4	%		27.5	%		50.8	%		40.4	%		15.3	%		17.2	%		0.0	%		0.0	%
REO		0.0	%		17.0	%		0.0	%		17.2	%		0.1	%		8.6	%		0.0	%		0.0	%


	Acquisitions for the quarter ended
	December 31, 2011						September 30, 2011						June 30, 2011						March 31, 2011
	At			June 30,			At			June 30,			At			June 30,			At			June 30,
	purchase			2014			purchase			2014			purchase			2014			purchase			2014
	(dollars in millions)
Unpaid principal balance	$	49.0		$	29.3		$	542.6		$	185.9		$	259.8		$	105.8		$	515.1		$	183.1
Pool factor (1)		1.00			0.60			1.00			0.34			1.00			0.41			1.00			0.36
Collection status:
Delinquency
Current		0.2	%		31.5	%		0.6	%		20.8	%		11.5	%		26.2	%		2.0	%		23.2	%
30 days		0.1	%		3.4	%		1.3	%		3.9	%		6.5	%		8.6	%		1.9	%		5.8	%
60 days		0.2	%		5.2	%		2.0	%		3.2	%		5.2	%		3.9	%		3.9	%		2.9	%
over 90 days		70.4	%		22.8	%		22.6	%		27.0	%		31.2	%		24.0	%		25.9	%		18.8	%
In foreclosure		29.0	%		28.1	%		73.0	%		33.1	%		43.9	%		26.9	%		66.3	%		39.0	%
REO		0.0	%		9.0	%		0.4	%		12.0	%		1.7	%		10.4	%		0.0	%		10.3	%

(1)	Ratio of unpaid principal balance remaining to unpaid principal balance at acquisition.

Cash Flows

Our cash flows resulted in a net increase in cash of $10.5 million during the six months ended June 30, 2014. The increase was due to cash provided in our investing and financing activities exceeding cash used by our operating activities.

Operating activities

Cash used by operating activities totaled $570.5 million during the six months ended June 30, 2014 compared to cash used in operating activities of $440.6 million during the six months ended June 30, 2013. Cash used by operating activities in both periods is primarily attributable to growth in our inventory of mortgage loans acquired for sale.

Investing activities

Net cash provided by our investing activities was $112.8 million for the six months ended June 30, 2014 and reflects liquidations of investments in excess of new investment acquisitions. We realized cash inflows from repayments of mortgage loans and MBS, repayments of ESS and sales of REO totaling $508.2 million. Partially offsetting these cash inflows were the use of cash to purchase mortgage loans at fair value, ESS and REO of $379.1 million during the six months ended June 30, 2014.

Approximately 38% of our investments, comprised of short-term investments, MBS, non-correspondent production mortgage loans, ESS, REO and MSRs, were nonperforming assets as of June 30, 2014. Nonperforming assets include mortgage loans delinquent 90 or more days and REO. Accordingly, we expect that these assets will require a longer period to produce cash flow and the timing and amount of cash flows from these assets is less certain than for performing assets. During the six months ended June 30, 2014, we transferred $183.5 million of mortgage loans to REO and realized cash proceeds from the sales and repayments of mortgage loans at fair values and REO totaling $486.3 million.

As discussed above, our investing activities include the purchase of long-term assets which are not presently cash flowing or are at risk of interruption of cash flows in the near future. Furthermore, much of the investment income we recognize is in the form of valuation adjustments we record recognizing our estimates of the net appreciation in fair value of the assets as we work with borrowers to either modify their loans or acquire the property securing their loans in settlement thereof. Accordingly, the cash associated with a substantial portion of our revenues is often realized as part of the proceeds of the liquidation of the assets, either through payoff or sale of the mortgage loan or through acquisition and subsequent sale of the property securing the loans, many months after we record the revenues.

The following table illustrates, for assets liquidated during the periods presented, the net gain (loss) in value that we accumulated over the period during which we owned the liquidated assets, as compared to the proceeds actually received and the additional net gain (loss) realized upon liquidation of such assets:


	Quarter ended June 30,
	2014						2013
	Proceeds		Accumulated gains (losses) (2)		Gain on liquidation (3)		Proceeds		Accumulated gains (losses) (2)		Gain on liquidation (3)
	(in thousands)
Mortgage loans (1)	$	142,255	$	27,580	$	9,883	$	73,358	$	10,689	$	8,039
REO		48,874		3,229		3,811		30,993		1,155		3,049

	$	191,129	$	30,809	$	13,694	$	104,351	$	11,844	$	11,088


	Six months ended June 30,
	2014						2013
	Proceeds		Accumulated gains (losses) (2)		Gain on liquidation(3)		Proceeds		Accumulated gains (losses) (2)		Gain on liquidation (3)
	(in thousands)
Mortgage loans (1)	$	394,316	$	80,822	$	16,629	$	135,242	$	17,706	$	16,404
REO		82,268		6,202		6,078		63,017		2,178		5,885

	$	476,584	$	87,024	$	22,707	$	198,259	$	19,884	$	22,289

(1)	For the quarter and six months ended June 30, 2014, the amounts include a sale of reperforming loans with loan sale proceeds of $70.3 million and $264.3 million, accumulated gains of $18.6 million and $62.8 million, and $2.4 million and $3.5 million gain on liquidation, respectively.

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

(3)	Represents the gain or loss recognized upon sale or repayment of the respective asset.

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

The primary expenses incurred at a loan level in managing our portfolio of distressed assets are servicing and activity fees. From the time of acquisition of the distressed assets through their deboarding dates, we incurred servicing and activity fees of $3.1 million for assets liquidated during the quarter ended June 30, 2014; $1.6 million for assets liquidated during the quarter ended June 30, 2013; and $8.1 million and $4.4 million for assets liquidated during the six months ended June 30, 2014 and 2013, respectively.

Financing activities

Net cash provided by financing activities was $468.2 million for the six months ended June 30, 2014, which was primarily used to fund the increase in our inventory of mortgage loans acquired for sale and mortgage loans at fair value. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that our cash flows from the liquidation of our investments, which include accumulated gains recorded during the periods we hold those investments, along with our cash earnings, are adequate to fund our operating expenses and dividend payment requirements. As our business continues to grow, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.

Liquidity and Capital Resources

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

We expect our primary sources of liquidity to be proceeds from liquidations from our portfolio of distressed assets, cash earnings on our investments, cash flows from business activities, and proceeds from

borrowings and/or additional equity offerings. We do not expect repayments from contractual cash flows from our investments to be a primary source of liquidity as the majority of our distressed asset investments are nonperforming. Our portfolio of distressed mortgage loans was acquired with the expectation that the majority of the cash flows associated with these investments would result from liquidation of the loan or the property securing the loan, rather than from scheduled principal and interest payments. Our mortgage loans acquired for sale are generally held for fifteen days or less, and therefore are not expected to generate significant cash flows from principal repayments.

Our current leverage strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We have made borrowings in the form of borrowings under forward purchase agreements, and sales of assets under agreements to repurchase. We entered into two long-term financing agreements during the year ended December 31, 2013. To the extent available to us, we expect in the future to obtain long-term financing for assets with estimated future lives of more than one year; this may include term financing and securitization of performing (including newly purchased jumbo mortgage loans), nonperforming and/or reperforming mortgage loans.

The two long-term financing transactions are as follows:

•

In April 2013, our wholly-owned subsidiary, PMC, completed a private offering of $250.0 million of Notes due 2020. The Notes bear interest at a rate of 5.375% per year, payable semiannually. The Notes are exchangeable into common shares of the Company at a rate of 33.5733 common shares per $1,000 principal amount of the Notes, which exchange rate increased from the initial exchange rate of 33.5149 (equivalent to an initial exchange price of approximately $29.84 per common share). The increase in the calculated exchange rate was the result of cash dividends exceeding the dividend threshold amount of $0.57 as provided in the related indenture. The exchange rate is subject to adjustment upon the occurrence of other certain events, but will not be adjusted for any accrued and unpaid interest. The Notes will mature May 1, 2020, unless repurchased or exchanged in accordance with their terms before such date.

•

In September 2013, we financed $536.8 million at fair value of jumbo loans through a private-label securitization transaction. We sold $174.5 million of senior bonds backed by the loans and retained the remaining securities from the transaction, with a portion intended as long-term investments. We intend to sell a portion of the securities in the future as investor demand for private-label securities increases. We do not have plans to do additional financings through private-label securitizations until market conditions for such transactions improve.

We will continue to finance most of our assets on a short-term basis until long-term financing on favorable terms becomes more accessible. Our short-term financings will be primarily in the form of agreements to repurchase and other secured lending and structured finance facilities, pending the ultimate disposition of the assets, whether through sale, securitization or liquidation. Because a significant portion of our current debt facilities consist of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. During the quarter and six months ended June 30, 2014, the average balance outstanding under agreements to repurchase securities, mortgage loans, mortgage loans acquired for sale, mortgage loans held by VIE and REO totaled $2.3 billion and 2.0 billion, and the maximum daily amount outstanding under such agreements totaled $2.8 billion and 2.6 billion, respectively. The difference between the maximum and average daily amounts outstanding was due to the timing of our mortgage loan purchases through our correspondent production segment and settlements of the mortgage loans into securities and our use of excess cash to temporarily reduce our borrowings. The total facility size of our borrowings was approximately $3.9 billion at June 30, 2014.

As of June 30, 2014 and December 31, 2013, we financed our investments in MBS, our inventory of mortgage loans acquired for sale at fair value, mortgage loans at fair value, mortgage loans at fair value held by VIE, and REO under agreements to repurchase and forward purchase agreements as follows:


	June 30, 2014			December 31, 2013
	(dollars in thousands)
Assets financed	$	3,790,376		$	3,447,587
Total assets in classes of assets financed	$	4,066,102		$	3,787,478
Borrowings	$	2,871,956		$	2,431,600
Percentage of invested assets pledged		93	%		91	%
Advance rate against pledged assets		76	%		71	%
Leverage ratio(1)		1.98	x		1.83	x

(1)	All borrowings divided by shareholders’ equity at period end.

As discussed above, all of our repurchase agreements and forward purchase agreements have short-term maturities:

•

The transactions relating to mortgage loans and REO under agreements to repurchase mature between September 8, 2014 and February 17, 2015 and provide for the sale to major financial institution counterparties based on the fair value of the mortgage loans sold. The agreements provide for terms of approximately one year.

We do not currently have secured financing for our investments in MSRs and ESS. Direct leverage on these assets has been difficult to obtain due to the requirement of each Agency that its rights and interest in the MSRs and ESS remain senior to those of any lender extending credit. If we are unable to finance these asset classes, continued aggregation of MSRs and acquisition of ESS could place stress on our capital and liquidity positions or require us to forego attractive investment opportunities.

Our debt financing agreements require us and certain of our subsidiaries to comply with various financial covenants. As of the filing of this Report, these financial covenants include the following:

•

profitability at each of the Company and our Operating Partnership, for at least one (1) of the previous two consecutive fiscal quarters, as of the end of each fiscal quarter, for both the prior two (2) calendar quarters and the prior three (3) calendar quarters;

•

a minimum of $40 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $40 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PMC and PMH; and a minimum of $10 million in unrestricted cash and cash equivalents at each of PMC and PMH;

•

a minimum tangible net worth for the Company of $860 million; a minimum tangible net worth for our Operating Partnership of $700 million; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $150 million;

•

a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and 5:1 for the Company, our Operating Partnership and PMH; and

•

at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our existing debt financing agreements.

Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.

PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our Servicer under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:

•

positive net income during each calendar quarter;

•

a minimum in unrestricted cash and cash equivalents of $20 million;

•

a minimum tangible net worth of $90 million; and

•

a maximum ratio of total liabilities to tangible net worth of 10:1.

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

The transactions relating to mortgage loans and/or equity interests in special purpose entities holding real property under agreements to repurchase contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or additional mortgage loans or real property, as applicable, in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decrease in the market value (as determined by the applicable lender) of the assets subject to an agreement to repurchase. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

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

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of June 30, 2014, we have not entered into any off-balance sheet arrangements or guarantees.

Contractual Obligations

As of June 30, 2014, we had on-balance sheet contractual obligations of $2.7 billion for the financing of assets under agreements to repurchase with maturities between January 2, 2014 and December 18, 2014 as well as forward purchase agreements with maturities between June 16, 2014 and June 30, 2014. We also had contractual obligations of $250. 0 million in the Notes.

As of June 30, 2014, we had contractual obligations to purchase mortgage loans for resale totaling approximately $1.4 million. Of the $1.4 million in commitments to purchase mortgage loans for resale, we recorded IRLCs of $11.5 million on our balance sheet as assets under the caption Derivative assets and $395,000 as liabilities under the caption Derivative liabilities.

All agreements to repurchase assets that matured between June 30, 2014 and the date of this Report have been renewed, extended or repaid and are described in Note 16—Assets Sold Under Agreements to Repurchase at Fair Value in the accompanying consolidated financial statements.

Payment obligations under these agreements are summarized below:


	Payments due by period
Contractual obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
	(in thousands)
Commitments to purchase mortgage loans from correspondent lenders	$	1,443,612	$	1,443,612	$	—	$	—	$	—
Assets sold under agreements to repurchase		2,701,755		2,701,755		—		—		—
Asset-backed secured financing		168,676		—		—		—		168,676
Exchangeable senior notes		250,000		—		—		—		250,000

Total	$	4,564,043	$	4,145,367	$	—	$	—	$	418,676

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


Counterparty	Amount at risk
	(in thousands)
Citibank, N.A.	$	540,781
Credit Suisse First Boston Mortgage Capital LLC		243,465
The Royal Bank of Scotland Group		80,264
Bank of America, N.A.		57,715
Morgan Stanley Bank, N.A.		10,832
Daiwa Capital Markets America, Inc		7,412

	$	940,469

Management Agreement. We are externally managed and advised by our Manager pursuant to a management agreement, which was amended and restated effective February 1, 2013. Our management agreement requires our Manager to oversee our business affairs in conformity with the investment policies that are approved and monitored by our board of trustees. Our Manager is responsible for our day-to-day management and will perform such services and activities related to our assets and operations as may be appropriate.

Pursuant to our management agreement, our Manager collects a base management fee and may collect a performance incentive fee, both payable quarterly and in arrears. The term of our management agreement expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

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

Pursuant to our management agreement, the base management fee is equal to the sum of (i) 1.5% per annum of shareholders’ equity up to $2 billion, (ii) 1.375% per annum of shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per annum of shareholders’ equity in excess of $5 billion. The base management fee is paid in cash.

100

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

The performance incentive fee is calculated quarterly and escalates as net income (stated as a percentage of return on equity) increases over certain thresholds. On each calculation date, the threshold amounts represent a stated return on equity, plus or minus a “high watermark” adjustment. The performance fee payable for any quarter is equal to: (a) 10% of the amount by which net income for the quarter exceeds (i) an 8% return on equity plus the high watermark, up to (ii) a 12% return on equity; plus (b) 15% of the amount by which net income for the quarter exceeds (i) a 12% return on equity plus the high watermark, up to (ii) a 16% return on equity; plus (c) 20% of the amount by which net income for the quarter exceeds a 16% return on equity plus the high watermark.

The “high watermark” is the quarterly adjustment that reflects the amount by which the net income (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the Fannie Mae MBS Yield (the target yield) for such quarter. The “high watermark” starts at zero and is adjusted quarterly. If the net income is lower than the target yield, the high watermark is increased by the difference. If the net income is higher than the target yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for our Manager to earn a performance incentive fee are adjusted cumulatively based on the performance of our net income over (or under) the target yield, until the net income in excess of the target yield exceeds the then-current cumulative high watermark amount, and a performance incentive fee is earned. The performance incentive fee may be paid in cash or in our common shares (subject to a limit of no more than 50% paid in common shares), at our option.

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

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

Servicing Agreement. We have entered into a servicing agreement with our Servicer pursuant to which our Servicer provides servicing for our portfolio of residential mortgage loans. The loan servicing provided by our Servicer includes collecting principal, interest and escrow account payments, if any, with respect to mortgage loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. Our Servicer also engages in certain loan origination activities that include refinancing mortgage loans and financings that facilitate sales of real estate owned properties, or REOs. The term of our servicing agreement, as amended, expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

101

The base servicing fees for distressed whole loans are calculated based on a monthly per-loan dollar amount, with the actual dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or the related underlying real estate. Presently, the base servicing fees for distressed whole loans range from $30 per month for current loans up to $125 per month for loans that are severely delinquent and in foreclosure.

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

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

To the extent that our Servicer participates in HAMP (or other similar mortgage loan modification programs), our Servicer is entitled to retain any incentive payments made to it and to which it is entitled under HAMP, provided that, with respect to any incentive payments paid to our Servicer in connection with a mortgage loan modification for which we previously paid our Servicer a modification fee, our Servicer is required to reimburse us an amount equal to the incentive payments.

In addition, because we do not have any employees or infrastructure, our Servicer is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services, our Servicer receives a supplemental servicing fee of $25 per month for each distressed whole loan and $3.25 per month for each other subserviced loan; provided, however, that from and after January 1, 2014, the aggregate supplemental servicing fees for all loans that are owned by a third party investor and with respect to which we have acquired the related servicing rights (and that are not distressed whole loans) shall not exceed $700,000 in any fiscal quarter. Our Servicer is entitled to reimbursement for all customary, bona fide reasonable and necessary out-of-pocket expenses incurred by our Servicer in connection with the performance of its servicing obligations.

Mortgage Banking and Warehouse Services Agreement. We have also entered into a mortgage banking and warehouse services agreement (the “MBWS agreement”), pursuant to which our Servicer provides us with certain mortgage banking services, including fulfillment and disposition-related services, with respect to loans acquired by us from correspondent lenders, and certain warehouse lending services, including fulfillment and administrative services, with respect to loans financed by us for our warehouse lending clients. The term of our MBWS agreement expires on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

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

102

In consideration for the mortgage banking services provided by our Servicer with respect to our acquisition of mortgage loans, our Servicer is entitled to a fulfillment fee based on the type of mortgage loan that we acquire and equal to a percentage of the unpaid principal balance of such mortgage loan. Presently, the applicable percentages are (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans sold in accordance with the Ginnie Mae Mortgage-Backed Securities Guide, (iii) 0.80% for HARP mortgage loans with a loan-to-value ratio of 105% or less, (iv) 1.20% for HARP mortgage loans with a loan-to-value ratio of greater than 105%, and (v) 0.50% for all other mortgage loans not contemplated above; provided, however, that PLS may, in its sole discretion, reduce the amount of the applicable fulfillment fee and credit the amount of such reduction to the reimbursement otherwise due as described below. This reduction may only be credited to the reimbursement applicable to the month in which the related mortgage was funded.

At this time, we do not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under our MBWS agreement, our Servicer currently purchases loans saleable in accordance with the Ginnie Mae Mortgage-Backed Securities Guide “as is” and without recourse of any kind from us at cost less an administrative fee paid by the correspondent lender to us plus accrued interest and a sourcing fee of three basis points.

In the event that we purchase mortgage loans with an aggregate unpaid principal balance in any month greater than $2.5 billion, our Servicer has agreed to discount the amount of such fulfillment fees by reimbursing us an amount equal to the product of (i) 0.025%, and (ii) the amount of unpaid principal balance in excess of $2.5 billion and less than or equal to $5.0 billion, plus (b) the product of (i) 0.05%, and (ii) the amount of unpaid principal balance in excess of $5 billion.

In consideration for the mortgage banking services provided by our Servicer with respect to our acquisition of mortgage loans under our Servicer’s early purchase program, our Servicer is entitled to fees accruing (i) at a rate equal to $25,000 per annum, and (ii) in the amount of $50 for each mortgage loan that we acquire. In consideration for the warehouse services provided by our Servicer with respect to mortgage loans that we finance for our warehouse lending clients, with respect to each facility, our Servicer is entitled to fees accruing (i) at a rate equal to $25,000 per annum, and (ii) in the amount of $50 for each mortgage loan that we finance thereunder. Where we have entered into both an early purchase agreement and a warehouse lending agreement with the same client, our Servicer shall only be entitled to one $25,000 per annum fee and, with respect to any mortgage loan that becomes subject to both such agreements, only one $50 per loan fee.

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

MSR Recapture Agreement. Effective February 1, 2013, we entered into an MSR recapture agreement with our Servicer. Pursuant to the terms of our MSR recapture agreement, if our Servicer refinances via its retail lending business loans for which we previously held the MSRs, our Servicer is generally required to transfer and convey to us, without cost to us, the MSRs with respect to new mortgage loans originated in those refinancings (or, under certain circumstances, other mortgage loans) that have an aggregate unpaid principal balance that is not less than 30% of the aggregate unpaid principal balance of all the loans so originated. Where the fair market value of the aggregate MSRs to be transferred for the applicable month is less than $200,000, our Servicer may, at its option, wire cash to us in an amount equal to such fair market value in lieu of transferring such MSRs. The initial term of our MSR recapture agreement expires, unless terminated earlier in accordance with the terms of the agreement, on February 1, 2017, subject to automatic renewal for additional 18-month periods, unless terminated in accordance with the terms of the agreement.

Spread Acquisition and MSR Servicing Agreements. Effective February 1, 2013, we entered into a master spread acquisition and MSR servicing agreement (the “2/1/13 Spread Acquisition Agreement”), pursuant to which we may acquire from our Servicer the rights to receive certain ESS arising from MSRs acquired by our Servicer from banks and other third party financial institutions. Our Servicer is generally required to service or subservice the related mortgage loans for the applicable agency or investor. The terms of each transaction under the 2/1/13 Spread Acquisition Agreement are subject to the terms thereof, as modified and supplemented by the terms of a confirmation executed in connection with such transaction.

103

To the extent our Servicer refinances any of the mortgage loans relating to the ESS we have acquired, the 2/1/13 Spread Acquisition Agreement contains recapture provisions requiring that our Servicer transfer to us, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, our Servicer may, at its option, wire cash to us in an amount equal to such fair market value in lieu of transferring such ESS.

On December 30, 2013, we entered into a second master spread acquisition and MSR servicing agreement with our Servicer (the “12/30/13 Spread Acquisition Agreement”). The terms of the 12/30/13 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that we only intend to purchase ESS relating to Ginnie Mae MSRs under the 12/30/13 Spread Acquisition Agreement.

To the extent our Servicer refinances any of the mortgage loans relating to the ESS we have acquired, the 12/30/13 Spread Acquisition Agreement also contains recapture provisions requiring that our Servicer transfer to us, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the 12/30/13 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, our Servicer is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the 12/30/13 Spread Acquisition Agreement contains provisions that require our Servicer to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, our Servicer may, at its option, wire cash to us in an amount equal to such fair market value in lieu of transferring such ESS.

In connection with our entry into the 12/30/13 Spread Acquisition Agreement, we were also required to enter into a Security and Subordination Agreement (the “Security Agreement”) with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”). Under the terms of the Security Agreement, we pledged to CSFB our rights under the 12/30/13 Spread Acquisition Agreement and our interest in any ESS purchased thereunder. The Security Agreement was required as a result of a separate loan and security agreement between our Servicer and CSFB (the “LSA”), pursuant to which our Servicer pledged to CSFB all of its rights and interests in the Ginnie Mae MSRs it owns or acquires, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and our Servicer. As a condition to permitting our Servicer to transfer to us the ESS relating to a portion of those pledged Ginnie Mae MSRs, CSFB required such transfer to be subject to CSFB’s continuing lien on the ESS, the pledge and acknowledgement of which were effected pursuant to the Security Agreement. CSFB’s lien on the ESS remains subordinate to the rights and interests of Ginnie Mae pursuant to the provisions of the 12/30/13 Spread Acquisition Agreement and the terms of the acknowledgement agreement.

The Security Agreement contains representations, warranties and covenants by us that are substantially similar to those contained in our other financing arrangements with CSFB. The Security Agreement also permits CSFB to liquidate our ESS along with the related MSRs to the extent there exists an event of default under the LSA, and it contains certain trigger events, including breaches of representations, warranties or covenants and defaults under other of our credit facilities, that would require our Servicer to either (i) repay in full the outstanding loan amount under the LSA or (ii) repurchase the ESS from us at fair market value. To the extent our Servicer is unable to repay the loan under the LSA or repurchase our ESS, an event of default would exist under the LSA, thereby entitling CSFB to liquidate the ESS and the related MSRs. In the event our ESS is liquidated as a result of certain actions or inactions of our Servicer, we generally would be entitled to seek indemnity under the 12/30/13 Spread Acquisition Agreement.

Reimbursement Agreement. In connection with the initial public offering of our common shares (“IPO”), on August 4, 2009, we entered into an agreement with our Manager pursuant to which we agreed to reimburse our Manager for the $2.9 million payment that it made to the underwriters for the IPO (the “Conditional

104

Reimbursement”) if we satisfied certain performance measures over a specified period of time. Effective February 1, 2013, we amended the terms of the reimbursement agreement to provide for the reimbursement of our Manager of the Conditional Reimbursement if we are required to pay our Manager performance incentive fees under our management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12-month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. The reimbursement agreement also provides for the payment to the IPO underwriters of the payment that we agreed to make to them at the time of the IPO if we satisfied certain performance measures over a specified period of time. As our Manager earns performance incentive fees under our management agreement, the IPO underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by our Manager. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $2.0 million and the maximum amount that may be paid under the agreement is $5.9 million.

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

Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are real estate risk, credit risk, interest rate risk, prepayment risk, inflation risk and market value risk. A substantial portion of our investments are comprised of nonperforming loans. We believe that such assets’ fair values respond primarily to changes in the fair value of the real estate securing such loans.

The following table summarizes the estimated change in fair value of our portfolio of our portfolio of distressed mortgage loans (comprised of mortgage loans at fair value, excluding mortgage loans at fair value held by VIE) as of June 30, 2014, given several hypothetical (instantaneous) changes in home values from those used in estimating fair value:


Property value shift in %	-15%			-10%			-5%			+5%			+10%			+15%
	(dollars in thousands)
Fair value	$	1,936,221		$	2,015,253		$	2,088,825		$	2,217,930		$	2,273,373		$	2,323,059
Change in fair value:
$	$	(220,280	)	$	(141,248	)	$	(67,676	)	$	61,429		$	116,872		$	166,559
%		(10.21	)%		(6.55	)%		(3.14	)%		2.85	%		5.42	%		7.72	%

The following table summarizes the estimated change in fair value of our mortgage loans at fair value held by VIE as of June 30, 2014, net of the effect of changes in fair value of the related asset-backed secured financing of the VIE at fair value, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:


Interest rate shift in basis points	-200			-100			-50			50			100			200
	(dollar in thousands)
Fair value	$	383,132		$	384,298		$	379,673		$	361,402		$	351,542		$	332,608
Change in fair value:
$	$	12,014		$	13,180		$	8,555		$	(9,716	)	$	(19,576	)	$	(38,510	)
%		3.24	%		3.55	%		2.31	%		(2.62	)%		(5.27	)%		(10.38	)%

105

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of June 30, 2014, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:


Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	312,394		$	300,399		$	294,715		$	283,924		$	278,799		$	269,049
Change in fair value:
$	$	23,168		$	11,173		$	5,489		$	(5,302	)	$	(10,427	)	$	(20,177	)
%		8.01	%		3.86	%		1.90	%		(1.83	)%		(3.61	)%		(6.98	)%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	313,065		$	300,757		$	294,899		$	283,731		$	278,405		$	268,233
Change in fair value:
$	$	23,838		$	11,531		$	5,673		$	(5,495	)	$	(10,821	)	$	(20,993	)
%		8.24	%		3.99	%		1.96	%		(1.90	)%		(3.74	)%		(7.26	)%


Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	296,269		$	292,748		$	290,987		$	287,465		$	285,705		$	282,183
Change in fair value:
$	$	7,043		$	3,522		$	1,761		$	(1,761	)	$	(3,522	)	$	(7,043	)
%		2.44	%		1.22	%		0.61	%		(0.61	)%		(1.22	)%		(2.44	)%

The following tables summarize the estimated change in fair value of MSRs accounted for using the fair value option method as of June 30, 2014, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:


Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	50,414		$	48,544		$	47,658		$	45,975		$	45,176		$	43,654
Change in fair value:
$	$	3,611		$	1,742		$	856		$	(827	)	$	(1,627	)	$	(3,149	)
%		7.72	%		3.72	%		1.83	%		(1.77	)%		(3.48	)%		(6.73	)%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	51,918		$	49,260		$	48,008		$	45,642		$	44,525		$	42,412
Change in fair value:
$	$	5,115		$	2,458		$	1,205		$	(1,160	)	$	(2,277	)	$	(4,390	)
%		10.93	%		5.25	%		2.57	%		(2.48	)%		(4.87	)%		(9.38	)%

106


Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	47,962		$	47,382		$	47,092		$	46,513		$	46,223		$	45,643
Change in fair value:
$	$	1,159		$	580		$	290		$	(290	)	$	(580	)	$	(1,159	)
%		2.48	%		1.24	%		0.62	%		(0.62	)%		(1.24	)%		(2.48	)%

Excess servicing spread

The following tables summarize the estimated change in fair value of our ESS as of June 30, 2014, given several shifts in pricing spreads and prepayment speed:


Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	199,426		$	194,727		$	192,459		$	188,079		$	185,963		$	181,870
Change in fair value:
$	$	9,182		$	4,483		$	2,215		$	(2,165	)	$	(4,281	)	$	(8,374	)
%		4.83	%		2.36	%		1.16	%		(1.14	)%		(2.25	)%		(4.40	)%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollars in thousands)
Fair value	$	209,090		$	199,286		$	194,675		$	185,983		$	181,882		$	174,132
Change in fair value:
$	$	18,847		$	9,043		$	4,431		$	(4,261	)	$	(8,361	)	$	(16,112	)
%		9.91	%		4.75	%		2.33	%		(2.24	)%		(4.40	)%		(8.47	)%

Factors That May Affect Our Future Results

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

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

•

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

•

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

•

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

•

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

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

107

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and as set forth in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

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

•

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

•

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

•

events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

•

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

•

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

•

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

•

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

•

the concentration of credit risks to which we are exposed;

•

the degree and nature of our competition;

•

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

•

changes in personnel and lack of availability of qualified personnel at our Manager, Servicer or their affiliates;

•

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

•

the adequacy of our cash reserves and working capital;

•

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

•

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

•

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

•

the performance, financial condition and liquidity of borrowers;

•

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

•

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

•

the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;

•

increased rates of delinquency, default and/or decreased recovery rates on our investments;

•

our ability to foreclose on our investments in a timely manner or at all;

108

•

increased prepayments of the mortgages and other loans underlying our MBS or relating to our MSRs, excess servicing spread and other investments;

•

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

•

the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;

•

our failure to maintain appropriate internal controls over financial reporting;

•

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

•

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

•

developments in the secondary markets for our mortgage loan products;

•

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

•

changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Ginnie Mae, FHA or the VA, or government-sponsored entities such as Fannie Mae or the Freddie Mac, or such changes that increase the cost of doing business with such entities;

•

the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies;

•

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

•

changes in government support of homeownership;

•

changes in government or government-sponsored home affordability programs;

•

limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a REIT for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of 1940 and the ability of certain of our subsidiaries to qualify as REITs or as a TRS for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

•

changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);

•

our ability to make distributions to our shareholders in the future;

•

the effect of public opinion on our reputation; and

•

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

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

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

109

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In response to this Item 3, the information set forth on pages 105 through 107 is incorporated herein by reference.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

110

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

111

Item 6 Exhibits and Financial Statement Schedules


Exhibit Number		Exhibit Description

3.1		Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated (incorporated by reference to Exhibit 3.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

3.2		Amended and Restated Bylaws of PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on August 13, 2013).

4.1		Specimen Common Share Certificate of PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 4.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

4.2		Indenture for Senior Debt Securities, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on April 30, 2013).

4.3		First Supplemental Indenture, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed on April 30, 2013).

4.4		Form of 5.375% Exchangeable Senior Notes due 2020 (included in Exhibit 4.3).

10.1		Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

10.2		Registration Rights Agreement, dated as of August 4, 2009, among PennyMac Mortgage Investment Trust, Stanford L. Kurland, David A. Spector, BlackRock Holdco II, Inc., Highfields Capital Investments LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

10.3		Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 1.6 of our Current Report on Form 8-K filed on February 7, 2013).

10.4		Amended and Restated Management Agreement, dated as of February 1, 2013, among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on February 7, 2013).

10.5		Amended and Restated Flow Servicing Agreement, dated as of February 1, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on February 7, 2013).

10.6		Second Amended and Restated Flow Servicing Agreement, dated as of March 1, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.7		Amendment No. 1 to Second Amended and Restated Flow Servicing Agreement, dated as of November 14, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on November 20, 2013).

10.8		Amendment No. 2 to Second Amended and Restated Flow Servicing Agreement, dated as of June 1, 2014, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.

10.9†		PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

112


Exhibit Number		Exhibit Description

10.10†		Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to Amendment No. 3 to the Company’s Registration Statement on Form S-11, filed with the SEC on July 24, 2009).

10.11		Master Repurchase Agreement, dated as of November 2, 2010, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).

10.12		Amendment Number One to Master Repurchase Agreement, dated as of August 18, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.13		Amendment Number Two to Master Repurchase Agreement, dated as of September 28, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.14		Amendment Number Three to Master Repurchase Agreement, dated as of December 30, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.15 of our Annual Report on Form 10-K for the year ended December 31, 2011).

10.15		Amendment Number Four to Master Repurchase Agreement, dated as of December 28, 2012, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.17 of our Annual Report on Form 10-K for the year ended December 31, 2012).

10.16		Master Repurchase Agreement, dated as of November 2, 2010, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).

10.17		Amendment Number One to Master Repurchase Agreement, dated as of May 20, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.15 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011).

10.18		Amendment Number Two to Master Repurchase Agreement, dated as of July 14, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.20 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.19		Amendment Number Three to Master Repurchase Agreement, dated as of October 7, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.21 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.20		Amendment Number Four to Master Repurchase Agreement, dated as of November 1, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.21		Amendment Number Five to Master Repurchase Agreement, dated as of November 30, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 30, 2011).

113


Exhibit Number		Exhibit Description

10.22		Amendment Number Six to Master Repurchase Agreement, dated as of March 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.25 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).

10.23		Amendment Number Seven to Master Repurchase Agreement, dated as of July 25, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 31, 2012).

10.24		Amendment Number Eight to Master Repurchase Agreement, dated as of September 26, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 1, 2012).

10.25		Amendment Number Nine to Master Repurchase Agreement, dated as of October 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 29, 2012).

10.26		Amended and Restated Master Repurchase Agreement, dated as of June 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed June 5, 2013).

10.27		Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of August 29, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed September 5, 2013).

10.28		Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.31 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.29		Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed January 3, 2014).

10.30		Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.33 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.31		Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.32		Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of February 21, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 24, 2014).

10.33		Amendment No. 7 to Amended and Restated Master Repurchase Agreement, dated as of May 22, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.

114


Exhibit Number		Exhibit Description

10.34		Guaranty, dated as of November 2, 2010, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).

10.35		Master Repurchase Agreement, dated as of December 9, 2010, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and PennyMac Loan Services, LLC, and Citibank, N.A. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on December 15, 2010).

10.36		Amendment Number One to the Master Repurchase Agreement, dated as of February 25, 2011, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on March 3, 2011).

10.37		Amendment Number Two to the Master Repurchase Agreement, dated as of December 8, 2011, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.28 of our Annual Report on Form 10-K for the year ended December 31, 2011).

10.38		Amendment Number Three to the Master Repurchase Agreement, dated as of February 24, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.30 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).

10.39		Amendment Number Four to the Master Repurchase Agreement, dated as of April 13, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.32 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).

10.40		Amendment Number Five to the Master Repurchase Agreement, dated as of April 20, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).

10.41		Amendment Number Six to the Master Repurchase Agreement, dated as of May 31, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on June 5, 2012).

10.42		Amendment Number Seven to the Master Repurchase Agreement, dated as of November 13, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.39 of our Annual Report on Form 10-K for the year ended December 31, 2012).

10.43		Amendment Number Eight to the Master Repurchase Agreement, dated as of December 31, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.40 of our Annual Report on Form 10-K for the year ended December 31, 2012).

10.44		Amendment Number Nine to the Master Repurchase Agreement, dated as of March 12, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on March 13, 2013).

10.45		Amendment Number Ten to the Master Repurchase Agreement, dated as of April 19, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.47 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

115


Exhibit Number		Exhibit Description

10.46		Amendment Number Eleven to the Master Repurchase Agreement, dated as of June 25, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.48 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.47		Amendment Number Twelve to the Master Repurchase Agreement, dated as of July 25, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 31, 2013).

10.48		Amendment Number Thirteen to the Master Repurchase Agreement, dated as of September 26, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.48 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.49		Amendment Number Fourteen to the Master Repurchase Agreement, dated as of February 5, 2014, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.11 of our Current Report on Form 8-K filed on February 6, 2014).

10.50		Amendment Number Fifteen to the Master Repurchase Agreement, dated as of May 13, 2014, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC.

10.51		Guaranty Agreement, dated as of December 9, 2010, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on December 15, 2010).

10.52		Amended and Restated Master Repurchase Agreement, dated as of August 25, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.28 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.53		Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of June 6, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.38 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).

10.54		Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of March 28, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.50 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

116


Exhibit Number		Exhibit Description

10.55		Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of May 8, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.51 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.56		Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.54 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.57		Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on January 3, 2014).

10.58		Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.56 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.59		Master Repurchase Agreement, dated as of November 7, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 14, 2011).

10.60		Amendment No. 1 to Master Repurchase Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.45 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).

10.61		Amendment No. 2 to Master Repurchase Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on January 7, 2013).

10.62		Amendment No. 3 to Master Repurchase Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on April 3, 2013).

10.63		Amendment No. 4 to Master Repurchase Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 6, 2014).

10.64		Amendment No. 5 to Master Repurchase Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.64 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.65		Amendment No. 6 to Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on July 14, 2014).

10.66		Guaranty, dated as of November 7, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P., in favor of Bank of America, N.A. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 14, 2011).

117


Exhibit Number		Exhibit Description

10.67		Master Repurchase Agreement, dated as of March 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on April 4, 2012).

10.68		Amendment No. 1 to Master Repurchase Agreement, dated as of July 25, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on July 31, 2012).

10.69		Amendment No. 2 to Master Repurchase Agreement, dated as of September 26, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 1, 2012).

10.70		Amendment No. 3 to Master Repurchase Agreement, dated as of October 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 31, 2012).

10.71		Amendment No. 4 to Master Repurchase Agreement, dated as of June 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on June 5, 2013).

10.72		Amendment No. 5 to Master Repurchase Agreement, dated as of August 29, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on September 5, 2013).

10.73		Amendment No. 6 to Master Repurchase Agreement, dated as of September 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.75 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.74		Amendment No. 7 to Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.69 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.75		Amendment No. 8 to Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on January 3, 2014).

10.76		Amendment No. 9 to Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.71 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.77		Amendment No. 10 to Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.76 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.78		Amendment No. 11 to Master Repurchase Agreement, dated as of February 21, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on February 24, 2014).

118


Exhibit Number		Exhibit Description

10.79		Amendment No. 12 to Master Repurchase Agreement, dated as of May 22, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.

10.80		Guaranty, dated as of March 29, 2012, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on March 29, 2012).

10.81		Master Repurchase Agreement, dated as of May 24, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on May 30, 2012).

10.82		Amendment Number One to the Master Repurchase Agreement, dated as of October 15, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 16, 2012).

10.83		Amendment Number Two to the Master Repurchase Agreement, dated as of November 13, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.62 of our Annual Report on Form 10-K for the year ended December 31, 2012).

10.84		Amendment Number Three to the Master Repurchase Agreement, dated as of December 31, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.72 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.85		Amendment Number Four to the Master Repurchase Agreement, dated as of May 23, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.77 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.86		Amendment Number Five to the Master Repurchase Agreement, dated as of June 25, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.78 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.87		Amendment Number Six to Master Repurchase Agreement, dated as of July 25, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on July 31, 2013).

10.88		Amendment Number Seven to Master Repurchase Agreement, dated as of February 5, 2014, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.12 of our Current Report on Form 8-K filed on February 6, 2014).

10.89		Guaranty, dated as of May 24, 2012, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on May 30, 2012).

10.90		Master Repurchase Agreement, dated as of July 2, 2012, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 10, 2012).

10.91		Amendment No. 1 to PennyMac Master Repurchase Agreement, dated as of February 1, 2013, among PennyMac Corp., PennyMac Loan Services, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC (incorporated by reference to Exhibit 10.81 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.92		Amendment No. 2 to PennyMac Master Repurchase Agreement, dated as of June 28, 2013, among PennyMac Corp., PennyMac Loan Services, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC (incorporated by reference to Exhibit 10.82 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

119


Exhibit Number		Exhibit Description

10.93		Master Repurchase Agreement, dated as of September 28, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 3, 2012).

10.94		Amendment No. 1 to Master Repurchase Agreement, dated as of May 8, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.80 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.95		Amendment No. 2 to Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.90 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.96		Amendment No. 3 to Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.98 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.97		Guaranty, dated as of September 28, 2012, by PennyMac Mortgage Investment Trust in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 3, 2012).

10.98		Master Repurchase Agreement, dated as of November 20, 2012, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 26, 2012).

10.99		Amendment Number One to the Master Repurchase Agreement, dated as of August 20, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.96 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.100		Amendment Number Two to the Master Repurchase Agreement, dated as of August 26, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.97 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.101		Amendment Number Three to Master Repurchase Agreement, dated as of November 14, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.95 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.102		Amendment Number Four to Master Repurchase Agreement, dated as of December 19, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.96 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.103		Guaranty, dated as of November 20, 2012, by PennyMac Mortgage Investment Trust in favor of Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on November 26, 2012).

10.104		Mortgage Banking and Warehouse Services Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.3 of our Current Report on Form 8-K filed on February 7, 2013).

10.105		Amendment No. 1 to Mortgage Banking and Warehouse Services Agreement, dated as of March 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.85 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

120


Exhibit Number		Exhibit Description

10.106		Amendment No. 2 to Mortgage Banking and Warehouse Services Agreement, dated as of August 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on August 19, 2013).

10.107		MSR Recapture Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.4 of our Current Report on Form 8-K filed on February 7, 2013).

10.108		Amendment No. 1 to MSR Recapture Agreement, dated as of August 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.103 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.109		Master Spread Acquisition and MSR Servicing Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.5 of our Current Report on Form 8-K filed on February 7, 2013).

10.110		Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of September 30, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.105 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.111		Amendment No. 2 to Master Spread Acquisition and MSR Servicing Agreement, dated as of November 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.105 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.112		Amendment No. 3 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 19, 2014, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.114 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.113		Master Spread Acquisition and MSR Servicing Agreement, dated as of December 30, 2013, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on January 3, 2014).

10.114		Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of June 1, 2014, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC.

10.115		Security and Subordination Agreement, dated as of December 30, 2013, between Credit Suisse First Boston Mortgage Capital LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed on January 3, 2014).

10.116		Master Repurchase Agreement, dated as of February 18, 2014, between The Royal Bank of Scotland PLC, PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 24, 2014).

10.117		Guaranty, dated as of February 18, 2014, of PennyMac Mortgage Investment Trust in favor of The Royal Bank of Scotland PLC (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 24, 2014).

10.118		Confidentiality Agreement, dated as of February 6, 2013, between Private National Mortgage Acceptance Company, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.7 of our Current Report on Form 8-K filed on February 7, 2013).

10.119		Amended and Restated Confidentiality Agreement, dated as of March 1, 2013, between Private National Mortgage Acceptance Company, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.89 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

121


Exhibit Number		Exhibit Description

10.120		Letter Agreement, dated as of June 14, 2013, between PennyMac Corp. and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.98 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*

10.121		Letter Agreement, dated as of June 28, 2013, between PennyMac Corp. and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.99 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*

10.122		Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 23, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 6, 2014).

10.123		Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 6, 2014).

10.124		Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of October 29, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on February 6, 2014).

10.125		Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 5, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed on February 6, 2014).

10.126		Amendment No. 4 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K filed on February 6, 2014).

10.127		Amendment No. 5 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.7 of our Current Report on Form 8-K filed on February 6, 2014).

10.128		Amendment No. 6 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 2, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.8 of our Current Report on Form 8-K filed on February 6, 2014).

10.129		Amendment No. 7 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.9 of our Current Report on Form 8-K filed on February 6, 2014).

10.130		Amendment No. 8 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.

10.131		Guaranty, dated as of December 23, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.10 of our Current Report on Form 8-K filed on February 6, 2014).

10.132		Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.a., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 14, 2014).

122


Exhibit Number		Exhibit Description

10.133		Guaranty, dated as of July 9, 2014, by PennyMac Mortgage Investment Trust in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on July 14, 2014).

31.1		Certification of Stanford L. Kurland pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Anne D. McCallion pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Stanford L. Kurland pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Anne D. McCallion pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Income for the quarters ended June 30, 2014 and 2013, (iii) the Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended June 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the quarters ended June 30, 2014 and 2013 and (v) the Notes to the Consolidated Financial Statements.

*	Certain terms have been redacted pursuant to requests for confidential treatment submitted to the Securities and Exchange Commission concurrently with the filing of this Report.

The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

†	Indicates management contract or compensatory plan or arrangement.

123

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	PENNYMAC MORTGAGE INVESTMENT TRUST (Registrant)

Dated: August 11, 2014	By:	/s/ STANFORD L. KURLAND
		Stanford L. Kurland
		Chairman of the Board and Chief Executive Officer

Dated: August 11, 2014	By:	/s/ ANNE D. MCCALLION
		Anne D. McCallion
		Chief Financial Officer

FORM 10-Q

June 30, 2014

INDEX OF EXHIBITS


Exhibit Number		Exhibit Description

3.1		Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and restated (incorporated by reference to Exhibit 3.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

3.2		Amended and Restated Bylaws of PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on August 13, 2013).

4.1		Specimen Common Share Certificate of PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 4.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

4.2		Indenture for Senior Debt Securities, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on April 30, 2013).

4.3		First Supplemental Indenture, dated as of April 30, 2013, among PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed on April 30, 2013).

4.4		Form of 5.375% Exchangeable Senior Notes due 2020 (included in Exhibit 4.3).

10.1		Amended and Restated Limited Partnership Agreement of PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

10.2		Registration Rights Agreement, dated as of August 4, 2009, among PennyMac Mortgage Investment Trust, Stanford L. Kurland, David A. Spector, BlackRock Holdco II, Inc., Highfields Capital Investments LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

10.3		Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 1.6 of our Current Report on Form 8-K filed on February 7, 2013).

10.4		Amended and Restated Management Agreement, dated as of February 1, 2013, among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on February 7, 2013).

10.5		Amended and Restated Flow Servicing Agreement, dated as of February 1, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on February 7, 2013).

10.6		Second Amended and Restated Flow Servicing Agreement, dated as of March 1, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.7		Amendment No. 1 to Second Amended and Restated Flow Servicing Agreement, dated as of November 14, 2013, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on November 20, 2013).

10.8		Amendment No. 2 to Second Amended and Restated Flow Servicing Agreement, dated as of June 1, 2014, between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.

10.9†		PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).


Exhibit Number		Exhibit Description

10.10†		Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to Amendment No. 3 to the Company’s Registration Statement on Form S-11, filed with the SEC on July 24, 2009).

10.11		Master Repurchase Agreement, dated as of November 2, 2010, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).

10.12		Amendment Number One to Master Repurchase Agreement, dated as of August 18, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.13		Amendment Number Two to Master Repurchase Agreement, dated as of September 28, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.14		Amendment Number Three to Master Repurchase Agreement, dated as of December 30, 2011, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.15 of our Annual Report on Form 10-K for the year ended December 31, 2011).

10.15		Amendment Number Four to Master Repurchase Agreement, dated as of December 28, 2012, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.17 of our Annual Report on Form 10-K for the year ended December 31, 2012).

10.16		Master Repurchase Agreement, dated as of November 2, 2010, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).

10.17		Amendment Number One to Master Repurchase Agreement, dated as of May 20, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.15 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011).

10.18		Amendment Number Two to Master Repurchase Agreement, dated as of July 14, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.20 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.19		Amendment Number Three to Master Repurchase Agreement, dated as of October 7, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.21 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.20		Amendment Number Four to Master Repurchase Agreement, dated as of November 1, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.21		Amendment Number Five to Master Repurchase Agreement, dated as of November 30, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 30, 2011).

10.22		Amendment Number Six to Master Repurchase Agreement, dated as of March 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.25 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).

10.23		Amendment Number Seven to Master Repurchase Agreement, dated as of July 25, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 31, 2012).


Exhibit Number		Exhibit Description

10.24		Amendment Number Eight to Master Repurchase Agreement, dated as of September 26, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 1, 2012).

10.25		Amendment Number Nine to Master Repurchase Agreement, dated as of October 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 29, 2012).

10.26		Amended and Restated Master Repurchase Agreement, dated as of June 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed June 5, 2013).

10.27		Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of August 29, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed September 5, 2013).

10.28		Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.31 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.29		Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed January 3, 2014).

10.30		Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.33 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.31		Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.32		Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of February 21, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 24, 2014).

10.33		Amendment No. 7 to Amended and Restated Master Repurchase Agreement, dated as of May 22, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.

10.34		Guaranty, dated as of November 2, 2010, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).

10.35		Master Repurchase Agreement, dated as of December 9, 2010, among PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC, and PennyMac Loan Services, LLC, and Citibank, N.A. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on December 15, 2010).

10.36		Amendment Number One to the Master Repurchase Agreement, dated as of February 25, 2011, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on March 3, 2011).

10.37		Amendment Number Two to the Master Repurchase Agreement, dated as of December 8, 2011, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.28 of our Annual Report on Form 10-K for the year ended December 31, 2011).

10.38		Amendment Number Three to the Master Repurchase Agreement, dated as of February 24, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.30 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).


Exhibit Number		Exhibit Description

10.39		Amendment Number Four to the Master Repurchase Agreement, dated as of April 13, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.32 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).

10.40		Amendment Number Five to the Master Repurchase Agreement, dated as of April 20, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.33 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).

10.41		Amendment Number Six to the Master Repurchase Agreement, dated as of May 31, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on June 5, 2012).

10.42		Amendment Number Seven to the Master Repurchase Agreement, dated as of November 13, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.39 of our Annual Report on Form 10-K for the year ended December 31, 2012).

10.43		Amendment Number Eight to the Master Repurchase Agreement, dated as of December 31, 2012, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.40 of our Annual Report on Form 10-K for the year ended December 31, 2012).

10.44		Amendment Number Nine to the Master Repurchase Agreement, dated as of March 12, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on March 13, 2013).

10.45		Amendment Number Ten to the Master Repurchase Agreement, dated as of April 19, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.47 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.46		Amendment Number Eleven to the Master Repurchase Agreement, dated as of June 25, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.48 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.47		Amendment Number Twelve to the Master Repurchase Agreement, dated as of July 25, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 31, 2013).

10.48		Amendment Number Thirteen to the Master Repurchase Agreement, dated as of September 26, 2013, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.48 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.49		Amendment Number Fourteen to the Master Repurchase Agreement, dated as of February 5, 2014, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.11 of our Current Report on Form 8-K filed on February 6, 2014).

10.50		Amendment Number Fifteen to the Master Repurchase Agreement, dated as of May 13, 2014, by and among Citibank, N.A. and PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Loan Services, LLC.

10.51		Guaranty Agreement, dated as of December 9, 2010, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on December 15, 2010).

10.52		Amended and Restated Master Repurchase Agreement, dated as of August 25, 2011, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.28 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).

10.53		Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of June 6, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.38 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).


Exhibit Number		Exhibit Description

10.54		Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of March 28, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.50 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.55		Amendment No. 3 to Amended and Restated Master Repurchase Agreement, dated as of May 8, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.51 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.56		Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Mortgage Investment Trust Holdings I, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.54 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.57		Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on January 3, 2014).

10.58		Amendment No. 6 to Amended and Restated Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Corp., PennyMac Holdings, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.56 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.59		Master Repurchase Agreement, dated as of November 7, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 14, 2011).

10.60		Amendment No. 1 to Master Repurchase Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.45 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).

10.61		Amendment No. 2 to Master Repurchase Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on January 7, 2013).

10.62		Amendment No. 3 to Master Repurchase Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on April 3, 2013).

10.63		Amendment No. 4 to Master Repurchase Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 6, 2014).

10.64		Amendment No. 5 to Master Repurchase Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.64 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.65		Amendment No. 6 to Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on July 14, 2014).

10.66		Guaranty, dated as of November 7, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P., in favor of Bank of America, N.A. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 14, 2011).

10.67		Master Repurchase Agreement, dated as of March 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on April 4, 2012).

10.68		Amendment No. 1 to Master Repurchase Agreement, dated as of July 25, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on July 31, 2012).


Exhibit Number		Exhibit Description

10.69		Amendment No. 2 to Master Repurchase Agreement, dated as of September 26, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 1, 2012).

10.70		Amendment No. 3 to Master Repurchase Agreement, dated as of October 29, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 31, 2012).

10.71		Amendment No. 4 to Master Repurchase Agreement, dated as of June 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on June 5, 2013).

10.72		Amendment No. 5 to Master Repurchase Agreement, dated as of August 29, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on September 5, 2013).

10.73		Amendment No. 6 to Master Repurchase Agreement, dated as of September 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.75 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.74		Amendment No. 7 to Master Repurchase Agreement, dated as of October 1, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Mortgage Investment Trust Holdings I, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.69 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.75		Amendment No. 8 to Master Repurchase Agreement, dated as of December 27, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on January 3, 2014).

10.76		Amendment No. 9 to Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.71 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.77		Amendment No. 10 to Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.76 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014)

10.78		Amendment No. 11 to Master Repurchase Agreement, dated as of February 21, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on February 24, 2014).

10.79		Amendment No. 12 to Master Repurchase Agreement, dated as of May 22, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Holdings, LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust.

10.80		Guaranty, dated as of March 29, 2012, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on March 29, 2012).

10.81		Master Repurchase Agreement, dated as of May 24, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on May 30, 2012).


Exhibit Number		Exhibit Description

10.82		Amendment Number One to the Master Repurchase Agreement, dated as of October 15, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 16, 2012).

10.83		Amendment Number Two to the Master Repurchase Agreement, dated as of November 13, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.62 of our Annual Report on Form 10-K for the year ended December 31, 2012).

10.84		Amendment Number Three to the Master Repurchase Agreement, dated as of December 31, 2012, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.72 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.85		Amendment Number Four to the Master Repurchase Agreement, dated as of May 23, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.77 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.86		Amendment Number Five to the Master Repurchase Agreement, dated as of June 25, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.78 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.87		Amendment Number Six to Master Repurchase Agreement, dated as of July 25, 2013, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on July 31, 2013).

10.88		Amendment Number Seven to Master Repurchase Agreement, dated as of February 5, 2014, among Citibank, N.A., PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.12 of our Current Report on Form 8-K filed on February 6, 2014).

10.89		Guaranty, dated as of May 24, 2012, by PennyMac Mortgage Investment Trust in favor of Citibank, N.A. (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on May 30, 2012).

10.90		Master Repurchase Agreement, dated as of July 2, 2012, among Barclays Bank PLC, PennyMac Corp., PennyMac Loan Services, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on July 10, 2012).

10.91		Amendment No. 1 to PennyMac Master Repurchase Agreement, dated as of February 1, 2013, among PennyMac Corp., PennyMac Loan Services, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC (incorporated by reference to Exhibit 10.81 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.92		Amendment No. 2 to PennyMac Master Repurchase Agreement, dated as of June 28, 2013, among PennyMac Corp., PennyMac Loan Services, LLC, PennyMac Mortgage Investment Trust and Barclays Bank PLC (incorporated by reference to Exhibit 10.82 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).

10.93		Master Repurchase Agreement, dated as of September 28, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on October 3, 2012).

10.94		Amendment No. 1 to Master Repurchase Agreement, dated as of May 8, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.80 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.95		Amendment No. 2 to Master Repurchase Agreement, dated as of December 31, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.90 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.96		Amendment No. 3 to Master Repurchase Agreement, dated as of January 10, 2014, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.98 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.97		Guaranty, dated as of September 28, 2012, by PennyMac Mortgage Investment Trust in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on October 3, 2012).

10.98		Master Repurchase Agreement, dated as of November 20, 2012, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on November 26, 2012).


Exhibit Number		Exhibit Description

10.99		Amendment Number One to the Master Repurchase Agreement, dated as of August 20, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.96 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.100		Amendment Number Two to the Master Repurchase Agreement, dated as of August 26, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.97 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.101		Amendment Number Three to Master Repurchase Agreement, dated as of November 14, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.95 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.102		Amendment Number Four to Master Repurchase Agreement, dated as of December 19, 2013, among PennyMac Corp., Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.96 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.103		Guaranty, dated as of November 20, 2012, by PennyMac Mortgage Investment Trust in favor of Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 1.2 of our Current Report on Form 8-K filed on November 26, 2012).

10.104		Mortgage Banking and Warehouse Services Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.3 of our Current Report on Form 8-K filed on February 7, 2013).

10.105		Amendment No. 1 to Mortgage Banking and Warehouse Services Agreement, dated as of March 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.85 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.106		Amendment No. 2 to Mortgage Banking and Warehouse Services Agreement, dated as of August 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.1 of our Current Report on Form 8-K filed on August 19, 2013).

10.107		MSR Recapture Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.4 of our Current Report on Form 8-K filed on February 7, 2013).

10.108		Amendment No. 1 to MSR Recapture Agreement, dated as of August 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.103 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.109		Master Spread Acquisition and MSR Servicing Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 1.5 of our Current Report on Form 8-K filed on February 7, 2013).

10.110		Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of September 30, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.105 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013).

10.111		Amendment No. 2 to Master Spread Acquisition and MSR Servicing Agreement, dated as of November 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.105 of our Annual Report on Form 10-K for the year ended December 31, 2013).

10.112		Amendment No. 3 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 19, 2014, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.114 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.113		Master Spread Acquisition and MSR Servicing Agreement, dated as of December 30, 2013, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on January 3, 2014).

10.114		Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of June 1, 2014, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC.


Exhibit Number		Exhibit Description

10.115		Security and Subordination Agreement, dated as of December 30, 2013, between Credit Suisse First Boston Mortgage Capital LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed on January 3, 2014).

10.116		Master Repurchase Agreement, dated as of February 18, 2014, between The Royal Bank of Scotland PLC, PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 24, 2014).

10.117		Guaranty, dated as of February 18, 2014, of PennyMac Mortgage Investment Trust in favor of The Royal Bank of Scotland PLC (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 24, 2014).

10.118		Confidentiality Agreement, dated as of February 6, 2013, between Private National Mortgage Acceptance Company, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 1.7 of our Current Report on Form 8-K filed on February 7, 2013).

10.119		Amended and Restated Confidentiality Agreement, dated as of March 1, 2013, between Private National Mortgage Acceptance Company, LLC and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.89 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.120		Letter Agreement, dated as of June 14, 2013, between PennyMac Corp. and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.98 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*

10.121		Letter Agreement, dated as of June 28, 2013, between PennyMac Corp. and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.99 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*

10.122		Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 23, 2011, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 6, 2014).

10.123		Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 17, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 6, 2014).

10.124		Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of October 29, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on February 6, 2014).

10.125		Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 5, 2012, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed on February 6, 2014).

10.126		Amendment No. 4 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 3, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K filed on February 6, 2014).

10.127		Amendment No. 5 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 28, 2013, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.7 of our Current Report on Form 8-K filed on February 6, 2014).

10.128		Amendment No. 6 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 2, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.8 of our Current Report on Form 8-K filed on February 6, 2014).

10.129		Amendment No. 7 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 31, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.9 of our Current Report on Form 8-K filed on February 6, 2014).

10.130		Amendment No. 8 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 27, 2014, among Bank of America, N.A., PennyMac Corp., PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P.

10.131		Guaranty, dated as of December 23, 2011, by PennyMac Mortgage Investment Trust and PennyMac Operating Partnership, L.P. in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.10 of our Current Report on Form 8-K filed on February 6, 2014).


Exhibit Number		Exhibit Description

10.132		Master Repurchase Agreement, dated as of July 9, 2014, among Bank of America, N.a., PennyMac Operating Partnership, L.P. and PennyMac Mortgage Investment Trust (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 14, 2014).

10.133		Guaranty, dated as of July 9, 2014, by PennyMac Mortgage Investment Trust in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on July 14, 2014).

31.1		Certification of Stanford L. Kurland pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Anne D. McCallion pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Stanford L. Kurland pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Anne D. McCallion pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Income for the quarters ended June 30, 2014 and 2013, (iii) the Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended June 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the quarters ended June 30, 2014 and 2013 and (v) the Notes to the Consolidated Financial Statements.

*	Certain terms have been redacted pursuant to requests for confidential treatment submitted to the Securities and Exchange Commission concurrently with the filing of this Report.

†	Indicates management contract or compensatory plan or arrangement.