PennyMac Financial Services, Inc. (Form: 10-Q, Received: 05/06/2019 16:48:16)

Quarter ended March 31,

(in thousands)

Real estate acquired in settlement of loans

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2019

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

For the transition period from to

Commission file number: 001-38727

PennyMac Financial Services, Inc.

( formerly known as New PennyMac Financial Services, Inc. )

(Exact name of registrant as specified in its charter)


Delaware		83-1098934
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


3043 Townsgate Road, Westlake Village, California		91361
(Address of principal executive offices)		(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

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

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

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


Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐		Smaller reporting company ☐
Emerging growth company ☐

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.0001 per value		PFSI		New York Stock Exchange

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 May 3, 2019
Common Stock, $0.0001 par value		78,334,037

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

March 31, 2019

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		5

Item 1.	Financial Statements (Unaudited) :	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	70
Item 4.	Controls and Procedures	71

PART II. OTHER INFORMATION		72

Item 1.	Legal Proceedings	72
Item 1A.	Risk Factors	72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	73
Item 6.	Exhibits	73

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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

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

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

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

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

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

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

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

You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2019.

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

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

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

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

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

changes to government mortgage modification programs;

certain banking regulations that may limit our business activities;

foreclosure delays and changes in foreclosure practices;

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

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

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

difficulties inherent in growing loan production volume;

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

any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all;

changes in prevailing interest rates;

increases in loan delinquencies and defaults;

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

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

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

our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights (“MSRs”);

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

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

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

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

the effect of public opinion on our reputation;

our recent growth;

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

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

our ability to detect misconduct and fraud;

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

our ability to mitigate cybersecurity risks and cyber incidents;

our exposure to risks of loss resulting from adverse weather conditions and man-made or natural disasters; and

our organizational structure and certain requirements in our charter documents.

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

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	March 31,		December 31,
	2019		2018
	(in thousands, except share amounts)
ASSETS
Cash (includes $93,372 and $108,174 pledged to creditors)	$	144,266	$	155,289
Short-term investments at fair value		149,372		117,824
Mortgage loans held for sale at fair value (includes $2,639,669 and $2,478,858 pledged to creditors)		2,668,929		2,521,647
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors		125,929		131,025
Derivative assets		121,153		96,347
Servicing advances, net (includes valuation allowance of $65,696 and $70,582; $147,435 and $162,895 pledged to creditors)		284,230		313,197
Mortgage servicing rights at fair value (includes $2,675,704 and $2,807,333 pledged to creditors)		2,905,090		2,820,612
Real estate acquired in settlement of loans		1,690		2,250
Operating lease right-of-use assets		56,239		—
Furniture, fixtures, equipment and building improvements, net (includes $15,254 and $16,281 pledged to creditors)		33,423		33,374
Capitalized software, net (includes $940 and $1,017 pledged to creditors)		45,416		39,748
Investment in PennyMac Mortgage Investment Trust at fair value		1,553		1,397
Receivable from PennyMac Mortgage Investment Trust		29,951		33,464
Mortgage loans eligible for repurchase		1,094,702		1,102,840
Other		157,057		109,559
Total assets	$	7,819,000	$	7,478,573
LIABILITIES
Assets sold under agreements to repurchase	$	2,151,938	$	1,933,859
Mortgage loan participation purchase and sale agreements		547,879		532,251
Notes payable		1,292,736		1,292,291
Obligations under capital lease		5,091		6,605
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		205,081		216,110
Derivative liabilities		17,838		3,064
Operating lease liabilities		76,373		—
Accounts payable and accrued expenses		162,677		156,212
Mortgage servicing liabilities at fair value		7,844		8,681
Payable to PennyMac Mortgage Investment Trust		76,494		104,631
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		46,537		46,537
Income taxes payable		414,636		400,546
Liability for mortgage loans eligible for repurchase		1,094,702		1,102,840
Liability for losses under representations and warranties		17,982		21,155
Total liabilities		6,117,808		5,824,782

Commitments and contingencies – Note 14

STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 78,317,843 and 77,494,332 shares, respectively		8		8
Additional paid-in capital		1,311,914		1,310,648
Retained earnings		389,270		343,135
Total stockholders' equity		1,701,192		1,653,791
Total liabilities and stockholders’ equity	$	7,819,000	$	7,478,573

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended March 31,
	2019		2018
	(in thousands, except earnings per share)
Revenues
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates	$	166,790	$	135,483
From PennyMac Mortgage Investment Trust		10,570		11,019
Ancillary and other fees		22,017		14,171
		199,377		160,673
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		(122,857)		(36,963)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust		4,051		(6,921)
		(118,806)		(43,884)
Net mortgage loan servicing fees		80,571		116,789
Net gains on mortgage loans held for sale at fair value:
From non-affiliates		58,753		59,028
From PennyMac Mortgage Investment Trust		26,023		12,386
		84,776		71,414
Mortgage loan origination fees:
From non-affiliates		21,687		23,355
From PennyMac Mortgage Investment Trust		2,243		1,208
		23,930		24,563
Fulfillment fees from PennyMac Mortgage Investment Trust		27,574		11,944
Net interest income:
Interest income:
From non-affiliates		56,537		40,639
From PennyMac Mortgage Investment Trust		1,796		1,976
		58,333		42,615
Interest expense:
To non-affiliates		34,477		32,811
To PennyMac Mortgage Investment Trust		3,066		3,934
		37,543		36,745
Net interest income		20,790		5,870
Management fees, net:
From PennyMac Mortgage Investment Trust		7,248		5,696
From Investment Funds		—		79
		7,248		5,775
Carried Interest from Investment Funds		—		(180)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		192		182
Results of real estate acquired in settlement of loans		274		(28)
Other		2,350		1,872
Total net revenues		247,705		238,201
Expenses
Compensation		106,600		102,013
Servicing		30,293		26,299
Technology		15,966		14,620
Loan origination		14,497		2,115
Occupancy and equipment		6,776		6,377
Professional services		5,881		5,738
Marketing		1,325		2,161
Other		6,076		5,882
Total expenses		187,414		165,205
Income before provision for income taxes		60,291		72,996
Provision for income taxes		14,156		6,070
Net income		46,135		66,926
Less: Net income attributable to noncontrolling interest		—		50,307
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	46,135	$	16,619

Earnings per share
Basic	$	0.59	$	0.70
Diluted	$	0.58	$	0.67
Weighted average shares outstanding
Basic		77,653		23,832
Diluted		79,286		79,461

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


	Quarter ended March 31, 2019
	Common stock

				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity
	(in thousands)
Balance at December 31, 2018	77,494	$	8	$	1,310,648	$	343,135	$	1,653,791
Net income	—		—		—		46,135		46,135
Stock-based compensation	820		—		1,180		—		1,180
Issuance of common stock in settlement of directors' fees	4		—		86		—		86
Balance at March 31, 2019	78,318	$	8	$	1,311,914	$	389,270	$	1,701,192


	Quarter ended March 31, 2018
	Class A common stock							Noncontrolling
								interest in Private
				Additional				National Mortgage		Total
	Number of	Par		paid-in		Retained		Acceptance		stockholders'
	shares	value		capital		earnings		Company, LLC		equity
	(in thousands)
Balance at December 31, 2017	23,530	$	2	$	204,103	$	265,306	$	1,250,263	$	1,719,674
Cumulative effect of change in accounting principle – accounting for all existing classes of mortgage servicing rights at fair value	—		—		—		189		587		776
Balance at January 1, 2018	23,530		2		204,103		265,495		1,250,850		1,720,450
Net income	—		—		—		16,619		50,307		66,926
Stock and unit-based compensation	—		—		5,191		—		4,235		9,426
Issuance of Class A common stock in settlement of directors' fees	—		—		24		—		55		79
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	748		—		14,859		—		(14,859)		—
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	—		—		(2,682)		—		—		(2,682)
Balance at March 31, 2018	24,278	$	2	$	221,495	$	282,114	$	1,290,588	$	1,794,199

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Quarter ended March 31,
	2019		2018
	(in thousands)
Cash flow from operating activities
Net income	$	46,135	$	66,926
Adjustments to reconcile net income to net cash used in operating activities:
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		118,806		43,884
Net gains on mortgage loans held for sale at fair value		(84,776)		(71,414)
Capitalization of interest on mortgage loans held for sale at fair value		(16,487)		(14,467)
Accrual of interest on excess servicing spread financing		3,066		3,934
Amortization of net debt issuance (premiums) and costs		(6,570)		(3,600)
Carried Interest from Investment Funds		—		180
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(156)		(147)
Results of real estate acquired in settlement in loans		(274)		28
Stock-based compensation expense		4,531		6,171
Provision for servicing advance losses		4,820		6,787
Depreciation and amortization		3,159		2,592
Amortization of right-of-use assets		2,359		—
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust		(6,959,389)		(9,212,188)
Originations of mortgage loans held for sale		(1,719,734)		(1,281,302)
Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale		(941,154)		(911,585)
Sale to non-affiliates and principal payments of mortgage loans held for sale		8,536,430		11,103,785
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust		884,510		781,326
Repurchase of mortgage loans subject to representations and warranties		(4,064)		(6,309)
Settlement of repurchase agreement derivatives		11,436		—
Decrease in servicing advances		24,087		27,450
Sale of real estate acquired in settlement of loans		2,075		1,230
Decrease (increase) in receivable from PennyMac Mortgage Investment Trust		2,775		(955)
(Increase) decrease in other assets		(38,676)		6,198
Decrease in operating lease liabilities		(2,977)		—
Increase in accounts payable and accrued expenses		10,483		2,344
Decrease in payable to PennyMac Mortgage Investment Trust		(28,752)		(19,544)
Increase in income taxes payable		14,090		6,068
Net cash (used in) provided by operating activities		(134,247)		537,392
Cash flow from investing activities
(Increase) decrease in short-term investments		(31,548)		64,190
Net change in assets purchased from PMT under agreement to resell		5,096		1,190
Net settlement of derivative financial instruments used for hedging		125,695		(128,099)
Purchase of mortgage servicing rights		(211,481)		(27,544)
Purchase of furniture, fixtures, equipment and leasehold improvements		(2,126)		(2,779)
Acquisition of capitalized software		(6,750)		(3,722)
Decrease in margin deposits		28,343		15,501
Net cash used in investing activities		(92,771)		(81,263)
Cash flow from financing activities
Sale of assets under agreements to repurchase		8,382,013		9,771,234
Repurchase of assets sold under agreements to repurchase		(8,164,625)		(10,338,629)
Issuance of mortgage loan participation purchase and sale certificates		5,555,946		6,155,178
Repayment of mortgage loan participation purchase and sale certificates		(5,540,374)		(6,172,301)
Advances on notes payable		—		650,000
Repayment of notes payable		—		(400,000)
Repayment of obligations under capital lease		(1,514)		(4,536)
Repayment of excess servicing spread financing		(10,552)		(12,291)
Payment of debt issuance costs		(1,536)		(7,891)
Issuance of common stock pursuant to exercise of stock options		1,283		3,255
Payment of withholding taxes relating to stock-based compensation		(4,634)		—
Net cash provided by (used in) financing activities		216,007		(355,981)
Net (decrease) increase in cash and restricted cash		(11,011)		100,148
Cash and restricted cash at beginning of quarter		155,924		38,173
Cash and restricted cash at end of quarter	$	144,913	$	138,321
Cash and restricted cash at end of quarter are comprised of the following:
Cash	$	144,266	$	137,863
Restricted cash included in Other assets		647		458
	$	144,913	$	138,321

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

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PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization

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

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production and mortgage loan servicing. PennyMac’s investment management activities and a portion of its mortgage loan servicing activities are conducted on behalf of investment vehicles that invest in residential mortgage loans and related assets. PennyMac’s primary wholly owned subsidiaries are:

PNMAC Capital Management, LLC (“PCM”) —a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM enters into investment management agreements with entities that invest in residential mortgage loans and related assets.

Presently, PCM has a management agreement with PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust. Previously, PCM had management agreements with PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P. an affiliate of these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (the “Private Fund”) (collectively, the “Investment Funds”). The Investment Funds were dissolved during 2018.

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

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

On November 1, 2018, the Company completed a corporate reorganization (the “Reorganization”) by which it changed its equity structure to create a single class of common stock held by all stockholders at a new top-level publicly traded parent holding corporation, as opposed to the two classes of common stock, Class A and Class B, that were in place before the Reorganization. The predecessor holding company became a consolidated subsidiary of the Company and is considered the predecessor of the Company for accounting purposes. Accordingly, the predecessor holding company's historical consolidated financial statements remain the Company’s historical financial statements. As part of the Reorganization, the Company retained its officers and directors in their previously existing roles and assumed the predecessor holding company's stock-based compensation plan. The details of the Reorganization are more fully described in Note 1 – Organization to Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements

Basis of Presentation

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information 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 GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2019. Intercompany accounts and transactions have been eliminated.

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

Accounting Change

Effective January 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases (Topic 842) , as amended (“ASU 2016-02”), using the modified retrospective approach. As the result of this adoption, the Company recorded a $58.6 million right-of-use asset, a corresponding lease liability and reclassified $20.7 million of deferred rent from accrued liabilities to the lease liability for a total lease liability of $79.3 million. The Company did not adjust the prior comparative period.

As part of its adoption of ASU 2016-02, the Company made the following accounting policy elections:

to retain its current classification of existing leases; and

to exclude from its consolidated balance sheet leases with initial terms that are less than or equal to 12 months.

The adoption of ASU 2016-02 did not have any effect on the Company’s consolidated statements of income, stockholder’s equity or cash flows.

The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets and Operating lease liabilities in its consolidated balance sheet. Operating lease right-of-use assets represent the Company’s right to use the underlying assets and operating lease liabilities represent its obligation to make the payments required by the leases.

As most of the Company’s leases do not provide an implicit discount rate, PFSI uses its incremental borrowing rate based on information available at the commencement date to determine the present value of its lease payment obligations. The operating lease right-of-use assets also includes any lease payments made and is reduced by lease incentives. Lease expense is recognized on the straight-line basis over the lease term.

The Company has lease agreements that include both lease and non-lease components (such as common area maintenance), which are generally included in the lease and are accounted for along with the lease component as a single lease component. Detailed lease disclosures are included in Note 10‒Leases .

Note 3—Concentration of Risk

A substantial portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of mortgage loan servicing fees, gains on mortgage loans held for sale, mortgage loan origination fees, fulfillment fees, change in fair value of excess servicing spread financing (“ESS”), net interest paid to these entities, management fees, and change in fair value of investment and dividend received from PMT) totaled 31% and 15% of total net revenue for the quarters ended March 31, 2019 and 2018, respectively.

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Note 4—Transactions with Affiliates

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities and MSR Recapture

The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. Historically, the Company has used the mortgage loan purchase agreement for the purpose of selling to PMT prime jumbo residential mortgage loans. In the third quarter of 2017, the Company began selling conventional conforming balance mortgage loans to PMT under the agreement.

Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, which was amended and restated effective September 12, 2016, if the Company refinances mortgage loans for which PMT previously held the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. The MSR recapture agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

Pursuant to a mortgage banking services agreement, which was amended and restated effective September 12, 2016, the Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a fulfillment fee. Pursuant to the terms of the mortgage banking services agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage‑Backed Securities (“MBS”) Guide. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company currently purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days mortgage loans are held by PMT before being purchased by the Company.

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
Net gains (loss) on mortgage loans held for sale at fair value:
Net gains on mortgage loans held for sale to PMT	$	27,146	$	13,811
Mortgage servicing rights and excess servicing spread recapture incurred		(1,123)		(1,425)
	$	26,023	$	12,386
Sale of mortgage loans held for sale to PMT	$	884,510	$	781,326

Fulfillment fee revenue	$	27,574	$	11,944
Unpaid principal balance of mortgage loans fulfilled for PMT subject to fulfillment fees	$	8,135,552	$	4,225,631

Sourcing fees paid to PMT	$	1,994	$	2,641
Unpaid principal balance of mortgage loans purchased from PMT	$	6,647,338	$	8,847,873

Tax service fees earned from PMT included in Mortgage loan origination fees	$	2,243	$	1,208

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Mortgage Loan Servicing

The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), which was amended and restated effective September 12, 2016 and pursuant to which the Company provides servicing for PMT’s portfolio of residential mortgage loans and subservicing for its portfolio of MSRs. The Servicing Agreement provides for servicing fees of per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to mortgage loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.

The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.

To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.

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

Because PMT has a small number of employees and limited infrastructure, the Company 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, the Company receives a supplemental servicing fee of $25 per month for each distressed mortgage loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in performance of its servicing obligations.

The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan; provided, however, that with respect to any such incentive payments paid to the Company in connection with a mortgage loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments.

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

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

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

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
Mortgage loans acquired for sale at fair value	$	239	$	178
Mortgage loans at fair value		463		3,085
Mortgage servicing rights		9,868		7,756
	$	10,570	$	11,019
Property management fees received from PMT included in Other income	$	123	$	99

Investment Management Activities

The Company has a management agreement with PMT (“Management Agreement”), which was amended and restated effective September 12, 2016. Pursuant to the Management Agreement, the Company oversees PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which it collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:

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

The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by which PMT’s “net income,” on a rolling four‑quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income” for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on PMT’s equity; plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12% return on PMT’s equity plus the “high watermark,” up to (ii) a 16% return on PMT’s equity; plus (c) 20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on equity plus the “high watermark.”

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

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

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

The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30‑year MBS yield (the “Target Yield”) for the four quarters then ended. If the “net income” is lower than the Target Yield, the high watermark is increased by the difference. If the “net income” is higher than the Target Yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of the Target Yield exceeds the then‑current cumulative high watermark amount, and a performance incentive fee is earned.

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

The Management Agreement expires on September 12, 2020, subject to automatic renewal for additional
18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of termination of the Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period immediately preceding the date of termination.

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
Base management	$	6,109	$	5,696
Performance incentive		1,139		—
	$	7,248	$	5,696

Expense Reimbursement

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

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

The Company received reimbursements from PMT for expenses as follows:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Reimbursement of:
Common overhead incurred by the Company included in Other revenue	$	1,236	$	1,001
Compensation included in Other revenue		120		120
Expenses incurred on PMT's behalf, net		570		573
	$	1,926	$	1,694
Payments and settlements during the quarter (1)	$	15,189	$	7,658

(1)

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

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Conditional Reimbursement of Underwriting Fees

In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the Management Agreement, and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursement agreement was extended to February 1, 2023. The Company received $75,000 in reimbursement of underwriting fees from PMT during the quarter ended March 31, 2019.

Investing Activities

Master Repurchase Agreement

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

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

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

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

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	1,796	$	1,976
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Dividends received	$	36	$	35
Change in fair value of investment		156		147
	$	192	$	182

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	March 31,		December 31,
	2019		2018
	(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	125,929	$	131,025
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value	$	1,553	$	1,397
Number of shares		75		75

Financing Activities

Spread Acquisition and MSR Servicing Agreements

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

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

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
Excess servicing spread financing:
Issuance pursuant to recapture agreement	$	508	$	904
Repayment	$	10,552	$	12,291
Gain (loss) recognized	$	4,051	$	(6,921)
Interest expense	$	3,066	$	3,934
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on mortgage loans held for sale at fair value	$	489	$	830

	March 31,		December 31,
	2019		2018
	(in thousands)
Excess servicing spread financing at fair value	$	205,081	$	216,110

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Receivable from and Payable to PMT

Amounts receivable from and payable to PMT are summarized below:


	March 31,		December 31,
	2019		2018
	(in thousands)
Receivable from PMT:
Fulfillment fees	$	11,744	$	10,006
Management fees		7,238		6,559
Servicing fees		4,350		4,841
Allocated expenses and expenses incurred on PMT's behalf		3,907		9,066
Correspondent production fees		1,852		2,071
Conditional Reimbursement		726		801
Interest on assets purchased under agreements to resell		134		120
	$	29,951	$	33,464
Payable to PMT:
Deposits made by PMT to fund servicing advances	$	73,149	$	100,554
Mortgage servicing rights recapture payable		160		179
Other		3,185		3,898
	$	76,494	$	104,631

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

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

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

Based on the PennyMac unitholder exchanges to date, the Company has recorded a $46.5 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, 2019 and December 31, 2018. The Company did not make any payments under the tax receivable agreement during the quarters ended March 31, 2019 and 2018.

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Note 5—Loan Sales and Servicing Activities

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

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
Cash flows:
Sales proceeds	$	8,536,430	$	11,103,785
Servicing fees received (1)	$	137,148	$	113,091
Net servicing recoveries	$	(24,176)	$	(10,637)

(1)

Net of guarantee fees paid to the Agencies.

The following table summarizes unpaid principal balance (the “UPB”) of the mortgage loans sold by the Company in which it maintains continuing involvement:


	March 31,		December 31,
	2019		2018
	(in thousands)
Unpaid principal balance of mortgage loans outstanding	$	148,795,055	$	145,224,596
Delinquencies:
30-89 days	$	5,489,000	$	6,222,864
90 days or more:
Not in foreclosure	$	2,085,034	$	2,208,083
In foreclosure	$	710,297	$	720,894
Foreclosed	$	24,875	$	24,243
Bankruptcy	$	1,053,399	$	970,329

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


	March 31, 2019
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	148,795,055	$	—	$	148,795,055
Purchased		72,039,709		—		72,039,709
		220,834,764		—		220,834,764
PennyMac Mortgage Investment Trust		—		101,287,428		101,287,428
Mortgage loans held for sale		2,573,121		—		2,573,121
	$	223,407,885	$	101,287,428	$	324,695,313
Subserviced for the Company (1)	$	16,270,233	$	—	$	16,270,233
Delinquent mortgage loans:
30 days	$	6,244,534	$	479,185	$	6,723,719
60 days		1,781,121		111,089		1,892,210
90 days or more:
Not in foreclosure		3,100,186		223,231		3,323,417
In foreclosure		1,094,892		115,637		1,210,529
Foreclosed		35,354		157,762		193,116
	$	12,256,087	$	1,086,904	$	13,342,991
Bankruptcy	$	1,521,842	$	118,609	$	1,640,451
Custodial funds managed by the Company (2)	$	3,851,327	$	1,384,404	$	5,235,731

(1)

Certain of the mortgage loans for which the Company has purchased the MSRs are subserviced on the Company’s behalf by other mortgage loan servicers on an interim basis when servicing of the loans has not yet been transferred to the Company’s loan servicing platform.

(2)

Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to mortgage loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the mortgage loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income.

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	December 31, 2018
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	145,224,596	$	—	$	145,224,596
Purchased		56,990,486		—		56,990,486
		202,215,082		—		202,215,082
PennyMac Mortgage Investment Trust		—		94,658,154		94,658,154
Mortgage loans held for sale		2,420,636		—		2,420,636
	$	204,635,718	$	94,658,154	$	299,293,872
Subserviced for the Company (1)	$	414,219	$	—	$	414,219
Delinquent mortgage loans:
30 days	$	6,677,179	$	525,989	$	7,203,168
60 days		1,983,381		113,238		2,096,619
90 days or more:
Not in foreclosure		3,102,492		217,115		3,319,607
In foreclosure		1,027,493		127,025		1,154,518
Foreclosed		33,493		176,377		209,870
	$	12,824,038	$	1,159,744	$	13,983,782
Bankruptcy	$	1,415,106	$	107,083	$	1,522,189
Custodial funds managed by the Company (2)	$	3,033,658	$	970,328	$	4,003,986

(1)

(2)

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


	March 31,		December 31,
State	2019		2018
	(in thousands)
California	$	54,790,956	$	51,377,441
Florida		25,043,416		22,650,926
Texas		24,957,664		23,648,042
Virginia		19,845,177		19,011,950
Maryland		14,748,291		13,774,011
All other states		185,309,809		168,831,502
	$	324,695,313	$	299,293,872

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Note 6—Fair Value

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

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

Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company.

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

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

Fair Value Accounting Elections

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

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


	March 31, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	149,372	$	—	$	—	$	149,372
Mortgage loans held for sale at fair value		—		2,213,396		455,533		2,668,929
Derivative assets:
Interest rate lock commitments		—		—		68,248		68,248
Repurchase agreement derivatives		—		—		24,632		24,632
Forward purchase contracts		—		61,932		—		61,932
Forward sales contracts		—		1,215		—		1,215
MBS put options		—		6,287		—		6,287
MBS call options		—		6,251		—		6,251
Put options on interest rate futures purchase contracts		2,639		—		—		2,639
Call options on interest rate futures purchase contracts		14,078		—		—		14,078
Total derivative assets before netting		16,717		75,685		92,880		185,282
Netting		—		—		—		(64,129)
Total derivative assets		16,717		75,685		92,880		121,153
Investment in PennyMac Mortgage Investment Trust		1,553		—		—		1,553
Mortgage servicing rights at fair value		—		—		2,905,090		2,905,090
	$	167,642	$	2,289,081	$	3,453,503	$	5,846,097
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value	$	—	$	—	$	205,081	$	205,081
Derivative liabilities:
Interest rate lock commitments		—		—		2,183		2,183
Forward purchase contracts		—		3,170		—		3,170
Forward sales contracts		—		25,962		—		25,962
Total derivative liabilities before netting		—		29,132		2,183		31,315
Netting		—		—		—		(13,477)
Total derivative liabilities		—		29,132		2,183		17,838
Mortgage servicing liabilities at fair value		—		—		7,844		7,844
	$	—	$	29,132	$	215,108	$	230,763

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	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	117,824	$	—	$	—	$	117,824
Mortgage loans held for sale at fair value		—		2,261,639		260,008		2,521,647
Derivative assets:
Interest rate lock commitments		—		—		50,507		50,507
Repurchase agreement derivatives		—		—		26,770		26,770
Forward purchase contracts		—		35,916		—		35,916
Forward sales contracts		—		437		—		437
MBS put options		—		720		—		720
MBS call options		—		2,135		—		2,135
Put options on interest rate futures purchase contracts		866		—		—		866
Call options on interest rate futures purchase contracts		5,965		—		—		5,965
Total derivative assets before netting		6,831		39,208		77,277		123,316
Netting		—		—		—		(26,969)
Total derivative assets		6,831		39,208		77,277		96,347
Investment in PennyMac Mortgage Investment Trust		1,397		—		—		1,397
Mortgage servicing rights at fair value		—		—		2,820,612		2,820,612
	$	126,052	$	2,300,847	$	3,157,897	$	5,557,827
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value	$	—	$	—	$	216,110	$	216,110
Derivative liabilities:
Interest rate lock commitments		—		—		1,169		1,169
Forward purchase contracts		—		215		—		215
Forward sales contracts		—		26,762		—		26,762
Total derivative liabilities before netting		—		26,977		1,169		28,146
Netting		—		—		—		(25,082)
Total derivative liabilities		—		26,977		1,169		3,064
Mortgage servicing liabilities at fair value		—		—		8,681		8,681
	$	—	$	26,977	$	225,960	$	227,855

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As shown above, all or a portion of the Company’s mortgage loans held for sale, Interest Rate Lock Commitments (“IRLCs”), repurchase agreement derivatives, MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are rollforwards of these items for each of the quarters ended March 31, 2019 and 2018:


	Quarter ended March 31, 2019
	Mortgage		Net interest		Repurchase		Mortgage
	loans held		rate lock		agreement		servicing
	for sale		commitments (1)		derivatives		rights			Total
	(in thousands)
Assets:
Balance, December 31, 2018	$	260,008	$	49,338	$	26,770	$	2,820,612	$	3,156,728
Purchases and issuances, net		784,262		56,983		9,855		227,772		1,078,872
Sales and repayments		(176,302)		—		(11,436)		—		(187,738)
Mortgage servicing rights resulting from mortgage loan sales		—		—		—		115,751		115,751
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(6,091)		—		—		—		(6,091)
Other factors		—		59,978		(557)		(259,045)		(199,624)
		(6,091)		59,978		(557)		(259,045)		(205,715)
Transfers from Level 3 to Level 2		(405,163)		—		—		—		(405,163)
Transfers to real estate acquired in settlement of loans		(1,181)		—		—		—		(1,181)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(100,234)		—		—		(100,234)
Balance, March 31, 2019	$	455,533	$	66,065	$	24,632	$	2,905,090	$	3,451,320
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2019	$	(3,540)	$	66,065	$	—	$	(259,045)	$	(196,520)

(1)

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


	Quarter ended March 31, 2019
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, December 31, 2018	$	216,110	$	8,681	$	224,791
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		508		—		508
Accrual of interest		3,066		—		3,066
Repayments		(10,552)		—		(10,552)
Mortgage servicing liabilities resulting from mortgage loan sales		—		794		794
Changes in fair value included in income		(4,051)		(1,631)		(5,682)
Balance, March 31, 2019	$	205,081	$	7,844	$	212,925
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2019	$	(4,051)	$	(1,631)	$	(5,682)

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	Quarter ended March 31, 2018
	Mortgage		Net interest		Repurchase		Mortgage
	loans held		rate lock		agreement		servicing
	for sale		commitments (1)		derivatives		rights		Total
	(in thousands)
Assets:
Balance December 31, 2017	$	782,211	$	58,272	$	10,656	$	638,010	$	1,489,149
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to adoption of the fair value method of accounting		—		—		—		1,482,426		1,482,426
Balance, January 1, 2018		782,211		58,272		10,656		2,120,436		2,971,575
Purchases and issuances, net		647,269		65,598		10,751		27,606		751,224
Sales and repayments		(604,094)		—		(7)		—		(604,101)
Mortgage servicing rights resulting from mortgage loan sales		—		—		—		143,910		143,910
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(8,755)		—		—		—		(8,755)
Other factors		—		(44,913)		(426)		62,537		17,198
		(8,755)		(44,913)		(426)		62,537		8,443
Transfers from Level 3 to Level 2		(356,232)		—		—		—		(356,232)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(28,061)		—		—		(28,061)
Balance, March 31, 2018	$	460,399	$	50,896	$	20,974	$	2,354,489	$	2,886,758
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2018	$	(7,598)	$	50,896	$	(77)	$	62,537	$	105,758

(1)

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


	Quarter ended March 31, 2018
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance December 31, 2017	$	236,534	$	14,120	$	250,654
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		904		—		904
Accrual of interest		3,934		—		3,934
Repayments		(12,291)		—		(12,291)
Mortgage servicing liabilities resulting from mortgage loan sales		—		2,037		2,037
Changes in fair value included in income		6,921		(4,094)		2,827
Balance, March 31, 2018	$	236,002	$	12,063	$	248,065
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2018	$	6,921	$	(4,094)	$	2,827

The information used in the preceding roll forwards represents activity for any assets and liabilities measured at fair value on a recurring basis and identified as using “Level 3” significant fair value inputs at either the beginning or the end of the quarters presented. The Company had transfers among the fair value levels arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase or funding of the respective mortgage loans and from the return to salability in the active secondary market of certain mortgage loans held for sale.

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

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


	Quarter ended March 31,
	2019						2018
	Net		Net gains on				Net		Net gains on
	mortgage		mortgage				mortgage		mortgage
	loan		loans held				loan		loans held
	servicing		for sale at				servicing		for sale at
	fees		fair value		Total		fees		fair value		Total
	(in thousands)
Assets:
Mortgage loans held for sale	$	—	$	101,995	$	101,995	$	—	$	(6,118)	$	(6,118)
Mortgage servicing rights		(259,045)		—		(259,045)		62,537		—		62,537
	$	(259,045)	$	101,995	$	(157,050)	$	62,537	$	(6,118)	$	56,419
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	4,051	$	—	$	4,051	$	(6,921)	$	—	$	(6,921)
Mortgage servicing liabilities		1,631		—		1,631		4,094		—		4,094
	$	5,682	$	—	$	5,682	$	(2,827)	$	—	$	(2,827)

Following are the fair value and related principal amounts due upon maturity of assets accounted for under the fair value option:


	March 31, 2019						December 31, 2018
			Principal						Principal
			amount						amount
	Fair		due upon				Fair		due upon
	value		maturity		Difference		value		maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,357,344	$	2,252,816	$	104,528	$	2,324,203	$	2,220,371	$	103,832
90 days or more delinquent:
Not in foreclosure		235,957		240,728		(4,771)		143,631		144,011		(380)
In foreclosure		75,628		79,577		(3,949)		53,813		56,254		(2,441)
	$	2,668,929	$	2,573,121	$	95,808	$	2,521,647	$	2,420,636	$	101,011

Assets Measured at Fair Value on a Nonrecurring Basis

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


Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total
	(in thousands)
March 31, 2019	$	—	$	—	$	719	$	719
December 31, 2018	$	—	$	—	$	2,150	$	2,150

The following table summarizes the total gains on assets measured at fair value on a nonrecurring basis:

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Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell , Assets sold under agreements to repurchase , Mortgage loan participation purchase and sale agreements , Notes payable and Obligations under capital lease are carried at amortized cost.

These assets and liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate these their fair values. The Company has concluded that the fair values of these assets and liabilities other than the Term Notes approximate their carrying values due to their short terms and/or variable interest rates. The fair value of the Term Notes at March 31, 2019 was $1.3 billion and was based on non-affiliate broker indications of value. The fair value of Term Notes at December 31, 2018 was $1.3 billion, and was estimated using a discounted cash flow approach using indications of market pricing spreads provided by non-affiliated brokers to develop an appropriate discount rate.

Valuation Governance

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

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

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

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

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

Valuation Techniques and Inputs

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

Mortgage Loans Held for Sale

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

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

Certain delinquent government guaranteed or insured mortgage loans purchased by the Company from Ginnie Mae guaranteed pools in its mortgage loan servicing portfolio. The Company’s right to purchase delinquent government guaranteed or insured mortgage loans arises as the result of the borrower’s failure to make payments for at least three consecutive months preceding the month of repurchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such repurchased mortgage loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed pool. Such eligibility occurs when when the repurchased mortgage loans become current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms.

Certain of the Company’s mortgage loans held for sale that are non-saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a mortgage loan with an identified defect.

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

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



Key inputs (1)	March 31, 2019	December 31, 2018
Discount rate:
Range	3.1% – 9.2%	2.8% – 9.2%
Weighted average	3.1%	2.9%
Twelve-month projected housing price index change:
Range	3.0% – 4.8%	2.2% – 5.0%
Weighted average	3.3%	3.5%
Voluntary prepayment / resale speed (2):
Range	0.1% – 24.3%	0.1% – 21.8%
Weighted average	22.0%	20.1%
Total prepayment speed (3):
Range	0.1% – 42.0%	0.1% – 40.5%
Weighted average	39.2%	37.7%

(1)

Weighted average inputs are based on the fair value of mortgage loans.

(2)

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

(3)

Total prepayment speed is measured using Life Total CPR.

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

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Derivative Financial Instruments

Interest Rate Lock Commitments

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

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

Changes in fair value of IRLCs are included in Net gains on mortgage loans acquired for sale at fair value and may be allocated to Net mortgage loan servicing fees – Change in fair value of mortgage servicing rights and mortgage servicing liabilities as an economic hedge of the fair value of MSRs in the consolidated statements of income when IRLCs are included as a component of the Company’s MSR hedging strategy.

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



Key inputs (1)	March 31, 2019	December 31, 2018
Pull-through rate:
Range	12.2% – 100%	16.6% – 100%
Weighted average	82.8%	84.1%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range	1.1 – 5.7	1.5 – 5.5
Weighted average	3.8	3.8
Percentage of unpaid principal balance:
Range	0.3% – 2.7%	0.4% – 3.2%
Weighted average	1.5%	1.5%

(1)

Weighted average inputs are based on the committed amounts.

Hedging Derivatives

Fair value of exchange-traded hedging derivative financial instruments are categorized by the Company as “Level 1” fair value assets and liabilities. Fair value of hedging derivative financial instruments based on observable MBS prices or interest rate volatilities in the MBS market are categorized as “Level 2” fair value assets and liabilities.

Changes in the fair value of hedging derivatives are included in Net gains on mortgage loans acquired for sale at fair value, or Net mortgage loan servicing fees – Change in fair value of mortgage servicing rights and mortgage servicing liabilities , as applicable, in the consolidated statements of income.

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Repurchase Agreement Derivatives

The Company has a master repurchase agreement that includes incentives for financing mortgage loans approved for satisfying certain consumer relief characteristics. These incentives are classified for financial reporting purposes as embedded derivatives and are separated for accounting purposes from the master repurchase agreement. The Company classifies these derivatives as “Level 3” fair value assets. The significant unobservable inputs into the valuation of these derivative assets are the discount rate and the Company’s expected approval rate of the mortgage loans financed under the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate was 97% at March 31, 2019 and December 31, 2018.

Mortgage Servicing Rights

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

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


	Quarter ended March 31,
	2019		2018
	(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)
MSR and pool characteristics:
Amount recognized	$	115,751	$	143,910
Unpaid principal balance of underlying mortgage loans	$	8,145,850	$	10,162,316
Weighted average servicing fee rate (in basis points)		39		35
Key inputs (1):
Pricing spread (2)
Range		5.8% – 15.6%		7.4% – 14.1%
Weighted average		8.9%		10.3%
Annual total prepayment speed (3)
Range		5.8% – 73.0%		3.9% – 49.0%
Weighted average		15.3%		8.9%
Life (in years)
Range		0.8 – 10.2		1.1 – 11.6
Weighted average		5.8		8.2
Per-loan annual cost of servicing
Range		$78 – $100		$78 – $98
Weighted average		$95		$89

(1)

Weighted average inputs are based on the UPB of the underlying mortgage loans.

(2)

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

(3)

Prepayment speed is measured using Life Total CPR.

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


	March 31, 2019	December 31, 2018
	(Carrying value, unpaid principal balance of underlying
	mortgage loans and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$2,905,090	$2,820,612
Unpaid principal balance of underlying mortgage loans	$219,834,361	$201,054,144
Weighted average note interest rate	4.0%	4.0%
Weighted average servicing fee rate (in basis points)	33	33
Key inputs (1):
Pricing spread (2):
Range	6.0% – 15.8%	5.8% – 16.1%
Weighted average	8.7%	8.7%
Effect on fair value of:
5% adverse change	($45,330)	($45,268)
10% adverse change	($89,217)	($89,073)
20% adverse change	($172,915)	($172,556)
Prepayment speed (3):
Range	9.0% – 33.5%	8.4% – 32.6%
Weighted average	11.4%	9.9%
Average life (in years):
Range	1.5 – 7.6	1.5 – 7.9
Weighted average	6.6	7.2
Effect on fair value of:
5% adverse change	($54,920)	($47,687)
10% adverse change	($107,628)	($93,626)
20% adverse change	($206,907)	($180,623)
Annual per-loan cost of servicing:
Range	$78 – $100	$78 – $99
Weighted average	$97	$93
Effect on fair value of:
5% adverse change	($24,494)	($22,944)
10% adverse change	($49,004)	($45,888)
20% adverse change	($98,024)	($91,775)

(1)

Weighted average inputs are based on the UPB of the underlying mortgage loans.

(2)

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

(3)

Prepayment speed is measured using Life Total CPR.

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

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Excess Servicing Spread Financing at Fair Value

The Company categorizes ESS as a “Level 3” fair value liability. Because the ESS is a claim to a portion of the cash flows from MSRs, the fair value measurement of the ESS is similar to that of MSRs. The Company uses the same discounted cash flow approach to measuring the ESS as it uses to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSR and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS. The key inputs used in the estimation of ESS fair value include pricing spread (discount rate) and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not necessarily directly related.

ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage interest rates normally discourage mortgage refinancing activity. Decreased refinancing activity increases the life of the mortgage loans underlying the ESS, thereby increasing its fair value. Changes in the fair value of ESS are included in Net mortgage loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust.

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


	March 31,	December 31,
	2019	2018
Carrying value (in thousands)	$205,081	$216,110
ESS and pool characteristics:
Unpaid principal balance of underlying mortgage loans (in thousands)	$22,664,211	$23,196,033
Average servicing fee rate (in basis points)	34	34
Average excess servicing spread (in basis points)	19	19
Key inputs (1):
Pricing spread (2):
Range	3.0% – 3.3%	2.8% – 3.2%
Weighted average	3.2%	3.1%
Annualized prepayment speed (3):
Range	8.5% – 29.9%	8.2% – 29.5%
Weighted average	10.4%	9.7%
Average life (in years):
Range	1.5 – 7.4	1.6 – 7.6
Weighted average	6.5	6.8

(1)

Weighted average inputs are based on the UPB of the underlying mortgage loans.

(2)

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

(3)

Prepayment speed is measured using Life Total CPR.

Mortgage Servicing Liabilities

MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. This approach consists of projecting net servicing cash flows discounted at a rate that management believes market participants would use in their determinations of fair value. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread (discount rate), the prepayment rates of the underlying mortgage loans, and the per-loan annual cost to service the respective mortgage loans. Changes in the fair value of MSLs are included in Net servicing fees — Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

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


		March 31,		December 31,
		2019		2018
MSL and pool characteristics:
Carrying value (in thousands)	$	7,844	$	8,681
Unpaid principal balance of underlying mortgage loans (in thousands)	$	1,000,403	$	1,160,938
Servicing fee rate (in basis points)		25		25
Key inputs:
Pricing spread (1)		7.4%		7.3%
Prepayment speed (2)		32.6%		32.2%
Average life (in years)		3.6		3.8
Annual per-loan cost of servicing	$	364	$	373

(1)

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

(2)

Prepayment speed is measured using Life Total CPR.

Note 7—Mortgage Loans Held for Sale at Fair Value

Mortgage loans held for sale at fair value include the following:


	March 31,		December 31,
	2019		2018
	(in thousands)
Government-insured or guaranteed	$	2,083,470	$	2,116,126
Conventional conforming		129,926		145,513
Home equity lines of credit		86		—
Purchased from Ginnie Mae pools serviced by the Company		446,290		250,585
Repurchased pursuant to representations and warranties		9,157		9,423
	$	2,668,929	$	2,521,647
Fair value of mortgage loans pledged to secure:
Assets sold under agreements to repurchase	$	2,065,151	$	1,923,857
Mortgage loan participation purchase and sale agreements		574,518		555,001
	$	2,639,669	$	2,478,858

Note 8—Derivative Activities

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

IRLCs that are created when the Company commits to purchase or originate a mortgage loan acquired for sale.

Derivatives that are embedded in a master repurchase agreement that provides for the Company to receive incentives for financing mortgage loans that satisfy certain consumer relief characteristics under the master repurchase agreement.

The Company also engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of mortgage loans held for sale and the portion of its MSRs not financed with ESS.

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The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

Derivative Notional Amounts and Fair Value of Derivatives

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


	March 31, 2019					December 31, 2018
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount	assets		liabilities		amount	assets		liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Not subject to master netting arrangements:
Interest rate lock commitments	3,821,942	$	68,248	$	2,183	2,805,400	$	50,507	$	1,169
Repurchase agreement derivatives			24,632		—			26,770		—
Used for hedging purposes:
Forward purchase contracts	9,313,389		61,932		3,170	6,657,026		35,916		215
Forward sales contracts	7,583,005		1,215		25,962	6,890,046		437		26,762
MBS put options	9,425,000		6,287		—	4,635,000		720		—
MBS call options	3,350,000		6,251		—	1,450,000		2,135		—
Put options on interest rate futures purchase contracts	3,350,000		2,639		—	3,085,000		866		—
Call options on interest rate futures purchase contracts	2,250,000		14,078		—	1,512,500		5,965		—
Treasury futures purchase contracts	1,810,000		—		—	835,000		—		—
Treasury futures sale contracts	1,075,000		—		—	1,450,000		—		—
Interest rate swap futures purchase contracts	1,025,000		—		—	625,000		—		—
Total derivatives before netting			185,282		31,315			123,316		28,146
Netting			(64,129)		(13,477)			(26,969)		(25,082)
		$	121,153	$	17,838		$	96,347	$	3,064
Deposits placed with derivative counterparties		$	50,652				$	1,887

The following table summarizes notional amount activity for derivative contracts used in the Company’s hedging activities:


	Quarter ended March 31, 2019
	Notional			Notional
	amount			amount
	beginning of		Dispositions/	end of
Instrument	quarter	Additions	expirations	quarter
	(in thousands)
Forward purchase contracts	6,657,026	52,621,845	(49,965,482)	9,313,389
Forward sale contracts	6,890,046	59,673,487	(58,980,528)	7,583,005
MBS put options	4,635,000	19,160,000	(14,370,000)	9,425,000
MBS call options	1,450,000	4,500,000	(2,600,000)	3,350,000
Put options on interest rate futures purchase contracts	3,085,000	6,675,000	(6,410,000)	3,350,000
Call options on interest rate futures purchase contracts	1,512,500	4,462,800	(3,725,300)	2,250,000
Put options on interest rate futures sale contracts	—	10,135,300	(10,135,300)	—
Treasury futures purchase contracts	835,000	4,111,200	(3,136,200)	1,810,000
Treasury futures sale contracts	1,450,000	2,761,200	(3,136,200)	1,075,000
Interest rate swap futures purchase contracts	625,000	400,000	—	1,025,000

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	Quarter ended March 31, 2018
	Notional			Notional
	amount			amount
	beginning of		Dispositions/	end of
Instrument	quarter	Additions	expirations	quarter
	(in thousands)
Forward purchase contracts	4,920,883	45,330,785	(43,707,885)	6,543,783
Forward sale contracts	5,204,796	56,355,552	(54,636,002)	6,924,346
MBS put options	4,925,000	4,500,000	(5,675,000)	3,750,000
MBS call options	—	5,675,000	(5,675,000)	—
Put options on interest rate futures purchase contracts	2,125,000	5,525,000	(4,850,000)	2,800,000
Call options on interest rate futures purchase contracts	100,000	375,000	(250,000)	225,000
Put options on interest rate futures sale contracts	—	4,850,000	(4,850,000)	—
Call options on interest rate futures sale contracts	—	250,000	(250,000)	—
Treasury futures purchase contracts	100,000	1,904,900	(1,494,900)	510,000
Treasury futures sale contracts	—	3,406,200	(2,156,200)	1,250,000
Interest rate swap futures purchase contracts	1,400,000	465,000	(1,400,000)	465,000
Interest rate swap futures sale contracts	—	1,400,000	(1,400,000)	—

Derivative Balances and Netting of Financial Instruments

The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs and repurchase agreement derivatives.

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts:


	March 31, 2019						December 31, 2018
	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
	amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	assets		balance sheet		balance sheet		assets		balance sheet		balance sheet
	(in thousands)
Derivatives not subject to master netting arrangements:
Interest rate lock commitments	$	68,248	$	—	$	68,248	$	50,507	$	—	$	50,507
Repurchase agreement derivatives		24,632		—		24,632		26,770		—		26,770
		92,880		—		92,880		77,277		—		77,277
Derivatives subject to master netting arrangements:
Forward purchase contracts		61,932		—		61,932		35,916		—		35,916
Forward sale contracts		1,215		—		1,215		437		—		437
MBS put options		6,287		—		6,287		720		—		720
MBS call options		6,251		—		6,251		2,135		—		2,135
Put options on interest rate futures purchase contracts		2,639		—		2,639		866		—		866
Call options on interest rate futures purchase contracts		14,078		—		14,078		5,965		—		5,965
Netting				(64,129)		(64,129)		—		(26,969)		(26,969)
		92,402		(64,129)		28,273		46,039		(26,969)		19,070
	$	185,282	$	(64,129)	$	121,153	$	123,316	$	(26,969)	$	96,347

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Derivative Assets, Financial Instruments, and Cash 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.


	March 31, 2019								December 31, 2018
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
	Net amount		balance sheet						Net amount		balance sheet
	of assets in the				Cash				of assets in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount
	(in thousands)
Interest rate lock commitments	$	68,248	$	—	$	—	$	68,248	$	50,507	$	—	$	—	$	50,507
Deutsche Bank		24,632		—		—		24,632		26,770		—		—		26,770
RJ O'Brien		16,717		—		—		16,717		6,831		—		—		6,831
Bank of America, N.A.		4,052		—		—		4,052		2,781		—		—		2,781
JPMorgan Chase Bank, N.A.		3,494		—		—		3,494		1,399		—		—		1,399
Wells Fargo Bank, N.A.		2,275		—		—		2,275		3,707		—		—		3,707
Goldman Sachs		1,286		—		—		1,286		—		—		—		—
Citibank, N.A.		—		—		—		—		2,488		—		—		2,488
Others		449		—		—		449		1,864		—		—		1,864
	$	121,153	$	—	$	—	$	121,153	$	96,347	$	—	$	—	$	96,347

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. Assets sold under agreements to repurchase do not qualify for netting.


	March 31, 2019						December 31, 2018
					Net						Net
					amount						amount
	Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
	amount of		offset in the		in the		amount of		offset in the		in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet
	(in thousands)
Derivatives not subject to master netting arrangements – Interest rate lock commitments	$	2,183	$	—	$	2,183	$	1,169	$	—	$	1,169
Derivatives subject to a master netting arrangement:
Forward purchase contracts		3,170		—		3,170		215		—		215
Forward sale contracts		25,962		—		25,962		26,762		—		26,762
Netting		—		(13,477)		(13,477)		—		(25,082)		(25,082)
		29,132		(13,477)		15,655		26,977		(25,082)		1,895
Total derivatives		31,315		(13,477)		17,838		28,146		(25,082)		3,064
Assets sold under agreements to repurchase:
Amount outstanding		2,152,588		—		2,152,588		1,935,200		—		1,935,200
Unamortized debt issuance premiums and costs, net		(650)		—		(650)		(1,341)		—		(1,341)
		2,151,938		—		2,151,938		1,933,859		—		1,933,859
	$	2,183,253	$	(13,477)	$	2,169,776	$	1,962,005	$	(25,082)	$	1,936,923

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Derivative Liabilities, Financial Instruments, 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 qualify under the accounting guidance for netting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.


	March 31, 2019								December 31, 2018
			Gross amounts								Gross amounts
			not offset in the								not offset in the
	Net amount		consolidated						Net amount		consolidated
	of liabilities		balance sheet						of liabilities		balance sheet
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		pledged		amount		balance sheet		instruments		pledged		amount
	(in thousands)
Interest rate lock commitments	$	2,183	$	—	$	—	$	2,183	$	1,169	$	—	$	—	$	1,169
Credit Suisse First Boston Mortgage Capital LLC		848,914		(845,622)		—		3,292		691,030		(690,766)		—		264
Deutsche Bank		692,010		(692,010)		—		—		741,978		(741,978)		—		—
BNP Paribas		199,395		(199,395)		—		—		149,675		(149,482)		—		193
Bank of America, N.A.		170,859		(170,859)		—		—		170,820		(170,820)		—		—
Citibank, N.A.		83,533		(82,659)		—		874		14,960		(14,960)		—		—
Morgan Stanley Bank, N.A.		80,998		(71,069)		—		9,929		77,687		(77,687)		—		—
JPMorgan Chase Bank, N.A.		50,875		(50,875)		—		—		54,326		(54,326)		—		—
Royal Bank of Canada		40,099		(40,099)		—		—		35,181		(35,181)		—		—
Federal National Mortgage Association		764		—		—		764		—		—		—		—
Others		796		—		—		796		1,438		—		—		1,438
	$	2,170,426	$	(2,152,588)	$	—	$	17,838	$	1,938,264	$	(1,935,200)	$	—	$	3,064

Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement line items where such gains and losses are included:


		Quarter ended March 31,
Derivative activity	Income statement line	2019		2018
		(in thousands)
Interest rate lock commitments	Net gains on mortgage loans held for sale at fair value	$	16,727	$	(7,376)
Repurchase agreement derivatives	Interest expense	$	(557)	$	(426)
Hedged item:
Interest rate lock commitments and mortgage loans held for sale	Net gains on mortgage loans held for sale at fair value	$	(34,668)	$	87,747
Mortgage servicing rights	Net mortgage loan servicing fees –C hange in fair value of mortgage servicing rights and mortgage servicing liabilities	$	134,557	$	(103,593)

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Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights at Fair Value

The activity in MSRs is as follows:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Balance at beginning of quarter	$	2,820,612	$	638,010
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to adoption of the fair value method of accounting		—		1,482,426
Balance after reclassification		2,820,612		2,120,436
Additions:
Purchases		227,772		27,606
Resulting from mortgage loan sales		115,751		143,910
		343,523		171,516
Change in fair value due to:
Changes in inputs used in valuation model (1)		(161,638)		130,449
Other changes in fair value (2)		(97,407)		(67,912)
Total change in fair value		(259,045)		62,537
Balance at end of quarter	$	2,905,090	$	2,354,489

	March 31,		December 31,
	2019		2018
		(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable	$	2,675,704	$	2,807,333

(1)

Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market interest rates, and changes in expected borrower performance and servicer losses given default.

(2)

Represents changes due to realization of cash flows.

Mortgage Servicing Liabilities at Fair Value

The activity in MSLs is summarized below:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Balance at beginning of quarter	$	8,681	$	14,120
Mortgage servicing liabilities resulting from mortgage loan sales		794		2,037
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		3,301		2,643
Other changes in fair value (2)		(4,932)		(6,737)
Total change in fair value		(1,631)		(4,094)
Balance at end of quarter	$	7,844	$	12,063

(1)

Principally reflects changes in expected borrower performance and servicer losses given default.

(2)

Represents changes due to realization of cash flows.

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Servicing fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Mortgage loan servicing fees—From non-affiliates on the consolidated statements of income; late charges and other ancillary fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Mortgage loan servicing fees—Ancillary and other fees on the Company’s consolidated statements of income. Such amounts are summarized below:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Contractual servicing fees	$	166,790	$	135,483
Ancillary and other fees:
Late charges		9,812		7,459
Other		1,661		1,562
	$	178,263	$	144,504

Note 10—Leases

The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to ten years, some of which include options to extend for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.

The Company’s lease agreements are summarized below:



	Quarter ended March 31, 2019
	(dollars in thousands)
Lease expense:
Operating leases	$	3,229
Short-term leases		217
Sublease income		(32)
Net lease expense included in Occupancy and equipment	$	3,414

Other information:
Cash payments for operating leases	$	3,846
Operating lease right-of-use assets recognized upon the adoption of ASU 2016-02	$	58,598
Weighted averages:
Remaining lease term (in years)		6.3
Discount rate		4.6%

The maturities of the Company’s operating lease liabilities are summarized below:


Twelve months ended March 31,	Operating leases
	(in thousands)
2020	$	15,683
2021		14,993
2022		13,397
2023		11,941
2024		10,343
Thereafter		21,999
Total lease payments		88,356
Less imputed interest		(11,983)
Total	$	76,373

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As of March 31, 2019, the Company has one operating lease that has not yet commenced with an undiscounted minimum payment commitment totaling $1.5 million. The lease is expected to commence in May 2020.

Note 11—Borrowings

The borrowing facilities described throughout this Note 11 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of March 31, 2019.

Assets Sold Under Agreements to Repurchase

The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by mortgage loans held for sale at fair value or participation certificates backed by MSRs. Eligible mortgage loans and participation certificates backed by MSRs are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the lender’s overnight cost of funds rate or on LIBOR depending on the terms of the respective agreements. Mortgage loans and MSRs financed under these agreements may be re-pledged by the lenders.

Assets sold under agreements to repurchase are summarized below:


	Quarter ended March 31,
	2019			2018
	(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	1,437,957		$	1,643,443
Weighted average interest rate (1)		4.47	%		3.59	%
Total interest expense (2)	$	8,635		$	6,732
Maximum daily amount outstanding	$	2,152,588		$	2,380,121


		March 31,			December 31,
	2019			2018
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	2,152,588		$	1,935,200
Unamortized debt issuance premiums and costs, net		(650)			(1,341)
	$	2,151,938		$	1,933,859
Weighted average interest rate		4.35	%		4.22	%
Available borrowing capacity (3):
Committed	$	625,413		$	695,767
Uncommitted		2,206,999			2,354,033
	$	2,832,412		$	3,049,800
Fair value of assets securing repurchase agreements:
Mortgage loans held for sale	$	2,065,151		$	1,923,857
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	125,929		$	131,025
Servicing advances (4)	$	147,435		$	162,895
Mortgage servicing rights (4)	$	2,574,228		$	2,807,333
Margin deposits placed with counterparties (5)	$	3,750		$	3,750

(1)

Excludes the effect of amortization of net premiums totaling $7.4 million and $8.0 million for the quarters ended March 31, 2019 and 2018, respectively.

(2)

In 2017, PFSI entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the quarters ended March 31, 2019 and 2018, the Company included $9.3 million and $10.2 million, respectively, of such incentives as reductions in Interest expense . The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.

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(3)

The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed.

(4)

Beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes described in Notes Payable . The VFN financing is included in Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2 Notes are included in Notes payable on the Company's consolidated balance sheet.

(5)

Margin deposits are included in Other assets on the Company’s consolidated balance sheet.

Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:


Remaining maturity at March 31, 2019	Balance
	(dollars in thousands)
Within 30 days	$	518,972
Over 30 to 90 days		1,334,389
Over 90 to 180 days		44,227
Over one to two years		255,000
Total assets sold under agreements to repurchase	$	2,152,588
Weighted average maturity (in months)		2.5

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 is summarized by counterparty below as of March 31, 2019:


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	1,165,339	April 26, 2020	April 26, 2020
Credit Suisse First Boston Mortgage Capital LLC	$	26,541	April 16, 2019	April 26, 2019
Deutsche Bank AG	$	90,911	June 16, 2019	August 21, 2019
BNP Paribas	$	16,691	June 19, 2019	August 2, 2019
Bank of America, N.A.	$	14,405	May 4, 2019	October 28, 2019
Morgan Stanley Bank, N.A.	$	5,237	June 15, 2019	August 23, 2019
Citibank, N.A.	$	4,828	June 7, 2019	June 7, 2019
JP Morgan Chase Bank, N.A.	$	4,360	May 31, 2019	October 11, 2019
Royal Bank of Canada	$	2,631	June 28, 2019	June 28, 2019

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 fair value (as determined by the applicable lender) of the assets securing those agreements decreases.

Mortgage Loan Participation Purchase and Sale Agreements

Certain of the borrowing facilities secured by mortgage loans held for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.

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The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price. The holdback amount is not required to be paid to the Company until the settlement of the security and its delivery to the lender.

The mortgage loan participation purchase and sale agreements are summarized below:


	Quarter ended March 31,
	2019			2018
	(dollars in thousands)
Average balance	$	236,667		$	215,614
Weighted average interest rate (1)		3.68	%		2.89	%
Total interest expense	$	2,311		$	1,727
Maximum daily amount outstanding	$	548,038		$	527,706

(1)

Excludes the effect of amortization of facility fees totaling $135,000 and $171,000 for the quarters ended March 31, 2019 and 2018, respectively.


	March 31,			December 31,
	2019			2018
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	548,038		$	532,466
Unamortized debt issuance costs		(159)			(215)
	$	547,879		$	532,251
Weighted average interest rate		3.75	%		3.77	%
Fair value of mortgage loans pledged to secure mortgage loan participation purchase and sale agreements	$	574,518		$	555,001

Notes Payable

Term Notes

On February 28, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of $650 million in Term Notes (the “2018-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2018-GT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.85% per annum. The 2018-GT1 Notes will mature on February 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, February 25, 2025 (unless earlier redeemed in accordance with their terms). Concurrent with issuance of the 2018-GT1 Notes, the Company also redeemed certain notes previously issued by the Issuer Trust. As a result, the Company recognized unamortized debt issuance costs of $3.4 million in Interest Expense during the quarter ended March 31, 2018.

On August 10, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of $650 million in Term Notes (the “2018-GT2 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2018-GT2 Notes bear interest at a rate equal to one-month LIBOR plus 2.65% per annum. The 2018-GT2 Notes will mature on August 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, August 25, 2025 (unless earlier redeemed in accordance with their terms). Concurrent with the issuance of the 2018-GT2 Notes, the Company also redeemed certain notes previously issued by the Issuer Trust. As a result, the Company recognized unamortized debt issuance costs of $4.6 million in Interest Expense during the quarter ended September 31, 2018.

All of the Term Notes rank pari passu with each other and with the VFN issued by the Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility.

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Corporate Revolving Line of Credit

On November 1, 2018, the Company, through its subsidiary, PennyMac (the “Borrower”), entered into amendments (the "Amendments") to that certain (i) amended and restated credit agreement, dated as of November 18, 2016, by and among the Borrower, the lenders that are parties thereto and Credit Suisse AG, as administrative agent and collateral agent, and Credit Suisse Securities (USA) LLC, as sole bookrunner and sole lead arranger (the “Credit Agreement”); and (ii) amended and restated collateral and guaranty agreement, dated as of November 18, 2016, by and among the Borrower, as grantor, Credit Suisse AG, Cayman Islands Branch (“CS Cayman”), as collateral agent, and PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) and certain of its subsidiaries, PCM, PLS and PNMAC Opportunity Fund Associates, LLC (“Associates”), as guarantors and grantors (“the “Guaranty”).

Pursuant to the Credit Agreement, the lenders have agreed to make revolving loans to the Borrower in an amount not to exceed $150 million. Interest on the loans shall accrue at a per annum rate of interest equal to, at the election of the Borrower, either LIBOR plus the applicable margin or an alternate base rate (as defined in the Credit Agreement). During the existence of certain events of default, interest shall accrue at a higher default rate. The proceeds of the loans are to be used solely for working capital and general corporate purposes of the Borrower and its subsidiaries.

The primary purposes of the Amendments were to (i) extend the maturity date of the Credit Agreement to October 31, 2019; (ii) name the Company as an additional guarantor under the Credit Agreement; and (iii) release Associates from its obligations as a guarantor under the Credit Agreement. Accordingly, the obligations of the Borrower under the Credit Agreement are now guaranteed by PFSI, PNMAC Holdings, Inc., PCM and PLS, and secured by a grant by each of the referenced grantors of its respective right, title and interest in and to limited and otherwise unencumbered (other than specified permitted encumbrances) specified contract rights, specified deposit accounts, all documents and instruments related to such specified contract rights and specified deposit accounts, and any and all proceeds and products thereof. All other terms and conditions of the Credit Agreement and Guaranty remain the same in all material respects.

MSR Note Payable

On February 1, 2018, the Company issued a note payable in favor of CS Cayman that is secured by Fannie Mae and Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on February 1, 2020. The maximum amount that the Company may borrow under the note payable is $400 million, less any amount outstanding under the agreement to repurchase pursuant to which the Company finances the VFN. The Company did not borrow under this note payable during the quarters ended March 31, 2019 or 2018.

Notes payable are summarized below:


	Quarter ended March 31,
	2019			2018
	(dollars in thousands)
Average balance	$	1,300,000		$	979,868
Weighted average interest rate (1)		5.25	%		5.63	%
Total interest expense	$	17,995		$	18,222
Maximum daily amount outstanding	$	1,300,000		$	1,150,000

(1)

Excluding the effect of amortization of debt issuance costs totaling $0.7 million and $4.2 million for the quarters ended March 31, 2019 and 2018, respectively. Also excludes the effect of non-utilization fees of $196,000 and $192,000 for the quarters ended March 31, 2019 and 2018, respectively.

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	March 31,			December 31,
	2019			2018
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,300,000		$	1,300,000
Unamortized debt issuance costs		(7,264)			(7,709)
	$	1,292,736		$	1,292,291
Weighted average interest rate		5.24	%		5.07	%
Unused amount	$	150,000		$	150,000
Assets pledged to secure notes payable:
Cash	$	93,372		$	108,174
Servicing advances (1)	$	147,435		$	162,895
Mortgage servicing rights (1)	$	2,675,704		$	2,807,333

(1)

Beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes. The VFN financing is included in Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2 Notes are included in Notes payable on the Company's consolidated balance sheet.

Obligations Under Capital Lease

In December 2015, the Company entered into a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on March 23, 2020 and bears interest at a spread over one-month LIBOR.

Obligations under capital lease are summarized below:


	Quarter ended March 31,
	2019			2018
	(dollars in thousands)
Average balance	$	5,848		$	18,703
Weighted average interest rate		4.50	%		3.64	%
Total interest expense	$	66		$	170
Maximum daily amount outstanding	$	6,605		$	20,971


	March 31,			December 31,
	2019			2018
	(dollars in thousands)
Unpaid principal balance	$	5,091		$	6,605
Weighted average interest rate		4.48	%		4.46	%
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment	$	15,254		$	16,281
Capitalized software	$	940		$	1,017

Excess Servicing Spread Financing at Fair Value

In conjunction with its purchase from non-affiliates of certain MSRs on pools of Agency-backed residential mortgage loans, the Company has entered into sale and assignment agreements with PMT. Under these agreements, the Company sold to PMT the right to receive ESS cash flows relating to certain MSRs. The Company retained a fixed base servicing fee and all ancillary income associated with servicing the loans. The Company continues to be the servicer of the mortgage loans and retains all servicing obligations, including responsibility to make servicing advances.

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Following is a summary of ESS:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Balance at beginning of quarter	$	216,110	$	236,534
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to recapture agreement		508		904
Accrual of interest		3,066		3,934
Repayment		(10,552)		(12,291)
Change in fair value		(4,051)		6,921
Balance at end of quarter	$	205,081	$	236,002

Note 12—Liability for Losses Under Representations and Warranties

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
Balance at beginning of quarter	$	21,155	$	20,053
Provision for losses on mortgage loans sold:
Resulting from sales of mortgage loans		1,067		1,492
Reduction in liability due to change in estimate		(4,210)		(1,113)
Incurred losses, net		(30)		(3)
Balance at end of quarter	$	17,982	$	20,429
Unpaid principal balance of mortgage loans subject to representations and warranties at end of quarter	$	133,698,782	$	127,056,220

Note 13—Income Taxes

The Company’s effective income tax rates were 23.5% and 8.3% for the quarters ended March 31, 2019 and 2018, respectively. Beginning November 1, 2018, the Company’s income subject to income tax includes the portion of its income formerly attributed to the noncontrolling interest, which prior to the Reorganization was not subject to income tax at the Company level. As a result, the Company reported a higher effective tax rate for the quarter ended March 31, 2019 than for the quarter ended March 31, 2018.

Note 14—Commitments and Contingencies

Litigation

The Company is a party to legal proceedings and potential claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of such proceedings and exposure will not have a material adverse effect on the financial condition, results of operations, or cash flows of the Company.

Regulatory Matters

The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan production and servicing operations by the various states it operates in as well as federal agencies such as the Consumer Financial Protection Bureau, HUD, and the FHA and is subject to the requirements of the Agencies to which it sells loans and for which it performs loan servicing activities. As a result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by such various federal, state and local regulatory bodies.

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Commitments to Purchase and Fund Mortgage Loans

The Company’s commitments to purchase and fund mortgage loans totaled $3.8 billion as of March 31, 2019.

Note 15—Stockholders’ Equity

In June 2017, the Company’s board of directors authorized a stock repurchase program under which the Company may repurchase up to $50 million of its outstanding common stock. The Company has repurchased and cancelled $13.9 million of shares of common stock under the stock repurchase program from its inception through March 31, 2019.

Note 16—Noncontrolling Interest

As a result of the Reorganization, noncontrolling interest unitholders contributed their Class A units of PNMAC in exchange for shares of the Company’s common stock without any cash consideration on a one-for-one basis. Consequently, the noncontrolling interest was reclassified to the Company’s paid-in capital accounts, net of deferred income taxes attributable to the noncontrolling interests.

Net income attributable to the Company’s common stockholders and the effects of changes in noncontrolling ownership interest in PennyMac are summarized below:


	Quarter ended
	March 31, 2018
	(in thousands)
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	16,619
Increase in the Company's paid-in capital accounts for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	$	14,859
Shares of Class A common stock of PennyMac Financial Services, Inc. issued pursuant to exchange of Class A units of Private National Mortgage Acceptance Company, LLC by noncontrolling interest unitholders and issued as equity compensation		748

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Note 17—Net Gains on Mortgage Loans Held for Sale

Net gains on mortgage loans held for sale at fair value is summarized below:


	Quarter ended March 31,
	2019		2018
	(in thousands)
From non-affiliates:
Cash loss:
Mortgage loans	$	(41,242)	$	(181,801)
Hedging activities		(8,927)		104,396
		(50,169)		(77,405)
Non-cash gain:
Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales		114,957		141,873
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales		(1,067)		(1,492)
Reduction in liability due to change in estimate		4,210		1,113
Change in fair value relating to mortgage loans and derivatives held at quarter end:
Interest rate lock commitments		16,727		(7,376)
Mortgage loans		(164)		18,964
Hedging derivatives		(25,741)		(16,649)
		58,753		59,028
From PennyMac Mortgage Investment Trust		26,023		12,386
	$	84,776	$	71,414

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Note 18—Net Interest Income

Net interest income is summarized below:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Interest income:
From non-affiliates:
Cash and short-term investments	$	1,933	$	608
Mortgage loans held for sale at fair value		31,343		26,607
Placement fees relating to custodial funds		23,261		13,424
		56,537		40,639
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell		1,796		1,976
		58,333		42,615

Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase (1)		8,635		6,732
Mortgage loan participation purchase and sale agreements		2,311		1,727
Notes payable		17,995		18,222
Obligations under capital lease		66		170
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		4,311		4,830
Interest on mortgage loan impound deposits		1,159		1,130
		34,477		32,811
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value		3,066		3,934
		37,543		36,745
	$	20,790	$	5,870

(1)

In 2017, the Company entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the quarters ended March 31, 2019 and 2018, the Company included $9.3 million and $10.2 million, respectively, of such incentives as reductions in Interest expense . The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the financing incentives under the repurchase agreement in the second quarter of 2019.

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Note 19—Stock-based Compensation

As of March 31, 2019, the Company had one stock-based compensation plan. Following is a summary of the stock-based compensation activity:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Grants:
Units:
Performance-based RSUs		665		524
Stock options		344		674
Time-based RSUs		330		316
Grant date fair value:
Performance-based RSUs	$	15,253	$	12,791
Stock options		2,965		6,147
Time-based RSUs		7,545		7,703
Total	$	25,763	$	26,641
Vestings and exercises:
Performance-based RSUs vested		648		—
Stock options exercised		89		196
Time-based RSUs vested		291		234
Compensation expense	$	4,531	$	6,171

Note 20—Earnings Per Share of Common Stock

Basic earnings per share of common stock is determined using net income attributable to the Company’s common stockholders divided by the weighted average number of shares of common stock outstanding during the quarter. Diluted earnings per share of common stock is determined by dividing net income attributable to the Company’s common stockholders by the weighted average number of shares of common stock outstanding, assuming all dilutive shares of common stock were issued.

Potentially dilutive shares of common stock include non-vested stock-based compensation awards and PennyMac Class A units. The Company applies the treasury stock method to determine the diluted weighted average shares of common stock outstanding based on the outstanding stock-based compensation awards. As a result of the Reorganization, all Class A units of PNMAC converted into shares of the Company’s common stock on a one-for-one basis.

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


	Quarter ended March 31,
	2019		2018
	(in thousands, except per share amounts)
Basic earnings per share of common stock:
Net income attributable to common stockholders	$	46,135	$	16,619
Weighted average shares of common stock outstanding		77,653		23,832
Basic earnings per share of common stock	$	0.59	$	0.70

Diluted earnings per share of common stock:
Net income attributable to common stockholders	$	46,135	$	16,619
Net income attributable to dilutive stock-based compensation units		—		1,400
Net income attributable to PennyMac Class A units exchangeable to Class A common stock, net of income taxes		—		35,449
Net income attributable to common stockholders for diluted earnings per share	$	46,135	$	53,468
Weighted average shares of common stock outstanding applicable to basic earnings per share		77,653		23,832
Effect of dilutive shares:
Common shares issuable under stock-based compensation plan		1,633		2,947
PennyMac Class A units exchangeable to Class A common stock		—		52,682
Weighted average shares of common stock applicable to diluted earnings per share		79,286		79,461
Diluted earnings per share of common stock	$	0.58	$	0.67

Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the anti-dilutive weighted-average number of outstanding performance-based restricted share units (“RSUs”), time-based RSUs, and stock options excluded from the calculation of diluted earnings per share:


	Quarter ended March 31,
	2019		2018
	(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)		1,279		134
Time-based RSUs		61		—
Stock options (2)		706		172
Total anti-dilutive stock-based compensation		2,046		306
Weighted average exercise price of anti-dilutive stock options (2)	$	24.26	$	24.40

(1)

Certain performance-based RSUs were outstanding but not included in the computation of earnings per share because the performance thresholds included in such RSUs have not been achieved.

(2)

Certain stock options were outstanding but not included in the computation of diluted earnings per share because the weighted-average exercise prices were above the average stock prices for the quarter.

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Note 21—Supplemental Cash Flow Information


	Quarter ended March 31,
	2019		2018
	(in thousands)
Cash paid for interest	$	33,952	$	40,227
Cash paid for income taxes, net	$	66	$	2
Non-cash investing activity:
Mortgage servicing rights resulting from mortgage loan sales	$	115,751	$	143,910
Mortgage servicing liabilities resulting from mortgage loan sales	$	794	$	2,037
Unsettled portion of MSR acquisitions	$	16,291	$	62
Operating right-of-use assets recognized upon the adoption of ASU 2016-02	$	58,598	$	—
Non-cash financing activity:
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement	$	508	$	904
Issuance of common stock and Class A common stock in settlement of director fees	$	86	$	79

Note 22—Regulatory Capital and Liquidity Requirements

The Company, through PLS and PennyMac, is required to maintain specified levels of capital and liquidity to remain a seller/servicer in good standing with the Agencies. Such capital and liquid asset requirements generally are tied to the size of the Company’s loan servicing portfolio or loan origination volume.

The Company is subject to financial eligibility requirements for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include tangible net worth of $2.5 million plus 25 basis points of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others and a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB in excess of 600 basis points.

The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The eligibility requirements include net worth of $2.5 million plus 35 basis points of PLS' outstanding Ginnie Mae single-family obligations and a liquidity requirement equal to the greater of $1.0 million or 10 basis points of PLS' outstanding Ginnie Mae single-family securities.

The Agencies’ capital and liquidity requirements, the calculations of which are specified by each Agency, are summarized below:



	March 31, 2019						December 31, 2018
Agency–company subject to requirement	Actual (1)			Requirement (1)			Actual (1)			Requirement (1)
	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac – PLS	$	1,833,819		$	561,020		$	1,788,430		$	514,089
Ginnie Mae – PLS	$	1,543,756		$	819,028		$	1,535,826		$	733,342
Ginnie Mae – PennyMac	$	1,802,129		$	900,931		$	1,786,430		$	806,676
HUD – PLS	$	1,543,756		$	2,500		$	1,535,826		$	2,500
Liquidity
Fannie Mae & Freddie Mac – PLS	$	287,089		$	77,292		$	271,802		$	70,775
Ginnie Mae – PLS	$	287,089		$	208,693		$	271,802		$	189,592
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac – PLS		20	%		6	%		21	%		6	%

(1)

Calculated in compliance with the respective Agency’s requirements.

Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency.

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Note 23—Segments

The Company operates in three segments: production, servicing and investment management.

Two of the segments are in the mortgage banking business: production and servicing. The production segment performs mortgage loan origination, acquisition and sale activities. The servicing segment performs servicing of mortgage loans, execution and management of early buyout loan transactions and servicing of mortgage loans sourced and managed by the investment management segment for PMT, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.

The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions and managing the acquired assets and correspondent production activities for PMT.

Financial performance and results by segment are as follows:


	Quarter ended March 31, 2019
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net mortgage loan servicing fees	$	—	$	80,571	$	80,571	$	—	$	80,571
Net gains on mortgage loans held for sale at fair value		66,721		18,055		84,776		—		84,776
Mortgage loan origination fees		23,930		—		23,930		—		23,930
Fulfillment fees from PennyMac Mortgage Investment Trust		27,574		—		27,574		—		27,574
Net interest income (expense):
Interest income		14,369		43,964		58,333		—		58,333
Interest expense		3,915		33,621		37,536		7		37,543
		10,454		10,343		20,797		(7)		20,790
Management fees		—		—		—		7,248		7,248
Other		488		765		1,253		1,563		2,816
Total net revenue		129,167		109,734		238,901		8,804		247,705
Expenses		82,161		98,571		180,732		6,682		187,414
Income before provision for income taxes	$	47,006	$	11,163	$	58,169	$	2,122	$	60,291
Segment assets at quarter end	$	2,501,468	$	5,299,813	$	7,801,281	$	17,719	$	7,819,000

(1)

All revenues are from external customers.

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	Quarter ended March 31, 2018
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net mortgage loan servicing fees	$	—	$	116,789	$	116,789	$	—	$	116,789
Net gains on mortgage loans held for sale at fair value		36,198		35,216		71,414		—		71,414
Mortgage loan origination fees		24,563		—		24,563		—		24,563
Fulfillment fees from PennyMac Mortgage Investment Trust		11,944		—		11,944		—		11,944
Net interest income (expense):
Interest income		14,248		28,367		42,615		—		42,615
Interest expense		2,102		34,627		36,729		16		36,745
		12,146		(6,260)		5,886		(16)		5,870
Management fees		—		—		—		5,775		5,775
Carried Interest from Investment Funds		—		—		—		(180)		(180)
Other		316		395		711		1,315		2,026
Total net revenue		85,167		146,140		231,307		6,894		238,201
Expenses		67,997		91,265		159,262		5,943		165,205
Income before provision for income taxes	$	17,170	$	54,875	$	72,045	$	951	$	72,996
Segment assets at quarter end (2)	$	2,251,354	$	4,630,946	$	6,882,300	$	11,877	$	6,894,177

(1)

All revenues are from external customers.

(2)

Excludes parent Company assets, which consist of $8.7 million of cash.

Note 24—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period, there have been no material events that would require recognition in our consolidated financial statements or disclosure in the notes to the consolidated financial statements.

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

Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.

Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.

Overview

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI.

Our Company

We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities and capitalize on other related opportunities as they arise in the future.

We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PennyMac”). PennyMac was founded in 2008 by members of our executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC (“BlackRock” or “BlackRock, Inc.”) and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates (“Highfields”).

We were formed as a Delaware corporation on July 2, 2018. We became the top-level parent holding company for the consolidated PennyMac business pursuant to a corporate reorganization (the “Reorganization”) that was consummated on November 1, 2018. Before the Reorganization, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings”) was our top-level parent holding company and our public company registrant. One result of the consummation of the Reorganization was that our equity structure was changed to create a single class of publicly-held common stock as opposed to the two classes that were in place before the Reorganization. The Reorganization is to be treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of the Internal Revenue Code. PNMAC Holdings’ financial statements remain our historical financial statements.

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Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government‑sponsored entity (“GSE”). PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.

Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”), as amended. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT. PCM previously managed PNMAC Mortgage Opportunity Fund, LLC, PNMAC Mortgage Opportunity Fund, LP, an affiliate of these funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our “Investment Funds” and, together with PMT, as our “Advised Entities.” The Investment Funds were dissolved during 2018.

We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.

The production segment performs mortgage loan origination, acquisition and sale activities.

The servicing segment performs mortgage loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT.

The investment management segment represents our investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement.

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Results of Operations

Our results of operations are summarized below:


	Quarter ended March 31,
	2019		2018
	(dollars in thousands, except per share amounts)
Revenues:
Net mortgage loan servicing fees	$	80,571	$	116,789
Net gains on mortgage loans held for sale at fair value		84,776		71,414
Mortgage loan origination fees		23,930		24,563
Fulfillment fees from PennyMac Mortgage Investment Trust		27,574		11,944
Net interest income		20,790		5,870
Management fees		7,248		5,775
Other		2,816		1,846
Total net revenue		247,705		238,201
Expenses		187,414		165,205
Provision for income taxes		14,156		6,070
Net income	$	46,135	$	66,926
Earnings per share
Basic	$	0.59	$	0.70
Diluted	$	0.58	$	0.67
Annualized return on average common stockholders' equity		11.0%		13.6%
Income before provision for income taxes by segment:
Mortgage banking:
Production	$	47,006	$	17,170
Servicing		11,163		54,875
Total mortgage banking		58,169		72,045
Investment management		2,122		951
	$	60,291	$	72,996
During the quarter:
Interest rate lock commitments issued	$	10,134,199	$	10,857,635
Unpaid principal balance of mortgage loans fulfilled for PMT subject to fulfillment fees	$	8,135,552	$	4,225,631
At end of quarter:
Unpaid principal balance of mortgage loan servicing portfolio:
Owned:
Mortgage servicing rights	$	219,834,361	$	173,487,165
Mortgage servicing liabilities		1,000,403		1,766,722
Mortgage loans held for sale		2,573,121		2,512,546
		223,407,885		177,766,433
Subserviced for PMT		101,287,428		77,539,438
	$	324,695,313	$	255,305,871
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust	$	1,727,589	$	1,542,258
Investment Funds		—		2,668
	$	1,727,589	$	1,544,926
Book value per share	$	21.72	$	20.74

For the quarter ended March 31, 2019, net income decreased $20.8 million compared to the same period in 2018. The decrease was primarily due to a reduction in net mortgage loan servicing fees combined with increases in total expenses and an increase in the provision for income taxes resulting from the Reorganization. The decrease in net mortgage loan servicing fees was mainly due to lower interest rates that resulted in a fair value loss net of hedging results, compared to fair value gains during the same period in 2018. The increase in total expenses was mainly due to increases in origination expenses, servicing expenses and compensation expenses, reflecting the continuing growth of our mortgage banking activities. Following is a discussion of these changes.

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Net Mortgage Loan Servicing Fees

Following is a summary of our net mortgage loan servicing fees:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates	$	166,790	$	135,483
From PennyMac Mortgage Investment Trust		10,570		11,019
Ancillary and other fees		22,017		14,171
		199,377		160,673
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results		(118,806)		(43,884)
Net mortgage loan servicing fees	$	80,571	$	116,789
Average mortgage loan servicing portfolio	$	308,212,285	$	249,833,285

Change in fair value of mortgage servicing rights and excess servicing spread are summarized below:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Realization of cash flows	$	(92,475)	$	(61,176)
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities		(164,939)		127,806
Change in fair value of excess servicing spread		4,051		(6,921)
Hedging results		134,557		(103,593)
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread	$	(118,806)	$	(43,884)
Quarterly average balances:
Mortgage servicing rights	$	2,843,028	$	2,265,744
Mortgage servicing liabilities	$	8,188	$	12,063
Excess servicing spread financing	$	211,661	$	238,320
At quarter end:
Mortgage servicing rights	$	2,905,090	$	2,354,489
Mortgage servicing liabilities	$	7,844	$	12,063
Excess servicing spread financing	$	205,081	$	236,002

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Following is a summary of our mortgage loan servicing portfolio:



	March 31,		December 31,
	2019		2018
	(in thousands)
Mortgage loans serviced
Prime servicing:
Owned:
Mortgage servicing rights
Originated	$	147,987,738	$	144,296,544
Acquired		71,846,623		56,757,600
		219,834,361		201,054,144
Mortgage servicing liabilities		1,000,403		1,160,938
Mortgage loans held for sale		2,573,121		2,420,636
		223,407,885		204,635,718
Subserviced for PMT		100,939,297		94,276,938
Total prime servicing		324,347,182		298,912,656
Special servicing – Subserviced for PMT		348,131		381,216
Total mortgage loans serviced	$	324,695,313	$	299,293,872

Net mortgage loan servicing fees decreased $36.2 million during the quarter ended March 31, 2019 as compared to the same period in 2018. The decrease was due to an increase of $74.9 million in losses in fair value of MSRs and mortgage servicing liabilities (“MSLs”), net of hedging results, resulting from the effect of lower interest rates during the quarter ended March 31, 2019. The increased losses were partially offset by an increase of $38.7 million in mortgage loan servicing fees, resulting from an increase in our average servicing portfolio of 23% for the quarter ended March 31, 2019, as compared to the same period in 2018.

The lower interest rates that prevailed during the quarter ended March 31, 2019, as compared to the same period in 2018, resulted in a $26.3 million in fair value loss, net of hedging results, as compared to $17.3 million of gains during 2018. The market-based fair value losses were partially offset by a $7.4 million increase in mortgage loan servicing fees, net of increased realization of cash flows. This increase reflects the offsetting influences of growth in our MSR portfolio and increased rate of realization of cash flows caused by increased prepayment expectations.

Net Gains on Mortgage Loans Held for Sale at Fair Value

Most of our mortgage loan production consists of government-insured or guaranteed mortgage loans that we source primarily through PMT. PMT is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. We purchase such mortgage loans that PMT acquires through its correspondent production activities and pay PMT a sourcing fee ranging from two to three and one-half basis points on the UPB of such mortgage loans.

During the quarter ended March 31, 2019, we recognized Net gains on mortgage loans held for sale at fair value totaling $84.8 million, an increase of $13.4 million compared to the same period in 2018. The increase was primarily due to an improvement in profit margins in our mortgage lending business.

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
From non - affiliates:
Cash loss:
Mortgage loans	$	(41,242)	$	(181,801)
Hedging activities		(8,927)		104,396
		(50,169)		(77,405)
Non-cash gain:
Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales		114,957		141,873
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales		(1,067)		(1,492)
Reduction in liability due to change in estimate		4,210		1,113
Change in fair value of mortgage loans and derivative financial instruments outstanding at quarter end:
Interest rate lock commitments		16,727		(7,376)
Mortgage loans		(164)		18,964
Hedging derivatives		(25,741)		(16,649)
		58,753		59,028
From PennyMac Mortgage Investment Trust		26,023		12,386
	$	84,776	$	71,414
During the quarter:
Interest rate lock commitments issued:
Government-insured or guaranteed mortgage loans	$	8,831,495	$	9,755,438
Conventional mortgage loans		1,301,243		1,102,197
Home equity lines of credit		1,461		—
	$	10,134,199	$	10,857,635
At end of quarter:
Mortgage loans held for sale at fair value	$	2,668,929	$	2,584,236
Commitments to fund and purchase mortgage loans	$	3,821,942	$	4,275,126

Our gain on sale of mortgage loans acquired for sale includes both cash and non-cash elements. We receive proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which represents the fair value of the costs we expect to incur in excess of the fees we receive for early buyout of delinquent mortgage loans (“EBO loans”) we have resold) and for the fair value of our estimate of the losses we expect to incur relating to the representation and warranties we provide in our mortgage loan sale transactions. How we measure and update our measurements of MSRs and MSLs is detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the financial statements included in this Quarterly Report.

Our agreements with the purchasers and insurers include representations and warranties related to the mortgage loans we sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the mortgage loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of our representations and warranties, we may be required to either repurchase the mortgage loans with the identified defects or indemnify the purchaser 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 originators that sold such mortgage loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.

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

We recorded provisions for losses under representations and warranties relating to current mortgage loan sales as a component of Net gains on mortgage loans held for sale at fair value totaling $1.1 million and $1.5 million for the quarters ended March 31, 2019 and 2018, respectively. We also recorded reductions in the liability of $4.2 million during the quarter ended March 31, 2019 compared to $1.1 million during the same period in 2018. The reductions in the liability resulted from previously sold mortgage loans meeting criteria established by the Agencies which exempt them from certain repurchase or indemnification claims.

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


	Quarter ended March 31,
	2019		2018
	(in thousands)
During the quarter:
Indemnification activity
Mortgage loans indemnified by PFSI at beginning of quarter	$	8,899	$	7,579
New indemnifications		682		2,632
Less indemnified mortgage loans sold, repaid or refinanced		117		210
Mortgage loans indemnified by PFSI at end of quarter	$	9,464	$	10,001
Repurchase activity
Total mortgage loans repurchased by PFSI	$	4,064	$	6,313
Less:
Mortgage loans repurchased by correspondent lenders		2,920		6,646
Mortgage loans repaid by borrowers or resold with defects resolved		907		116
Net mortgage loans repurchased (resold or repaid) with losses chargeable to liability for representations and warranties	$	237	$	(449)
Net losses charged to liability for representations and warranties	$	30	$	3

At end of quarter:
Unpaid principal balance of mortgage loans subject to representations and warranties	$	133,698,782	$	127,056,220
Liability for representations and warranties	$	17,982	$	20,429

During the quarter ended March 31, 2019, we repurchased mortgage loans totaling $4.1 million in UPB. We recorded net losses of $30,000 net of recoveries from correspondent sellers as a result of these repurchases during the quarter ended March 31, 2019. As the outstanding balance of mortgage loans we purchase and sell subject to representations and warranties increases, as the loans sold continue to season, as economic conditions change and as investor and insurer loss mitigation strategies are adjusted, we expect that the level of repurchase activity may increase.

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of mortgage loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying mortgage loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas.

Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current UPB of mortgage loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties.

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Mortgage loan origination fees

Mortgage loan origination fees decreased $633,000 during the quarter ended March 31, 2019 compared to the same period in 2018. The decrease was primarily due to a decrease in volume of mortgage loans we produced.

Fulfillment fees from PennyMac Mortgage Investment Trust

Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of mortgage loans. The fulfillment fees are calculated as a percentage of the UPB of the mortgage loans we fulfill for PMT.

Following is a summary of our fulfillment fees:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Fulfillment fee revenue	$	27,574	$	11,944
Unpaid principal balance of mortgage loans fulfilled subject to fulfillment fees	$	8,135,552	$	4,225,631
Average fulfillment fee rate (in basis points)		34		28

Fulfillment fees increased $15.6 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to a combination of an increase in PMT’s loan production volume and a decrease in discretionary reductions in the fulfillment fee rate during the quarter ended March 31, 2019, as compared to the same period in 2018.

Net Interest Income

Net interest income increased $14.9 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase is primarily due to an increase in the placement fees we receive relating to custodial funds that we manage, reflecting the growth of our servicing portfolio, as well as an increase in net interest income on mortgage loans held for sale.

We entered into a master repurchase agreement in 2017 that provides us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recorded $9.3 million and $10.2 million of such incentives as reductions of Interest expense during the quarters ended March 31, 2019 and 2018, respectively. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. We expect that we will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019. While there can be no assurance, we expect that the loss of such incentives will be partially offset by an improvement in pricing margins in our Net gains on mortgage loans held for sale at fair value .

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Management fees and Carried Interest

Management fees and Carried Interest are summarized below:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Management Fees:
PennyMac Mortgage Investment Trust:
Base management	$	6,109	$	5,696
Performance incentive		1,139		—
		7,248		5,696
Investment Funds		—		79
Total management fees		7,248		5,775
Carried Interest		—		(180)
Total management fees and Carried Interest	$	7,248	$	5,595
Net assets of Advised Entities at end of quarter:
PennyMac Mortgage Investment Trust	$	1,727,589	$	1,542,258
Investment Funds		—		2,668
	$	1,727,589	$	1,544,926

Management fees increased $1.5 million during the quarter ended March 31, 2019 compared to the same period in 2018, reflecting the combined effect of the performance incentive fee arising from PMT’s increased profitability and the increase in PMT’s average shareholders’ equity upon which its base management fees are based. The increase in average shareholders’ equity was primarily due to the issuance of new common shares by PMT during the quarter ended March 31, 2019.

Expenses

Compensation

Our compensation expense is summarized below:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Salaries and wages	$	67,058	$	63,380
Incentive compensation		19,175		19,576
Taxes and benefits		15,836		12,886
Stock and unit-based compensation		4,531		6,171
	$	106,600	$	102,013
Head count:
Average		3,461		3,233
Quarter end		3,459		3,241

Compensation expense increased $4.6 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to an increase in salaries and wages due to increased average headcount resulting from the growth in our mortgage banking activities, partially offset by a decrease in stock and unit-based compensation due to lower than expected attainment of profitability targets during the quarter ended March 31, 2019.

Servicing

Servicing expenses increased $4.0 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to increased purchases of EBO loans from Ginnie Mae guaranteed pools for the quarter ended March 31, 2019 compared to the same period in 2018. During the quarter ended March 31, 2019, we purchased $351.7 million in UPB of EBO loans compared to $264.9 million for the quarter ended March 31, 2018.

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The EBO program reduces the ongoing cost of servicing defaulted mortgage loans that have been sold into Ginnie Mae MBS when we purchase and either sell the defaulted loans or finance them with debt at interest rates below the Ginnie Mae MBS pass-through rates. While the EBO program reduces the ultimate cost of servicing such mortgage loan pools, it accelerates loss recognition when the mortgage loans are purchased. We recognize the loss because purchasing the mortgage loans from their Ginnie Mae pools causes us to write off accumulated non-reimbursable interest advances, net of interest receivable from the mortgage loans’ insurer or guarantor at the debenture rate of interest applicable to the respective mortgage loans.

Loan origination

Loan origination expense increased $12.4 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to increases in wholesale brokerage fees and loan file compilation expenses, resulting from increased broker direct lending activities, as well as an increase in lender paid fees due to the mix of production volume shifting toward a higher proportion of VA-guaranteed loans during the quarter ended March 31, 2019 as compared to the same period during 2018.

Provision for Income Taxes

Our effective income tax rates were 23.5% and 8.3% for the quarters ended March 31, 2019 and 2018, respectively. Beginning November 1, 2018, PFSI’s income subject to income tax includes the portion of its income formerly attributed to the noncontrolling interest, which before the Reorganization was not subject to income tax at the PFSI level. As a result, we reported a higher effective tax rate for the quarter ended March 31, 2019 than the quarter ended March 31, 2018.

Balance Sheet Analysis

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


	March 31,		December 31,
	2019		2018
	(in thousands)
ASSETS
Cash and short-term investments	$	293,638	$	273,113
Mortgage loans held for sale at fair value		2,668,929		2,521,647
Servicing advances, net		284,230		313,197
Investments in and advances to affiliates		157,433		165,886
Mortgage servicing rights		2,905,090		2,820,612
Mortgage loans eligible for repurchase		1,094,702		1,102,840
Other		414,978		281,278
Total assets	$	7,819,000	$	7,478,573

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt	$	2,449,908	$	2,332,143
Long-term debt		1,752,817		1,648,973
Liability for mortgage loans eligible for repurchase		1,094,702		1,102,840
Other		820,381		740,826
Total liabilities		6,117,808		5,824,782
Stockholders' equity		1,701,192		1,653,791
Total liabilities and stockholders' equity	$	7,819,000	$	7,478,573

Total assets increased $340.4 million from $7.5 billion at December 31, 2018 to $7.8 billion at March 31, 2019. The increase was primarily due to increases in mortgage loans held for sale at fair value resulting from an increase in mortgage loan production volume and in our investment in MSRs reflecting continued additions from our mortgage loan production activities and servicing portfolio acquisitions, as well as an increase in other assets due to capitalization of operating leases pursuant to our adoption of the Financial Accounting Standards Board’s Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”) effective January 1, 2019.

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Total liabilities increased $293.0 million from $5.8 billion at December 31, 2018 to $6.1 billion at March 31, 2019. The increase was primarily attributable to an increase in borrowings required to finance a larger inventory of mortgage loans held for sale and MSR asset combined with a $76.4 million increase in other liabilities due to recognition of operating lease liabilities effective January 1, 2019, as the result of our adoption of ASU 2016-02, which requires us to recognize our lease obligations on our consolidated balance sheet.

Cash Flows

Our cash flows for the quarter ended March 31, 2019 and 2018 are summarized below:


	Quarter ended March 31,
	2019		2018		Change
	(in thousands)
Operating	$	(134,247)	$	537,392	$	(671,639)
Investing		(92,771)		(81,263)		(11,508)
Financing		216,007		(355,981)		571,988
Net (decrease) increase in cash and restricted cash	$	(11,011)	$	100,148	$	(111,159)

Our cash flows resulted in a net decrease in cash and restricted cash of $11.0 million during the quarter ended March 31, 2019 as discussed below.

Operating activities

Net cash used in operating activities totaled $134.2 million during quarter ended March, 31, 2019 and net cash provided by operating activities totaled $537.4 million during the same period in 2018. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Cash flows from:
Mortgage loans held for sale	$	(203,401)	$	473,727
Other operating sources		69,154		63,665
	$	(134,247)	$	537,392

Investing activities

Net cash used in investing activities during the quarter ended March 31, 2019 totaled $92.8 million primarily due to the purchase of MSRs totaling $211.5 million, partially offset by a $125.7 million net settlement of derivative financial instruments used to hedge our investment in MSRs. Net cash used in investing activities during the quarter ended March 31, 2018 totaled $81.3 million primarily due to a $128.1 million net use of cash in net settlement of derivative financial instruments used for hedging our investment in MSRs and purchase of MSRs totaling $27.6 million, partially offset by a $64.2 million decrease in short-term investments.

Financing activities

Net cash provided by financing activities totaled $216.0 million during the quarter ended March 31, 2019, primarily to finance the growth in our inventory of mortgage loans held for sale and our investments in MSRs. Net cash used in financing activities totaled $356.0 million during the quarter ended March 31, 2018 primarily due to net repurchases of assets sold under agreements to repurchase, reflecting a reduction in our financing of mortgage loans held for sale.

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Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings, proceeds from and issuance of ESS and/or equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, ESS financing, notes payable (including a revolving credit agreement) and a capital lease. Most of our borrowings have short-term maturities and provide for terms of approximately one year. Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average outstanding, maximum and ending balances:


	Quarter ended March 31,
	2019		2018
	(in thousands)
Average balance	$	1,437,957	$	1,643,443
Maximum daily balance	$	2,152,588	$	2,380,121
Balance at quarter end	$	2,152,588	$	1,813,463

The differences between the average and maximum daily balances on our repurchase agreements reflect the fluctuations throughout the month of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.

Our secured financing agreements at PLS require us to comply with various financial covenants. The most significant financial covenants currently include the following:

positive net income during each calendar quarter;

a minimum in unrestricted cash and cash equivalents of $40 million;

a minimum tangible net worth of $500 million;

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

at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements.

With respect to servicing performed for PMT, PLS is also subject to certain covenants under PMT’s debt agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants described above.

In addition to the covenants noted above, PennyMac’s revolving credit agreement and capital lease contain additional financial covenants including, but not limited to,

a minimum of cash equal to the amount borrowed under the revolving credit agreement;

a minimum of unrestricted cash and cash equivalents equal to $25 million;

a minimum of tangible net worth of $500 million;

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a minimum asset coverage ratio (the ratio of the total asset amount to the total commitment) of 2.5; and

a maximum ratio of total indebtedness to tangible net worth ratio of 5:1.

Although these financial covenants limit the amount of indebtedness that we may incur and affect 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.

Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. 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.

We are also subject to liquidity and net worth requirements established by FHFA for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity requirements and revised their net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers, as summarized below:

FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;

FHFA net worth requirement is a minimum net worth of $2.5 million plus 0.25% (25 basis points) of UPB for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%;

Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or 0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and

Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s outstanding Ginnie Mae single-family obligations.

We believe that we are currently in compliance with the applicable Agency requirements.

We have purchased portfolios of MSRs and have financed them in part through the sale to PMT of the right to receive ESS. The outstanding amount of the ESS is based on the current fair value of such ESS and amounts received on the underlying mortgage loans.

In June 2017, our Board of Directors approved a stock repurchase program that allows us to repurchase up to $50 million of our common stock using open market stock purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. We intend to finance the stock repurchase program through cash on hand. From inception through March 31, 2019, we have repurchased $13.9 million of shares under our stock repurchase program.

We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of March 31, 2019, we have not entered into any off-balance sheet arrangements.

Contractual Obligations

As of March 31, 2019 we had contractual obligations aggregating $8.5 billion, comprised of borrowings, commitments to purchase and originate mortgage loans and a payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under a tax receivable agreement. We also lease our office facilities and license certain software to support our loan servicing operations.

Payment obligations under these agreements are summarized below:


	Payments due by year
			Less than		1-3		3-5		More than
Contractual obligations	Total		1 year		years		years		5 years
	(in thousands)
Commitments to purchase and originate mortgage loans	$	3,821,942	$	3,821,942	$	—	$	—	$	—
Short-term debt		2,450,717		2,450,717		—		—		—
Long-term debt		1,760,081		—		255,000		1,300,000		205,081
Interest on long-term debt		351,286		79,425		154,893		91,617		25,351
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		46,537		—		—		—		46,537
Software licenses (1)		13,942		13,942		—		—		—
Office leases		89,855		15,683		29,387		22,534		22,251
Total	$	8,534,360	$	6,381,709	$	439,280	$	1,414,151	$	299,220

(1)

Software licenses include both volume and activity based fees that are dependent on the number of loans serviced during each period and include a base fee of approximately $1.9 million per month. Estimated payments for software licenses above are based on the number of loans currently serviced by us, which totaled approximately 1.6 million at March 31, 2019. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. For the quarter ended March 31, 2019, software license fees totaled $7.1 million.

Debt Obligations

As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through borrowings with major financial institution counterparties in the form of sales of assets under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable (including a revolving credit agreement), ESS and a capital lease. The borrower under each of these facilities is PLS or the Issuer Trust with the exception of the revolving credit agreement and the capital lease, in each case where the borrower is PennyMac. All PLS obligations as previously noted are guaranteed by PennyMac.

Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of March 31, 2019, we believe we were in compliance in all material respects with these covenants.

The agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. 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.

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In addition, the agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.

The borrowings have maturities as follows:


	Outstanding		Total		Committed
Lender	indebtedness (1)		facility size (2)		facility (2)		Maturity date (2)
	(dollar amounts in thousands)
Assets sold under agreements to repurchase
Credit Suisse First Boston Mortgage Capital LLC	$	590,622	$	1,100,000	$	300,000	April 24, 2020
Credit Suisse First Boston Mortgage Capital LLC (3)	$	255,000	$	400,000	$	400,000	April 26, 2020
Deutsche Bank AG	$	692,010	$	950,000	$	—	August 21, 2019
BNP Paribas	$	199,395	$	200,000	$	100,000	August 2, 2019
Bank of America, N.A.	$	170,859	$	500,000	$	500,000	October 28, 2019
Citibank, N.A.	$	82,659	$	700,000	$	350,000	June 7, 2019
Morgan Stanley Bank, N.A.	$	71,069	$	500,000	$	100,000	August 23, 2019
JPMorgan Chase Bank, N.A.	$	50,875	$	500,000	$	50,000	October 11, 2019
Royal Bank of Canada	$	40,099	$	135,000	$	20,000	June 28, 2019
Mortgage loan participation purchase and sale agreements
Bank of America, N.A.	$	548,038	$	550,000	$	—	October 28, 2019
Notes payable
GMSR 2018-GT1 Term Note	$	650,000	$	650,000			February 25, 2023
GMSR 2018-GT2 Term Note	$	650,000	$	650,000			August 25, 2023
Credit Suisse AG	$	—	$	150,000	$	—	October 31, 2019
Credit Suisse AG (3)	$	—	$	—	$	—	February 1, 2020
Obligations under capital lease
Banc of America Leasing and Capital LLC	$	5,091	$	35,000	$	—	March 23, 2020

(1)

Outstanding indebtedness as of March 31, 2019.

(2)

Total facility size, committed facility and maturity date include contractual changes through the date of this Report.

(3)

The borrowing of $255 million with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase up to a maximum of $400 million, less any amount utilized under the Credit Suisse AG note payable facility.

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The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2019:


			Weighted average
			maturity of
			advances under
Counterparty	Amount at risk		repurchase agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC (1)	$	1,165,339	April 26, 2020	April 26, 2020
Credit Suisse First Boston Mortgage Capital LLC (2)	$	26,541	April 16, 2019	April 26, 2019
Deutsche Bank AG	$	90,911	June 16, 2019	August 21, 2019
BNP Paribas	$	16,691	June 19, 2019	August 2, 2019
Bank of America, N.A.	$	14,405	May 4, 2019	October 28, 2019
Morgan Stanley Bank, N.A.	$	5,237	June 15, 2019	August 23, 2019
Citibank, N.A.	$	4,828	June 7, 2019	June 7, 2019
JP Morgan Chase Bank, N.A.	$	4,360	May 31, 2019	October 11, 2019
Royal Bank of Canada	$	2,631	June 28, 2019	June 28, 2019

(1)

The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase.

(2)

The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under agreement to repurchase.

All debt financing arrangements that matured between March 31, 2019 and the date of this Report have been renewed or extended and are described in Note 11 — Borrowings to the accompanying consolidated financial statements.

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Item 3. 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 credit risk, interest rate risk, prepayment risk, inflation risk and fair value risk.

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

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of March 31, 2019, 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%
	(dollar amounts in thousands)

Fair value	$	3,102,267		$	3,000,357		$	2,951,932		$	2,859,760		$	2,815,873		$	2,732,175
Change in fair value:
$	$	197,177		$	95,266		$	46,841		$	(45,330)		$	(89,217)		$	(172,915)
%		6.8	%		3.3	%		1.6	%		(1.6)	%		(3.1)	%		(6.0)	%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)

Fair value	$	3,149,794		$	3,022,122		$	2,962,358		$	2,850,171		$	2,797,462		$	2,698,183
Change in fair value:
$	$	244,704		$	117,032		$	57,268		$	(54,920)		$	(107,628)		$	(206,907)
%		8.4	%		4.0	%		2.0	%		(1.9)	%		(3.7)	%		(7.1)	%


Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)

Fair value	$	3,003,145		$	2,954,126		$	2,929,616		$	2,880,596		$	2,856,086		$	2,807,066
Change in fair value:
$	$	98,055		$	49,035		$	24,525		$	(24,494)		$	(49,004)		$	(98,024)
%		3.4	%		1.7	%		0.8	%		(0.8)	%		(1.7)	%		(3.4)	%

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Excess Servicing Spread Financing

The following tables summarize the estimated change in fair value of our ESS accounted for using the fair value method as of March 31, 2019, given several shifts in pricing spreads and prepayment speed (decrease in the liabilities’ values increases net income):


Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)

Fair value	$	210,894		$	207,949		$	206,505		$	203,675		$	202,288		$	199,566
Change in fair value:
$	$	5,813		$	2,868		$	1,424		$	(1,406)		$	(2,793)		$	(5,515)
%		2.8	%		1.4	%		0.7	%		(0.7)	%		(1.4)	%		(2.7)	%


Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)

Fair value	$	225,659		$	214,934		$	209,905		$	200,451		$	196,004		$	187,620
Change in fair value:
$	$	20,578		$	9,853		$	4,824		$	(4,630)		$	(9,077)		$	(17,461)
%		10.0	%		4.8	%		2.4	%		(2.3)	%		(4.4)	%		(8.5)	%

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, as amended (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 Rule 13a-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.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to legal proceedings and potential claims arising in the ordinary course of our business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of such proceedings and exposure will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.

On December 20, 2018, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Court of Chancery of the State of Delaware, captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et al ., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action alleges, among other things, that certain current directors and officers of the Company breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to and entering into the Reorganization without ensuring that the Reorganization was entirely fair to the Company or public shareholders. The Reorganization was approved by 99.8% of voting shareholders on October 24, 2018. On March 1, 2019, the Company and its directors and officers named in the Garfield Action filed a motion to dismiss the complaint.

Item 1A. Risk Factors

There have been 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, 2018, filed with the SEC on March 5, 2019 and our Quarterly Reports on Form 10-Q filed thereafter.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the quarter ended March 31, 2019.

Repurchases of our Common Stock

The following table summarizes information about our stock repurchases during the quarter ended March 31, 2019:

Total number
of shares
purchased

Average price
paid per share

Total number of
shares purchased
as part of publicly
announced plans
or program (1)

Approximate dollar
value of shares that
may yet be
purchased under
the plans
or program (1)

January 1, 2019 – March 31, 2019

—

36,108,029

(1)

As disclosed in our current report on Form 8-K filed on June 21, 2017, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $50.0 million of our outstanding Class A common stock. The stock repurchase program does not require us to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected through negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

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Item 5. Other Information

None

Item 6. Exhibits

		Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 15-68669 or 001-38727)
Exhibit No.	Exhibit Description	Form	Filing Date

3.1	Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.	8-K12B	November 1, 2018

3.1.1	Certificate of Amendment to Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.	8-K12B	November 1, 2018

3.2	Amended and Restated Bylaws of New PennyMac Financial Services, Inc.	8-K12B	November 1, 2018

10.1#	Amended and Restated Registration Rights Agreement, dated as of November 1, 2018, among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc. and the Holders.	8-K12B	November 1, 2018

10.2#	Amended and Restated Stockholder Agreement, dated as of November 1, 2018, among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc. and HC Partners LLC.	8-K12B	November 1, 2018

10.3#	Master Lease Agreement No. 30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC.	8-K	December 14, 2015

10.4	HELOC Flow Purchase and Servicing Agreement, dated as of February 25, 2019, by and between PennyMac Loan Services, LLC and PennyMac Corp.	*

10.5	Amendment No. 6 to Third Amended and Restated Master Repurchase Agreement, dated as of April 26, 2019, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.	*

10.6†	PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (2019).	*

31.1	Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

31.2	Certification of Andrew S. Chang pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

32.1	Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	**

32.2	Certification of Andrew S. Chang pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	**

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# Refiled herewith to provide an updated hyperlink to the appropriate prior filing.

* Filed herewith.

** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

† Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PENNYMAC FINANCIAL SERVICES, INC.
	(Registrant)

Dated: May 6, 2019	By:	/s/ DAVID A. SPECTOR
		David A. Spector
		President and Chief Executive Officer

Dated: May 6, 2019	By:	/s/ ANDREW S. CHANG
		Andrew S. Chang
		Senior Managing Director and Chief Financial Officer

Exhibit 10.4

HELOC FLOW PURCHASE AND SERVICING AGREEMENT

by and between

PennyMac Loan Services, LLC,

as Seller and Servicer,

and

PennyMac Corp.,

as Purchaser

Dated as of February 25, 2019

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		Page
ARTICLE 1 DEFINITIONS AND CONSTRUCTION		1
1.1	Definitions	1
1.2	Interpretation Provisions.	10
ARTICLE 2 PURCHASE AND SALE		10
2.1	Purchase and Sale of Acquired Assets	10
2.2	Assumed Liabilities	11
2.3	Excluded Liabilities	11
ARTICLE 3 PURCHASE PRICE; CLOSING		11
3.1	Purchase Price	11
3.2	Closing	11
3.3	Seller Closing Deliveries	12
3.4	Purchaser Closing Deliveries	12
3.5	Correction for Errors	12
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER		12
4.1	Organization, Qualification and Standing	12
4.2	Authority, Non-Contravention, Required Filings	12
4.3	Title to Assets	13
4.4	Representations and Warranties as to Individual HELOCs	13
4.5	Compliance with Law	13
4.6	Litigation	13
4.7	Required Consents. .	14
4.8	Fair Consideration.	14
4.9	Sale Treatment. .	14
4.10	Ordinary Course. .	14
4.11	MERS Member. .	14
4.12	No Brokers or Finders	14
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER		15
5.1	Organization, Power and Standing	15
5.2	Authority, Non-Contravention, Required Filings	15
5.3	Compliance with Law	16
5.4	Regulatory Consents	16

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		Page
5.5	Litigation	16
5.6	Sufficient Funds Available	16
5.7	No Brokers or Finders	16
5.8	Sophisticated Investor..	16
ARTICLE 6 COVENANTS		16
6.1	Access to Information; Confidentiality	16
6.2	Mortgage Loan Schedule	17
6.3	Mortgage Files; Due Diligence	17
6.4	Protection of Consumer Information	18
ARTICLE 7 CONDITIONS		18
7.1	Conditions to the Obligations of the Parties	18
7.2	Conditions to the Obligations of Purchaser	19
7.3	Conditions to the Obligations of Seller	19
ARTICLE 8 SERVICING OF LOANS		19
8.1	Seller to Act as Servicer.	19
8.2	Servicing Compensation. .	20
8.3	HELOC Draws.	20
8.4	Additional HELOC-Specific Servicing Obligations..	21
8.5	Notice to Mortgagors..	21
8.6	Establishment of and Deposits to the Custodial Account.	21
8.7	Permitted Withdrawals From Custodial Account.	21
8.8	Servicing Advances.	21
8.9	Superior Liens..	21
8.10	Fidelity Bond, Errors and Omissions Insurance.	22
8.11	Right to Examine Servicer Records.	22
ARTICLE 9 INDEMNIFICATION AND REPURCHASE		22
9.1	Indemnification and Limitation on Liability Related to Servicing	22
9.2	Repurchase Obligations Related to HELOCs.	22
9.3	Indemnification Related to HELOCs..	23
ARTICLE 10 MISCELLANEOUS		24
10.1	Public Announcements	24

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		Page
10.2	Expenses	24
10.3	Notices	24
10.4	Entire Agreement; Modification	25
10.5	Severability	25
10.6	No Waiver; Cumulative Remedies	25
10.7	Governing Law	25
10.8	WAIVER OF TRIAL BY JURY.	25
10.9	SUBMISSION TO JURISDICTION; WAIVERS..	26
10.10	Counterparts.	26
10.11	Assignments	26
10.12	No Third Party Beneficiaries	26
10.13	Further Assurances	26
10.14	No Solicitation	26
10.15	Amendment	27

Schedules and Exhibits

Schedule 1 Servicing Fees

Exhibit A Contents of Collateral File

Exhibit B Representations and Warranties as to Individual HELOCs

Exhibit C Form of Purchase Confirmation

iii

HELOC FLOW PURCHASE AND SERVICING AGREEMENT

This HELOC FLOW PURCHASE AND SERVICING AGREEMENT (this “ Agreement ”) is made as of February 25, 2019, by and between PennyMac Loan Services, LLC, a Delaware limited liability company (“ Seller ”), and PennyMac Corp., a Delaware corporation (“ Purchaser ”). Each of Seller and Purchaser may be referred to, individually, as a “ Party ” or, collectively, as the “ Parties .”

WHEREAS , Seller is in the business of making variable rate, open-end home equity mortgage loans to individuals, the repayment of which is secured by a first or second lien mortgage on such individuals’ residences.

WHEREAS , Seller desires to sell, from time to time, and Purchaser desires to purchase and accept, from time to time, the Acquired Assets (as defined herein), including the related Servicing Rights (as defined herein), on a servicing-released basis, subject to the terms and conditions described in this Agreement.

WHEREAS, Purchaser desires to have Seller service the HELOCs on behalf of Purchaser, and Seller desires to service the HELOCs on behalf of Purchaser.

WHEREAS , Purchaser and Seller wish to prescribe the manner of purchase, conveyance, management, servicing and control of the HELOCs.

NOW, THEREFORE , in consideration of the premises and the mutual covenants and agreements contained herein, the Parties, intending to be legally bound hereby, do agree as follows:

ARTICLE 1

DEFINITIONS AND CONSTRUCTION

1.1 Definitions . For purposes of this Agreement, the following terms shall have the meanings designated to them under this Article 1 , unless otherwise specifically indicated:

“ Accepted Servicing Practices ” shall mean, with respect to a particular HELOC, adherence to (i) those customary or usual servicing standards, practices or policies (as applicable) of prudent institutions that service home equity line of credit loans in the jurisdiction where the related Mortgaged Property (as applicable) is located, (ii) applicable Laws, (iii) the terms of the documents contained in the related Mortgage File, and (iv) the provisions of Article IV of the Existing Servicing Agreement.

“ Acquired Assets ” shall have the meaning set forth in Section 2.1 .

“ Action ” shall mean any action, claim, suit, litigation, proceeding, arbitration, mediation, audit, investigation or dispute.

“ Additional Balance ” shall mean, as to any HELOC, any future Draw made by the related Mortgagor pursuant to such HELOC after the related Closing Date.

“ Affiliate ” shall mean, as to any specified Person, any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such specified Person. For purposes of this definition, “control,” “controlled by” or “under common control with” shall mean the possession of the power to direct or cause the direction of management and policies of such Person, whether through direct or indirect the ownership of voting securities or otherwise; provided, however, that, as to Purchaser, the term shall be limited to PennyMac Mortgage Investment Trust and its wholly-owned subsidiaries and, as to Seller and Servicer, the term shall be limited to PennyMac Financial Services, Inc. and its wholly-owned subsidiaries.

“ Agreement ” shall have the meaning set forth in the Preamble.

“ ALTA ”: The American Land Title Association or any successor thereto.

“ Ancillary Income ” has the meaning set forth in the Existing Servicing Agreement.

“ Applicable Requirements ” shall mean, as of the time of reference, (a) all applicable Laws relating to the management and sale of real property, the solicitation, underwriting, origination (including the taking, processing or underwriting of the relevant HELOC application, the provision of collateral valuation services of the relevant HELOC, the provision of settlement services or each Closing or funding of the relevant HELOC), sale, pooling, servicing, subservicing or enforcement of, or filing of claims in connection with, any HELOC at the relevant time, (b) all of the terms of the Credit Agreement, security instrument and any other related loan documents relating to each HELOC, (c) any Laws applicable to any HELOC, (d) all obligations to, or Contracts with, any insurer, Investor or Governmental Entity, including any rules, regulations, guidelines, underwriting standards, handbooks and other binding requirements and guidelines of any Governmental Entity, insurer or Investor, applicable to any HELOC, and (e) all underwriting, originating and servicing guidelines and requirements of Seller at the relevant time.

“ Assignment of Mortgage ” shall mean an assignment of the Mortgage, notice of transfer or equivalent instrument, in recordable form, that when properly completed and recorded, is sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to give record notice of the sale of the HELOC to Purchaser or its designee.

“ Assumed Liabilities ” shall have the meaning set forth in Section 2.3 .

“ Bank ” means City National Bank, in its capacity as bank with respect to the Dedicated Account Control Agreement.

“ Business Day ” shall mean any day that is not a Saturday, a Sunday or other day on which banks or savings and loan institutions are required or authorized by Law to be closed in the states of California, Texas, or New York.

“ Charges ” shall mean all taxes, ground rents, government assessments, hazard and mortgage insurance premiums, water, sewer, municipal charges and common charges of condominiums, homeowners’ associations or planned unit developments and similar charges relating to the HELOCs.

“ Closing ” shall have the meaning set forth in Section 3.2 .

“ Closing Date ” The date or dates on which the Purchaser, from time to time, shall purchase, and the Seller, from time to time, shall sell, HELOCs and the Servicing Rights related to such HELOCs. Each Closing Date shall be the date designated as such in the related Purchase Confirmation.

“ Collateral File ” shall mean the documents customarily held by the Custodian, including the documents listed on Exhibit A.

“ Consent ” shall mean any and all notices to, consents, approvals, clearances, ratifications, permissions, authorizations or waivers from Third Parties, including from any Governmental Entity.

“ Consumer Information ” shall mean any personally identifiable information in any form (written electronic or otherwise) relating to a Mortgagor, including, but not limited to: a Mortgagor’s name, address, telephone number, social security number, loan number, loan payment history, delinquency status, insurance carrier or payment information, tax amount or payment information; the fact that the Mortgagor has a relationship with Seller or the originator of the related HELOC, and any other non-public personally identifiable information.

“ Contract ” shall mean all agreements, contracts, subcontracts, leases (whether for real or personal property), purchase orders, covenants not to compete, confidentiality agreements, licenses, instruments, notes, options and warranties to which Seller is a party or by which Seller or any of the Acquired Assets are bound.

“ Court Order ” shall mean any judgment, decision, decree, consent decree, writ, injunction, ruling or order of any Governmental Entity that is binding on any Person or its property under applicable Laws.

“ Credit Agreement ” s hall mean with respect to each HELOC, the home equity line of credit agreement between Seller and a Mortgagor evidencing the indebtedness of such Mortgagor secured by a Mor tgage, t ogether with any assignment, reinstatement, extension, endorsement or modification thereof.

“ Credit Limit ” shall mean, as to any HELOC, the maximum loan balance permitted under the terms of the related Credit Agreement.

“ Custodial Agreement ” shall mean, with respect to any HELOC, the custodial agreement among Purchaser, the Custodian and any other parties named therein governing the retention of the Collateral Files.

“ Custodian ” shall mean, with respect to any Custodial Agreement, the custodian thereunder or its successor in interest or permitted assign, or any successor to the Custodian under the Custodial Agreement, as therein provided.

“ Damages ” shall mean any and all damages, injuries, charges, judgments, awards, liabilities, losses, indebtedness, burdens, Claims, demands, actions, suits, proceedings, payments, settlements, assessments, deficiencies, Taxes, interest, penalties, obligations, claims of any kind or nature, fines and costs and expenses (including reasonable attorneys’ fees and expenses and any

costs and expenses in connection with the enforcement of a party’s right to indemnification under this Agreement).

“ Dedicated Account ” means the account established by the Bank subject to a Dedicated Account Control Agreement, into which the Minimum Balance shall be deposited.

“ Dedicated Account Control Agreement ” means any agreement between Servicer, Purchaser, and the Bank in form and substance acceptable to Servicer, as the same may be amended from time to time.

“ Delinquent ” shall mean, any HELOC with respect to which the scheduled combined payment of principal and interest payable by a Mortgagor under the related Credit Agreement on a due date is not received, based on the Mortgage Bankers Association method of calculating delinquency.

“ Draw ” shall mean, with respect to any HELOC, an additional extension of credit by the related Mortgagor subsequent to the related Closing Date in accordance with the related Credit Agreement.

“ Draw Period ” shall mean, with respect to any HELOC, the period specified in the related Credit Agreement during which the related Mortgagor is permitted to make Draws.

“ Early Payment Default ” means when any minimum monthly payment due to the Purchaser from the Mortgagor on a HELOC, as required under the related Credit Agreement, becomes (30) days or more delinquent on or prior to one-hundred twenty (120) days after the related Closing Date. However, no Early Payment Default shall be deemed to occur where the Mortgage becomes delinquent due to an administrative error by the Servicer in connection with the application of payments relating to a servicing transfer so long as the Mortgagor resumes timely payment within sixty (60) days of the related Closing Date.

“ Encumbrance ” shall mean any lien, mortgage, deed of trust, right-of-way, right of setoff, assessment, security interest, pledge, lease, attachment, adverse claim, levy, charge, easement, restriction, license, encumbrance, or other similar restriction or any conditional sale Contract, title retention Contract, option to purchase or lease, right of first refusal or offer, restriction on transfer, preemptive right or other Contract giving rise to any of the foregoing.

“ Escrow Accounts ” shall mean all escrow and impound accounts relating to the HELOCs including, without limitation, all accounts established for purposes of receiving funds for Escrow Payments, suspense, buydown funds, unapplied balances, replacement reserve balances, loss draft balances (including interest accrued thereon for the benefit of the Mortgagors under the HELOCs if required by applicable Law or the applicable Mortgage Files), completion escrow monies and any other miscellaneous cash balances held with respect to the HELOCs.

“ Escrow Payments ” shall mean, with respect to any HELOC, to the extent applicable, the amounts constituting ground rents, taxes, assessments, water rates, sewer rents, municipal charges, mortgage insurance premiums, fire and hazard insurance premiums, flood insurance premiums, condominium charges and other payments required to be escrowed by the Mortgagor with the

Mortgagee pursuant to the terms of any HELOC, the related Mortgage or any other document in the related Mortgage File or Collateral File.

“ Excluded Liabilities ” shall have the meaning set forth in Section 3 .

“ Existing Servicing Agreement ” shall mean the Third Amended and Restated Flow Servicing Agreement, dated September 12, 2016, by and between Servicer and PennyMac Operating Partnership, L.P., a Delaware limited partnership, as the same may be amended from time to time.

“ Fannie Mae ” shall mean the entity formally known as the Federal National Mortgage Association (FNMA) or any successor thereto.

“ Federal Funds Rate ” shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that if such day is not a Business Day or the Federal Funds Rate is not so published for any day, the Federal Funds Rate for such day shall be such rate on such transactions on the next Business Day as so published on the next succeeding Business Day.

“ Final Purchase Price ” shall have the meaning set forth in Section 3.5(b) .

“ FIRREA ” shall mean, Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and any regulations promulgated thereunder, each as amended, and in effect as of the applicable date of determination.

“ Freddie Mac ” shall mean the entity formally known as the Federal Home Loan Mortgage Corporation (FHLMC) or any successor thereto.

“ Fundamental Representations ” shall mean, with respect to Seller, the representations in Sections 4.1 , 4.2(a) , 4.2(b) , 4.2(c)(i) , 4.2(c)(iv) , 4.3 and 4.8 and, with respect to Purchaser, the representations in Sections 5.1 , 5.2(a) , 5.2(b) , 4.2(c)(i) and 5.2(c)(iv) .

“ GAAP ” shall mean U.S. generally accepted accounting principles.

“ Governmental Entity ” shall mean any applicable national, supranational, federal, state, local, provincial or other governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body of competent jurisdiction.

“ HELOCs ” shall mean all adjustable-rate, first and second lien revolving home equity line of credit loans identified on the related Mortgage Loan Schedule including, to extent related thereto, all scheduled and unscheduled payments, liquidation proceeds, insurance proceeds, condemnation proceeds, real estate owned disposition proceeds, any escrow amounts related to the HELOC, all Additional Balances with respect thereto, the related Mortgage Files and all other rights, benefits, proceeds and obligations arising from or in connection with the HELOC.

“ HELOC Funding Account ” shall mean an account established by the Servicer for the funding of Draws.

“ HELOC Interest Rate ” shall mean the rate of interest borne on such HELOC in accordance with the applicable Credit Agreement.

“ High Cost Loan ” shall mean a HELOC that is (a) a “high cost” mortgage loan under the Home Ownership and Equity Protection Act of 1994, as amended, (b) a “high cost home,” “threshold,” “covered,” “high risk home,” “predatory,” “abusive,” or similarly defined loan, including refinance loans, under any other applicable state, federal or local law or regulation (or a similarly classified loan using different terminology under a law imposing heightened regulatory scrutiny or additional legal liability for residential mortgage loans having high interest rates, points and/or fees) or (c) categorized as High Cost pursuant to Appendix E of Standard & Poor’s LEVELS® Glossary, as revised from time to time. For avoidance of doubt, the parties agree that this definition shall apply to any law regardless of whether such law is presently, or in the future becomes, the subject of judicial review or litigation.

“ IFRS ” shall mean International Financial Reporting Standards.

“ Interest Rate Adjustment Date ” shall mean, with respect to each HELOC, the date of the daily or other periodic interest rate adjustments applied to the daily outstanding balance of the HELOC under the terms of the Credit Agreement.

“ Investor ” shall mean, as applicable, the private investor which owns or holds HELOCs or any interest therein, or provides any credit support or insurance against any default on the underlying HELOCs, which HELOCs are serviced by Seller pursuant to this Agreement.

“ Law ” shall mean any applicable federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, Court Order, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity.

“ Liability ” shall mean, with respect to any Person, any direct or indirect liability, indebtedness, obligation, commitment, burden, charge, expense (including interest and penalties due and payable with respect to attorneys’ and other professional fees and expenses in connection with any claim whether involving a third party or any claim solely between the parties), Claim, settlement payment, judgment, fine, penalty, assessment, deficiency, guaranty or endorsement of or by such Person of any type, whether accrued, absolute, fixed, contingent, matured, unmatured, liquidated, unliquidated, asserted, unasserted, known, unknown, foreseeable, unforeseeable, determined, determinable or otherwise, implied, vicarious, derivative, joint, several, secondary, insured or uninsured, whenever or however arising (including, whether arising out of any Contract or tort based on negligence or strict liability) and whether or not the same would be required by GAAP to be reflected in financial statements or disclosed in the notes thereto.

“ Material Adverse Effect ” shall mean any event, occurrence, effect, matter, change, development or state of facts that (a) has had or would reasonably be expected to have a material and adverse effect on the Acquired Assets or Assumed Liabilities, in each case taken as a whole, (b) has had or would reasonably be expected to have a material and adverse effect on the legality,

validity or enforceability of this Agreement or Seller’s ability to perform in any material respect on a timely basis its obligations under this Agreement, or (c) prevents, materially delays or materially impairs, or would be reasonably likely to prevent, materially delay or materially impair, the ability of Seller from consummating the transactions contemplated by this Agreement; provided , however , that in the case of clause (a) only, “Material Adverse Effect” shall not include any circumstance, change in or effect on the Acquired Assets or Assumed Liabilities to the extent arising out of or attributable solely to (i) changes in general economic, legal, regulatory or political conditions (including the outbreak or escalation of hostilities or acts of terrorism to the extent not directly impacting facilities or systems of the Acquired Assets or Assumed Liabilities), (ii) changes after the date hereof in general financial and capital market conditions, including interest rates, or changes therein, (iii) changes in general industry conditions affecting the mortgage industry generally, (iv) changes in law, IFRS, GAAP or regulatory accounting principles, or authoritative interpretations thereof or (v) any action or omission required to be taken or required to be omitted to be taken pursuant to the express terms of this Agreement; except to the extent any such circumstance, change or effect arising out of or attributable to clauses (i), (ii), (iii) and (iv) is disproportionately adverse to the business, operations, results of operations or the financial condition of the Acquired Assets or Assumed Liabilities, taken as a whole, as compared to other similar companies in the mortgage industry generally.

“ Minimum Balance ” shall have the meaning set forth in Section 8.3(c).

“ Mor tgage ” s hall mean a mortgage, deed of trust or other instrument creating a first or second lien on the Mor tgaged Property, as applicable, sec uring the Credit Agreement .

“ Mortgage Interest Rate ” shall mean, with respect to each HELOC, the annual rate at which interest accrues on such HELOC from time to time in accordance with the provisions of the related Credit Agreement .

“ Mortgage Loan Schedule ” shall mean the schedule of HELOCs in an electronic file in a format mutually agreed by the Parties containing the data fields for the HELOCs sold as of the particular Closing Date with the name of the file identified on Schedule 1 to the related Purchase Confirmation.

“ Mor tgaged Property ” s hall mean, with respect to a particular HELOC, a Mortgag or’s real property securing repayment of the related Credit Agreement, c onsisting of a fee simple interest in a single parcel of real property improved by a residential dwelling.

“ Mor tgage File ” s hall mean, with respect to any HELOC, a ny origination, servicing, escrow and other documents or instruments pertaining to such HELOC, which may be originals, copies or electronically imaged and indexed, which are in the possession of or under the control of Seller or any agent or vendor of Seller, that are necessary or used in the ordinary course of business to service or own such HELOC in accordance with the Applicable Requirements.

“ Mortgagee ” shall mean, with respect to any HELOC, the mortgagee or beneficiary named in the related Mortgage and the successors and assigns of such mortgagee or beneficiary.

“ Mortgagor ” shall mean, with respect to any HELOC, the borrower on the related Credit Agreement .

“ Obligor ” shall mean any Per son tha t is a borrower or guarantor on a Credit Agreement.

“ Other Fees ” shall mean any additional Other Fees set forth in Schedule 1 of this Agreement.

“ Organizational Documents ” shall mean, as to any Person, as applicable, its certificate of incorporation and by-laws, its certificate of formation and limited liability company agreement, or any equivalent documents under the applicable Law of such Person’s jurisdiction of organization.

“ Party ” or “ Parties ” shall have the meaning set forth in the Preamble.

“ Person ” shall mean any person or entity, whether an individual, trustee, corporation, limited liability company, general partnership, limited partnership, trust, unincorporated organization, business association, firm, joint venture or Governmental Entity.

“ P ur chase Price ” s hall mean, with respect to each HELOC, as more specifically set forth in the related Purchase Confirmation, (i) (A) the unpaid principal balance of such HELOC as of the related Closing Date, multiplied by (B) the Purchase Price Percentage for the HELOCs, plus (ii) accrued interest on such unpaid principal balance at the HELOC Interest Rate, from the last interest paid-to date through the business day before the related Closing Date, plus (iii) a HELOC Origination Fee of $1,500.

“ Pur chase Price Percentage for HELOCs ” s hall mean the percentage set forth in the related Purchase Confirmation .

“ Purchaser ” shall have the meaning set forth in the Preamble.

“ Purchase Confirmation ” shall mean, with respect to each HELOC sold on a Closing Date, an agreement, in substantially the form attached hereto as Exhibit C, by and between the Seller and the Purchaser, confirming the sale by the Seller and purchase by the Purchaser of the HELOCs set forth in the related Mortgage Loan Schedule.

“ Repurchase Price ” shall mean, with respect to such HELOC, (i) (A) the unpaid principal balance of such HELOC as of the related repurchase date, multiplied by (B) the Purchase Price Percentage for the HELOC as set forth in the related Purchase Confirmation, plus (ii) accrued interest on such unpaid principal balance at the HELOC Interest Rate, from the last interest paid-to date through the Business Day before the related repurchase date, plus (iii) the HELOC Origination Fee of $1,500.

“ Seller ” shall have the meaning set forth in the Preamble.

“ Servicer ” means PennyMac Loan Services, LLC or its successor in interest or any permitted assignee or designee under this Agreement as herein provided and as provided in Section 8.02 of the Existing Servicing Agreement.

“ Servicing Advances ” shall mean all customary, reasonable and necessary “out‑of‑pocket” costs and expenses (including reasonable attorneys’ fees and disbursements) incurred (regardless if any such advance is not, in the reasonable determination of the Servicer, a Nonrecoverable

Advance when made but, thereafter, becomes a Nonrecoverable Advance) in the performance by the Servicer of its servicing obligations, including, but not limited to, the cost of (a) the preservation, restoration and protection of the Mortgaged Property or REO Property, (b) any fees relating to any enforcement or judicial proceedings, excluding foreclosures, (c) amounts advanced to correct defaults on any mortgage loan or lien which is senior to the HELOC and amounts advanced to keep current or pay off a mortgage loan or lien that is senior to the HELOC, (d) any appraisals, valuations, broker price opinions, inspections, or environmental assessments, (e) the management and liquidation of the Mortgaged Property if the Mortgaged Property is acquired in satisfaction of the Mortgage, (f) taxes, assessments, water rates, sewer rents, mortgage insurance premiums, fire and hazard insurance premiums, flood insurance premiums and other charges which are or may become a lien upon the Mortgaged Property, and (g) executing and recording instruments of satisfaction, deeds of reconveyance.

“ Servicing Fee ” shall mean the fee charged by the Servicer for servicing the HELOCs during the related Servicing Period, on a monthly, per-HELOC basis, as set forth in attached Schedule 1 to this Agreement and shall constitute the Base Servicing Fee with respect to HELOCs under the Existing Servicing Agreement.

“ Servicing Period ” shall mean, with respect to each HELOC, the period commencing with the related Closing Date and ending with the related Outbound Transfer Date as defined in the Existing Servicing Agreement.

“ Servicing Rights ” shall mean any and all of the following: (a) any and all rights to administer and service the HELOCs; (b) any payments to or monies received for servicing the HELOCs; (c) any late fees, penalties or similar payments with respect to the HELOCs; (d) all agreements or documents creating, defining or evidencing any such servicing rights to the extent they relate to such servicing rights; (e) rights to administer the Escrow Payments or other similar payments with respect to the HELOCs and any amounts actually collected with respect thereto and to receive interest on the Escrow Accounts where permitted by applicable Law, if applicable; (f) all accounts and other rights to payment related to any of the property described in this paragraph; (g) any and all documents, files, records, servicing files, servicing documents, servicing records, data tapes, computer records, or other information pertaining to the HELOCs or pertaining to the past, present or prospective servicing of the HELOCs; and (h) all rights, powers and privileges incident to any of the foregoing or to the extent they relate to such rights, all in accordance with Accepted Servicing Practices.

“ Third Party ” shall mean any Person other than the Parties or their respective Affiliates.

“ Trailing Documents ” shall mean mortgage loan documents that are required by a warehouse lender or an Investor pursuant to Applicable Requirements to be part of the Collateral File that, as of the time of reference, are (i) in the custody of counsel in accordance with Applicable Requirements or (ii) have been submitted for recording and have not yet been returned by the applicable recording office.

“ Underwriting Guidelines ” shall mean, as to any HELOC, the written underwriting guidelines, policies and procedures pursuant to which such HELOC was underwritten then in effect on the origination date for such HELOC and reasonably acceptable to Purchaser.

1.2 I nterpretation Provisions . (a) The words “he reof,” “he rein” and “he reunder” and words of similar import when used in this Ag reement re fer to this Ag reement as a whole and not to any particular provision of this Ag reement, and Article, Section, Sc hedule an d Ex hibit re ferences are to this Ag reement un less otherwise specified.

(b) The terms “in clude” and “in cluding,” and variations thereof, are not limiting but rather shall be deemed to be followed by the words “without limitation.”

(c) References to statutes shall in clude al l regulations promulgated thereunder and references to statutes or regulations shall be construed as in cluding al l statutory and regulatory provisions consolidating, amending or replacing the statute or regulation.

(d) The captions and headings of this Ag reement ar e for convenience of reference only and shall not affect the construction of this Ag reement.

(e) Whenever the context requires: the singular number shall in clude th e plural, and vice versa; the masculine gender shall in clude th e feminine and neuter genders; the feminine gender shall in clude th e masculine and neuter genders; and the neuter gender shall in clude th e masculine and feminine genders.

(f) The Schedules and Exhibits to this Ag reement ar e a material part he reof an d shall be treated as if fully incorporated into the body of this Ag reement.

(g) References to “written” or “in writing” in clude in electronic form.

(h) Any capitalized terms used but not defined herein shall have the meanings as set forth in Section 1.01 of the Existing Servicing Agreement.

ARTICLE 2

PURCHASE AND SALE

2.1 Purchase and Sale of Acquired Assets . Subject to the terms and conditions set forth in this Agreement, in exchange for payment of the related Purchase Price on the related Closing Date, from time to time, Seller agrees to sell, convey, assign, transfer and deliver to Purchaser, and Purchaser, from time to time, agrees to purchase and accept, all of Seller’s right, title and interest in and to the Acquired Assets. As used in this Agreement, “ Acquired Assets ” shall mean:

(a) the HEL OCs and the related Servicing Rights, as set forth on the related Mortgage Loan Schedule, o n a servicing-released basis;

(b) t he related Mor tgage Files and Collateral Files;

(d) all claims, counterclaims, defenses, causes of act ion, r ights of recovery, rights of set-off, rights of subrogation and all other rights of any kind against any Thi rd Party, t o the extent relating to any Ass umed Liabilities or the Acquired Assets;

The sale of each HELOC and related Servicing Rights shall be reflected on the Seller’s balance sheet and other financial statements, tax returns and business records as a sale of assets by the Seller. All payments of principal and interest received on or after the related Closing Date shall belong to Purchaser. Upon the sale of the HELOCs, the ownership of each related Mortgage File and Collateral File shall vest immediately in Purchaser and the ownership of all records and documents with respect to each related HELOC prepared by or which come into the possession of Seller shall vest immediately in Purchaser and be held in trust for Purchaser’s benefit by the Seller or Servicer (in the case of Collateral Files or Trailing Documents, until delivered to Custodian).

2.2 A ssu med Liabilities . Subject to the terms and conditions set forth in this Agreement, Purchaser hereby assumes, and agrees to pay or otherwise perform or discharge when due, the following Liabilities (collectively, the “ Assumed Liabilities ”):

(a) all Lia bilities ari sing aft er each Closing Date in connection with the HELOCs, except to the extent arising from or relating to any act or failure to act of Seller or Servicer, including any breach, default, violation, non-payment or omission with respect to an Acquired Asset, occurring prior to each Closing Date ;

(b) the obligation to fund Draws subject to the provisions of Section 8.3 of this Agreement, and

(c) any accrued and unpaid charges, fees and expenses related to the Acquired Assets, to the extent arising out of activities occurring after each Closing.

2.3 Excl uded Liabilities . Purchaser shall not assume, nor become responsible for, any other Liability of Seller, including Liabilities in respect of or relating to the Acquired Assets to the extent arising prior to each Closing (collectively, the “ Excluded Liabilities ”), including any Liabilities arising from or involving allegations of improper origination or servicing of any HELOC prior to each Closing Date, or fraud, misappropriation of funds, gross negligence, willful misconduct or illegal or tortious action or failure to act of Seller, Servicer or any originator or prior owner or servicer of any HELOC or any agent of any of the foregoing prior to each Closing Date.

ARTICLE 3

PUR CHASE PRICE; CL OS ING

3.1 Pur ch ase Price . On or prior to each Closing Date, Seller and Purchaser shall mutually agree on the final form of Purchase Confirmation. On the terms and subject to the conditions set forth in this Agreement and the related Purchase Confirmation, in consideration of the sale of the Acquired Assets, at each Closing, Purchaser shall pay to Seller an amount in cash equal to the Purchase Price, calculated based on the Purchase Confirmation and subject to post-Closing adjustment as set forth in Section 3.5 .

3.2 Clos i ng . On the terms and subject to the conditions set forth in this Agreement, the sale, conveyance, assignment, transfer and delivery of the Acquired Assets and the assumption of the Assumed Liabilities contemplated by this Agreement (collectively, a “ Closing ”) shall take place via the delivery of executed documents and applicable closing deliverables through personal delivery, electronic mail, or electronic signature by each Party on each Closing Date.

3.3 Se lle r Closing Deli veries . At each Closing, Seller shall deliver and release, or cause to be delivered and released, to Purchaser or its designee the following:

(a) duly executed counterpart to the related Purchase Confirmation ;

3.4 Pu rch aser Closing Deli veries . At each Closing, Purchaser shall deliver, or cause to be delivered, to Seller the following:

(a) the related Purc hase Price, by wire transfer of immediately available funds to a bank acco unt or a ccounts designated by Sell er;

(b) du ly executed counterpart to the related Purchase Confirmation ;

3.5 Correction for Errors . If, within six (6) months after any Closing Date, the outstanding principal balance of any HELOC as of the related Closing Date is found to be in error, or if for any reason the related Purchase Price or such other amounts in the related Purchase Confirmation is or are found to be in error, the Parties shall mutually agree to an appropriate adjustment (and an associated reconciliation statement or other such documentation with respect to such adjustment), and the Party benefiting from the error shall pay an amount sufficient to correct and reconcile the Purchase Price or such other amounts as mutually agreed by the Parties. Such amounts shall be paid by the applicable Party within ten (10) Business Days from receipt of satisfactory written verification of amounts due.

ARTICLE 4

R EPRESENTATIONS AND WARRANTIES OF SELLE R

As an inducement for Purchaser to enter into this Agreement and each Purchase Confirmation, Seller represents and warrants to Purchaser as of each related Closing Date as follows:

4.1 Orga nization, Qualification and Standing . Seller is a limited liability company duly organized, validly existing and in good standing under the Laws of the state of Delaware. The Seller (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) is qualified to transact business in and is in good standing under the laws of each state where a Mortgaged Property is located or is otherwise exempt from such qualification or not required under applicable law to effect such qualification, and (iii) no demand for such qualification has been made upon the Seller by any state having jurisdiction, and in any event the Seller is or will be in compliance with the laws of any such state to the extent necessary to ensure the enforceability of each Credit Agreement and the sale of the HELOCs and Servicing Rights as contemplated by the Agreement.

4.2 Auth ority, Non-Contravention, Required Filings .

(a) Seller has t he requisite organizational power and authority to execute and deliver this Agree ment and each Purchase Confirmation and t o perform its obligations hereu nder and thereunder and t o co nsummate the transactions contemplated hereby and thereby. Th e execution and delivery of this Agree ment and each Purchase Confirmation by Se lle r, the performance by Selle r of it s obligations hereu nder and thereunder and t he consummation by Selle r

of th e transactions contemplated hereby and thereby, have been duly authorized by all necessary organizational actio n on th e part of Selle r.

(b) Thi s Agree ment and each Purchase Confirmation has b een duly executed and delivered by Selle r and c onstitutes a valid and binding obligation of Selle r, enf orceable against it in accordance with its terms, in each case subject to (i) the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar Laws relat ing to or affecting the enforcement of creditors’ rights generally and (ii) general equitable principles (whether considered in a proceeding in equity or at Law).

(c) Th e execution and delivery of this Agree ment by Se lle r do no t, the execution and delivery of each Purchase Confirmation by Se lle r, the performance by Selle r of it s obligations hereu nder or th ereunder, and the consummation by Selle r of th e transactions contemplated hereby or thereby do not, (i) contravene any provision of the Organ izational Documents of Seller, (ii ) const itute a breach, violate the terms, conditions or provisions of, or result in a material default under, or give to others any rights of termination, amendment, acceleration or cancellation of any Contr act, (ii i) resul t in the creation of any Encum brance upon the Acquired Assets or (iv) viola te in any material respect any provision of any Law t o wh ich Selle r is su bject , pre ve nt or materially delay the ability of Seller to consummate the transactions contemplated by this Agreement, or materially and adversely affect the value of or the interest of the Purchaser in the related HELOCs.

(d) Sel ler has a ll permits, licenses and registrations issued by or obtained from a Gover nmental Entity that are required in connection with the Acquired Assets.

4.3 Title to Assets . As of each Closing Date, Seller has good and valid title to and ownership of the Acquired Assets, in each case free and clear of all Encumbrances, and full right and authority to sell and assign the same.

4.4 Representations and Warranties as to Individual HELOCs (a) . As to each HELOC and t he related Mortg age File and Collateral File, the Seller makes the representations and warranties set forth on Exhibit B to the Purchaser as of the related Closing Date or such other date specified in Exhibit B .

4.5 Com pliance with Law . Seller is in compliance with all Laws applicable to the Acquired Assets, except where the failure to so comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and Seller has not received any written or, to Seller’s knowledge, oral notice alleging any noncompliance with any applicable Law with respect to its operation of the Acquired Assets or that Seller is under any investigation by any Governmental Entity for such alleged noncompliance with respect to its operation of the Acquired Assets, except for such noncompliance that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

4.6 Li tigation .

(a) There is no Acti on pendi ng or, to S eller’s knowledge, thr eatened in writing against Sell er in co nnection with the Acquired Assets or the transactions contemplated hereby, other than those that would not, individually or in the aggregate, reasonably be expected to have a

Material Adverse Effect or ma terially impair or delay Sell er’s ab ility to co nsummate the transactions contemplated hereby.

(b) Non e of the Acquired Assets is subject to the provisions of any Cour t Order, oth er than those that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(c) There is no Action pending, or to Seller’s knowledge, threatened, with respect to any Acquired Asset or the related Mortgage Property and nor does Seller know of any basis for any such Action arising from the condition of the Mortgaged Property or the origination or servicing of the HELOC. No Acquired Asset is subject to any outstanding litigation for fraud, origination, predatory lending, servicing or closing practices, and neither Seller nor any Acquired Asset is subject to any litigation that, if determined adversely, would materially and adversely affect the value of, or the interest of Purchaser in, any Acquired Asset.

4.7 Required Consents . No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Seller of or compliance by the Seller with the Agreement or the terms of the HELOCs, the delivery of the Mortgage Files to the Purchaser, the sale of the HELOCs to the Purchaser or the consummation of the transactions contemplated by the Agreement, or if required, such consent, approval, authorization or order has been obtained prior to the related Closing Date.

4.8 Fair Consideration . The consideration received by the Seller upon the sale of the HELOCs under this Agreement shall constitute fair consideration and reasonably equivalent value for the HELOCs;

4.9 Sale Treatment . Seller has determined that the disposition of the HELOCs pursuant to the Agreement will be afforded sale treatment for tax and accounting purposes; and the sale of each HELOC shall be reflected on Seller’s balance sheet and other financial statements as a sale of assets by Seller.

4.10 Ordinary Course . The consummation of the transactions contemplated by the Agreement are in the ordinary course of business of the Seller, and the transfer, assignment and conveyance of the HELOCs, including the Mortgage Notes, the Mortgages and/or the Servicing Rights, by the Seller pursuant to the Agreement are not subject to the bulk transfer laws or any similar statutory provisions in effect and applicable to this transaction. Seller is solvent and the sale of the HELOCs will not cause Seller to become insolvent. The sale of the HELOCs is not undertaken with the intent to hinder, delay or defraud any of Seller’s creditors. The Seller has not filed a petition in bankruptcy or for protection under any other federal or state debtor relief law on or prior to each Closing Date.

4.11 MERS Member . The Seller is a member of MERS in good standing, and has complied with the rules and procedures of MERS in connection with the HELOCs registered with the MERS System.

4.12 No Brokers or Finders . There is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of Seller who might be

entitled to any fee or commission from Seller in connection with the transactions contemplated hereby.

ARTICLE 5

REP RESENTATIONS AND WARRANTIES OF PURCHA SER

Purchaser hereby makes, as of the date hereof, the following representations and warranties to Seller:

5.1 Organ ization, Power and Standing . Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the state of Delaware. Purchaser has the requisite corporate power and authority to own and operate its business as presently conducted. Purchaser is duly qualified to do business and in good standing in each jurisdiction where the operations of its business requires such qualification, except where the failure to be so qualified or in such good standing would not, individually or in the aggregate, reasonably be expected to prevent or materially impair or delay the ability of Purchaser to consummate the transactions contemplated by this Agreement.

5.2 Autho rity, Non-Contravention, Required Filings .

(a) Purchas er has th e requisite corporate power and authority to execute and deliver this Agreem ent and ea ch Purchase Confirmation and to perform its obligations hereun der and th ereunder and to con summate the transactions contemplated hereby and th ereby. The execution and delivery of this Agreem ent and ea ch Purchase Confirmation by Purcha ser, and the performance by Purcha ser of its obligations hereun der and th ereunder and the consummation by Purcha ser of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of Purcha ser.

(b) This Agreem ent and each Purchase Confirmation has be en duly executed and delivered by Purcha ser and co nstitutes a valid and binding obligation of Purcha ser, enfo rceable against it in accordance with its terms, in each case subject to (i) the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar Laws r elati ng to or affecting the enforcement of creditors’ rights generally and (ii) general equitable principles (whether considered in a proceeding in equity or at Law).

(c) The execution and delivery of this Agreem ent and each Purchase Confirmation by Pur cha ser do not , the performance by Purcha ser of its obligations hereun der and th ereunder and the consummation by Purcha ser of the transactions contemplated hereby and thereby will not, (i) contravene any provision of the Organi zational Documents of Purchaser, (ii) c onsti tute a breach, violate the terms, conditions or provisions of, or result in a material default under, or give to others any rights of termination, amendment, acceleration or cancellation of any contra ct or agr eem ent to whi ch Purcha ser is a p arty or is otherwise bound, or (iii) violat e in any material respect any provision of any Law to whi ch Purcha ser is sub ject, except, in the case of clause (ii) o r (ii i) above, for any such breaches, violations, defaults or other occurrences, if any, that w ould not, individually or in the aggregate, reasonably be expected to prevent or materially delay the ability of Purchaser to consummate the transactions contemplated by this Agreement.

(d) Purc has er has al l permits, licenses and registrations issued by or obtained from a Govern mental Entity that a re required in connection with the Acquired Assets.

5.3 Compliance with Law . Purchaser is in compliance with all Laws applicable to its business, except where the failure to so comply would not, individually or in the aggregate, be materially adverse to Purchaser or materially impair or delay Purchaser’s ability to consummate the transactions contemplated hereby.

5.4 Regul atory Consen ts . No Consent of or filing with any Governmental Entity is necessary or required of Purchaser in connection with the execution and delivery of this Agreement or the performance by Purchaser of its obligations hereunder.

5.5 Litig ation . There is no Action pending against Purchaser in connection with its business or the transactions contemplated hereby, other than those that would not, individually or in the aggregate, be materially adverse to Purchaser or materially impair or delay Purchaser’s ability to consummate the transactions contemplated hereby.

5.6 Suffi cient Funds Available . Purchaser has sufficient funds available to consummate the transactions contemplated by this Agreement, and to perform its obligations to be performed as of each Closing (including payment of the Purchase Price) and to pay the fees and expenses Purchaser incurred in connection with such transactions and obligations.

5.7 No B rokers or Finders . There is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of Purchaser who might be entitled to any fee or commission from Purchaser in connection with the transactions contemplated hereby.

5.8 Sophisticated Investor . The Purchaser is a sophisticated institutional investor which has knowledge and experience in financial and business matters that enable it to evaluate the merits and risks of its investment in the HELOCs pursuant to this Agreement.

ARTICLE 6

COVE NANTS

6.1 Access to Information; Confidentiality .

(a) Purchaser shall own and be vested with title to each HELOC, including the related Mortgage and Credit Agreement, as of each Closing Date. Notwithstanding the foregoing, any contents of any Mortgage File or Collateral File not delivered to Purchaser or its designee shall be possessed solely by Seller in trust for the benefit of Purchaser or its designee, as the case may be. All rights arising out of the HELOCs, inclusive of the Servicing Rights, including, but not limited to, all funds received by Seller on or after the related Closing Date, other than those funds belonging to Seller as set forth herein, on or in connection with the HELOCs shall be vested in Purchaser or one or more designees of Purchaser and shall be held by Seller in trust for the benefit of Purchaser or the appropriate designee of Purchaser, as the case may be, as the owner of the HELOCs pursuant to the terms of this Agreement.

(b) Each Party and its Representatives (defined below) may not, without the prior written consent of the other Party, disclose to any Third Party any information regarding this Agreement or the transactions contemplated herein, except to the extent that such disclosure is (i) required to effect the transactions contemplated herein, (ii) required by Applicable Law, court order or regulation, or (iii) necessary to permit the audit of the accounts of a Party hereto. Neither Party shall disclose any Confidential Information to any person unless such Person is an officer, director, employee, agent or other advisor or representative of such Party (the “Representatives”), has a need to know the Confidential Information, has been formally apprised prior to receipt of such Confidential Information of the obligations of such Party hereunder, and has agreed to keep the Confidential Information confidential. Each Party shall be responsible for a breach of this Section 6.1(b) by any of its Representatives. In addition, each Party shall take all reasonable measures to ensure that the Confidential Information is not disclosed, published, released, transferred, duplicated or otherwise made available to others in contravention of the provisions of this Agreement. As used herein, “Confidential Information” shall mean the fact of and terms of this Agreement, and any data or information that is provided in connection with this Agreement or the transactions contemplated herein that is proprietary to the other Party and not generally known to the public, whether in tangible or intangible form, including, but not limited to, the following information: inventions, trade secrets, know-how, software, databases and customer lists.

(c) Purchaser and Seller acknowledge that an actual or threatened violation of the covenants contained in Sections 6.1 and 6.4 may cause the other Party and/or Persons obligated under or in connection with the HELOCs immediate and irreparable harm, damage and injury that cannot be fully compensated for by an award of damages or other remedies at law. Accordingly, Purchaser or Seller, as applicable, shall be entitled, as a matter of right, to an injunction from any court of competent jurisdiction restraining any further violation by the other Party of this Agreement or Sections 6.1 or 6.4 without any requirement to show any actual damage or to post any bond or other security. Such right to seek an injunction shall be cumulative and in addition to, and not in limitation of, any other rights and remedies that such Party may have at law or in equity.

6.2 Mortgage Loan Schedule . No later than one Business Day prior to each Closing Date, Seller shall have delivered to Purchaser a Mortgage Loan Schedule reflecting all HELOCs to be sold on such Closing Date containing information current as of such date.

6.3 Mortgage Files; Due Diligence .

(a) Seller shall, if requested by Purchaser, at a reasonable time prior to each Closing Date, (a) have delivered to Purchaser or its designee (which may include the Custodian) in escrow, pursuant to the terms of a mutually-agreeable bailee arrangement, for examination, imaged copies of the related Collateral Files for each HELOC, including the Assignment of Mortgage for loans not registered with MERS pertaining to such HELOC, and (b) made the Mortgage Files and Collateral Files available to Purchaser for examination at Seller’s offices or such other location as shall otherwise be agreed upon by Purchaser and Seller. Purchaser may, at its sole option and without notice to Seller, purchase all or part of the HELOCs without conducting any partial or complete examination. The fact that Purchaser or its designee has conducted or has failed to conduct any partial or complete examination of the Mortgage Files shall not affect Purchaser’s (or

any of its successor’s) rights to demand any other relief or remedy to the extent provided under this Agreement.

Seller shall notify Purchaser of any material changes to the related Underwriting Guidelines, if any, prior to each Closing Date, which changes shall be reasonably acceptable to Purchaser.

On each Closing Date, either (i) Seller shall have obtained a paid in full, life of loan, transferable flood certification reasonably acceptable to Purchaser, if required and if applicable, or (ii) Seller may be subject to a reasonable flood zone determination fee.

(b) Purchaser shall have the right to conduct an underwriting (or to cause its designee to conduct) and a due diligence review of Mortgage Files or Collateral Files (including without limitation credit, compliance, policies, valuation and data) relating to the HELOCs to ensure conformity with this Agreement.

(c) Within ten (10) Business Days after receipt of a Trailing Document by Seller or Seller’s Custodian, Seller shall provide, or cause to be provided, such Trailing Document to Purchaser’s Custodian.

6.4 Protection of Consumer Information . Seller and Purchaser each agree that it (i) shall comply with any applicable Laws regarding the privacy and security of Consumer Information, (ii) shall not use Consumer Information in any manner inconsistent with any applicable Laws regarding the privacy and security of Consumer Information, (iii) shall not disclose Consumer Information to third parties except as required by applicable Laws or to carry out the express terms hereof, (iv) shall maintain adequate physical, technical and administrative safeguards to protect Consumer Information from unauthorized access and (v) shall immediately notify the other party of any actual or suspected breach of the confidentiality of Consumer Information. As soon as reasonably practicable following any actual or suspected breach of the confidentiality of Consumer Information, Seller or Purchaser, as applicable, shall provide the other party with an estimate of any intrusion’s effect on such other party and notice of the corrective action being taken.

ARTICLE 7

CONDI TIONS

7.1 Conditions to the Obligations of the Parties . The respective obligations of the Parties hereunder to consummate the transactions contemplated by this Agreement are subject to the fulfillment, at or before each Closing, of each of the following conditions (all or any of which may be waived, to the extent legally permissible, in writing in whole or in part by the Parties in their sole reasonable discretion).

(a) No Order . No Governme ntal Entity shall ha ve enacted, issued, promulgated, enforced or entered any applicable Law or C ourt Or der (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the transactions contemplated by this Agreemen t illegal, otherwise enjoining or prohibiting the consummation of

such transactions, or that would prevent, or materially impair or delay the ability of either Party to consummate the transactions contemplated by this Agreement.

7.2 Conditions to the Obligations of Purchase r . The obligations of Purchaser hereunder to consummate the transactions contemplated by this Agreement are subject to the fulfillment, at or before each Closing, of each of the following conditions (all or any of which may be waived in writing in whole or in part by Purchaser in its sole reasonable discretion).

(a) Representations and Warranties . Each of the representations and warranties of Seller i n Article 4 shall be true and correct (without giving effect to materiality, Material Adverse Effect or any s imilar qualification) as of each Closing as if ma de at such time (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date) .

(b) Trust Receipt . The Purchaser shall have received from the Custodian a trust receipt in form and substance acceptable to the Purchaser with respect to the Custodian’s receipt of the Collateral Files for the related HELOCs.

(c) Material Adverse Effect . No Material Adverse Effect shall have occurred since the date of the prior Purchase Confirmation.

(d) Covena nts . The covenants and agreements contained in this Agreemen t to be co mplied with by Seller o n or be fore each Closing shall ha ve been complied with in all material respects.

7.3 Conditions to the Obligations of Seller . The obligations of Seller hereunder to consummate the transactions contemplated by this Agreement are subject to the fulfillment, at or before each Closing, of each of the following conditions (all or any of which may be waived in writing in whole or in part by Seller in its sole reasonable discretion):

(a) Representations and Warranties . Each of the representations and warranties of Purchas er in Article 5 shall be true and correct (without giving effect to materiality or any similar qualification) as of each Closing as if ma de at such time (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date) .

(b) Covena nts . The covenants and agreements contained in this Agreemen t to be co mplied with by Purchase r on or be fore each Closing shall ha ve been complied with in all material respects.

ARTICLE 8

SERVICING OF LOANS

8.1 Seller to Act as Servicer .

(a) The HELOCs will be purchased by the Purchaser and sold by the Seller on a servicing-released basis and the purchase of the HELOCs by the Purchaser shall, for all purposes, include all Servicing Rights relating thereto. During the Servicing Period, the Servicer, as an

independent contractor and acting alone, shall service the HELOCs sold to the Purchaser on such Closing Date in accordance with Accepted Servicing Practices and the terms of this Agreement on behalf of Purchaser as the owner of the HELOCs and Servicing Rights.

(b) The Servicer shall service the HELOCs in accordance with the provisions of Article IV of the Existing Servicing Agreement and the related Credit Agreement. For purposes of the Existing Servicing Agreement, all HELOCs shall be treated by Servicer as Mortgage Loans, Eligible Mortgage Loans, Non-Agency Mortgage Loans (to the extent such provisions are applicable to HELOCs), and either as First Lien Mortgage Loans or Second Lien Mortgage Loans, as applicable, and as identified in the related Mortgage Loan Schedule.

(c) To the extent set forth in and subject to the terms of the Delegation of Authority Matrix attached as Exhibit 10 to the Existing Servicing Agreement, Purchaser hereby delegates authority to the Servicer to carry out the Servicer’s servicing and administration duties with respect to the HELOCs without obtaining the Purchaser’s prior written approval.

8.2 Servicing Compensation . As consideration for servicing the HELOCs, the Purchaser shall (a) pay the Servicer the applicable Servicing Fee and Other Fees the Servicer is entitled to each month, and (b) permit the Servicer to retain additional servicing compensation in the form of Ancillary Income, each in accordance with Schedule 1 hereto.

8.3 HELOC Draws .

(a) As of each Closing Date, the Purchaser shall assume the financial obligations of the Seller to fund Draws. Notwithstanding the foregoing, Servicer shall administer the Draw requests and Draws, by among other things taking the Draw requests from the Mortgagors, determining whether the Draw request is within the related Credit Limit and Draw Period and otherwise permitted by the related Credit Agreement at such time, notifying Mortgagors whether or not the Draw request will be honored, and remitting the approved Draw to the Mortgagor, if applicable, in accordance with Accepted Servicing Practices.

(b) If permitted by Applicable Requirements, the Purchaser shall, within twenty four (24) hours of the Servicer’s written request pursuant to a notice (which notice shall include sufficient information on the related Draws for the Purchaser to reconcile such Draws), remit the aggregate amount of any Draw requests to the Servicer (or its designee) in immediately available funds to the HELOC Funding Account (“Advance Funding of Draws”). Purchaser shall notify Servicer in which states Advance Funding of Draws is permitted.

(c) If Advance Funding of Draws is not permitted by Applicable Requirements, the Servicer shall fund the Draws from the HELOC Funding Account using Servicer’s own funds. On the Business Day following the Mortgagor’s receipt of the Draw, Purchaser shall pay the Servicer for any Draws and for the related Cost of Funds by transferring the full amount of such funds to Servicer’s general operating account. The Parties shall establish a Dedicated Account to serve as collateral for Purchaser’s timely performance of its obligation to pay under this Section 8.3(c). Purchaser shall at all times be obligated to maintain a minimum balance in the Dedicated Account (“Minimum Balance”) in an amount equal to the anticipated daily Draws from the HELOC Funding Account to be funded from Servicer’s own funds. Servicer shall provide daily

notice of the Minimum Balance obligation to Purchaser. If Purchaser fails to timely pay Servicer for any Draws and the related Cost of Funds, Servicer shall have the right to withdraw such unpaid Draws and the related Cost of Funds from the Dedicated Account pursuant to the Dedicated Account Control Agreement. If Purchaser fails to maintain the Minimum Balance, Servicer shall have no obligation to fund Draws from the HELOC Funding Account using Servicer’s own funds.

8.4 Additional HELOC-Specific Servicing Obligations . Servicer shall collect the Annual Fee, Early Closure Fee, and One-Time Draft Fee, each if applicable, as set forth in the related Credit Agreement. In the event that Servicer becomes aware of the occurrence of any event (i) permitting the termination and acceleration of the HELOC, or (ii) giving rise to a right to suspend Draws or reduce the credit limit of the HELOC, each in accordance with the terms of the Credit Agreement, Servicer shall take such action as the Servicer shall deem reasonably necessary to be in the best interest of the Purchaser in accordance with Accepted Servicing Practices. Servicer shall determine the daily periodic interest rate and the periodic finance charges and prepare and deliver billing statements, each in accordance with the terms of the Credit Agreement. Servicer shall obtain an appraisal or other type of valuation of the Mortgaged Property when the Servicer deems reasonably necessary to be in the best interest of the Purchaser in accordance with Accepted Servicing Practices.

8.5 Notice to Mortgagors . Upon boarding of each HELOC for the benefit of Purchaser, the Servicer shall deliver to each related Mortgagor (i) a “Welcome Letter” in accordance with RESPA, (ii) not later than thirty (30) days after each related Closing Date, a written notice meeting the requirements of Section 131(g) of the Truth in Lending Act identifying Purchaser as the new owner or assignee of the HELOC, each in accordance with Accepted Servicing Practices.

8.6 Establishment of and Deposits to the Custodial Account . With respect to the HELOCs, the Servicer shall establish and maintain one or more Custodial Accounts and shall deposit collections on the HELOCs in such Custodial Accounts in accordance with the terms of Section 4.04 of the Existing Servicing Agreement.

8.7 Permitted Withdrawals From Custodial Account . With respect to the HELOCs, Servicer shall be entitled to withdraw funds from the Custodial Account as provided in Section 4.05 of the Existing Servicing Agreement to reimburse itself for any Draws and for the related Cost of Funds as an additional permitted purpose to the extent not paid pursuant to Section 8.3(c) of this Agreement.

8.8 Servicing Advances . Servicer shall be reimbursed monthly for all unpaid Servicing Advances incurred by Servicer in the prior month. With respect to any Servicing Advances made by Servicer from its own funds under the terms of this Agreement, the Servicer shall be entitled to collect from the Purchaser monthly for the Cost of Funds on such Servicing Advances in the same manner as in the Existing Servicing Agreement.

8.9 Superior Liens . With respect to the second lien HELOCs, if the Servicer is notified that any superior lienholder has accelerated or intends to accelerate the obligations secured by the superior lien, or has declared or intends to declare a default under the superior mortgage or the promissory note secured thereby, or has filed or intends to file an election to have the related Mortgaged Property sold or foreclosed, the Servicer shall take whatever actions are necessary to

protect the interests of the Purchaser, and/or to preserve the security of the related HELOC, subject to any requirements applicable to real estate mortgage investment conduits pursuant to the Code as more fully described in Section 4.24 of the Existing Servicing Agreement. If a HELOC is identified on the Mortgage Loan Schedule as a second lien HELOC, then the Servicer may consent to the refinancing of the prior senior lien on the related Mortgaged Property, subject to the requirements set forth in Section 4.24 of the Existing Servicing Agreement.

8.10 Fidelity Bond, Errors and Omissions Insurance . During the applicable Servicing Period, the Servicer shall maintain with responsible companies that meet the requirements of Fannie Mae or any Investor in the HELOCs, at its own expense, a blanket Fidelity Bond and an Errors and Omissions Insurance Policy with broad coverage on all officers, employees or other persons acting in any capacity requiring such persons to handle funds, money, documents or papers relating to the HELOCs in accordance with the provisions of Section 4.12 of the Existing Servicing Agreement.

8.11 Right to Examine Servicer Records. Purchaser shall have the right to examine and audit any and all of the books, records, or other information of the Servicer, whether held by the Servicer or by another on its behalf, with respect to or concerning this Agreement or the HELOCs in accordance with the provisions of Section 6.05 of the Existing Servicing Agreement.

8.12 Reports to the Owner. Servicer shall furnish to the Purchaser standard monthly reports as set forth in Section 5.02 of the Existing Servicing Agreement.

8.13 Possession of Servicing Files. The contents of each Servicing File related to a HELOC are and shall be held in trust by the Servicer for the benefit of the Purchaser in accordance with the provisions of Section 6.01 of the Existing Servicing Agreement.

8.14 Limitation on Resignation and Assignment by Servicer . Servicer shall not assign this Agreement, or the servicing of the HELOCs or delegate its rights or duties hereunder or any portion hereof unless permitted under Section 9.03 of the Existing Servicing Agreement.

8.15 Termination . The Servicer’s duties, responsibilities and liabilities under the provisions of this Article VIII shall continue in full force and effect until terminated in accordance with the provisions of Article VIII of the Existing Servicing Agreement.

8.16 Cooperation of Servicer with a Reconstitution . The Servicer and the Purchaser agree that with respect to some or all of the HELOCs, on one or more Reconstitution Dates, at the Purchaser’s sole option, the Purchaser may effect a Reconstitution of some or all of the HELOCs then subject to this Agreement, without recourse, in accordance with the provisions of Article XII of the Existing Servicing Agreement.

ARTICLE 9

INDEMNIFICATION AND REPURCHASE

9.1 Indemnification and Limitation on Liability Related to Servicing . With respect to Servicing of the HELOCs, the Parties agree that the indemnification and limitation on liabilities provisions of Sections 9.01 and 9.02 of the Existing Servicing Agreement shall apply.

9.2 Repurchase Obligations Related to HELOCs . As further provided below, Seller shall have a repurchase obligation (“Repurchase Obligation”) with respect to any HELOC upon the occurrence of one or more of the following breaches affecting such HELOC:

(a) Upon the discovery by either the Seller or the Purchaser of a breach of any representation, warranty or covenant referenced in Article IV of this Agreement;

(b) Where the Seller fails to deliver, or fails to cause to be delivered, one or more original Collateral Files with respect to the HELOC, within one hundred and eighty (180) days after the related Closing Date, unless specifically caused by delays at the applicable county recorder’s office; or

Upon receipt of notice from the Purchaser of a breach set forth in this Section 9.2 with respect to any HELOC, if such breach is capable of being cured, the Seller shall have a period of forty (45) days from the date of the notice in which to cure such breach. If the Seller fails to cure such breach within this time frame, the Seller shall repurchase the affected HELOC by paying the Purchaser the related Repurchase Price immediately after the conclusion of the cure period. With respect to any breach set forth in this Section 9.2 that is not capable of being cured by the Seller, the Seller shall repurchase the affected HELOC by paying the Repurchase Price within five (5) Business Days after the earlier of (x) the date of its receipt of the notice, and (y) the date of its determination that such breach is incapable of being cured.

Seller expressly understands and agrees that no Repurchase Obligation with respect to any HELOC shall be affected in any way by: (i) the initiation or prosecution of a foreclosure proceeding, or the occurrence of a foreclosure sale, with respect to the HELOC (or the acceptance of a deed-in-lieu of foreclosure by Servicer on behalf of Purchaser); (ii) the transfer of title to the Mortgaged Property to the Purchaser or any third party; (iii) the modification of the HELOC by Purchaser, any subsequent Investor or the Servicer, (iv) the waiver of all or a portion of the unpaid principal balance of the HELOC by Purchaser, any subsequent Investor or the Servicer; or (v) any other action or omission by Purchaser, any subsequent Investor or the Servicer, including, without limitation, normal and customary servicing of the HELOC, including any loss mitigation efforts that affect or impair any rights or remedies against the Mortgagor under the terms of the HELOC or applicable Law, it being expressly understood that any such action or omission set forth in (i) through (v) above may have been required, reasonably necessary or desirable to mitigate any losses resulting from the breach giving rise to the Repurchase Obligation.

At the time of repurchase, the Purchaser and the Seller shall arrange for the reassignment of the repurchased HELOC to the Seller and the delivery to the Seller of the related Mortgage File and Collateral File held by the Purchaser, its Custodian, or the Servicer on behalf of the Purchaser relating to such HELOC.

9.3 Indemnification Related to HELOCs . In addition to the Repurchase Obligations set forth in Section 9.2, the Seller shall defend and indemnify the Purchaser and hold it harmless against any losses, damages, penalties, fines, forfeitures, judgments and any related costs including, without limitation, reasonable and necessary legal fees, resulting from any claim, demand, defense or liability based upon or arising out of (a) any act or omission on the part of the Seller in receiving, processing, funding or servicing any HELOC prior to the Closing Date, (b) any material breach by Seller of any of the terms of this Agreement to the extent not covered under Section 9.1, or (c) any circumstance giving rise to a Repurchase Obligation as set forth in Section 9.2. In addition to the obligations of the Seller set forth in this Article IX, the Purchaser may

pursue any and all remedies otherwise available at law or in equity, including, but not limited to, the right to seek damages.

ARTICLE 10

MI SCELLA NEOUS

10.1 Public Announcements . No Party shall issue or make any public announcement, press release or other public disclosure regarding this Agreement or its subject matter without the prior approval of the other Party, except for any such disclosure that is, in the opinion of the disclosing Party’s counsel, required by applicable Law or the rules of a stock exchange on which the securities of the disclosing Party are listed; provided, however, that Purchaser shall be entitled to disclose the existence and terms of this transaction and the identity of Seller (and its Affiliates) in connection with any securitization or sale transaction involving the HELOCs. If a Party is, in the opinion of its counsel, required by applicable Law or the rules of a stock exchange on which its securities are listed to make a public disclosure, such Party shall submit the proposed disclosure in writing as far in advance of the disclosure as practicable, to the other Party and provide the other Party a reasonable opportunity to comment thereon. The contents of any public announcement, press release or other public disclosure that has been reviewed and approved by the reviewing Party or that is consistent with the foregoing may then be re-released by any Party without a requirement for advance notice or re-approval.

10.2 Expenses . Whether or not the transactions contemplated hereby are consummated and, except as otherwise specified herein, unless otherwise provided herein each Party shall bear its own costs and expenses with respect to the transactions contemplated by this Agreement. Seller shall pay all initial recording fees, if any, for any Assignment of Mortgage, and all other fees, costs or expenses in transferring all original documents to the Custodian (or, upon written request of Purchaser, to Purchaser or Purchaser’s designee). Purchaser shall pay all fees and expenses of Purchaser’s Custodian. All other costs and expenses incurred in connection with the transfer and delivery of the HELOCs, including recording fees, shall be paid by Seller.

10.3 N otices . Unless otherwise specified herein, all notices required or permitted to be given under this Agreement shall be in writing and shall be delivered personally, sent by a nationally recognized overnight courier service, or transmitted by facsimile or email (receipt verified), and shall be deemed to be effective upon receipt. Any such notices shall be addressed to the receiving Party at such Party’s address, fax number or email address set forth below, or at such other address, fax number or email address as may from time to time be furnished by similar notice by either Party:

If to Seller: PennyMac Loan Services, LLC

3043 Townsgate Road

Westlake Village, CA 91361

Attn: Andrew S. Chang

Email: Andy.Chang@pnmac.com

If to Purchaser: PennyMac Corp.

3043 Townsgate Road

Westlake Village, CA 91361

Attn: Vandy Fartaj

Email: Vandy.Fartaj@pnmac.com

If to Servicer: PennyMac Loan Services, LLC

3043 Townsgate Road

Westlake Village, CA 91361

Attn: Director, Servicing Operations

Email: Steve.Bailey@pnmac.com

10.4 E ntire Agreeme nt; M odification . This Agreement and the related Purchase Confirmations (including all schedules, exhibits and attachments hereto and thereto) and the applicable provisions of the Existing Servicing Agreement, contain the entire agreement between the Parties with respect to the subject matter hereof and supersedes all previous agreements, negotiations, commitments and writings between the Parties with respect of the subject matter hereof, and may not be changed or modified in any manner unless in a written instrument duly approved by both Parties.

10.5 Severability . If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement.

10.6 No Waiver; Cumu lative Remedies . No failure to exercise and no delay in exercising, on the part of a Party hereto, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

10.7 Governing Law . This Agreement shall be construed in accordance with the substantive laws of the State of New York applicable to agreements made and to be performed entirely in such State, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. The parties hereto intend that the provisions of Section 5-1401 of the New York General Obligations Law shall apply to this Agreement.

10.8 WAIVER OF TRIAL BY JURY . EACH PARTY HERETO ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND, THEREFORE, EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH OR

RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

10.9 SUBMISSION TO JURISDICTION; WAIVERS . EACH PARTY HEREBY IRREVOCABLY (I) SUBMITS, FOR ITSELF IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE JURISDICTION OF ANY NEW YORK STATE AND FEDERAL COURTS SITTING IN THE BOROUGH OF MANHATTAN IN NEW YORK CITY WITH RESPECT TO MATTERS ARISING OUT OF OR RELATING TO THIS AGREEMENT; (II) AGREES THAT ALL CLAIMS WITH RESPECT TO ANY ACTION OR PROCEEDING REGARDING SUCH MATTERS MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURTS; (III) WAIVES, TO THE FULLEST POSSIBLE EXTENT, WITH RESPECT TO SUCH COURTS, THE DEFENSE OF AN INCONVENIENT FORUM; AND (IV) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.

10.10 Counterparts . This Agreement, and the related Purchase Confirmations and any amendment or supplement hereto or theretomay be executed in any number of counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. This Agreement and the related Purchase Confirmations may be executed and delivered by facsimile or any other electronic means, including “.pdf” or “.tiff” files, and any facsimile or electronic signature shall constitute an original for all purposes.

10.11 Assignments . Except as set forth in Section 8.12, neither Party shall be permitted to assign this Agreement or any of its rights or obligations under this Agreement, directly or by operation of law or otherwise, without the other Party’s express, prior written consent. Any such purported assignment or sublicense in violation of this Agreement shall be null and void ab initio .

10.12 No Third Party Beneficiar ies . This Agreement is for the sole benefit of the Parties and their permitted assigns and nothing herein, express or implied, shall give or be construed to give to any Person, other than the Parties and such permitted assigns, any legal or equitable rights hereunder.

10.13 Further Assu rances . Subject to the terms and conditions of this Agreement, at any time or from time to time after the execution of this Agreement, Seller including in its role as Servicer, at its own expense, shall execute and deliver such instruments of transfer, provide such materials and information and take such other actions as may reasonably be necessary, proper or advisable, to the extent permitted by Law, to fulfill its obligations under this Agreement.

10.14 No Solicitation . From and after each Closing Date, Seller shall not take any action or permit or cause any action to be taken by any of its agents or subsidiaries, or by any independent contractors on its behalf, to personally, by telephone or mail, solicit the Mortgagor or obligor to refinance a HELOC without the prior written consent of Purchaser. Nothing herein shall preclude Purchaser or Seller from responding to an unsolicited request from a Mortgagor.

Notwithstanding the foregoing, it is understood and agreed that Seller:

(a) may advertise its availability for handling refinancings of mortgages in its portfolio, including loans to consolidate first and second lien mortgages, including the promotion of terms it has available for such refinancings, through the sending of letters or promotional material, so long as it does not specifically target Mortgagors and so long as such promotional material either is sent to the mortgagors for all of the mortgages meeting designated criteria in the servicing portfolio of Seller (those it owns as well as those serviced for others) or sent to all of the Mortgagors who have specific types of mortgages (such as FHA, VA, conventional fixed-rate or conventional adjustable-rate other than HELOCs), or sent to those Mortgagors whose mortgages fall within specific interest rate ranges;

(b) may provide pay-off information and otherwise cooperate with individual Mortgagors who contact it about prepaying their mortgages by advising them of refinancing terms and streamlined origination arrangements that are available; and,

(c) may offer to refinance a HELOC made within thirty (30) days following receipt by it of a pay-off request from the related Mortgagor.

Promotions undertaken by Seller or any of its subsidiaries which are directed to the general public at large (including, without limitation, mass mailing based on commercially acquired mailing lists, newspaper, radio and television advertisements), shall not constitute solicitation under this Section 10.14.

10.15 Amendment . This Agreement may be amended from time to time by Seller and Purchaser by an executed written agreement.

10.16 Reproduction of Documents . This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by any party at the closing, and (c) financial statements, certificates and other information previously or hereafter furnished, may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The Parties agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.

(Signature Page Follows)

IN WITNESS WHEREOF , this Agreement has been executed and delivered by the authorized officers of Purchaser and Seller as of the date first above written.

	PENNYMAC LOAN SERVICES, LLC, as Seller and Servicer


	By:	/s/ Andrew S. Chang
		Name: Andrew S. Chang
		Title: Senior Managing Director and Chief Financial Officer

[Signature Page to HELOC Flow Purchase Agreement]


	PENNYMAC CORP., as Purchaser


	By:	/s/ Vandad Fartaj
		Name: Vandad Fartaj
		Title: Senior Managing Director and Chief Investment Officer

[Signature Page to HELOC Flow Purchase Agreement]

SCHEDULE 1

SERVICING FEES

Monthly Base Servicing Fee (per HELOC):

37.5 basis points times 1/12 times the HELOC unpaid principal balance as of the first day of the relevant month

Additional Monthly Fees for Delinquent Loans:

With respect to each HELOC, an additional monthly Servicing Fee shall apply in the following circumstances:

(i) if, as of the first day of the relevant month, such HELOC is delinquent by 30 days or more and less than 60 days, and no bankruptcy proceeding is pending by or against the Mortgagor and no foreclosure proceeding has been initiated, $10.00;

(iii) if, as of the first day of the relevant month, such HELOC is delinquent by 60 days or more and less than 90 days, and no bankruptcy proceeding is pending by or against the Mortgagor and no foreclosure proceeding has been initiated, $20.00;

(iv) if, as of the first day of the relevant month, such HELOC is delinquent by 90 days or more, and no bankruptcy proceeding is pending by or against the Mortgagor and no foreclosure proceeding has been initiated, $75.00;

(v) if, as of the first day of the relevant month, a bankruptcy proceeding is pending by or against the Mortgagor, $45.00;

(vi) if, as of the first day of the relevant month, foreclosure proceedings on either the HELOC or a superior lien have been commenced, $55.00; or,

(vii) if, as of the first day of the relevant month, the Mortgaged Property has become an REO Property, $75.00.

ANCILLARY INCOME AND OTHER FEES

The Servicer shall be entitled to the following Ancillary Income and Other Fees related to HELOCs, which are paid by the Mortgagor unless indicated below:

Annual Fee:	Servicer will retain $50 (when charged); Purchaser receives remainder.
Early Closure Fee:	Purchaser receives 100%.
One-Time Draft Fee:	Servicer will retain 100%.
Late Charges Collected:	Servicer will retain 75%; Purchaser receives 25%.

NSF Fee:	Servicer will retain 100%.
Draw Administration Fee:	$0
Line Increase Fee:	N/A
Line Decrease or Freeze Fee:	$50; Paid by Purchaser; Servicer will retain 100%.
Completed Repayment Plan Fee:	$200; Paid by Purchaser; Servicer will retain 100%.
Assumption Fee:	N/A
Setup Fee:	$10 for electronic boarding; $25 for manual boarding; Paid by Purchaser; Servicer will retain 100%.
Service Release Fee:	N/A
Subordination Fee:	$300; Servicer will retain 100%.
Deed in Lieu Fee:	$1,750; Paid by Purchaser; Servicer will retain 100%.
Loan Modification Fee:	$1,750; Paid by Purchaser; Servicer will retain 100%.
Short Sale Fee:	$1,750; Paid by Purchaser; Servicer will retain 100%.
Lien Release Fee:	Servicer will retain 100%.

EXHIBIT A

CONTENTS OF COLLATERAL FILE

With respect to each HELOC, the Collateral File shall include each of the following items, originals or copies of which shall be delivered by Seller to Purchaser or Purchaser’s Custodian as specified below:

(A) The original Credit Agreement together with any applicable riders, bearing all intervening endorsements necessary to show a complete chain of endorsements from the original payee to the last endorsee, endorsed (on the Credit Agreement or an allonge attached thereto) “Pay to the order of ________________ without recourse,” and signed in the name of the last endorsee by a duly qualified officer of the last endorsee.

(B) Except as provided below, the original Mortgage with evidence of recording thereon. If the original Mortgage has not been returned from the applicable public recording office or if such public recording office retains the original recorded mortgage, a true and complete copy of the original Mortgage which has been delivered for recording in the appropriate public recording office of the jurisdiction in which the Mortgaged Property is located.

(C) With respect to any HELOCs not registered with MERS, the original Assignment of Mortgage, in blank, executed via original signature, which assignment shall be in form and substance acceptable for recording (except for the insertion of the name of the assignee and the related Mortgage recording information).

(D) The (i) original policy of title insurance, or (ii) with respect to HELOCs covered by a Master Secondary Loan Policy acquired from Old Republic Home Protection and/or an errors and omissions policy, a copy of such policy or policies. In each case, if delivered electronically, a copy of the electronic copy, or, if the policy has not yet been issued an electronic copy of the written commitment or interim binder issued by the title insurance company, dated and certified as of the date the HELOC was funded, with a statement by the title insurance company or closing attorney on such binder or commitment that the priority of the lien of the related Mortgage during the period between the date of the funding of the related HELOC and the date of the related title policy (which title policy shall be dated the date of recording of the related Mortgage) is insured.

(E) With respect to any HELOCs not registered with MERS or that was not a MOM Loan at origination, originals of all intervening Assignments of Mortgage (if applicable), with evidence of recording thereon, showing a complete chain of title from the originator to the last assignee. If the original Assignment of Mortgage has not been returned from the applicable public recording office, a duplicate copy of the original Assignment of Mortgage which has been

delivered for recording, certified by Seller. If any such intervening Assignment of Mortgage has been lost or if such public recording office retains the original recorded intervening Assignments of Mortgage, a copy of the instrument certified as recorded by the jurisdiction in which the related Mortgaged Property is located certified by Seller to be a true and complete copy of such Assignments of Mortgage.

(F) Originals of all assumption, modification, consolidation or extension agreements, if any, with evidence of recording thereon where required by applicable Law, or if any such assumption, modification, consolidation or extension agreement has not been returned from the applicable public recording office or has been lost or if such public recording office retains the original recorded document, a true and complete photocopy of such document.

(G) If the Credit Agreement or Mortgage was executed pursuant to a power of attorney or other instrument that authorized or empowered such Person to sign, the original power of attorney (or such other instrument), with evidence of recording thereon, unless such originals are permanently retained by the applicable recording office (in which event, a true and correct copy of each such original).

(H) The original of the guarantee executed in connection with the Credit Agreement (if any).

(I) The original of any security agreement, chattel mortgage or equivalent document executed in connection with the Mortgage.

EXHIBIT B

REPRESENTATIONS AND WARRANTIES AS TO INDIVIDUAL LOANS

Seller makes the following representations and warranties to the Purchaser with respect to each purchased HELOC as of the related Closing Date or such other date as referenced herein.

(a) Payments Current . All payments required to be made prior to the related Closing Date for the HELOC under the terms of the Credit Agreement have been made and credited. No payment required under the HELOC is delinquent nor has any payment under the HELOC been delinquent at any time since the origination of the HELOC.

(b) No Outstanding Charges . All taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established, to the extent required under the related Mortgage and as permitted by applicable law, in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable.

(c) Original Terms Unmodified . The terms of the Credit Agreement and Mortgage have not been impaired, waived, altered or modified in any respect, from the date of origination; except by a written instrument which has been or is in the process of being recorded, if necessary to protect the interests of the Purchaser. The substance of any such waiver, alteration or modification has been approved by the title insurer, to the extent required. No Mortgagor in respect of the HELOC has been released, in whole or in part, except in connection with an assumption agreement approved by the title insurer, to the extent required by such policy, and which assumption agreement is part of the Mortgage File.

(d) No Defenses . The Credit Agreement and the Mortgage are not subject to any right of rescission, set-off, counterclaim or defense, including, without limitation, the defense of usury, nor will the operation of any of the terms of the Credit Agreement or the Mortgage, or the exercise of any right thereunder, render either the Credit Agreement or the Mortgage unenforceable, in whole or in part and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto, and no Mortgagor in respect of the HELOC was a debtor in any state or Federal bankruptcy or insolvency proceeding at the time the HELOC was originated. Seller has no knowledge nor has it received any notice that any Mortgagor in respect of the HELOC is a debtor in any state or federal bankruptcy or insolvency proceeding and the Mortgaged Property was not subject to any bankruptcy or foreclosure proceedings during the time period set forth in the related Underwriting Guidelines.

(e) Hazard Insurance . The Mortgaged Property (including all buildings and improvements thereon) is insured by a fire and extended perils insurance policy, issued by a Qualified Insurer, and such other hazards as are covered under a standard extended

coverage endorsement and are customary in the area where the Mortgaged Property is located, in an amount not less than the greatest of (i) 100% of the replacement cost of all improvements to the Mortgaged Property, (ii) the outstanding principal balance of the HELOC, or (iii) the amount necessary to avoid the operation of any co-insurance provisions with respect to the Mortgaged Property. At origination of the HELOC, if any portion of the Mortgaged Property is in an area identified by any federal Governmental Entity as having special flood hazards, and flood insurance is available, a flood insurance policy meeting the then-current guidelines of the Federal Emergency Management Agency is in effect with a generally acceptable insurance carrier, in an amount representing coverage not less than the least of (1) the outstanding principal balance of the HELOC (2) the full insurable value of the Mortgaged Property, and (3) the maximum amount of insurance available under the National Flood Insurance Act of 1968, as amended by the Flood Disaster Protection Act of 1973. With respect to a HELOC secured by a condominium unit, it is included under the coverage afforded by a blanket policy for the project. All such insurance policies (collectively, the “hazard insurance policy”) contain a standard mortgagee clause naming Seller, its successors and assigns, as mortgagee, and may not be reduced, terminated or canceled without 30 days’ prior written notice to the mortgagee. No such notice has been received by Seller. All premiums due on such insurance policy prior to the related Closing Date have been paid. The related Mortgage obligates the Mortgagor to maintain all such insurance and, at such Mortgagor’s failure to do so, authorizes the mortgagee to maintain such insurance at the Mortgagor’s cost and expense and to seek reimbursement therefor from such Mortgagor. Where required by applicable state law or regulation, the Mortgagor has been given an opportunity to choose the carrier of the required hazard insurance, provided the policy is not a “master” or “blanket” hazard insurance policy covering a condominium, or any hazard insurance policy covering the common facilities of a planned unit development. The hazard insurance policy is the valid and binding obligation of the insurer and is in full force and effect and will be in full force and effect and inure to the benefit of the Purchaser upon the consummation of the transactions contemplated by this Agreement, except as enforceability may be limited by (i) applicable bankruptcy, insolvency, liquidation, receivership, moratorium, reorganization or other similar laws relating to or affecting the enforcement of insurance policies and (ii) general principles of equity. Seller has not engaged in, and has no knowledge of the Mortgagor’s having engaged in, any act or omission which would impair the coverage of any such policy, the benefits of the endorsement provided for herein, or the validity and binding effect of either including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by Seller.

(f) Compliance with Applicable Laws . Any and all requirements of any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the HELOC have been complied with, the consummation of the transactions contemplated hereby will not involve the violation of any such laws or regulations, and Seller shall maintain or shall cause its agent to maintain in its possession, available for the inspection by the Purchaser, and shall deliver to the Purchaser, upon demand, evidence of compliance with all such requirements.

(g) No Satisfaction of Mortgage . The Mortgage has not been satisfied, canceled or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would affect any such release, cancellation or rescission. Seller has not waived the performance by the Mortgagor of any action, if the Mortgagor’s failure to perform such action would cause the HELOC to be in default, nor has Seller waived any default resulting from any action or inaction by the Mortgagor.

(h) Location and Type of Mortgaged Property . The Mortgaged Property is located in the United States or a territory of the United States and consists of a single parcel of real property with a detached single family residence erected thereon, or a two- to four-family dwelling, or an individual condominium unit in a condominium project, or an individual unit in a planned unit development or a townhouse; provided that no residence or dwelling is a mobile home. No portion of the Mortgaged Property is used for commercial purposes; provided, that, the Mortgaged Property may be a mixed use property or a rental property if such Mortgaged Property conforms to the Underwriting Guidelines and use of a portion of the Mortgaged Property as a home office shall not be considered use for a commercial purpose.

(i) Valid First or Second Lien . The Mortgage is a valid, subsisting, enforceable and, with respect to a HELOC other than a second lien HELOC, perfected first priority lien and first priority security interest or, with respect to a second lien HELOC, a second lien and a second priority security interest, in each case, on the real property included in the Mortgaged Property, including all buildings and improvements on the Mortgaged Property. The appraisal of the Mortgaged Property does not list any material repair or maintenance items. The lien of the Mortgage is subject only to:

(i) the lien of current real property taxes and assessments not yet due and payable;

(ii) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording acceptable to prudent mortgage lending institutions generally in the area where the related Mortgaged Property is located and specifically referred to in lender’s title insurance policy or the title insurance policy equivalent delivered to the originator of the HELOC and (a) referred to or otherwise considered in the appraisal made for the originator of the HELOC or (b) which do not adversely affect the Appraised Value of the Mortgaged Property set forth in such appraisal;

(iii) with respect to a second lien HELOC, a first lien; and

(iv) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property.

To the extent applicable, any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the HELOC establishes and creates a valid, subsisting and enforceable, with respect to a HELOC other than a second lien HELOC, first lien and first priority security interest or, with respect to a second lien HELOC, a second lien and second priority security interest, in each case, on the property described therein and Seller has full right to pledge and assign the same to the Purchaser. The Mortgaged Property was not, as of the date of origination of the HELOC, subject to a mortgage, deed of trust, deed to secure debt or other security instrument creating a lien subordinate to the lien of the HELOC.

(j) Validity of Mortgage Documents . The Credit Agreement and the Mortgage and any other agreement executed and delivered by a Mortgagor or guarantor, if applicable, in connection with a HELOC, and all signatures thereon, are genuine, and each such document is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and general principles of equity, whether enforcement is sought in a proceeding in equity or at law. All parties to the Credit Agreement, the Mortgage and any other such related agreement had legal capacity to enter into the HELOC and to execute and deliver the Credit Agreement, the Mortgage and any such agreement, and the Credit Agreement, the Mortgage and any other such related agreement have been duly and properly executed by such related parties. No fraud, error, omission, misrepresentation, negligence or similar occurrence with respect to a HELOC has taken place on the part of (i) any Person, including, without limitation, the Mortgagor, any appraiser, any builder or developer, or any other party involved in the origination, sale or servicing of the HELOC, (ii) in the application of any insurance in relation to such HELOC, or (iii) that would impair in any way the rights of the Purchaser in such HELOC or the related Mortgaged Property or that violated applicable law. Seller has reviewed all of the documents constituting the Mortgage File and has made such inquiries as it deems necessary to make and confirm the accuracy of the representations set forth herein. To the best of Seller’s knowledge, except as disclosed to the Purchaser in writing, all tax identifications and property descriptions are legally sufficient; and tax segregation, where required, has been completed.

(k) [Reserved] .

(l) Ownership . Seller has full right to sell the HELOC to the Purchaser free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest, and has full right and authority subject to no interest or participation of, or agreement with, any other party, to sell each HELOC pursuant to this Agreement and immediately following the sale of each HELOC, the Purchaser will own such HELOC free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest except any such security interest created pursuant to the terms of this Agreement.

(m) Doing Business . All parties which have had any interest in the HELOC, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance with any and all

applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (ii) either (A) organized under the laws of such state, (B) qualified to do business in such state, (C) a federal savings and loan association, a savings bank or a national bank having a principal office in such state, or (D) not doing business in such state.

(n) Title Insurance . Except if the related Underwriting Guidelines do not require title insurance, the HELOC is covered by either (i) an attorney’s opinion of title and abstract of title, the form and substance of which is acceptable to prudent mortgage lending institutions making mortgage loans in the area wherein the Mortgaged Property is located or (ii) except with respect to HELOCs covered by a Master Secondary Loan Policy acquired from Old Republic Home Protection and/or an errors and omissions policy approved by the Buyer in its sole discretion, an ALTA lender’s title insurance policy or other generally acceptable form of policy or insurance acceptable to Fannie Mae or Freddie Mac or acceptable pursuant to the applicable Underwriting Guidelines and each such title insurance policy or such other acceptable form of policy or insurance is issued by a Qualified Insurer, insuring Seller, its successors and assigns, as to the first priority lien or second priority lien, as applicable, of the Mortgage, in the original principal amount of the HELOC, subject only to the exceptions contained in clauses (i)-(iv) of paragraph (i) of this Exhibit B. Additionally, such title insurance policy affirmatively insures ingress and egress, and against encroachments by or upon the related Mortgaged Property or any interest therein. Where required by state law or regulation, the Mortgagor has been given the opportunity to choose the carrier of the required insurance. Seller, its successors and assigns, are the sole insureds of such lender’s title insurance policy, the assignment to the Purchaser of the Seller’s interest in such title insurance policy does not require any consent or notification to the insurer which has not been obtained or made, and such lender’s title insurance policy is valid and remains in full force and effect and will be in force and effect upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such lender’s title insurance policy, and no prior holder or servicer of the related Mortgage, including Seller, has done, by act or omission, anything which would impair the coverage of such lender’s title insurance policy, including without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by Seller.

(o) No Defaults . There is no default, breach, violation or event of acceleration existing under the Mortgage or the Credit Agreement and no event has occurred which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and neither Seller nor its predecessors have waived any default, breach, violation or event of acceleration.

(p) No Mechanics’ Liens . There are no mechanics’ or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage, except for such liens as are expressly insured against by a title insurance policy referred to in (n) above.

(q) Location of Improvements; No Encroachments . All improvements which were considered in determining the Appraised Value of the Mortgaged Property lie wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property. No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning and building law, ordinance or regulation and the Seller has not received any notice of noncompliance with any applicable use or zoning law, building law, occupancy law, ordinance, regulation, standard, license or certificate with respect to such Mortgaged Property.

(r) Origination; Payment Terms . The HELOC was originated by or in conjunction with a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, a savings and loan association, a savings bank, a commercial bank, credit union, insurance company or similar institution which is supervised and examined by a federal or state authority. The Mortgage Interest Rate on each HELOC adjusts periodically in accordance with the Credit Agreement. On each Interest Rate Adjustment Date prior to the related Closing Date, if any, the Seller or its agent has made interest rate adjustments, as applicable, on the HELOC which are in compliance with the related Mortgage, Credit Agreement and applicable law.

(s) Customary Provisions . The Credit Agreement has a stated maturity. The Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby. There is no homestead or other exemption or other right available to the Mortgagor or any other person, or restriction on Seller or any other person, including without limitation, any federal, state or local, law, ordinance, decree, regulation, guidance, attorney general action, or other pronouncement, whether temporary or permanent in nature, that would interfere with, restrict or delay, either (y) the ability of Seller, the Purchaser or any servicer or any successor servicer to sell the related Mortgaged Property at a trustee's sale or otherwise, or (z) the ability of Seller, the Purchaser or any servicer or any successor servicer to foreclose on the related Mortgage.

(t) Occupancy of the Mortgaged Property . At origination and, to the best of the Seller’s knowledge, as of the related Closing Date, the Mortgaged Property is lawfully occupied in accordance with the related Mortgage and under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and, if applicable, fire underwriting certificates, have been made or obtained from the appropriate authorities. Seller has not received notification from any Governmental Entity that the Mortgaged Property is in material non-compliance with such laws or regulations, is being used, operated or occupied unlawfully or has failed to have or obtain such inspection, licenses or certificates, as the case may be. Seller has not received notice of any violation or failure to conform with any such law, ordinance, regulation, standard, license or certificate.

(u) No Additional Collateral . The Credit Agreement is not and has not been secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in clause (i) above.

(v) Deeds of Trust . In the event the Mortgage constitutes a deed of trust, a trustee, authorized and duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the mortgagee or the trust to the trustee under the deed of trust, except in connection with a trustee’s sale after default by the Mortgagor.

(w) Transfer of HELOCs . Except with respect to HELOCs registered with MERS, the Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located.

(x) Due-On-Sale . The Mortgage contains an enforceable provision, to the extent not prohibited by applicable law as of the date of such Mortgage, for the acceleration of the payment of the unpaid principal balance of the HELOC in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder.

(y) No Buydown Provisions; No Graduated Payments or Contingent Interests . The HELOC does not contain provisions pursuant to which Monthly Payments are paid or partially paid with funds deposited in any separate account established by Seller, the Mortgagor, or anyone on behalf of the Mortgagor, or paid by any source other than the Mortgagor nor does it contain any other similar provisions which may constitute a “buydown” provision. The HELOC is not a graduated payment mortgage loan and the HELOC does not have a shared appreciation or other contingent interest feature.

(z) Consolidation of Draws . Any Draws made prior to the related Closing Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The consolidated principal amount does not exceed the Credit Limit of the HELOC.

(aa) No Condemnation Proceeding . There have not been any proceedings pending and, to the best of the Seller’s knowledge, threatened for the total or partial condemnation of the Mortgaged Property.

(bb) Origination; Collection Practices; Escrow Deposits; Interest Rate Adjustments . The origination and collection practices used with respect to the HELOC have been in all respects in compliance with Accepted Servicing Practices, applicable laws and regulations, and have been in all respects legal and proper. With respect to escrow deposits and Escrow Payments, all such payments are in the possession of, or under the control of, Seller and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All Escrow Payments have been collected in full compliance with applicable state and federal law. An escrow

of funds is not prohibited by applicable law and has been established in an amount sufficient to pay for every item that remains unpaid and has been assessed but is not yet due and payable. No escrow deposits or Escrow Payments or other charges or payments due the Seller have been capitalized under the Mortgage or the Credit Agreement.

(cc) Servicemembers Civil Relief Act . The Mortgagor has not notified Seller, and Seller has no knowledge, of any relief requested or allowed to the Mortgagor under the Servicemembers Civil Relief Act of 2003.

(dd) Appraisal . The Mortgage File contains either (i) any property valuation acceptable to the Buyer in its sole discretion, or (ii) an appraisal of the related Mortgaged Property signed prior to the funding of the HELOC by a qualified appraiser, duly appointed by Seller, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the HELOC, and the appraisal and appraiser both satisfy the requirements of Fannie Mae or Freddie Mac and Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 as amended and the regulations promulgated thereunder, all as in effect on the date the HELOC was originated.

(ee) [Reserved] .

(ff) Construction of Mortgaged Property . No HELOC was made in connection with the construction of a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged Property.

(gg) Capitalization of Interest . The Credit Agreement does not by its terms provide for the capitalization or forbearance of interest.

(hh) No Equity Participation . No document relating to the HELOC provides for any contingent or additional interest in the form of participation in the cash flow of the Mortgaged Property or a sharing in the appreciation of the value of the Mortgaged Property. The indebtedness evidenced by the Credit Agreement is not convertible to an ownership interest in the Mortgaged Property or the Mortgagor and Seller has not financed nor does it own directly or indirectly, any equity of any form in the Mortgaged Property or the Mortgagor.

(ii) [ Reserved] .

(jj) [ Reserved] .

(kk) Mortgage Submitted for Recordation . The Mortgage either has been or will promptly be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. Except with respect to HELOCs registered with MERS, all subsequent assignments of such original Mortgage have been or will be recorded in the appropriate jurisdictions in which such recordation is necessary to perfect the liens against creditors of the Seller.

(ll) Other Encumbrances . To the best of Seller’s knowledge, any property subject to any security interest given in connection with the HELOC is not subject to any other encumbrances other than a stated first mortgage with respect to a first lien HELOC or, with respect to a second lien HELOC, a stated second mortgage and encumbrances which may be allowed under the related Underwriting Guidelines.

(mm) Description . Each HELOC conforms to the description thereof as set forth on the related Mortgage Loan Schedule in all material respects. The information on the related Mortgage Loan Schedule correctly and accurately reflects the information contained in the related collateral file and the Seller’s records in all material respects.

(nn) Located in U.S. No collateral (including, without limitation, the related real property and the dwellings thereon and otherwise) relating to a HELOC is located in any jurisdiction other than in one of the fifty (50) states of the United States or a territory of the United States.

(oo) Underwriting Guidelines . Each HELOC has been originated in accordance with the related Underwriting Guidelines in effect at time of origination of such HELOC; provided, however, any HELOC not underwritten in conformance with the applicable Underwriting Guidelines has been marked as an exception loan on the related Mortgage Loan Schedule and such HELOC has documented compensating factors supporting the underwriting decision. The methodology used in underwriting the extension of credit for such HELOC employs objective mathematical principles which relate to the relationship between the Mortgagor’s income, assets, and liabilities and the proposed payment. To the extent required by the applicable Underwriting Guidelines, the source of the down payment with respect to the HELOC has been verified by the related originator in accordance with such Underwriting Guidelines.

(pp) [Reserved] .

(qq) [Reserved] .

(rr) Predatory Lending Regulations; High Cost Loans . None of the HELOCs are classified as High Cost Loans regardless of whether the originator or the Seller is exempted from applicable state or local law by virtue of federal preemption; provided that, any HELOC secured by a Mortgaged Property in Illinois characterized as a “threshold” loan shall not be a “high cost” loan unless it is characterized as “predatory” under applicable local law. No HELOC has an “annual percentage rate” or total “points and fees” payable by the related Mortgagor (as each such term is defined under the Home Ownership and Equity Protection Act of 1994 (“HOEPA”)) that exceed the thresholds set forth by HOEPA and its implementing regulations, including 12 C.F.R. § 226.32(a)(1)(i) and (ii). No HELOC has a percentage listed under the Indicative Loss Severity Column (the column that appears in the then-current Standard & Poor’s LEVELS® Glossary of Terms on Appendix E ).

(ss) [Reserved ] .

(tt) [ Reserved] .

(uu) Negative Amortization . No Credit Agreement relating to a HELOC provides for negative amortization.

(vv) [Reserved]

(ww) Ability to Repay . Notwithstanding anything to the contrary set forth in this Agreement, on and after January 10, 2014 (or such later date as set forth in the relevant regulations), prior to the origination of each HELOC, the originator made a reasonable and good faith determination that the Mortgagor had a reasonable ability to repay the loan according to its terms, in accordance with, at a minimum, the eight underwriting factors set forth in 12 CFR 1026.43(c); provided that a modification subsequent to the date listed above shall not be considered an “origination” of a HELOC or a “covered transaction” as long as no new Credit Agreement is executed and delivered and the interest rate of the related HELOC is not increased.

(xx) [Reserved] .

(yy) [Reserved] .

(ddd ) Property Value . Seller has delivered an appraisal or a property valuation acceptable to the Buyer in its sole discretion, as applicable. The person performing such property valuation received no benefit from, and such person’s compensation or flow of business from the Seller were not affected by, the acquisition of the HELOC by the Seller or any other applicable transferee.

(eee) Terms . With respect to the HELOC, the related Mortgagor may request advances up to the Credit Limit within the first (1st) ten (10) years following the date of origination, subject to termination or suspension under the terms of the related Credit Agreement.

(fff) Revolving Term . Each HELOC provides for an initial period (the “Revolving Period”) during which the Mortgagor is required to make monthly payments of interest payable in arrears and requires repayment of the unpaid principal balance thereof over a period following the Revolving Period (the “Repayment Period”), which is not in excess of tow hundered and forty (240) months. As of the related Closing Date, no HELOC was in its Repayment Period.

(ggg) Draws in Compliance with Laws . Each Draw under the HELOC has been disbursed in accordance with all applicable laws, rule and regulations, including, without limitation, all applicable state and local licensing requirements.

(hhh) Enforcement of Remedies . Each Credit Agreement permits the holder to enforce its full remedies, including the right to suspend or terminate the right to make additional Draws or to reduce the Credit Limit if (i) the value of the related Mortgaged Property declines significantly, (ii) the Mortgagor’s financial circumstances materially change, or (iii) certain other events occur, including a material event of default by the Mortgagor, as described in the related Credit Agreement.

(iii) Mortgagor . Each Mortgagor is a natural person and/or trustee for an Illinois land trust or a trustee under a “living trust” and such “living trust” is in compliance with Fannie Mae or Freddie Mac guidelines applicable at the time of origination of the related HELOC. In the event the Mortgagor is a trustee of a “living trust,” such trustee is a natural person and is an obligor under the related Credit Agreement in his or her individual capacity. The Mortgagor is (i)(x) either a United States citizen or (y) a permanent resident alien who has the right to legally live and work permanently in the United States or a territory of the United States, or (ii) an eligible Mortgagor pursuant to, and in accordance with, the applicable Underwriting Guidelines and legally permitted to reside in the United States or a territory of the United States. Evidence of residency status for a permanent resident alien has been validated by documentation acceptable to Fannie Mae or Freddie Mac.

(jjj) No Primary Mortgage Insurance . No HELOC is insured by a primary mortgage guaranty insurance.

(kkk) Qualified Mortgage . Each HELOC constitutes a qualified mortgage under Section 860G(a)(3)(A) of the Code and Treasury Regulation Section 1.860G-2(a)(1).

(lll) Single Premium Credit Life Insurance . The related Mortgagor was not required to purchase any credit life, credit disability, credit unemployment, credit property, accident or health insurance product as a condition of obtaining the extension of credit. None of the proceeds of such HELOC were used to purchase or finance a single premium credit insurance policy as part of the origination of, or as a condition to the closing of such HELOC.

(mmm) Higher Cost Products . The related Mortgagor was not encouraged or required to select such loan product offered by the originator that was a higher cost product designed for less creditworthy borrowers, unless at the time of such HELOC’s origination, such Mortgagor did not qualify, taking into account credit history and debt-to-income ratios, for a lower cost credit product then offered by such originator or an affiliate of such originator. If, at the time of loan application, the related Mortgagor may have qualified for a lower cost credit product then offered by the related originator or any mortgage lending affiliate of such originator, such originator referred such Mortgagor’s application to such affiliate for underwriting consideration.

(nnn) No Mandatory Arbitration . With respect to such HELOC, neither the related Mortgage nor the related Credit Agreement requires the related Mortgagor to submit to arbitration to resolve any dispute arising out of or relating in any way to the mortgage loan transaction.

(ooo) No Litigation Pending . There is no action, suit, proceeding or investigation pending, or to the best of the Seller’s knowledge, threatened, that is related to the HELOC and likely to materially and adversely affect such HELOC.

EXHIBIT C

FORM OF PURCHASE CONFIRMATION

This PURCHASE CONFIRMATION (this “Purchase Confirmation”), dated as of ________, 20__ (the “ Closing Date ”), is entered into by and between PennyMac Loan Services, LLC, a Delaware limited liability company (“ Seller ”), and PennyMac Corp., a Delaware corporation (“ Purchaser ”), pursuant to that certain HELOC Flow Purchase and Servicing Agreement Agreement, dated as of February 25, 2019 (the “Purchase Agreement”), by and between Purchaser and Seller. Each capitalized term used but not otherwise defined herein shall have the meaning ascribed thereto in the Purchase Agreement.

In consideration of the mutual representations, warranties, and covenants set forth in the Purchase Agreement and herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged:

1. Purchaser agrees (a) to purchase from Seller, on and as of the Closing Date, and on the terms and subject to the conditions set forth in the Purchase Agreement and herein, each Loan specified in the Mortgage Loan Schedule attached as Schedule 1 hereto, and (b) to pay Seller, on the Closing Date by wire transfer of immediately available funds to the account designated by Seller, the Purchase Price as follows:

Closing Date:
Purchase Price Percentage:
Aggregate Principal Balance:	x
Base Purchase Price:	=
Aggregate Accrued Interest:	+
HELOC Origination Fee	+ $1,500
PURCHASE PRICE	=

2. Seller hereby assigns, conveys, grants, sells, transfers, and releases to Purchaser, on and as of the Closing Date, and on the terms and subject to the conditions set forth in the Purchase Agreement and herein, indefeasible and marketable title — free and clear of all conditions, encumbrances, and other restrictions — to all interest, right, and title of Seller in and to each Loan specified in the Mortgage Loan Schedule, including without limitation the exclusive right to own, possess, and control all rights to: (a) all Loan proceeds received at any time on or after the Closing Date; (b) the Collateral File and the Mortgage File and all documents and instruments therein at all times on and after the Closing Date except as otherwise set forth in the Purchase Agreement; and (c) all other benefits, duties, obligations, powers, privileges, responsibilities, and rights arising out of, resulting from, or relating to any or all of the foregoing at all times on and after the Closing Date.

[Signature Page Follows]

IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Purchase Confirmation to be duly executed by their respective officers hereunder duly authorized, as of the Closing Date.


	SELLER:

	PENNYMAC LOAN SERVICES, LLC

	By:

	Name:

	Title:


	PURCHASER:

	PENNYMAC CORP.

	By:

	Name:

	Title:

SCHEDULE 1

TO THE PURCHASE CONFIRMATION

MORTGAGE LOAN SCHEDULE

Exhibit 10.5


PLS REGULAR FACILITY	EXECUTION

AMENDMENT NO. 6 TO

THIRD AMENDED AND RESTATED MASTER REPURCHASE AGREEMENT

Amendment No. 6 to Third Amended and Restated Master Repurchase Agreement, dated as of April 26, 2019 (this “ Amendment ”), among Credit Suisse First Boston Mortgage Capital LLC (the “ Administrative Agent ”), Credit Suisse AG, a company incorporated in Switzerland, acting through its Cayman Islands Branch (a “ Buyer ”), Alpine Securitization LTD (a “ Buyer ”), PennyMac Loan Services, LLC (the “ Seller ”) and Private National Mortgage Acceptance Company, LLC (the “ Guarantor ”).

RECITALS

The Administrative Agent, the Buyers, the Seller and the Guarantor are parties to that certain Third Amended and Restated Master Repurchase Agreement, dated as of April 28, 2017 (as amended by Amendment No. 1, dated as of June 1, 2017, Amendment No. 2, dated as of December 20, 2017, Amendment No. 3, dated as of February 1, 2018, Amendment No. 4, dated as of April 27, 2018, and Amendment No. 5, dated as of February 11, 2019, the “ Existing Repurchase Agreement ”; and as further amended by this Amendment, the “ Repurchase Agreement ”) and the related Second Amended and Restated Pricing Side Letter, dated as of April 28, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “ Pricing Side Letter ”). The Guarantor is party to that certain Amended and Restated Guaranty, dated as of April 28, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “ Guaranty ”), by the Guarantor in favor of Administrative Agent. Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Existing Repurchase Agreement or Guaranty, as applicable.

The Administrative Agent, the Buyers, the Seller and the Guarantor have agreed, subject to the terms and conditions of this Amendment, that the Existing Repurchase Agreement be amended to reflect certain agreed upon revisions to the terms of the Existing Repurchase Agreement. As a condition precedent to amending the Existing Repurchase Agreement, the Administrative Agent has required the Guarantor to ratify and affirm the Guaranty on the date hereof.

Accordingly, the Administrative Agent, the Buyers, the Seller and the Guarantor hereby agree, in consideration of the mutual promises and mutual obligations set forth herein, that the Existing Repurchase Agreement is hereby amended as follows:

SECTION 1. Definitions . Section 2 of the Existing Repurchase Agreement is hereby amended by:

1.1 deleting the definition of “ More Favorable Agreement ” and any and all references thereto.

1.2 deleting the definition of “ Termination Date ” and replacing it with the following:

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“ Termination Date ” means the earlier of (a) April 24, 2020, and (b) the date of the occurrence of an Event of Default.

1.3 adding the following definitions in their proper alphabetical order:

“ Successor Rate ” means a rate determined by Administrative Agent in accordance with Section 5(c) hereof.

“ Successor Rate Conforming Changes ” means with respect to any proposed Successor Rate, any spread adjustments or other conforming changes to the timing and frequency of determining rates and making payments of interest and other administrative matters as may be appropriate, in the discretion of Administrative Agent, to reflect the adoption of such Successor Rate and to permit the administration thereof by Administrative Agent in a manner substantially consistent with market practice.

SECTION 2. Price Differential . Section 5 of the Existing Repurchase Agreement is hereby amended by adding the following new subsection (c) at the end thereof:

c. If prior to any Price Differential Payment Date, Administrative Agent determines in its sole discretion that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining LIBOR, LIBOR is no longer in existence, or the administrator of LIBOR or a Governmental Authority having jurisdiction over Administrative Agent has made a public statement identifying a specific date after which LIBOR shall no longer be made available or used for determining the interest rate of loans, Administrative Agent may give prompt notice thereof to Seller, whereupon the rate for such period that will replace LIBOR for such period, and for all subsequent periods until such notice has been withdrawn by Administrative Agent, shall be the greater of (i) an alternative benchmark rate (including any mathematical or other adjustments to the benchmark rate (if any) incorporated therein) and (ii) zero, together with any proposed Successor Rate Conforming Changes, as determined by Administrative Agent in its sole discretion (any such rate, a “ Successor Rate ”). Any such determination of the Successor Rate shall be made by Administrative Agent in a manner substantially consistent with market practice with respect to similarly situated counterparties with substantially similar assets in similar facilities; provided, that the foregoing standard shall only apply to repurchase transactions that are under the supervision of Administrative Agent’s investment bank New York mortgage finance business that administers the Transactions.

SECTION 3. Representations and Warranties . Subsection 13(11) of the Existing Repurchase Agreement is hereby amended by deleting such subsection in its entirety and replacing it with the following:

(11) Litigation . There is no action, proceeding or investigation pending with respect to which either Seller or Guarantor has received service of process or, to the best of Seller’s or Guarantor’s knowledge threatened against it before any court, administrative agency or other tribunal (A) asserting the invalidity of this Agreement, any Transaction, Transaction Request or any Program Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement, any Transaction Request or any Program

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Agreement, (C) making a claim individually or in the aggregate in an amount greater than five percent (5%) of Seller’s Net Worth, (D) which requires filing with the Securities and Exchange Commission in accordance with the 1934 Act or any rules thereunder or (E) which might materially and adversely affect the validity of the Mortgage Loans or the performance by it of its obligations under, or the validity or enforceability of, this Agreement, any Transaction Request or any Program Agreement.

SECTION 4. Covenants . Section 14 of the Existing Repurchase Agreement is hereby amended by:

4.1 deleting subsection (c) in its entirety and replacing it with the following:

(c) Litigation . Seller and Guarantor, as applicable, will promptly, and in any event within ten (10) days after service of process on any of the following, give to Administrative Agent notice of all litigation, actions, suits, arbitrations, investigations (including, without limitation, any of the foregoing which are threatened or pending) or other legal or arbitrable proceedings affecting Seller, Guarantor or any of their Subsidiaries or affecting any of the Property of any of them before any Governmental Authority that (i) questions or challenges the validity or enforceability of any of the Program Agreements or any action to be taken in connection with the transactions contemplated hereby, (ii) makes a claim individually or in the aggregate in an amount greater than five percent (5%) of Seller’s Net Worth, or (iii) which, individually or in the aggregate, if adversely determined, could be reasonably likely to have a Material Adverse Effect. On each Reporting Date, Seller and Guarantor, as applicable, will provide to Administrative Agent a litigation docket listing all litigation, actions, suits, arbitrations, investigations (including, without limitation, any of the foregoing which are threatened or pending) or other legal or arbitrable proceedings affecting Seller, Guarantor or any of their Subsidiaries or affecting any of the Property of any of them before any Governmental Authority. Seller and Guarantor, as applicable, will promptly provide notice of any judgment, which with the passage of time, could cause an Event of Default hereunder.

4.2 deleting subsection (ff) in its entirety and replacing it with the following:

(ff) Reserved .

SECTION 5. Events of Default . Section 15 of the Existing Repurchase Agreement is hereby amended by deleting subsection (o) in its entirety and replacing it with the following:

(o) Financial Statements . Seller’s or PennyMac Financial Services, Inc.’s (“ PFS ”) audited annual financial statements or the notes thereto or other opinions or conclusions stated therein shall be qualified or limited by reference to the status of Seller or PFS as a “going concern” or a reference of similar import.

SECTION 6. Reports . Subsection 17(a)(3) of the Existing Repurchase Agreement is hereby amended by deleting such subsection in its entirety and replacing it with the following:

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(3) as soon as available and in any event within ninety (90) days after the end of each fiscal year of PFS and Seller, the consolidated balance sheets of PFS and its consolidated Subsidiaries and the balance sheet of Seller, each as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for PFS and its consolidated Subsidiaries and Seller for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion and the scope of audit shall be acceptable to Administrative Agent in its sole discretion, shall have no “going concern” qualification and shall state that said consolidated financial statements or financial statements, as applicable, fairly present the consolidated financial condition or financial condition, as applicable, and results of operations of PFS and its respective consolidated Subsidiaries or Seller, as applicable, as at the end of, and for, such fiscal year in accordance with GAAP;

SECTION 7. Conditions Precedent . This Amendment shall become effective as of the date hereof (the “ Amendment Effective Date ”), subject to the satisfaction of the following conditions precedent:

7.1 Delivered Documents . On the Amendment Effective Date, the Administrative Agent on behalf of Buyers shall have received the following documents, each of which shall be satisfactory to the Administrative Agent in form and substance:

(a) this Amendment, executed and delivered by duly authorized officers of the Administrative Agent, the Buyers, the Seller and the Guarantor;

(b) Amendment No. 6 to Second Amended and Restated Pricing Side Letter, executed and delivered by duly authorized officers of the Administrative Agent, the Buyers, the Seller and the Guarantor;

(c) evidence that all other actions necessary to perfect and protect Administrative Agent’s interest in the Additional Collateral have been taken; and

(d) such other documents as the Administrative Agent or counsel to the Administrative Agent may reasonably request.

SECTION 8. Representations and Warranties . Seller hereby represents and warrants to the Administrative Agent and Buyers that it is in compliance with all the terms and provisions set forth in the Repurchase Agreement on its part to be observed or performed, and that no Event of Default has occurred or is continuing, and hereby confirms and reaffirms the representations and warranties contained in Section 13 of Repurchase Agreement.

SECTION 9. Limited Effect . Except as expressly amended and modified by this Amendment, the Existing Repurchase Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms.

SECTION 10. Counterparts . This Amendment may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Delivery of an executed

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counterpart of a signature page of this Amendment in Portable Document Format (PDF) or by facsimile shall be effective as delivery of a manually executed original counterpart of this Amendment.

SECTION 11. Severability . Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement.

SECTION 12. GOVERNING LAW . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE CHOICE OF LAW PROVISIONS THEREOF.

SECTION 13. Reaffirmation of Guaranty . The Guarantor hereby ratifies and affirms all of the terms, covenants, conditions and obligations of the Guaranty and acknowledges and agrees that the term “Obligations” as used in the Guaranty shall apply to all of the Obligations of the Seller to Administrative Agent and Buyers under the Repurchase Agreement and related Program Agreements, as amended hereby.

[Remainder of page intentionally left blank]

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IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date first above written.


	CREDIT SUISSE FIRST BOSTON MORTGAGE
		CAPITAL LLC , as Administrative Agent


	By:	/s/ Margaret Dellafera
		Name: Margaret Dellafera
		Title: Vice President


	CREDIT SUISSE AG, CAYMAN ISLANDS
		BRANCH , as a Committed Buyer and as a Buyer


	By:	/s/ Margaret Dellafera
		Name: Margaret Dellafera
		Title: Authorized Signatory


	By:	/s/ Charles Trombley
		Name: Charles Trombley
		Title: Authorized Signatory


	ALPINE SECURITIZATION LTD , as a Buyer, by
		Credit Suisse AG, New York Branch as Attorney-
		in-Fact


	By:	/s/ Kenneth Aiani
		Name: Kenneth Aiani
		Title: Vice President


	By:	/s/ Patrick J. Hart
		Name: Patrick J. Hart
		Title: Director

Signature Page to Amendment No. 6 to Third Amended and Restated Master Repurchase Agreement

	PENNYMAC LOAN SERVICES, LLC , as Seller


	By:	/s/ Pamela Marsh
		Name: Pamela Marsh
		Title: Managing Director, Treasurer


	PRIVATE NATIONAL MORTGAGE
		ACCEPTANCE COMPANY, LLC , as
		Guarantor


	By:	/s/ Pamela Marsh
		Name: Pamela Marsh
		Title: Managing Director, Treasurer

Signature Page to Amendment No. 6 to Third Amended and Restated Master Repurchase Agreement

Exhibit 10.6

PENNYMAC FINANCIAL SERVICES, INC.

2013 EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT SUBJECT TO CONTINUED SERVICE

AWARD AGREEMENT

THIS AGREEMENT is dated as of , 2019, between PennyMac Financial Services, Inc., a corporation organized under the laws of the State of Delaware (the “Company”), and the individual identified in the table below (the “Recipient”).


Recipient

Grant Date

Vesting Commencement Date

Number of RSUs Subject to
Continued Service

1. Grant of Restricted Stock Units. Subject to the terms and conditions of this Award Agreement and the Company’s 2013 Equity Incentive Plan, as the same may be amended, modified, supplemented or interpreted from time to time (the “ Plan ”) , including without limitation the vesting provisions set forth in Section 2, the Company hereby grants to the Recipient, with effect as of the Grant Date specified above, the above indicated number of restricted stock units (the “ RSUs ”) to obtain for each RSU that is subject to vesting based on continued service, one fully paid and nonassessable share of Common Stock, par value $0.0001 per share, in the Company (the “ Stock ”).

2. Vesting and Settlement.

2.1 One hundred percent (100%) of the RSUs subject to vesting based on continued service shall vest in a lump sum on the first anniversary of the Vesting Commencement Date specified above, subject to the Recipient’s continued service through such vesting. The shares of Stock earned as such RSUs vest will be transferred or issued to the Recipient promptly after the date they vest, but in any event not later than the 15th day of the third month following the end of the calendar year in which such RSUs become vested.

2.2 Until the RSUs vest and are issued pursuant to the terms of this Award Agreement, the Recipient shall have no rights as a stockholder, such as the right to vote or to receive dividends in respect of the Stock covered by this Award.

2.3 The Recipient’s name shall be entered as the stockholder of record on the books and records of the transfer agent for the Company with respect to the Stock issuable pursuant to Section 2.1 only upon compliance to the satisfaction of the Committee with all requirements under applicable laws or regulations in connection with such issuance and with the requirements of this Agreement and of the Plan. The determination of the Committee as to such compliance shall be final and binding on the Recipient. Notwithstanding anything to the contrary in this Agreement, no Stock shall be issued in settlement of vested RSUs if the issuance

of such shares would constitute a violation of any applicable federal or state securities law or other law or regulation. As a condition to the issuance of Stock to the Recipient pursuant to Section 2.1, the Company may require the Recipient to make any representation or warranty to the Company at the time vested Stock becomes issuable to the Recipient as in the opinion of legal counsel for the Company may be required by any applicable law or regulation, including the execution and delivery of an appropriate representation statement. Accordingly, the stock certificates for the Stock issued pursuant to this Award may bear appropriate legends restricting the transfer of the Stock.

3. Effect of Termination. Unless otherwise expressly provided herein, no RSUs shall vest following the date (the Recipient’s “ Termination Date ”), reasonably fixed and determined by the Committee, of the voluntary or involuntary termination of the Recipient’s service as a Director of the Company and its Affiliates, for any or no reason whatsoever, including death or disability and an entity ceasing to be an Affiliate of the Company; provided, however, that military or sick leave shall not be deemed a termination of employment or other association, if it does not exceed the longer of 90 days or the period during which the Recipient’s reemployment rights, if any, are guaranteed by statute or by contract. As of the Recipient’s Termination Date, all of the then unvested RSUs shall be forfeited by the Recipient or any transferee.

4. Restrictions on Transfer . The RSUs may not be assigned or transferred (by operation of law or otherwise) except by will or the laws of descent and distribution.

5. Miscellaneous.

5.1 No Special Service Rights. Nothing contained in this Award Agreement shall confer upon the Recipient any right with respect to the continuation of his or her employment or other association with the Company (or any Affiliate), or interfere in any way with the right of the Company (or any Affiliate), subject to the terms of any separate employment or consulting agreement or provision of law or corporate articles or by-laws to the contrary, at any time to terminate such employment or consulting agreement or to increase or decrease, or otherwise adjust, the other terms and conditions of the Recipient’s employment or other association with the Company and its Affiliates.

5.2 Entire Agreement; Counterparts. This Award Agreement, including the Plan, constitute the entire agreement of the parties with respect to the subject matter hereof. This Award Agreement may be executed in any number of counterparts, each of which shall be an original and all of which, taken together, shall constitute one and the same instrument. In making proof of this Award Agreement it shall not be necessary to produce or account for more than one such counterpart.

5.3 Tax Consequences. The Company makes no representation or warranty as to the tax treatment to the Recipient of receipt of these RSUs, and does not warrant to the Recipient that all compensation paid or delivered to him or her for his or her services will be exempt from, or paid in compliance with, Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. The Recipient should rely on his or her own tax advisors for all such advice.

5.4 Community Property. To the extent the Recipient resides in a jurisdiction in which community property rules apply, without prejudice to the actual rights of the spouses as between each other, for all purposes of this Award Agreement, the Recipient shall be treated as agent and attorney-in-fact for that interest held or claimed by the Recipient’s spouse with respect to these RSUs and the parties hereto shall act in all matters as if the Recipient was the sole owner of these RSUs. This appointment is coupled with an interest and is irrevocable.

6. Receipt of Plan. The RSUs were awarded under the Plan, to which this Award Agreement is subject in all respects, including without limitation the adjustment and tax withholding provisions therein. All capitalized terms used in this Award Agreement and not otherwise defined shall have the meanings ascribed thereto in the Plan. The Recipient has reviewed and understands the Plan and this Award Agreement in their entirety, and has had an opportunity to obtain the advice of counsel prior to executing this Award Agreement. The Recipient hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Award Agreement.

IN WITNESS WHEREOF , the Recipient and the Company have entered into this Award Agreement as of the Grant Date.

PENNYMAC FINANCIAL SERVICES, INC.

Exhibit 31.1

CERTIFICATION

I, David A. Spector, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of PennyMac Financial Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 6, 2019


By:	/s/ David A. Spector
	David A. Spector
	President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Andrew S. Chang, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of PennyMac Financial Services, Inc.;

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 6, 2019


By:	/s/ Andrew S. Chang
	Andrew S. Chang
	Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of PennyMac Financial Services, Inc. (the “Company”) for the quarter ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Spector, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: May 6, 2019


By:	/s/ David A. Spector
	David A. Spector
	President and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PennyMac Financial Services, Inc. and will be retained by PennyMac Financial Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of PennyMac Financial Services, Inc. (the “Company”) for the quarter ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew S. Chang, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: May 6, 2019


By:	/s/ Andrew S. Chang
	Andrew S. Chang
	Chief Financial Officer