Transactions with Affiliates

Note 4—Transactions with Affiliates

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities and MSR Recapture

The Company provides fulfillment and other services to PMT under a mortgage banking services agreement for which it receives a fulfillment fee. Before September 12, 2016, the fulfillment fee was based on the type of mortgage loan that PMT acquired and equal to a percentage of the unpaid principal balance (“UPB”) of such mortgage loan. The applicable fulfillment fee percentages were (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans sold in accordance with the Ginnie Mae Mortgage‑Backed Securities Guide, and (iii) 0.50% for all other mortgage loans not contemplated above; provided, however, that the Company was permitted, in its sole discretion, to reduce the amount of the applicable fulfillment fee and credit the amount of such reduction to the reimbursement otherwise due as described below. This reduction was only credited to the reimbursement applicable to the month in which the related mortgage loan was funded.

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

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

The Company sells newly originated loans to PMT under a mortgage loan purchase agreement and a flow commercial 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. Beginning in the quarter ended September 30, 2017, the Company also sells non-government insured or guaranteed mortgage loans to PMT under the mortgage loan purchase agreement. The Company sells to PMT small balance commercial mortgage loans, including multifamily mortgage loans, originated as part of its commercial lending activities using the flow commercial mortgage loan purchase agreement.

Pursuant to the terms of an amended and restated MSR recapture agreement, 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 cash in an amount equal to 30% of the fair market value of the MSRs related to all the mortgage loans so originated. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

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


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Net gain (loss) on mortgage loans held for sale at fair value:
Net gain on mortgage loans held for sale to PMT	$	28,238	$	—	$	—
Mortgage servicing rights and excess servicing spread recapture incurred		(6,249)		(8,092)		(7,836)
	$	21,989	$	(8,092)	$	(7,836)
Fair value of mortgage loans sold to PMT		904,097		21,541		28,445

Fulfillment fee revenue	$	80,359	$	86,465	$	58,607
Unpaid principal balance of mortgage loans fulfilled for PMT	$	22,971,119	$	23,188,386	$	14,014,603

Sourcing fees paid to PMT	$	12,084	$	11,976	$	8,966
Unpaid principal balance of mortgage loans purchased from PMT	$	40,561,241	$	39,908,163	$	29,867,580

Tax service fees received from PMT included in Mortgage loan origination fees	$	7,078	$	6,690	$	4,390
Property management fees received from PMT included in Other income	$	350	$	138	$	14
Early purchase program fees earned from PMT included in Mortgage loan servicing fees	$	7	$	30	$	—

Mortgage Loan Servicing

The Company has a mortgage loan servicing agreement with PMT (“Servicing Agreement”). 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 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 to $100 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.

·

To the extent 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 an 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 (“HAMP”); 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 0.50% for a streamline modification to 1.50% for a 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.

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


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base and supplemental	$	305	$	330	$	260
Activity-based		649		733		371
		954		1,063		631
Mortgage loans at fair value:
Base and supplemental		6,650		11,078		16,123
Activity-based		8,960		18,521		12,437
		15,610		29,599		28,560
Mortgage servicing rights:
Base and supplemental		25,991		19,461		16,911
Activity-based		509		492		321
		26,500		19,953		17,232
	$	43,064	$	50,615	$	46,423

Investment Management Activities

The Company has a management agreement with PMT (“Management Agreement”). 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 attributable to its common shares of beneficial interest for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on 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 its 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.

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:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Base management	$	22,280	$	20,657	$	22,851
Performance incentive		304		—		1,343
	$	22,584	$	20,657	$	24,194

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, from and after September 12, 2016, 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:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Reimbursement of:
Common overhead incurred by the Company	$	5,306	$	7,898	$	10,742
Expenses incurred on PMT's (the Company's) behalf, net		2,257		(163)		582
	$	7,563	$	7,735	$	11,324
Payments and settlements during the period (1)	$	64,945	$	143,542	$	99,967

(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.

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. The term of the reimbursement agreement expires on February 1, 2019. The Company received $30,000, $0 and $237,000 in reimbursement from PMT during the years ended December 31, 2017, 2016 and 2015, respectively.

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.

Prior to the Company’s entry into the PMH Repurchase Agreement and PC Repurchase Agreement in connection with the GNMA MSR Facility, the Company was a party to a repurchase agreement with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”) (the “MSR Repo”), pursuant to which it financed Ginnie Mae MSRs and servicing advance receivables and pledged to CSFB all of its rights and interests in any Ginnie Mae MSRs it owned or acquired, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and the Company.

In connection with the MSR Repo described above, the Company and PMT entered into an underlying loan and security agreement, dated as of April 30, 2015, pursuant to which PMT was able to borrow up to $150 million from the Company for the purpose of financing ESS (the “Underlying LSA”). In order to secure its borrowings, PMT pledged its ESS to the Company under the Underlying LSA and the Company, in turn, re-pledged such ESS to CSFB under the MSR Repo. The principal amount of the borrowings under the Underlying LSA was based upon a percentage of the market value of the ESS pledged by PMT, subject to the $150 million sublimit described above. Pursuant to the Underlying LSA, PMT granted to the Company a security interest in all of its right, title and interest in, to and under the ESS pledged to secure the borrowings.

The Company and PMT agreed in connection with the Underlying LSA that PMT was required to repay the Company the principal amount of borrowings plus accrued interest to the date of such repayment, and the Company was required to repay CSFB the corresponding amount under the MSR Repo. Interest accrued on PMT’s note relating to the Underlying LSA at a rate based on CSFB’s cost of funds under the MSR Repo. PMT was also required to pay the Company a fee for the structuring of the Underlying LSA in an amount equal to the portion of the corresponding fee paid by the Company to CSFB and allocable to the $150 million relating to the ESS financing. The note receivable was replaced by the PMH Repurchase Agreement upon the closing of the GNMA MSR facility.

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:


		Year ended December 31,
		2017		2016		2015
	(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell:
Activity during the year:
Refinancing of note receivable from PennyMac Mortgage Investment Trust		$	—	$	150,000	$	—
Sale of assets purchased from PMT under agreement to resell		$	5,872	$	—	$	—
Interest income		$	8,038	$	253	$	—
Balance at end of year		$	144,128	$	150,000	$	—
Note receivable from PennyMac Mortgage Investment Trust:
Activity during the year:
Advances to PennyMac Mortgage Investment Trust		$	—	$	—	$	168,546
Repayments and refinancing with repurchase agreement from PennyMac Mortgage Investment Trust		$	—	$	150,000	$	18,546
Interest income		$	—	$	7,577	$	3,343
Balance at end of year		$	—	$	—	$	150,000
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Activity during the year:
Dividends earned from PennyMac Mortgage Investment Trust		$	141	$	141	$	207
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust			(23)		83		(437)
		$	118	$	224	$	(230)
Balance at end of year:
Fair value		$	1,205	$	1,228
Number of shares			75		75

Financing Activities

Spread Acquisition and MSR Servicing Agreements

Effective February 1, 2013, the Company entered into a master spread acquisition and MSR servicing agreement (the “2/1/13 Spread Acquisition Agreement”), pursuant to which it sold to PMT or one of its wholly-owned subsidiaries the rights to receive certain ESS from MSRs acquired by the Company from banks and other third party financial institutions. The Company was generally required to service or subservice the related mortgage loans for the applicable Agency or investor. The terms of each transaction under the 2/1/13 Spread Acquisition Agreement were subject to the terms thereof, as modified and supplemented by the terms of a confirmation executed in connection with such transaction.

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

On February 29, 2016, the parties terminated the 2/1/13 Spread Acquisition Agreement and all amendments thereto. In connection with the termination of the 2/1/13 Spread Acquisition Agreement, PLS reacquired from PMH all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by PLS to PMH and then subject to such 2/1/13 Spread Acquisition Agreement.

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

To the extent the Company refinances any of the mortgage loans relating to the ESS it sells to PMT, the 12/19/14 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 UPB of the newly originated mortgage loans. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, pay cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.

On February 29, 2016, PLS also reacquired from PMT all of its right, title and interest in and to all of the Freddie Mac ESS previously sold by PLS to PMT and then subject to such 12/19/14 Spread Acquisition Agreement. The 12/19/14 Spread Acquisition Agreement remains in full force and effect.

On December 19, 2016, the Company amended and restated a third master spread acquisition and MSR servicing agreement with PMT (the “12/19/16 Spread Acquisition Agreement”). The terms of the 12/19/16 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement and the 12/19/14 Spread Acquisition Agreement, except that the Company only intends to sell ESS relating to Ginnie Mae MSRs under the 12/19/16 Spread Acquisition Agreement. Pursuant to the 12/19/16 Spread Acquisition Agreement, the Company may 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 12/19/16 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 12/19/16 Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, 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 12/19/16 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, wire cash to PMT 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:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Excess servicing spread financing:
Issuance:
Cash	$	—	$	—	$	271,554
Pursuant to recapture agreement	$	5,244	$	6,603	$	6,728
Repayment	$	54,980	$	69,992	$	78,578
Settlement	$	—	$	59,045	$	—
Change in fair value	$	(19,350)	$	(23,923)	$	(3,810)
Interest expense	$	16,951	$	22,601	$	25,365
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	$	4,820	$	6,529	$	7,049
Balance at end of year	$	236,534	$	288,669

Receivable from and Payable to PMT

Amounts due from and payable to PMT are summarized below:


	December 31,
	2017		2016
	(in thousands)
Receivable from PMT:
Allocated expenses and expenses incurred on PMT's behalf	$	11,542	$	1,046
Servicing fees		6,583		5,465
Management fees		5,901		5,081
Correspondent production fees		1,735		2,371
Conditional Reimbursement		870		900
Fulfillment fees		346		1,300
Interest on assets purchased under agreements to resell		142		253
	$	27,119	$	16,416
Payable to PMT:
Deposits made by PMT to fund servicing advances	$	132,844	$	162,945
Mortgage servicing rights recapture payable		282		707
Other		3,872		6,384
	$	136,998	$	170,036

Investment Funds

The Company has investment management agreements with the Investment Funds pursuant to which it receives management fees consisting of base management fees and Carried Interest. The management fees are based on the lesser of the funds’ net asset values or aggregate capital contributions. The base management fees accrue at annual rates ranging from 1.5% to 2.0% of the applicable amounts on which they are based.

The Carried Interest that the Company recognizes from the Investment Funds is determined by the Investment Funds’ performance and its contractual rights to share in the Investments Funds’ returns in excess of the preferred returns, if any, accruing to the funds’ investors. The Company recognizes Carried Interest as a participation in the profits in the Investment Funds after the investors in the Investment Funds have achieved a preferred return as defined in the fund agreements. After the investors have achieved the preferred returns specified in the respective fund agreements, a “catch up” return accrues to the Company until it receives a specified percentage of the preferred return. Thereafter, the Company participates in future returns in excess of the preferred return at the rates specified in the fund agreements.

The Company also has loan servicing agreements with the Investment Funds. The loan servicing to be provided by the Company under the loan servicing agreements with the Investment Funds includes collecting principal, interest and escrow account payments, if any, with respect to mortgage loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. The Company may also engage in certain loan origination activities that include refinancing Investment Fund mortgage loans and arranging financings that facilitate sales of REOs.

The loan servicing agreements with the Investment Funds generally provide for fee revenue, which varies depending on the type and quality of the loans being serviced. The Company is also entitled to certain customary market-based fees and charges.

In 2017, the Investment Funds completed the sale of substantially all of their remaining assets. Accordingly, future management and servicing fees from the Investment Funds will be discontinued. In a related distribution of the sale proceeds, the Company received $61.3 million in cash in settlement of the majority of its Carried Interest. The terms of the Investment Funds currently run through December 31, 2018, subject to a one-year extension at the Company’s discretion, in accordance with the terms of the limited liability company and limited partnership agreements that govern the Investment Funds.

Amounts due from and payable to the Investment Funds are summarized below:


	December 31,
	2017		2016
	(in thousands)
Carried Interest due from Investment Funds:
PNMAC Mortgage Opportunity Fund, LLC	$	6,389	$	42,427
PNMAC Mortgage Opportunity Fund Investors, LLC		2,163		28,479
	$	8,552	$	70,906
Receivable from Investment Funds:
Mortgage loan servicing fee rebate deposit	$	300	$	250
Management fees		88		500
Expense reimbursements		27		238
Mortgage loan servicing fees		2		231
	$	417	$	1,219
Payable to Investment Funds:
Deposits received to fund servicing advances	$	2,329	$	20,221
Other		98		172
	$	2,427	$	20,393

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

The Company entered into a tax receivable agreement with unitholders of PennyMac other than the Company on the date of the IPO 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 such unitholders’ exchanges 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.

The enactment of the Tax Act on December 22, 2017 reduced the federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018. GAAP requires that the effect of tax legislation be recognized in the period in which the law was enacted.

The change in the corporate tax rate also had a significant effect on the value of the Company’s liability under a tax receivable agreement with PennyMac unitholders that exchanged their ownership units for the Company’s common stock. The lower tax rate reduced tax benefits that the Company might realize from the increased tax basis arising from the unitholder exchanges. In turn, the lower expected tax benefits reduced the Company’s corresponding liability under the tax receivable agreement. The Company re-measured its liability under the tax receivable agreement as a result of the reduction in the federal tax rate and recorded a reduction of $32.0 million in the payable to exchanged PennyMac unitholders under the tax receivable agreement due to the change in the federal tax rate.

Following is a summary of activity in Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Activity during the year:
Liability resulting from unit exchanges	$	7,723	$	2,190	$	2,728
Payments under tax receivable agreement	$	(6,726)	$	—	$	(5,132)
Repricing of liability (1)	$	(32,940)	$	(551)	$	1,695
Balance at end of year	$	44,011	$	75,954

(1)

A reduction of $32.0 million in the payable to exchanged PennyMac unitholders under the tax receivable agreement in 2017 was the result of the change in the federal tax rate under the Tax Act.

Loan Sales and Servicing Activities

12 Months Ended

Dec. 31, 2017

Loan Sales and Servicing Activities

Loan Sales and Servicing Activities

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 as servicer with the mortgage loans:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Cash flows:
Sales proceeds	$	50,235,245	$	49,633,909	$	36,679,638
Servicing fees received (1)	$	376,160	$	261,163	$	140,767
Net servicing advances	$	52,353	$	8,274	$	9,842

(1)

Net of guarantees paid to the Agencies

The following table summarizes the UPB of the mortgage loans sold by the Company in which it maintains continuing involvement:


	December 31,
	2017		2016
	(in thousands)
Unpaid principal balance of mortgage loans outstanding	$	120,853,138	$	89,516,155
Delinquencies:
30-89 days	$	5,097,688	$	2,545,970
90 days or more:
Not in foreclosure	$	2,303,114	$	735,263
In foreclosure	$	606,744	$	137,856
Foreclosed	$	30,310	$	2,552
Bankruptcy	$	657,368	$	256,471

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


	December 31, 2017
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	120,853,138	$	—	$	120,853,138
Purchased		47,016,708		—		47,016,708
		167,869,846		—		167,869,846
Advised Entities		—		74,980,268		74,980,268
Mortgage loans held for sale		2,998,377		—		2,998,377
	$	170,868,223	$	74,980,268	$	245,848,491
Delinquent mortgage loans:
30 days	$	5,326,710	$	515,922	$	5,842,632
60 days		1,935,216		215,957		2,151,173
90 days or more:
Not in foreclosure		3,690,159		541,945		4,232,104
In foreclosure		916,614		293,835		1,210,449
Foreclosed		41,244		278,890		320,134
	$	11,909,943	$	1,846,549	$	13,756,492
Bankruptcy	$	1,046,969	$	176,324	$	1,223,293
Custodial funds managed by the Company (1)	$	3,267,279	$	901,041	$	4,168,320

(1)

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


	December 31, 2016
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	89,516,155	$	—	$	89,516,155
Purchased		41,735,847		—		41,735,847
		131,252,002		—		131,252,002
Advised Entities		—		60,886,717		60,886,717
Mortgage loans held for sale		2,101,283		—		2,101,283
	$	133,353,285	$	60,886,717	$	194,240,002
Commercial real estate loans subserviced for the Company	$	—	$	22,338	$	22,338
Delinquent mortgage loans:
30 days	$	3,240,640	$	407,177	$	3,647,817
60 days		1,035,871		145,720		1,181,591
90 days or more:
Not in foreclosure		2,203,895		566,496		2,770,391
In foreclosure		937,204		685,001		1,622,205
Foreclosed		28,943		448,017		476,960
	$	7,446,553	$	2,252,411	$	9,698,964
Bankruptcy	$	793,517	$	280,459	$	1,073,976
Custodial funds managed by the Company (1)	$	3,097,365	$	736,398	$	3,833,763

(1)

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

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


	December 31,		December 31,
State	2017		2016
	(in thousands)
California	$	45,621,369	$	42,303,952
Texas		19,741,970		16,037,426
Florida		17,490,194		12,817,627
Virginia		16,210,673		13,143,510
Maryland		11,350,939		8,564,923
All other states		135,433,346		101,372,564
	$	245,848,491	$	194,240,002

Fair Value

12 Months Ended

Dec. 31, 2017

Fair Value

Note 6—Fair Value

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

Fair Value Accounting Elections

Management identified all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, its originated MSRs relating to loans with initial interest rates of more than 4.5%, its purchased MSRs and its MSLs 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. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method.

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:


	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	170,080	$	—	$	—	$	170,080
Mortgage loans held for sale at fair value		—		2,316,892		782,211		3,099,103
Derivative assets:
Interest rate lock commitments		—		—		60,012		60,012
Repurchase agreement derivatives		—		—		10,656		10,656
Forward purchase contracts		—		4,288		—		4,288
Forward sales contracts		—		2,101		—		2,101
MBS put options		—		3,481		—		3,481
Put options on interest rate futures purchase contracts		3,570		—		—		3,570
Call options on interest rate futures purchase contracts		938		—		—		938
Total derivative assets before netting		4,508		9,870		70,668		85,046
Netting		—		—		—		(6,867)
Total derivative assets		4,508		9,870		70,668		78,179
Investment in PennyMac Mortgage Investment Trust		1,205		—		—		1,205
Mortgage servicing rights at fair value		—		—		638,010		638,010
	$	175,793	$	2,326,762	$	1,490,889	$	3,986,577
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	236,534	$	236,534
Derivative liabilities:
Interest rate lock commitments		—		—		1,740		1,740
Forward purchase contracts		—		1,272		—		1,272
Forward sales contracts		—		7,031		—		7,031
Total derivative liabilities before netting		—		8,303		1,740		10,043
Netting		—		—		—		(4,247)
Total derivative liabilities		—		8,303		1,740		5,796
Mortgage servicing liabilities at fair value		—		—		14,120		14,120
	$	—	$	8,303	$	252,394	$	256,450


	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	85,964	$	—	$	—	$	85,964
Mortgage loans held for sale at fair value		—		2,125,544		47,271		2,172,815
Derivative assets:
Interest rate lock commitments		—		—		65,848		65,848
Forward purchase contracts		—		77,905		—		77,905
Forward sales contracts		—		28,324		—		28,324
MBS put options		—		3,934		—		3,934
MBS call options		—		217		—		217
Put options on interest rate futures purchase contracts		3,109		—		—		3,109
Call options on interest rate futures purchase contracts		203		—		—		203
Total derivative assets before netting		3,312		110,380		65,848		179,540
Netting		—		—		—		(96,635)
Total derivative assets		3,312		110,380		65,848		82,905
Investment in PennyMac Mortgage Investment Trust		1,228		—		—		1,228
Mortgage servicing rights at fair value		—		—		515,925		515,925
	$	90,504	$	2,235,924	$	629,044	$	2,858,837
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	288,669	$	288,669
Derivative liabilities:
Interest rate lock commitments		—		—		6,457		6,457
Forward purchase contracts		—		16,914		—		16,914
Forward sales contracts		—		85,035		—		85,035
Total derivative liabilities before netting		—		101,949		6,457		108,406
Netting		—		—		—		(86,044)
Total derivative liabilities		—		101,949		6,457		22,362
Mortgage servicing liabilities at fair value		—		—		15,192		15,192
	$	—	$	101,949	$	310,318	$	326,223

As shown above, certain of the Company’s mortgage loans held for sale, IRLCs, repurchase agreement derivatives, MSRs at fair value, ESS financing at fair value and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of these items for each of the three years ended December 31, 2017 where Level 3 fair value inputs were used:


	Year ended December 31, 2017
	Mortgage		Net interest		Repurchase		Mortgage
	loans held		rate lock		agreement		servicing
	for sale		commitments (1)		derivatives		rights			Total
	(in thousands)
Assets:
Balance, December 31, 2016	$	47,271	$	59,391	$	—	$	515,925	$	622,587
Purchases and issuances, net		2,928,249		302,389		10,986		183,850		3,425,474
Sales and repayments		(1,339,580)		—		—		—		(1,339,580)
Mortgage servicing rights resulting from mortgage loan sales		—		—		—		24,471		24,471
Changes in fair value included in income arising from:										—
Changes in instrument-specific credit risk		(1,794)		—		—		—		(1,794)
Other factors		—		115,434		(330)		(86,236)		28,868
		(1,794)		115,434		(330)		(86,236)		27,404
Transfers from Level 3 to Level 2		(851,935)		—		—		—		(851,935)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(418,942)		—		—		(418,942)
Balance, December 31, 2017	$	782,211	$	58,272	$	10,656	$	638,010	$	1,489,149
Changes in fair value recognized during the year relating to assets still held at December 31, 2017	$	(556)	$	58,272	$	(330)	$	(86,236)	$	(28,850)

(1)

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


	Year ended December 31, 2017
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, December 31, 2016	$	288,669	$	15,192	$	303,861
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		5,244		—		5,244
Accrual of interest		16,951		—		16,951
Repayments		(54,980)		—		(54,980)
Mortgage servicing liabilities resulting from mortgage loan sales		—		17,229		17,229
Changes in fair value included in income		(19,350)		(18,301)		(37,651)
Balance, December 31, 2017	$	236,534	$	14,120	$	250,654
Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2017	$	(19,350)	$	(18,301)	$	(37,651)


	Year ended December 31, 2016
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total
	(in thousands)
Assets:
Balance, December 31, 2015	$	48,531	$	43,773	$	660,247	$	752,551
Purchases		1,608,627		—		146		1,608,773
Sales and repayments		(1,202,621)		—		—		(1,202,621)
Interest rate lock commitments issued, net		—		429,598		—		429,598
Mortgage servicing rights resulting from mortgage loan sales		—		—		17,319		17,319
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		3,469		—		—		3,469
Other factors		—		143,867		(161,787)		(17,920)
		3,469		143,867		(161,787)		(14,451)
Transfers from Level 3 to Level 2		(410,735)		—		—		(410,735)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(557,847)		—		(557,847)
Balance, December 31, 2016	$	47,271	$	59,391	$	515,925	$	622,587
Changes in fair value recognized during the year relating to assets still held at December 31, 2016	$	936	$	59,391	$	(161,787)	$	(101,460)

(1)

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


	Year ended December 31, 2016
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, December 31, 2015	$	412,425	$	1,399	$	413,824
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		6,603		—		6,603
Accrual of interest		22,601		—		22,601
Repayments		(69,992)		—		(69,992)
Settlement		(59,045)		—		(59,045)
Mortgage servicing liabilities resulting from mortgage loan sales		—		14,991		14,991
Mortgage servicing liabilities assumed		—		10,139		10,139
Changes in fair value included in income		(23,923)		(11,337)		(35,260)
Balance, December 31, 2016	$	288,669	$	15,192	$	303,861
Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2016	$	(16,713)	$	(11,337)	$	(28,050)


	Year ended December 31, 2015
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total
	(in thousands)
Assets:
Balance December 31, 2014	$	209,908	$	32,401	$	325,383	$	567,692
Purchases		911,124		—		382,824		1,293,948
Sales and repayments		(844,419)		—		—		(844,419)
Interest rate lock commitments issued, net		—		271,692		—		271,692
Mortgage servicing rights resulting from mortgage loan sales		—		—		18,013		18,013
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		4,233		—		—		4,233
Other factors		—		73,068		(65,973)		7,095
		4,233		73,068		(65,973)		11,328
Transfers from Level 3 to Level 2		(232,315)		—		—		(232,315)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(333,388)		—		(333,388)
Balance, December 31, 2015	$	48,531	$	43,773	$	660,247	$	752,551
Changes in fair value recognized during the year relating to assets still held at December 31, 2015	$	4,305	$	43,773	$	(65,973)	$	(17,895)

(1)

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


	Year ended December 31, 2015
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance December 31, 2014	$	191,166	$	6,306	$	197,472
Issuance of excess servicing spread financing:
For cash		271,554		—		271,554
Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		6,728		—		6,728
Accrual of interest		25,365		—		25,365
Repayments		(78,578)		—		(78,578)
Mortgage servicing liabilities resulting from mortgage loan sales		—		20,442		20,442
Mortgage servicing liabilities assumed		—		—		—
Changes in fair value included in income		(3,810)		(25,349)		(29,159)
Balance, December 31, 2015	$	412,425	$	1,399	$	413,824
Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2015	$	(3,810)	$	(25,349)	$	(29,159)

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 years 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.

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:


	Year ended December 31,
	2017						2016						2015
	Net gains on		Net				Net gains on		Net				Net gains on		Net
	mortgage		mortgage				mortgage		mortgage				mortgage		mortgage
	loans held		loan				loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total		fair value		fees		Total
	(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	426,092	$	—	$	426,092	$	513,331	$	—	$	513,331	$	372,139	$	—	$	372,139
Mortgage servicing rights at fair value		—		(86,236)		(86,236)		—		(161,787)		(161,787)		—		(65,973)		(65,973)
	$	426,092	$	(86,236)	$	339,856	$	513,331	$	(161,787)	$	351,544	$	372,139	$	(65,973)	$	306,166
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	19,350	$	19,350	$	—	$	23,923	$	23,923	$	—	$	3,810	$	3,810
Mortgage servicing liabilities at fair value		—		18,301		18,301		—		11,337		11,337		—		25,349		25,349
	$	—	$	37,651	$	37,651	$	—	$	35,260	$	35,260	$	—	$	29,159	$	29,159

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


	December 31, 2017
			Principal
			amount
	Fair		due upon
	value		maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,430,517	$	2,326,772	$	103,745
90 days or more delinquent:
Not in foreclosure		614,329		614,357		(28)
In foreclosure		54,257		57,248		(2,991)
	$	3,099,103	$	2,998,377	$	100,726


	December 31, 2016
			Principal
			amount
	Fair		due upon
	value		maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,148,947	$	2,077,034	$	71,913
90 days or more delinquent:
Not in foreclosure		19,227		19,399		(172)
In foreclosure		4,641		4,850		(209)
	$	2,172,815	$	2,101,283	$	71,532

Assets Measured at Fair Value on a Nonrecurring Basis

Following is a summary of assets that are measured at fair value on a nonrecurring basis:


	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	1,463,552	$	1,463,552
Real estate acquired in settlement of loans		—		—		2,355		2,355
	$	—	$	—	$	1,465,907	$	1,465,907


	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	1,093,242	$	1,093,242
Real estate acquired in settlement of loans		—		—		1,152		1,152
	$	—	$	—	$	1,094,394	$	1,094,394

The following table summarizes the total gains (losses) on assets measured at fair values on a nonrecurring basis:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	(6,853)	$	(60,487)	$	(37,437)
Real estate acquired in settlement of loans		(125)		(86)		—
	$	(6,978)	$	(60,573)	$	(37,437)

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’ fair values do not have observable inputs and the fair value is measured using management’s estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Accordingly, the Company has classified these financial instruments as “Level 3” fair value assets and liabilities and has concluded that those assets and liabilities’ fair values approximate the carrying value due to their short terms and/or variable interest rates.

Valuation Techniques and Inputs

Most of the Company’s financial assets, a portion of its MSRs, its ESS financing 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 and approves 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, chief enterprise operations 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 “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.

With respect to IRLCs, the Company has assigned responsibility for developing fair values 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.

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 and their fair values are determined using their quoted market or contracted selling price or market price equivalent.

Certain of the Company’s mortgage loans held for sale are non-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 third-party investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed pool. Such eligibility for resale generally occurs 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 become 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 at fair value. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value mortgage loans held for sale at fair value 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 at fair value:


	December 31,
Key inputs	2017	2016
Discount rate:
Range	2.9% – 10.0%	2.6% – 8.8%
Weighted average	2.9%	3.0%
Twelve-month projected housing price index change:
Range	3.1% – 5.6%	2.0% – 4.5%
Weighted average	3.6%	3.7%
Voluntary prepayment / resale speed (1):
Range	0.2% – 72.2%	0.1% – 24.4%
Weighted average	44.6%	20.9%
Total prepayment speed (2):
Range	0.2% – 75.2%	0.1% – 39.8%
Weighted average	55.8%	34.3%

(1)

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

(2)

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 year end from the later of the beginning of the year 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.

Derivative Financial Instruments

Interest Rate Lock Commitments

The Company categorizes IRLCs as a “Level 3” fair value asset or liability. The Company estimates the fair value of an IRLC 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 IRLC’s 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 has decreased 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 – Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities as a hedge of the fair value of MSRs in the consolidated statements of income when it is included as a component of the MSR hedging strategy.

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


	December 31,
Key inputs	2017	2016
Pull-through rate:
Range	25.0% – 100%	35.0% – 100.0%
Weighted average	85.6%	84.9%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range	1.4 – 5.8	1.2 – 5.9
Weighted average	4.0	4.3
Percentage of unpaid principal balance:
Range	0.3% – 3.0%	0.3% – 2.8%
Weighted average	1.4%	1.3%

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 – Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities, as applicable, in the consolidated statements of income.

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 accounted for separate from the master repurchase agreement. The Company classifies these derivatives as “Level 3” fair value assets. The significant unobservable input into the valuation of these derivative assets is the ratio of derivative value to outstanding receivable due to the time value of money and the Company’s expected approval rate of the mortgage loans financed under the master repurchase agreement. The ratio included in the Company’s fair value estimate was 97% at December 31, 2017.

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. 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 MSRs include the prepayment rates of the underlying mortgage loans, the applicable pricing spread (discount rate), and the per-loan annual cost to service the respective mortgage loans. Changes in the fair value of MSRs are included in Net mortgage loan servicing fees—Amortization, impairment and 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 at the time of initial recognition, excluding MSR purchases:


	Year ended December 31,
	2017		2016		2015
	Fair	Amortized	Fair	Amortized	Fair	Amortized
	value	cost	value	cost	value	cost
	(Amount recognized and unpaid principal balance of underlying mortgage loans amounts in thousands)
MSR and pool characteristics:
Amount recognized	$24,471	$556,630	$17,319	$560,212	$18,013	$454,840
Unpaid principal balance of underlying mortgage loans	$2,316,539	$44,664,551	$1,452,779	$44,827,516	$1,463,150	$32,849,718
Weighted average servicing fee rate (in basis points)	31	31	33	30	33	34
Key inputs:
Pricing spread (1):
Range	7.6% – 11.2%	7.6% – 15.2%	7.2% – 10.5%	7.2% – 14.4%	7.0% – 14.4%	6.8% – 16.2%
Weighted average	10.5%	10.7%	9.2%	9.5%	9.3%	9.2%
Annual total prepayment speed (2):
Range	3.9% – 71.8%	3.4% – 47.6%	3.3% – 53.8%	2.8% – 50.9%	1.9% – 62.4%	2.5% – 50.0%
Weighted average	12.6%	9.1%	11.8%	9.0%	11.8%	8.9%
Life (in years):
Range	0.8 – 11.7	1.5 – 12.2	0.5 – 11.9	1.3 – 12.9	1.1 – 12.3	1.3 – 12.0
Weighted average	6.6	8.1	6.8	8.1	6.5	7.2
Per-loan annual cost of servicing:
Range	$78 – $101	$79 – $101	$68 – $105	$68 – $106	$59 – $101	$59 – $95
Weighted average	$89	$89	$88	$89	$77	$78

(1)

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

(2)

Prepayment speed is measured using Life Total CPR.

Following is a quantitative summary of key inputs used in the valuation and assessment for impairment of the Company’s MSRs at year end and the effect on the fair value from adverse changes in those inputs (weighted averages are based upon UPB):


	December 31, 2017		December 31, 2016
	Fair	Amortized	Fair	Amortized
	value	cost	value	cost
	(Carrying value, unpaid principal balance of underlying
	mortgage loans and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$638,010	$1,481,578	$515,925	$1,111,747
Unpaid principal balance of underlying mortgage loans	$51,883,539	$114,365,698	$43,667,165	$85,509,941
Weighted average note interest rate	4.0%	3.8%	4.1%	3.7%
Weighted average servicing fee rate (in basis points)	32	31	32	31
Key inputs:
Pricing spread (1):
Range	7.6% – 14.1%	7.6% – 14.1%	7.6% – 14.9%	7.6% – 14.9%
Weighted average	9.8%	10.3%	10.1%	10.7%
Effect on fair value of (2):
5% adverse change	($10,760)	($27,700)	($9,097)	($22,382)
10% adverse change	($21,155)	($54,376)	($17,872)	($43,889)
20% adverse change	($40,916)	($104,869)	($34,516)	($84,464)
Prepayment speed (3):
Range	7.9% – 46.2%	7.4% – 44.1%	7.0% – 46.7%	6.6% – 43.9%
Weighted average	10.5%	9.7%	10.3%	8.7%
Average life (in years):
Range	1.2 – 7.8	2.0 – 8.3	1.3 – 8.6	1.6 – 9.4
Weighted average	6.6	7.5	6.7	8.1
Effect on fair value of (2):
5% adverse change	($10,809)	($23,544)	($8,818)	($16,636)
10% adverse change	($21,239)	($46,284)	($17,336)	($32,750)
20% adverse change	($41,038)	($89,514)	($33,533)	($63,513)
Annual per-loan cost of servicing:
Range	$78 – $97	$79 – $97	$78 – $101	$79 – $101
Weighted average	$89	$89	$92	$92
Effect on fair value of (2):
5% adverse change	($6,247)	($11,216)	($5,612)	($8,890)
10% adverse change	($12,494)	($22,431)	($11,225)	($17,781)
20% adverse change	($24,987)	($44,863)	($22,450)	($35,562)

(1)

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

(2)

For MSRs carried at fair value, an adverse change in one of the above-mentioned key inputs is expected to result in a reduction in fair value which will be recognized in income. For MSRs carried at lower of amortized cost or fair value, an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of the recognized MSR impairment will depend on the relationship of fair value to the carrying value of such MSRs.

(3)

Prepayment speed is measured using Life Total CPR.

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

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 used 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 slow 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.

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


	December 31,
	2017	2016
Carrying value (in thousands)	$236,534	$288,669
ESS and pool characteristics:
Unpaid principal balance of underlying mortgage loans (in thousands)	$27,217,199	$32,376,359
Average servicing fee rate (in basis points)	34	34
Average excess servicing spread (in basis points)	19	19
Key inputs:
Pricing spread (1):
Range	3.8% – 4.3%	3.8% – 4.8%
Weighted average	4.1%	4.4%
Annualized prepayment speed (2):
Range	8.4% – 41.4%	7.0% – 41.3%
Weighted average	10.8%	10.5%
Average life (in years):
Range	1.4 – 7.7	1.4 – 8.6
Weighted average	6.5	6.8

(1)

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

(2)

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 prepayment rates of the underlying mortgage loans, the applicable pricing spread (discount rate), 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—Amortization, impairment and 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 MSLs:


		December 31,
		2017		2016
MSL and pool characteristics:
Carrying value (in thousands)	$	14,120	$	15,192
Unpaid principal balance of underlying mortgage loans (in thousands)	$	1,620,609	$	2,074,896
Weighted average servicing fee rate (in basis points)		25		25
Key inputs:
Pricing spread (1)		7.7%		8.0%
Prepayment speed (2)		32.9%		31.7%
Average life (in years)		3.5		3.7
Annual per-loan cost of servicing	$	404	$	497

(1)

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

(2)

Prepayment speed is measured using Life Total CPR.

Mortgage Loans Held for Sale at Fair Value

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Mortgage Loans Held for Sale at Fair Value

12 Months Ended

Dec. 31, 2017

Mortgage Loans Held for Sale at Fair Value

Note 7—Mortgage Loans Held for Sale at Fair Value

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


	December 31,		December 31,
	2017		2016
	(in thousands)
Government-insured or guaranteed	$	2,085,764	$	1,984,020
Conventional conforming		231,128		141,524
Purchased from Ginnie Mae pools serviced by the Company		777,300		40,437
Repurchased pursuant to representations and warranties		4,911		6,834
	$	3,099,103	$	2,172,815
Fair value of mortgage loans pledged to secure:
Assets sold under agreements to repurchase	$	2,530,299	$	1,422,255
Mortgage loan participation purchase and sale agreements		551,688		702,919
	$	3,081,987	$	2,125,174

Derivative Activities

12 Months Ended

Dec. 31, 2017

Derivative Activities

Derivative Activities

Note 8—Derivative Activities

Derivative Notional Amounts and Fair Value of Derivatives

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


	December 31, 2017					December 31, 2016
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount	assets		liabilities		amount	assets		liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Not subject to master netting arrangements:
Interest rate lock commitments	3,654,955	$	60,012	$	1,740	4,279,611	$	65,848	$	6,457
Repurchase agreement derivatives			10,656		—			—		—
Used for hedging purposes:
Forward purchase contracts	4,920,883		4,288		1,272	12,746,191		77,905		16,914
Forward sales contracts	5,204,796		2,101		7,031	16,577,942		28,324		85,035
MBS put options	4,925,000		3,481		—	1,175,000		3,934		—
MBS call options	—		—		—	1,600,000		217		—
Put options on interest rate futures purchase contracts	2,125,000		3,570		—	1,125,000		3,109		—
Call options on interest rate futures purchase contracts	100,000		938		—	900,000		203		—
Treasury futures purchase contracts	100,000		—		—	—		—		—
Interest rate swap futures purchase contracts	1,400,000		—		—	200,000		—		—
Total derivatives before netting			85,046		10,043			179,540		108,406
Netting			(6,867)		(4,247)			(96,635)		(86,044)
		$	78,179	$	5,796		$	82,905	$	22,362
Deposits placed with derivative counterparties		$	2,620				$	10,591

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


	Year ended December 31, 2017
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	year	Additions	expirations	year
	(in thousands)
Forward purchase contracts	12,746,191	181,761,564	(189,586,872)	4,920,883
Forward sale contracts	16,577,942	226,000,107	(237,373,253)	5,204,796
MBS put options	1,175,000	25,050,000	(21,300,000)	4,925,000
MBS call options	1,600,000	17,700,000	(19,300,000)	—
Put options on interest rate futures purchase contracts	1,125,000	11,360,000	(10,360,000)	2,125,000
Call options on interest rate futures purchase contracts	900,000	1,939,300	(2,739,300)	100,000
Put options on interest rate futures sale contracts	—	10,010,000	(10,010,000)	—
Call options on interest rate futures sale contracts	—	2,739,300	(2,739,300)	—
Treasury futures purchase contracts	—	544,900	(444,900)	100,000
Treasury futures sale contracts	—	444,900	(444,900)	—
Interest rate swap futures purchase contracts	200,000	2,100,000	(900,000)	1,400,000
Interest rate swap futures sale contracts	—	900,000	(900,000)	—


	Year ended December 31, 2016
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	year	Additions	expirations	year
	(in thousands)
Forward purchase contracts	5,254,293	210,412,697	(202,920,799)	12,746,191
Forward sale contracts	6,230,811	262,202,884	(251,855,753)	16,577,942
MBS put options	1,275,000	19,225,000	(19,325,000)	1,175,000
MBS call options	—	1,600,000	—	1,600,000
Put options on interest rate futures purchase contracts	1,650,000	15,331,000	(15,856,000)	1,125,000
Call options on interest rate futures purchase contracts	600,000	5,687,500	(5,387,500)	900,000
Put options on interest rate futures sale contracts	—	9,436,000	(9,436,000)	—
Call options on interest rate futures sale contracts	—	550,000	(550,000)	—
Treasury futures purchase contracts	—	585,800	(585,800)	—
Treasury futures sale contracts	—	585,800	(585,800)	—
Interest rate swap futures purchase contracts	—	400,000	(200,000)	200,000
Interest rate swap futures sale contracts	—	200,000	(200,000)	—


	Year ended December 31, 2015
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	year	Additions	expirations	year
	(in thousands)
Forward purchase contracts	2,634,218	103,571,212	(100,951,137)	5,254,293
Forward sale contracts	3,901,851	137,061,118	(134,732,158)	6,230,811
MBS put options	340,000	3,902,500	(2,967,500)	1,275,000
MBS call options	—	160,000	(160,000)	—
Put options on interest rate futures purchase contracts	755,000	8,790,000	(7,895,000)	1,650,000
Call options on interest rate futures purchase contracts	630,000	6,055,000	(6,085,000)	600,000
Put options on interest rate futures sale contracts	50,000	50,000	(100,000)	—
Call options on interest rate futures sale contracts	—	35,100	(35,100)	—

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.


	December 31, 2017						December 31, 2016
	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	$	60,012	$	—	$	60,012	$	65,848	$	—	$	65,848
Repurchase agreement derivatives		10,656		—		10,656		—		—		—
		70,668		—		70,668		65,848		—		65,848
Derivatives subject to master netting arrangements:
Forward purchase contracts		4,288		—		4,288		77,905		—		77,905
Forward sale contracts		2,101		—		2,101		28,324		—		28,324
MBS put options		3,481		—		3,481		3,934		—		3,934
MBS call options		—		—		—		217		—		217
Put options on interest rate futures purchase contracts		3,570		—		3,570		3,109		—		3,109
Call options on interest rate futures purchase contracts		938		—		938		203		—		203
Netting		—		(6,867)		(6,867)		—		(96,635)		(96,635)
		14,378		(6,867)		7,511		113,692		(96,635)		17,057
	$	85,046	$	(6,867)	$	78,179	$	179,540	$	(96,635)	$	82,905

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.


	December 31, 2017								December 31, 2016
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
			balance sheet								balance sheet
	Net amount								Net amount
	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	$	60,012	$	—	$	—	$	60,012	$	65,848	$	—	$	—	$	65,848
Deutsche Bank		10,656		—		—		10,656		—		—		—		—
RJ O'Brien		4,508		—		—		4,508		2,750		—		—		2,750
Federal National Mortgage Association		1,092		—		—		1,092		—		—		—		—
Goldman Sachs		540		—		—		540		—		—		—		—
Jefferies & Co.		514		—		—		514		540		—		—		540
Cantor Fitzgerald LP		472		—		—		472		265		—		—		265
Barclays Capital		—		—		—		—		12,002		—		—		12,002
Others		385		—		—		385		1,500		—		—		1,500
	$	78,179	$	—	$	—	$	78,179	$	82,905	$	—	$	—	$	82,905

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.


	December 31, 2017						December 31, 2016
					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	$	1,740	$	—	$	1,740	$	6,457	$	—	$	6,457
Derivatives subject to a master netting arrangement:
Forward purchase contracts		1,272		—		1,272		16,914		—		16,914
Forward sale contracts		7,031		—		7,031		85,035		—		85,035
Netting		—		(4,247)		(4,247)		—		(86,044)		(86,044)
		8,303		(4,247)		4,056		101,949		(86,044)		15,905
Total derivatives		10,043		(4,247)		5,796		108,406		(86,044)		22,362
Mortgage loans sold under agreements to repurchase:
Amount outstanding		2,380,866		—		2,380,866		1,736,922		—		1,736,922
Unamortized premiums and debt issuance costs, net		672		—		672		(1,808)		—		(1,808)
		2,381,538		—		2,381,538		1,735,114		—		1,735,114
	$	2,391,581	$	(4,247)	$	2,387,334	$	1,843,520	$	(86,044)	$	1,757,476

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.


	December 31, 2017								December 31, 2016
			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)
IRLCs	$	1,740	$	—	$	—	$	1,740	$	6,457	$	—	$	—	$	6,457
Credit Suisse First Boston Mortgage Capital LLC		1,010,562		(1,010,320)		—		242		961,533		(960,988)		—		545
Deutsche Bank		593,864		(593,864)		—		—		—		—		—		—
Bank of America, N.A.		406,787		(406,355)		—		432		349,638		(342,769)		—		6,869
Morgan Stanley Bank, N.A.		139,491		(138,983)		—		508		189,756		(188,851)		—		905
JPMorgan Chase Bank, N.A.		90,442		(90,442)		—		—		135,322		(135,322)		—		—
BNP Paribas		87,753		(87,753)		—		—		1,151		—		—		1,151
Royal Bank of Canada		24,835		(23,752)		—		1,083		2,937		—		—		2,937
Citibank, N.A.		23,010		(23,010)		—		—		81,555		(80,525)		—		1,030
Barclays Capital		6,387		(6,387)		—		—		28,467		(28,467)		—		—
Others		1,791		—		—		1,791		2,468		—		—		2,468
	$	2,386,662	$	(2,380,866)	$	—	$	5,796	$	1,759,284	$	(1,736,922)	$	—	$	22,362

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:


		Year ended December 31,
Derivative activity	Income statement line	2017		2016		2015
		(in thousands)
Repurchase agreement derivative	Interest expense	$	(330)	$	—	$	—
Hedged item:
Interest rate lock commitments and mortgage loans held for sale	Net gains on mortgage loans held for sale	$	(21,255)	$	20,619	$	(48,960)
Mortgage servicing rights	Net mortgage loan servicing fees–Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	(37,855)	$	26,405	$	(7,717)

Carried Interest Due from Investment Funds

12 Months Ended

Dec. 31, 2017

Carried Interest Due from Investment Funds

Carried Interest Due from Investment Funds

Note 9—Carried Interest Due from Investment Funds

The activity in the Company’s Carried Interest due from Investment Funds is summarized as follows:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	70,906	$	69,926	$	67,298
Carried Interest recognized during the year		(1,040)		980		2,628
Cash received during the year		(61,314)		—		—
Balance at end of year	$	8,552	$	70,906	$	69,926

The amount of the Carried Interest that will be received by the Company depends on the Investment Funds’ future performance. As a result, the amount of Carried Interest recorded by the Company is based on the cash flows that would be produced assuming termination of the Investment Funds at year end and may be reduced in future periods based on the performance of the Investment Funds in those periods. However, the Company is not required to pay guaranteed returns to the Investment Funds and the amount of any reduction to Carried Interest will be limited to the amounts previously recognized.

In 2017, the Investment Funds completed the sale of substantially all of their remaining assets. The Company collected a substantial portion of its Carried Interest during the year ended December 31, 2017 and expects to collect the remaining balance, adjusted for intervening income or losses through the date of liquidation of the Investment Funds, in the year ending December 31, 2018.

Mortgage Servicing Rights and Mortgage Servicing Liabilities

12 Months Ended

Dec. 31, 2017

Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights and Mortgage Servicing Liabilities

Note 10—Mortgage Servicing Rights and Mortgage Servicing Liabilties

Carried at Fair Value:

The activity in MSRs carried at fair value is as follows:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	515,925	$	660,247	$	325,383
Additions:
Purchases		183,850		146		382,824
Mortgage servicing rights resulting from mortgage loan sales		24,471		17,319		18,013
		208,321		17,465		400,837
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)		(4,771)		(80,244)		7,352
Other changes in fair value (2)		(81,465)		(81,543)		(73,325)
Total change in fair value		(86,236)		(161,787)		(65,973)
Balance at end of year	$	638,010	$	515,925	$	660,247

	December 31,
	2017		2016
		(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable	$	630,711	$	509,847

(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.

Carried at Lower of Amortized Cost or Fair Value:

The activity in MSRs carried at the lower of amortized cost or fair value is summarized below:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Amortized cost:
Balance at beginning of year	$	1,206,694	$	798,925	$	415,245
Mortgage servicing rights resulting from mortgage loan sales		556,630		560,212		454,840
Amortization		(179,946)		(139,666)		(71,160)
Application of valuation allowance to recognize other-than-temporary impairment		—		(12,777)		—
Balance at end of year		1,583,378		1,206,694		798,925

Valuation allowance:
Balance at beginning of year		(94,947)		(47,237)		(9,800)
Additions		(6,853)		(60,487)		(37,437)
Application of valuation allowance to recognize other-than-temporary impairment		—		12,777		—
Balance at end of year		(101,800)		(94,947)		(47,237)
Mortgage servicing rights, net	$	1,481,578	$	1,111,747	$	751,688
Fair value of mortgage servicing rights at end of year	$	1,482,426	$	1,112,302	$	766,345
Fair value of mortgage servicing rights at beginning of year	$	1,112,302	$	766,345	$	416,802

	December 31,
	2017		2016
	(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable	$	1,467,356	$	1,107,824

The following table summarizes the Company’s estimate of future amortization of its existing MSRs. This projection was developed using the inputs used by management in its December 31, 2017 valuation of MSRs. The inputs underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time.


	Estimated MSR
Year ending December 31,	amortization
	(in thousands)
2018	$	195,154
2019		174,729
2020		155,777
2021		138,141
2022		122,541
Thereafter		797,036
	$	1,583,378

Mortgage Servicing Liabilities at Fair Value:

The activity in mortgage servicing liability carried at fair value is summarized below:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	15,192	$	1,399	$	6,306
Mortgage servicing liabilities resulting from mortgage loan sales		17,229		14,991		20,442
Mortgage servicing liabilities assumed		—		10,139		—
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		6,526		5,264		(15,653)
Other changes in fair value (2)		(24,827)		(16,601)		(9,696)
Total change in fair value		(18,301)		(11,337)		(25,349)
Balance at end of year	$	14,120	$	15,192	$	1,399

(1)

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

(2)

Represents changes due to realization of cash flows.

Servicing fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—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—Loan servicing fees—Ancillary and other fees on the consolidated statements of income. The fees are summarized below:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Contractual servicing fees	$	475,848	$	385,633	$	290,474
Ancillary and other fees:
Late charges		25,097		19,341		5,835
Other		4,603		4,706		2,266
	$	505,548	$	409,680	$	298,575

Furniture, Fixtures, Equipment and Building Improvements

12 Months Ended

Dec. 31, 2017

Furniture, Fixtures, Equipment and Building Improvements [Member]

Furniture, fixtures, equipment and building improvements

Furniture, Fixtures, Equipment and Building Improvements

Note 11—Furniture, Fixtures, Equipment and Building Improvements

Furniture, fixtures, equipment and building improvements is summarized below:


	December 31,
	2017		2016
	(in thousands)
Furniture, fixtures, equipment and building improvements	$	54,186	$	48,713
Less: Accumulated depreciation and amortization		(24,733)		(17,392)
	$	29,453	$	31,321
Fixed assets pledged to secure obligations under capital lease	$	23,915	$	25,134

Depreciation and amortization expenses are summarized below:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Depreciation and amortization expenses	$	8,150	$	6,842	$	4,149
Less: Depreciation and amortization allocated to PMT(1)		(1,396)		(1,350)		(2,051)
Depreciation and amortization expenses included in Occupancy and equipment	$	6,754	$	5,492	$	2,098

(1)

The Company’s management agreement with PMT provides for allocation by the Company of certain common overhead costs to PMT.

Capitalized Software

12 Months Ended

Dec. 31, 2017

Long-lived asset disclosures

Liability for Losses Under Representations and Warranties

Note 12—Capitalized Software

Capitalized software is summarized below:


	December 31,
	2017		2016
	(in thousands)
Cost	$	29,621	$	13,457
Less: Accumulated amortization		(3,892)		(2,252)
	$	25,729	$	11,205
Capitalized software pledged to secure obligation under capital lease	$	1,568	$	515

Software amortization expense totaled $1.6 million, $357,000 and $324,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The Company recorded $827,000 of impairment of capitalized software during the year ended December 31, 2017. No such impairment was recorded during the years ended December 31, 2016 and 2015.

Borrowings

12 Months Ended

Dec. 31, 2017

Borrowings

Borrowings

Note 13—Borrowings

The borrowing facilities described throughout this Note 13 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 December 31, 2017.

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 and servicing advances. Eligible mortgage loans and participation certificates backed by MSRs and servicing advances are sold at advance rates based on the fair value of the assets sold. Interest is charged at a rate based on the buyer’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:


	Year ended December 31,
	2017			2016			2015
	(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	1,829,257		$	1,438,181		$	823,490
Weighted average interest rate (1)		3.18	%		2.91	%		1.78	%
Total interest expense	$	60,286		$	49,791		$	21,377
Maximum daily amount outstanding	$	3,022,656		$	2,661,746		$	1,976,744


	December 31,
	2017			2016
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	2,380,866		$	1,736,922
Unamortized premiums and debt issuance costs, net		672			(1,808)
	$	2,381,538		$	1,735,114
Weighted average interest rate		3.24	%		3.02	%
Available borrowing capacity (2):
Committed	$	316,503		$	347,487
Uncommitted		2,257,631			857,591
	$	2,574,134		$	1,205,078
Fair value of assets securing repurchase agreements:
Mortgage loans held for sale	$	2,530,299		$	1,422,255
Servicing advances	$	114,643		$	81,306
Mortgage servicing rights	$	474,922		$	1,479,322
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	144,128		$	150,000
Margin deposits placed with counterparties (3)	$	3,750		$	3,000

(1)

Excludes the effect of amortization of premium and debt issuance costs totaling $1.3 million, $7.3 million, and $7.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.

(2)

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.

(3)

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

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


Remaining maturity at December 31, 2017	Balance
	(dollars in thousands)
Within 30 days	$	768,906
Over 30 to 90 days		1,511,960
Over 90 to 180 days		100,000
Total loans sold under agreements to repurchase	$	2,380,866
Weighted average maturity (in months)		1.7

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 mortgage loans held for sale sold under agreements to repurchase is summarized by counterparty below as of December 31, 2017:


			Weighted average
			maturity of advances
			under repurchase
Counterparty	Amount at risk		agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC	$	489,565	April 27, 2018	April 27, 2018
Credit Suisse First Boston Mortgage Capital LLC	$	112,168	January 13, 2018	April 27, 2018
Deutsche Bank AG	$	76,542	March 17, 2018	June 30, 2018
Bank of America, N.A.	$	34,857	March 19, 2018	May 25, 2018
Morgan Stanley Bank, N.A.	$	10,339	February 15, 2018	August 24, 2018
JP Morgan Chase Bank, N.A.	$	7,662	February 16, 2018	October 12, 2018
BNP Paribas	$	5,280	March 20, 2018	November 16, 2018
Royal Bank of Canada	$	1,747	March 10, 2018	March 29, 2018
Citibank, N.A.	$	1,506	February 2, 2018	March 2, 2018
Barclays Bank PLC	$	686	February 1, 2018	February 1, 2018

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 mortgage loans 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 the 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.

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 and sale agreements are summarized below:


	Year ended December 31,
	2017			2016			2015
	(dollars in thousands)
Average balance	$	208,613		$	268,416		$	157,918
Weighted average interest rate (1)		2.34	%		1.75	%		1.45	%
Total interest expense	$	5,496		$	5,523		$	2,670
Maximum daily amount outstanding	$	532,266		$	1,268,871		$	250,325

(1)

Excludes the effect of amortization of facility fees totaling $545,000, $740,000, and $355,000 for the years ended December 31, 2017, 2016 and 2015, respectively.


	December 31,
	2017			2016
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	527,706		$	671,562
Unamortized debt issuance costs		(311)			(136)
	$	527,395		$	671,426
Weighted average interest rate		2.81	%		2.02	%
Fair value of mortgage loans pledged to secure mortgage loan participation and sale agreements	$	551,688		$	702,919

Notes Payable

On February 16, 2017, the Company, through the Issuer Trust, issued an aggregate principal amount of $400 million in Term Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Term Notes bear interest at a rate equal to one-month LIBOR plus 4.75% per annum. The Term Notes will mature on February 25, 2020 or, if extended pursuant to the terms of the related indenture supplement, February 25, 2021 (unless earlier redeemed in accordance with the terms of the Term Notes).

On August 10, 2017, the Company, through the Issuer Trust, issued an aggregate principal amount of $500 million in Term Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Term Notes bear interest at a rate equal to one-month LIBOR plus 4.0% per annum. The Term Notes will mature on August 25, 2022 or, if extended pursuant to the terms of the related indenture supplement, August 25, 2023 (unless earlier redeemed in accordance with the terms of the Term Notes).

The Term Notes rank pari passu with each other and with the VFN issued by 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.

The Company entered into a revolving credit agreement, pursuant to which the lenders agreed to make revolving loans in an amount not to exceed $150 million. The proceeds of the loans are to be used solely for working capital and general corporate purposes of the Company and its subsidiaries. Interest on the loans accrues at a per annum rate of interest equal to, at an election of the Company, 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 accrues at a higher rate. The maturity date is November 16, 2018.

During December 2015, the Company entered into a note payable which is secured by Fannie Mae and Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The maturity date is February 1, 2018.

Notes payable are summarized below:


	Year ended December 31,
	2017			2016			2015
	(dollars in thousands)
Average balance	$	586,135		$	108,475		$	214,235
Weighted average interest rate (1)		5.86	%		5.13	%		3.28	%
Total interest expense	$	39,369		$	8,688		$	9,336
Maximum daily amount outstanding	$	900,000		$	153,849		$	469,380

(1)

Excluding the effect of amortization of debt issuance costs totaling $4.5 million, $3.0 million and 2.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.


	December 31,
	2017			2016
	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	900,006		$	151,935
Unamortized debt issuance costs		(8,501)			(993)
	$	891,505		$	150,942
Weighted average interest rate		5.66	%		4.67	%
Unused amount	$	280,000		$	98,065
Assets pledged to secure notes payable:
Cash	$	20,765		$	91,788
Carried Interest	$	8,552		$	70,906
Mortgage servicing rights	$	1,623,145		$	138,349

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:


	Year ended December 31,
	2017			2016			2015
	(dollars in thousands)
Average balance	$	24,830		$	18,620		$	1,132
Weighted average interest rate		3.07	%		2.47	%		2.34	%
Total interest expense	$	769		$	510		$	18
Maximum daily amount outstanding	$	30,044		$	24,242		$	13,579


	December 31,			December 31,
	2017			2016
	(in thousands)
Unpaid principal balance	$	20,971		$	23,424
Weighted average interest rate		3.26	%		2.48	%
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment	$	23,915		$	25,134
Capitalized software	$	1,568		$	515

Excess Servicing Spread Financing at Fair Value

In conjunction with the Company’s 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 all ancillary income associated with servicing the loans and a fixed base servicing fee. The Company continues to be the servicer of the mortgage loans and retains all servicing obligations, including responsibility to make servicing advances.

Following is a summary of ESS:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	288,669	$	412,425	$	191,166
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust:
For cash		—		—		271,554
Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		5,244		6,603		6,728
Accrual of interest		16,951		22,601		25,365
Repayment		(54,980)		(69,992)		(78,578)
Settlement (1)		—		(59,045)		—
Change in fair value		(19,350)		(23,923)		(3,810)
Balance at end of year	$	236,534	$	288,669	$	412,425

(1)

On February 29, 2016, the Company and PMT terminated that certain master spread acquisition and MSR servicing agreement that the parties entered into effective February 1, 2013 (the “2/1/13 Spread Acquisition Agreement”) and all amendments thereto. In connection with the termination of the 2/1/13 Spread Acquisition Agreement, the Company reacquired from PMT all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by the Company to PMT under the 2/1/13 Spread Acquisition Agreement and then subject to such 2/1/13 Spread Acquisition Agreement. On February 29, 2016, the Company also reacquired from PMT all of its right, title and interest in and to all of the Freddie Mac ESS previously sold to PMT by the Company.

Liability for Losses Under Representations and Warranties

12 Months Ended

Dec. 31, 2017

Liability for Losses Under Representations and Warranties

Note 14—Liability for Losses Under Representations and Warranties

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


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	19,067	$	20,611	$	13,259
Provision for losses on mortgage loans sold:
Resulting from sales of mortgage loans		5,890		7,090		7,512
Reduction in liability due to change in estimate		(4,301)		(7,672)		—
Incurred losses		(603)		(962)		(160)
Balance at end of year	$	20,053	$	19,067	$	20,611
Unpaid principal balance of mortgage loans subject to representations and warranties at end of year	$	120,855,101	$	90,650,605

Income Taxes

12 Months Ended

Dec. 31, 2017

Income Taxes

Income Taxes

Note 15—Income Taxes

The Company files U.S. federal and state corporate income tax returns for PFSI and partnership returns for PennyMac. The Company’s federal tax returns are subject to examination for 2014 and forward and its state tax returns are generally subject to examination for 2013 and forward. PennyMac’s federal partnership returns are subject to examination for 2014 and forward, and its state tax returns are generally subject to examination for 2013 and forward. No returns are currently under examination.

The Company’s tax expense for the year ended December 31, 2017 was significantly impacted by the enactment on December 22, 2017 of H.R. 1, known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act reduces the U.S. federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018.

GAAP requires that the effect of tax legislation be recognized in the period in which the law was enacted. In the fourth quarter of 2017, the Company recorded a tax benefit of $13.7 million due to a re-measurement of deferred tax assets and liabilities resulting from a decrease in the federal tax rate. The re-measurement of the deferred tax assets and liabilities is predominantly based on a reduction to the federal rate as described above which will result in lower tax expense when these deferred tax assets and liabilities are realized. The Company is not aware of any areas of significant interpretation or judgment in the calculation of this benefit. However, if any additional interpretive guidance is released from taxing authorities or accounting standard setters, it is possible these amounts could change the calculation of the tax benefit in future reporting periods.

The revaluation of the deferred tax asset resulting from PennyMac unitholder exchanges under the tax receivable agreement resulted in the repricing of the Company’s corresponding liability under the tax receivable agreement. The Company recorded a reduction of $32.0 million in the payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement.

The following table details the Company’s income tax expense:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Current expense:
Federal	$	(81)	$	(1,622)	$	—
State		56		(244)		—
Total current expense		(25)		(1,866)		—
Deferred expense:
Federal		14,674		38,082		24,819
State		9,738		9,887		6,816
Total deferred expense		24,412		47,969		31,635
Total provision for income taxes	$	24,387	$	46,103	$	31,635

The provision for deferred income taxes for the years ended December 31, 2017, 2016, and 2015 primarily relates to the Company’s investment in PennyMac partially offset by the Company’s generation and utilization of a net operating loss and generation of tax credits. The portion attributable to its investment in PennyMac primarily relates to MSRs that PennyMac received pursuant to sales of mortgage loans held for sale at fair value and Carried Interest from the Investment Funds.

The following table is a reconciliation of the Company’s provision for income taxes at statutory rates to the provision for income taxes at the Company’s effective tax rate:


	Year ended December 31,
	2017		2016		2015
Federal income tax statutory rate	35.0	%	35.0	%	35.0	%
Less: Rate attributable to noncontrolling interest	(22.0)	%	(24.8)	%	(25.1)	%
State income taxes, net of federal benefit	2.2	%	1.6	%	1.6	%
Tax rate revaluation	(8.0)	%	0.0	%	0.0	%
Other	0.1	%	0.2	%	(0.2)	%
Valuation allowance	0.0	%	0.0	%	0.0	%
Effective tax rate	7.3	%	12.0	%	11.3	%

The components of the Company’s provision for deferred income taxes are as follows:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Investment in PennyMac	$	34,011	$	40,493	$	40,272
Net operating loss		(9,675)		8,110		(8,637)
Tax credits		76		(634)		—
Valuation allowance		—		—		—
Total provision for deferred income taxes	$	24,412	$	47,969	$	31,635

The components of Income taxes payable are as follows:


	December 31,
	2017		2016
	(in thousands)
Taxes currently receivable	$	(2,126)	$	(7,615)
Deferred income tax liability, net		54,286		32,703
Income taxes payable	$	52,160	$	25,088

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:


	December 31,
	2017		2016
	(in thousands)
Deferred income tax liabilities:
Investment in PennyMac	$	65,046	$	33,864
Net operating loss carryforward		(10,202)		(527)
Tax credits carryforward		(558)		(634)
Deferred income tax liabilities, net	$	54,286	$	32,703

The Company recorded a net deferred income tax liability in Income taxes payable in the consolidated balance sheet as of December 31, 2017 and 2016.

The Company recorded a deferred tax asset of $10.2 million related to a net operating loss of approximately $37.4 million, with $1.3 million and $36.1 million generally expiring in 2035 and 2037, respectively. Net operating losses arising in tax years beginning after December 31, 2017 are limited in annual use to 80% of taxable income (without regard to net operating less deduction) but can be carried forward indefinitely. The Company has tax credits of $0.6 million, which generally have no expiration date.

At December 31, 2017 and 2016, the Company had no unrecognized tax benefits and does not anticipate any unrecognized tax benefits. Should the recognition of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such expenses in the Company’s income tax accounts. No such accruals existed at December 31, 2017 and 2016.

Commitments and Contingencies

12 Months Ended

Dec. 31, 2017

Commitments and Contingencies.

Commitments and Contingencies

Note 16—Commitments and Contingencies

Litigation

The business of the Company involves the collection of numerous accounts, as well as the validation of liens and compliance with various state and federal lending and servicing laws. Accordingly, the Company may be involved in proceedings, claims, and legal actions arising in the ordinary course of business. As of December 31, 2017, the Company was not involved in any legal proceedings, claims, or actions that in management’s view would be reasonably likely to have a material adverse effect on 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, the Federal Housing Administration as well as subject to the requirements of the Agencies it sells loans to and performs loan servicing for. As the result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by the various federal, state and local regulatory bodies.

Commitments to Purchase and Fund Mortgage Loans


	December 31, 2017
	(in thousands)
Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust	$	2,245,579
Commitments to fund mortgage loans		1,409,376
	$	3,654,955

Leases

The Company leases office facilities. Rent expense during the years ended December 31, 2017, 2016 and 2015 was $12.3 million, $9.1 million and $4.6 million, respectively.

The following table provides a summary of future minimum lease payments required under lease agreements, which may also contain renewal options as of December 31, 2017:


Twelve months ended December 31,	Future minimum lease payments
	(in thousands)
2018	$	13,688
2019		14,404
2020		14,203
2021		12,017
2022		9,875
Thereafter		32,067
	$	96,254

Commitment to Make Distributions to PennyMac Owners

Under the terms of its Limited Liability Company Agreement, PennyMac is required to make cash distributions to the Company’s noncontrolling interest holders in amounts sufficient to allow such noncontrolling interest holders to pay federal and state taxes on their allocable share of PennyMac taxable income. Such distributions are calculated and, if required, made quarterly.

Stockholders' Equity

12 Months Ended

Dec. 31, 2017

Stockholders' Equity.

Stockholders' Equity

Note 17—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 Class A common stock.

The following table summarizes the Company’s stock repurchase activity:


		Year ended December 31,						Cumulative
	2017		2016		2015			Total (1)
	(in thousands)
Shares of Class A common stock repurchased		505		—		—		505
Cost of shares of Class A common stock repurchased	$	8,599	$	—	$	—	$	8,599

(1)

Amounts represent the total shares of Class A common stock repurchased under the stock repurchase program through December 31, 2017.

The shares of repurchased Class A common stock were canceled upon settlement of the repurchase transactions and returned to the authorized but unissued common stock pool.

Noncontrolling Interest

12 Months Ended

Dec. 31, 2017

Noncontrolling Interest.

Noncontrolling Interest

Note 18—Noncontrolling Interest

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


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	100,757	$	66,079	$	47,228
Increase in the Company's additional paid-in capital for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.	$	27,119	$	6,877	$	4,982
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		1,608		301		319


	December 31,			December 31,
	2017			2016
Percentage of noncontrolling interest in Private National Mortgage Acceptance Company, LLC		69.2	%		70.6	%

Net Gains on Mortgage Loans Held for Sale

12 Months Ended

Dec. 31, 2017

Net Gains on Mortgage Loans Held for Sale

Net Gains on Mortgage Loans Held for Sale

Note 19—Net Gains on Mortgage Loans Held for Sale

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


	Year ended December 31,
	2017		2016		2015
	(in thousands)
From non-affiliates:
Cash (loss) gain:
Mortgage loans	$	(174,669)	$	(62,283)	$	(82,709)
Hedging activities		(16,866)		10,275		(47,150)
		(191,535)		(52,008)		(129,859)
Non-cash gain:
Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales		563,872		562,540		452,411
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales		(5,890)		(7,090)		(7,512)
Reduction in liability due to change in estimate		4,301		7,672		—
Change in fair value relating to mortgage loans and hedging derivatives held at year end:
Interest rate lock commitments		(1,120)		15,618		11,372
Mortgage loans		4,576		2,796		3,949
Hedging derivatives		(4,389)		10,344		(1,810)
		369,815		539,872		328,551
From PennyMac Mortgage Investment Trust		21,989		(8,092)		(7,836)
	$	391,804	$	531,780	$	320,715

Net Interest Expense

12 Months Ended

Dec. 31, 2017

Net Interest Expense

Net Interest Expense

Note 20—Net Interest Expense

Net interest expense is summarized below:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Interest income:
From non-affiliates:
Short-term investments	$	2,356	$	2,558	$	506
Mortgage loans held for sale at fair value		91,972		54,584		42,008
Placement fees relating to custodial funds		40,813		16,155		3,298
		135,141		73,297		45,812
From PennyMac Mortgage Investment Trust—Financings receivable		8,038		7,830		3,343
		143,179		81,127		49,155

Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase (1)		60,286		49,791		21,377
Mortgage loan participation purchase and sale agreements		5,496		5,523		2,670
Notes payable		39,369		8,688		9,336
Obligations under capital lease		769		510		18
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		16,933		15,102		6,883
Interest on mortgage loan impound deposits		4,716		3,991		2,888
		127,569		83,605		43,172
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value		16,951		22,601		25,365
		144,520		106,206		68,537
	$	(1,341)	$	(25,079)	$	(19,382)

(1)

In 2017, the Company entered 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 year ended December 31, 2017, the Company included $9.2 million of such incentives as a reduction in Interest expense. The master repurchase agreement has an initial term of six months renewable for three additional six-month terms at the option of the lender. There can be no assurance whether the lender will renew this agreement upon its maturity.

Stock-based Compensation

12 Months Ended

Dec. 31, 2017

Stock-based Compensation

Stock-based Compensation

Note 21—Stock‑based Compensation

The Company’s 2013 Equity Incentive Plan provides for grants of stock options, time-based and performance-based restricted stock units (“RSUs”), stock appreciation rights, performance units and stock grants. As of December 31, 2017, the Company has 18.8 million units available for future awards.

Following is a summary of the stock-based compensation expense by instrument awarded:


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Performance-based RSUs	$	11,020	$	9,475	$	9,293
Stock options		4,909		4,464		5,713
Time-based RSUs		4,768		2,494		2,294
Exchangeable PNMAC units		—		72		221
	$	20,697	$	16,505	$	17,521

Performance‑Based RSUs

The performance‑based RSUs provide for the issuance of shares of the Company’s Class A common stock based on the attainment of earnings per share and/or return on equity and are generally adjusted for grantee job performance ratings. The satisfaction of the performance goals and issuance of shares will be approved by a committee of the Company’s board of directors. Approximately 779,000 shares vested under the grants with a performance period ended December 31, 2017 will be issued to the grantees in April 2018.

The fair value of the performance‑based RSUs is measured based on the fair value of the Company’s common stock at the grant date, taking into consideration management’s estimate of the expected outcome of the performance goal, and the number of shares to be forfeited during the vesting period. The Company assumes forfeiture rates of 0% ‑ 21.1% per year based on the grantees’ employee classification. The actual amount of shares earned could vary from zero, if the performance goals are not met, to as much as 130% of target, if the performance goals are meaningfully exceeded.

The table below summarizes performance‑based RSU activity:


	Year ended December 31,
	2017		2016		2015
	(in thousands, except per unit amounts)
Number of units:
Outstanding at beginning of year		2,475		2,350		1,257
Granted		694		813		1,143
Vested		(446)		—		—
Forfeited or cancelled		(334)		(688)		(50)
Outstanding at end of year		2,389		2,475		2,350
Weighted average grant date fair value per unit:
Outstanding at beginning of year	$	14.24	$	16.30	$	15.48
Granted	$	18.04	$	11.28	$	17.21
Vested	$	13.65	$	—	$	—
Forfeited	$	14.45	$	16.87	$	16.46
Outstanding at end of year	$	15.57	$	14.24	$	16.30
Compensation expense recorded during the year	$	11,020	$	9,475	$	9,293

Stock Options

The stock option award agreements provide for the award of stock options to purchase the optioned Class A common stock. In general, and except as otherwise provided by the agreement, one‑third of the stock option awards vests on each of the first, second, and third anniversaries of the grant date, subject to the recipient’s continued service through each anniversary. Each stock option has a term of ten years from the date of grant but expires (1) immediately upon termination of the holder’s employment or other association with the Company for cause, (2) one year after the holder’s employment or other association is terminated due to death or disability and (3) three months after the holder’s employment or other association is terminated for any other reason.

The fair value of each stock option award is estimated on the date of grant using a variant of the Black Scholes model based on the following inputs:


	Year ended December 31,
	2017	2016	2015
Expected volatility (1)	31%	28%	41%
Expected dividends	0%	0%	0%
Risk-free interest rate	0.8% -2.7%	0.3% - 2.1%	0.1% - 2.3%
Expected grantee forfeiture rate	0.0% -21.1%	0.0% -20.2%	0.0% -18.7%

(1)

Based on historical volatilities of the Company’s common stock for 2017 and 2016 grants and based on historical volatilities of comparable companies’ common stock for 2015 grants.

The Company uses its historical employee departure behavior to estimate the grantee forfeiture rates used in its option‑pricing model. The expected term of common stock options granted is derived from the Company’s option pricing model and represents the period that common stock options granted are expected to be outstanding. The risk‑free interest rate for periods within the contractual term of the common stock option is based on the U.S. Treasury yield curve in effect at the time of grant.

The table below summarizes stock option award activity:


	Year ended December 31,
	2017		2016		2015
	(in thousands, except per option amounts)
Number of stock options:
Outstanding at beginning of year		2,738		1,845		1,167
Granted		861		962		715
Exercised		(90)		(9)		—
Forfeited		(52)		(60)		(37)
Outstanding at end of year		3,457		2,738		1,845
Weighted average exercise price per option:
Outstanding at beginning of year	$	15.81	$	18.17	$	18.23
Granted	$	18.05	$	11.29	$	17.52
Exercised	$	15.04	$	17.33	$	17.26
Forfeited	$	15.58	$	15.66	$	17.88
Outstanding at end of year	$	16.40	$	15.81	$	18.17
Compensation expense recorded during the year	$	4,909	$	4,464	$	5,713


	December 31,
	2017
Number of options exercisable at end of year (in thousands)		1,781
Weighted average exercise price per exercisable option	$	17.21
Weighted average remaining contractual term (in years):
Outstanding		7.5
Exercisable		6.6
Aggregate intrinsic value:
Outstanding (in thousands)	$	20,583
Exercisable (in thousands)	$	9,151
Expected vesting amounts at year end:
Number of options expected to vest (in thousands)		1,541
Weighted average vesting period (in months)		10

Time‑Based RSUs

The RSU grant agreements provide for the award of time‑based RSUs, entitling the award recipient to one share of the Company’s Class A common stock for each RSU. One‑third of the time‑based RSUs vest on each of the first, second, and third anniversaries of the grant date, subject to the recipient’s continued service through each anniversary.

Compensation cost relating to time‑based RSUs is based on the grant date fair value of the Company’s Class A common stock and the number of shares expected to vest. For purposes of estimating the cost of the time‑based RSUs granted, the Company assumes forfeiture rates of 0% ‑ 21.1% per year based on the grantees’ employee classification.

The table below summarizes time‑based RSU activity:


	Year ended December 31,
	2017		2016		2015
	(in thousands, except per unit amounts)
Number of units:
Outstanding at beginning of year		382		271		202
Granted		408		261		150
Vested		(173)		(127)		(75)
Forfeited		(17)		(23)		(6)
Outstanding at end of year		600		382		271
Weighted average grant date fair value per unit:
Outstanding at beginning of year	$	13.71	$	17.81	$	17.92
Granted	$	18.02	$	11.77	$	17.87
Vested	$	14.66	$	17.99	$	18.25
Forfeited	$	14.87	$	15.55	$	26.07
Outstanding at end of year	$	16.37	$	13.71	$	17.81
Compensation expense recorded during the year	$	4,768	$	2,494	$	2,294

Earnings Per Share of Common Stock

12 Months Ended

Dec. 31, 2017

Earnings Per Share of Common Stock

Earnings Per Share of Common Stock

Note 22—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 year. 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 represented by the non-vested stock-based compensation awards. The diluted earnings per share calculation assumes the exchange of PennyMac Class A units for shares of common stock. Accordingly, earnings attributable to the Company’s common stockholders is also adjusted to include the earnings allocated to the PennyMac Class A units after taking into account the income taxes that would be applicable to such earnings.

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


	Year ended December 31,
	2017		2016		2015
	(in thousands, except per share data)
Basic earnings per share of common stock:
Net income attributable to common stockholders	$	100,757	$	66,079	$	47,228
Weighted average shares of common stock outstanding		23,199		22,161		21,755
Basic earnings per share of common stock	$	4.34	$	2.98	$	2.17

Diluted earnings per share of common stock:
Net income attributable to common stockholders	$	100,757	$	66,079	$	47,228
Effect of net income attributable to PennyMac Class A units exchangeable to Class A common stock, net of income taxes		—		159,570		119,697
Net income attributable to common stockholders for diluted earnings per share	$	100,757	$	225,649	$	166,925
Weighted average shares of common stock outstanding applicable to basic earnings per share		23,199		22,161		21,755
Effect of dilutive shares:
PennyMac Class A units exchangeable to Class A common stock		—		53,951		53,803
Non-vested PennyMac Class A units issuable under unit-based stock compensation plan and exchangeable to common stock		—		—		427
Common shares issuable under stock-based compensation plan		1,800		517		119
Weighted average shares of common stock outstanding applicable to diluted earnings per share		24,999		76,629		76,104
Diluted earnings per share of common stock	$	4.03	$	2.94	$	2.17

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 stock options and restricted stock units (“RSUs”) excluded from the calculation of diluted earnings per share:


	Year ended December 31,
	2017			2016		2015
	(in thousands, except exercise price data)
Performance-based RSUs (1)			497		2,054		2,358
Stock options (2)			1,323		1,829		1,748
Exchangeable PNMAC Class A units (3)			53,299		—		—
Total anti-dilutive stock-based compensation units			55,119		3,883		4,106
Weighted average exercise price of anti-dilutive stock options (2)		$	16.40	$	15.81	$	18.17

(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 during the year.

(3)

Exchangeable PNMAC units were anti-dilutive during 2017 primarily due to the effect of adoption of the Tax Act on earnings attributable to PNMAC unitholders.

Supplemental Cash Flow Information

12 Months Ended

Dec. 31, 2017

Supplemental Cash Flow Information

Supplemental Cash Flow Information

Note 23—Supplemental Cash Flow Information


	Year ended December 31,
	2017		2016		2015
		(in thousands)
Cash paid for interest	$	158,147	$	104,938	$	69,317
(Refunds received) cash paid for income taxes, net	$	(5,513)	$	1,866	$	1,909
Non-cash investing activity:
Mortgage servicing rights resulting from mortgage loan sales	$	581,101	$	577,531	$	472,853
Mortgage servicing liabilities resulting from mortgage loan sales	$	17,229	$	14,991	$	20,442
Unsettled portion of MSR acquisitions	$	5,319	$	—	$	—
Transfer of Note receivable from PennyMac Mortgage Investment Trust to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors	$	—	$	150,000	$	—
Non-cash financing activity:
Transfer of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement	$	5,244	$	6,603	$	6,728
Unpaid distribution to Private National Mortgage Acceptance Company, LLC members	$	—	$	7,585	$	—
Issuance of Class A common stock in settlement of director fees	$	338	$	313	$	297

Regulatory Capital and Liquidity Requirements

12 Months Ended

Dec. 31, 2017

Regulatory Capital and Liquidity Requirements

Regulatory Capital and Liquidity Requirements

Note 24—Regulatory Capital and Liquidity Requirements

The Company, through PLS and PennyMac, is required to maintain specified levels of equity to remain a seller/servicer in good standing with the Agencies. Such equity 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 (0.25%) 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 6.0%.

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:



	December 31, 2017						December 31, 2016
Agency–company subject to requirement	Actual (1)			Requirement (1)			Actual (1)			Requirement (1)
	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac – PLS	$	1,561,977		$	429,671		$	1,289,464		$	335,883
Ginnie Mae – PLS	$	1,307,580		$	674,133		$	1,085,549		$	455,542
Ginnie Mae – PennyMac	$	1,511,201		$	741,574		$	1,261,565		$	501,097
HUD – PLS	$	1,307,580		$	2,500		$	1,085,549		$	2,500
Liquidity
Fannie Mae & Freddie Mac – PLS	$	196,415		$	58,754		$	179,230		$	45,930
Ginnie Mae – PLS	$	196,415		$	153,431		$	179,230		$	115,304
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac – PLS		21	%		6	%		26	%		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.

Selected Quarterly Data (Unaudited)

The entire disclosure for a mortgage banking entity related to capital requirements imposed by secondary market investors or state imposed regulatory mandates. The disclosure may include: (1) a description of the minimum net worth requirements related to (a) secondary market investors and (b) state-imposed regulatory mandates; (2) actual or possible material effects of noncompliance; (3) whether the entity is in compliance with the regulatory capital requirements, including (a) the entity's required and actual net worth amounts, (b) factors that may significantly affect adequacy of net worth such as potentially volatile components of capital, qualitative factors, or regulatory mandates; and (4) possible affects of noncompliance on amounts and disclosures in the notes to the financial statements. Servicers with net worth requirements from multiple sources may disclose (1) significant servicing covenants with secondary market investors with commonly defined servicing requirements (2) any other secondary market investor where violation of the requirement would have a significant adverse effect and (3) the most restrictive third party agreement, if not included above. The disclosure may also include additional information that might be disclosed in situations where substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.

+ References + Details

Segments

12 Months Ended

Dec. 31, 2017

Segments

Segments

Note 25—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 newly originated mortgage loans, execution and management of early buyout transactions and servicing of mortgage loans sourced and managed by the investment management segment for the Advised Entities, 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, managing correspondent production activities for PMT and managing the acquired assets for the Advised Entities.

Financial performance and results by segment are as follows:


	Year ended December 31, 2017
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	286,242	$	105,562	$	391,804	$	—	$	391,804
Loan origination fees		119,202		—		119,202		—		119,202
Fulfillment fees from PennyMac Mortgage Investment Trust		80,359		—		80,359		—		80,359
Net servicing fees		—		306,059		306,059		—		306,059
Management fees		—		—		—		23,585		23,585
Carried Interest from Investment Funds		—		—		—		(1,040)		(1,040)
Net interest income (expense):
Interest income		61,195		81,984		143,179		—		143,179
Interest expense		35,359		109,112		144,471		49		144,520
		25,836		(27,128)		(1,292)		(49)		(1,341)
Other		2,002		1,710		3,712		183		3,895
Total net revenue		513,641		386,203		899,844		22,679		922,523
Expenses		275,133		327,531		602,664		16,890		619,554
Income before provision for income taxes and non-segment activities		238,508		58,672		297,180		5,789		302,969
Non-segment activities (2)		—		—		—		—		32,940
Income before provision for income taxes	$	238,508	$	58,672	$	297,180	$	5,789	$	335,909
Segment assets at year end (3)	$	2,459,014	$	4,886,594	$	7,345,608	$	19,880	$	7,365,488

(1)

All revenues are from external customers.

(2)

Primarily represents repricing Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement, of which, $32.0 million is the result of the change in the federal tax rate under the Tax Act.

(3)

Excludes parent company assets, which consist of working capital of $2.6 million.


	Year ended December 31, 2016
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenue: (1)
Net gains on mortgage loans held for sale at fair value	$	464,027	$	67,753	$	531,780	$	—	$	531,780
Loan origination fees		125,534		—		125,534		—		125,534
Fulfillment fees from PennyMac Mortgage Investment Trust		86,465		—		86,465		—		86,465
Net servicing fees		—		185,466		185,466		—		185,466
Management fees		—		—		—		22,746		22,746
Carried Interest from Investment Funds		—		—		—		980		980
Net interest income (expense):
Interest income		48,944		32,182		81,126		1		81,127
Interest expense		32,669		73,537		106,206		50		106,256
		16,275		(41,355)		(25,080)		(49)		(25,129)
Other		2,104		1,022		3,126		319		3,445
Total net revenue		694,405		212,886		907,291		23,996		931,287
Expenses		278,309		248,985		527,294		21,510		548,804
Income (loss) before provision for income taxes and non-segment activities		416,096		(36,099)		379,997		2,486		382,483
Non-segment activities (2)		—		—		—		—		600
Income (loss) before provision for income taxes	$	416,096	$	(36,099)	$	379,997	$	2,486	$	383,083
Segment assets at year end (3)	$	2,195,330	$	2,841,551	$	5,036,881	$	91,517	$	5,128,398

(1)

All revenues are from external customers

(2)

Primarily represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement.

(3)

Excludes parent company assets, which consist primarily of working capital of $5.5 million.


	Year ended December 31, 2015
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total
	(in thousands)
Revenues: (1)
Net gains on mortgage loans held for sale at fair value	$	310,254	$	10,461	$	320,715	$	—	$	320,715
Loan origination fees		91,520		—		91,520		—		91,520
Fulfillment fees from PennyMac Mortgage Investment Trust		58,607		—		58,607		—		58,607
Net servicing fees		—		229,543		229,543		—		229,543
Management fees		—		—		—		28,237		28,237
Carried Interest from Investment Funds		—		—		—		2,628		2,628
Net interest income (expense):
Interest income		39,238		9,917		49,155		—		49,155
Interest expense		19,851		48,686		68,537		—		68,537
		19,387		(38,769)		(19,382)		—		(19,382)
Other		1,868		1,087		2,955		(18)		2,937
Total net revenue		481,636		202,322		683,958		30,847		714,805
Expenses		209,767		201,025		410,792		23,125		433,917
Income before provision for income taxes and non-segment activities		271,869		1,297		273,166		7,722		280,888
Non-segment activities (2)		—		—		—		—		(1,695)
Income before provision for income taxes	$	271,869	$	1,297	$	273,166	$	7,722	$	279,193
Segment assets at year end (3)	$	1,122,242	$	2,270,940	$	3,393,182	$	92,893	$	3,486,075

(1)

All revenues are from external customers.

(2)

Represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement.

(3)

Excludes parent Company assets, which consist primarily of deferred tax asset of $18.4 million

Selected Quarterly Data (Unaudited)

12 Months Ended

Dec. 31, 2017

Selected Quarterly Data (Unaudited)

Note 26—Selected Quarterly Data (Unaudited)

Following is a presentation of selected quarterly financial data:


	Quarter ended
	2017								2016
	Dec. 31		Sept. 30		June. 30		Mar. 31		Dec. 31		Sept. 30		June. 30		Mar. 31
		(in thousands, except per share data)
During the quarter:
Net gains on mortgage loans held for sale at fair value	$	98,621	$	108,136	$	98,091	$	86,956	$	127,932	$	182,121	$	130,203	$	91,524
Fulfillment fees from PennyMac Mortgage Investment Trust		19,175		23,507		21,107		16,570		27,164		27,255		19,111		12,935
Net mortgage loan servicing fees		106,902		78,081		46,913		74,163		95,528		45,864		26,555		17,519
Management fees and Carried Interest		5,993		5,058		6,248		5,246		5,619		5,628		5,974		6,505
Other income		67,943		35,853		29,362		21,538		33,042		30,527		25,963		14,918
		298,634		250,635		201,721		204,473		289,285		291,395		207,806		143,401
Expenses		176,861		156,491		143,761		142,441		159,877		152,117		123,548		113,262
Income before (benefit from) provision for income taxes		121,773		94,144		57,960		62,032		129,408		139,278		84,258		30,139
(Benefit from) provision for income taxes		(2,125)		11,652		7,214		7,646		15,568		16,976		9,963		3,596
Net income		123,898		82,492		50,746		54,386		113,840		122,302		74,295		26,543
Less: Net income attributable to noncontrolling interest		61,580		65,411		40,267		43,507		91,096		98,617		59,820		21,368
Net income attributable to PennyMac Financial Services, Inc. common stockholders	$	62,318	$	17,081	$	10,479	$	10,879	$	22,744	$	23,685	$	14,475	$	5,175
Earnings per share of common stock:
Basic	$	2.67	$	0.73	$	0.45	$	0.48	$	1.02	$	1.07	$	0.66	$	0.24
Diluted	$	2.44	$	0.71	$	0.44	$	0.47	$	1.00	$	1.06	$	0.65	$	0.23
At quarter end:
Mortgage loans held for sale at fair value	$	3,099,103	$	2,935,593	$	3,037,602	$	2,277,751	$	2,172,815	$	3,127,377	$	2,097,138	$	1,653,963
Mortgage servicing rights		2,119,588		2,016,485		1,951,599		1,725,061		1,627,672		1,337,674		1,290,928		1,337,082
Carried Interest from Investment Funds		8,552		8,547		71,019		70,778		70,906		70,870		70,763		70,519
Servicing advances, net		318,066		262,650		291,907		317,513		348,306		306,150		296,581		284,140
Other assets		1,822,784		1,165,094		1,052,611		860,274		914,203		754,123		860,910		635,559
Total assets	$	7,368,093	$	6,388,369	$	6,404,738	$	5,251,377	$	5,133,902	$	5,596,194	$	4,616,320	$	3,981,263
Assets sold under agreements to repurchase	$	2,381,538	$	2,096,492	$	3,021,328	$	2,034,808	$	1,735,114	$	2,491,366	$	1,591,798	$	1,658,578
Mortgage loan participation and sale agreement		527,395		531,776		243,361		241,638		671,426		782,913		737,176		246,636
Notes payable		891,505		890,884		429,692		436,725		150,942		110,619		114,235		127,693
Excess servicing spread financing at fair value to PennyMac Mortgage Investment Trust		236,534		248,763		261,796		277,484		288,669		280,367		294,551		321,976
Other liabilities		1,611,447		1,030,163		937,309		803,127		888,395		640,525		707,707		533,167
Total liabilities		5,648,419		4,798,078		4,893,486		3,793,782		3,734,546		4,305,790		3,445,467		2,888,050
Total equity		1,719,674		1,590,291		1,511,252		1,457,595		1,399,356		1,290,404		1,170,853		1,093,213
Total liabilities and equity	$	7,368,093	$	6,388,369	$	6,404,738	$	5,251,377	$	5,133,902	$	5,596,194	$	4,616,320	$	3,981,263

Parent Company Information

12 Months Ended

Dec. 31, 2017

Parent Company Information

Parent Company Information

Note 27—Parent Company Information

The Company’s debt financing agreements require PLS, the Company’s indirect controlled subsidiary, to comply with financial covenants that include a minimum tangible net worth of $500 million. PLS is limited from transferring funds to the Parent by this minimum tangible net worth requirement.

PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED BALANCE SHEETS


	December 31,
	2017		2016
	(in thousands)
ASSETS
Cash	$	2,605	$	5,505
Investments in subsidiaries		556,439		472,792
Due from subsidiaries		6,538		3,585
Total assets	$	565,582	$	481,882
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement	$	44,011	$	75,954
Income taxes payable		52,160		25,077
Total liabilities		96,171		101,031
Stockholders' equity		469,411		380,851
Total liabilities and stockholders' equity	$	565,582	$	481,882

PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED STATEMENTS OF INCOME


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Revenues
Dividends from subsidiary	$	—	$	6,418	$	3,825
Interest		—		49		121
Revaluation of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		32,940		551		(1,695)
Total revenue		32,940		7,018		2,251
Expenses
Interest		—		—		6
Total expenses		—		—		6
Income before provision for income taxes and equity in undistributed earnings in subsidiaries		32,940		7,018		2,245
Provision for income taxes		24,387		46,103		31,635
Income before equity in undistributed earnings of subsidiaries		8,553		(39,085)		(29,390)
Equity in undistributed earnings of subsidiaries		92,204		105,164		76,618
Net income	$	100,757	$	66,079	$	47,228

PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED STATEMENTS OF CASH FLOWS


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Cash flows from operating activities
Net income	$	100,757	$	66,079	$	47,228
Adjustments to reconcile net income to net cash provided by (used in ) operating activities
Equity in undistributed earnings of subsidiaries		(92,204)		(105,164)		(76,618)
Revaluation of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(32,940)		(551)		1,695
Decrease in deferred tax asset		—		18,668		29,730
Decrease (increase) in intercompany receivable		5,646		(76)		(3,819)
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(6,726)		—		(5,132)
Increase in income taxes payable		29,912		25,559		—
Net cash provided by (used in) operating activities		4,445		4,515		(6,916)
Cash flows from financing activities
Repurchase of common stock		(8,599)		—		—
Proceeds from common stock options exercised		1,254		149		—
Net cash provided by financing activities		(7,345)		149		—
Net change in cash		(2,900)		4,664		(6,916)
Cash at beginning of year		5,505		841		7,757
Cash at end of year	$	2,605	$	5,505	$	841

Recently Issued Accounting Pronouncements.

The entire disclosure for condensed financial information, including the financial position, cash flows, and the results of operations of the registrant (parent company) as of the same dates or for the same periods for which audited consolidated financial statements are being presented. Alternatively, the details of this disclosure can be reported by the specific parent company taxonomy elements, indicating the appropriate date and period contexts in an instance document.

+ References + Details

Recently Issued Accounting Pronouncements

12 Months Ended

Dec. 31, 2017

Recently Issued Accounting Pronouncements

Note 28—Recently Issued Accounting Pronouncements

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Subtopic 606) (“ASU 2014-09”), which supersedes the guidance in the Revenue Recognition topic of the ASC. ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities and industries with certain scope exceptions including financial instruments, leases, and guarantees. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative-effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts.

The FASB has issued several amendments to the new revenue standard ASU 2014-09, including:

·

In August 2015, ASU 2015-14, Revenue From Contracts With Customers (“ASU 2015-14”). This update deferred the initial effective date of ASU 2014-09. As a result of the issuance of ASU 2015-14, ASU 2014-09 is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods.

·

In March 2016, ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments to this update are intended to improve the implementation guidance on principal versus agent considerations in ASU 2014-09 by clarifying how an entity should identify the unit of accounting (i.e. the specified good or service) and how an entity should apply the control principle to certain types of arrangements.

·

In May 2016, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments to this update clarify certain core recognition principles and provide practical expedients available at transition. The improvements address collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition.

·

In December 2016, ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments to this update:

o

Clarify that guarantee fees within the scope of the Guarantees topic of the ASC (other than product or service warranties) are not within the scope of the Revenue from Contracts with Customers topic of the ASC. The Derivatives and Hedging topic provides guidance relating to guarantees accounted for as derivatives.

o

Clarify guidance contained in the Other Assets and Deferred Costs—Contracts with Customers subtopic of the ASC that when performing impairment testing an entity should (a) consider expected contract renewals and extensions and (b) include both the amount of consideration it already has received but has not recognized as revenue and the amount it expects to receive in the future.

o

Clarify the interaction of impairment testing with guidance in other ASC topics that impairment testing first should be performed on assets not within the scope of the Other Assets and Deferred Costs, Intangibles-Goodwill and Other or the Property, Plant, and Equipment topics of the ASC (such as assets within the Inventory topic of the ASC), then assets within the scope of the Other Assets and Deferred Costs topic of the ASC, then asset groups and reporting units within the scope of the Other Assets and Deferred Costs, Intangibles-Goodwill and Other and the Property, Plant, and Equipment topics of the ASC.

o

Clarify that all contracts within the scope of the Financial Services – Insurance topic of the ASC are excluded from the scope of the Revenue from Contracts with Customers topic.

o

Provide optional exemptions from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue and expands the information that is required to be disclosed when an entity applies one of the optional exemptions.

o

Clarify that the disclosure of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances.

o

Align the cost-capitalization guidance for advisors to both public funds and private funds in the Financial Services— Investment Companies—Other Expenses subtopic of the ASC.

·

In February 2017, ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) (“ASU 2017-05”). The amendments to this update clarify the scope of the Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets subtopic of the ASC, and add guidance for partial sales of nonfinancial assets. ASU 2017-05 clarifies that:

o

A financial asset is within the scope of the Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets subtopic of the ASC if it meets the definition of an in substance nonfinancial asset and defines the term in substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets.

o

It excludes all businesses and nonprofit activities from the scope of the Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets subtopic of the ASC. Derecognition of all businesses and nonprofit activities should be accounted for in accordance with the Consolidation—Overall subtopic of the ASC.

o

An entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it.

o

An entity should allocate consideration to each distinct asset by applying the guidance in the Revenue from Contracts with Customers topic of the ASC on allocating the transaction price to performance obligations.

o

An entity must derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with the Consolidations topic of the ASC and (2) transfers control of the asset in accordance with the Revenue from Contracts with Customers topic of the ASC. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value.

The Company’s revenues from contracts with customers that are subject to ASU 2014-09 include fulfillment fees, management fees, Carried Interest and certain reimbursed overhead costs. The Company has concluded that:

·

The recognition and measurement of fulfillment fees and management fees is not expected to change as a result of the Company’s adoption of ASU 2014-09.

·

The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to the Company. As a result, the Company has concluded as part of its assessment of the effect of the adoption of ASU 2014-09 that its Carried Interest represents an equity method investment subject to the Investments – Equity Method and Joint Ventures topic of the ASC. Therefore, effective January 1, 2018, the Company will recharacterize its Carried Interest as financial instruments under the equity method of accounting. This change is not expected to change the timing or amount of the Company’s recognition of Carried Interest. At December 31, 2017, the Company had Carried Interest receivable totaling $8.6 million, which is expected to be realized in early 2018.

·

The effect of the adoption of ASU 2014-09 on the presentation of overhead reimbursements will be to increase Other income and the Company’s overhead expense categories by offsetting amounts. Under its management agreement, PMT is 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 are 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 recognizes such reimbursements as expense offsets in its consolidated statements of income. ASU 2014-09 requires such reimbursements to be treated as revenues. The Company included $5.3 million, $7.9 million and $10.7 million of such common overhead as expense offsets in the years ended December 31, 2017, 2016 and 2015, respectively.

The Company intends to adopt ASU 2014-09 using the modified retrospective method. The Company does not expect to record a cumulative effect adjustment to its beginning retained earnings as a result of adoption of ASU 2014-09.

Fair Value of Financial Instruments

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities under the fair value option, the presentation and disclosure of financial instruments, and the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.

ASU 2016-01 requires that:

·

All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) with readily determinable fair values will generally be measured at fair value with changes in fair value recognized through current period Income.

·

When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The accumulated gains and losses due to these changes will be reclassified from accumulated other comprehensive income to income if the financial liability is settled before maturity.

·

For financial instruments measured at amortized cost, public business entities will be required to use the exit price when measuring the fair value of financial instruments for disclosure purposes.

·

Financial assets and financial liabilities shall be presented separately in the notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or fair value) and form of financial asset (e.g., loans, securities).

·

Public business entities will no longer be required to disclose the methods and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost.

·

Entities will have to assess the realizability of a deferred tax asset related to a debt security classified as available for sale in combination with the entity’s other deferred tax assets.

The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income is permitted and can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. The adoption of ASU 2016-01 is not expected to have an effect on the Company’s consolidated financial statements.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors) and supersedes previous leasing standards. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.

ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential effect that the adoption of ASU 2016-02 will have on its consolidated financial statements. As shown in Note 16 - Commitments and Contingencies, the Company had approximately $96.3 million in future minimum lease payment commitments as of December 31, 2017. Were the Company to adopt ASU 2016-02 as of December 31, 2017, it would be required to recognize a right-of-use asset and a corresponding liability based on the present value of such obligation as of December 31, 2017. The Company does not expect to recognize a significant cumulative effect adjustment to its stockholders’ equity as a result of adopting ASU 2016-02.

Statement of Cash Flows

In November of 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in ASU 2016-18 do not provide a definition of restricted cash or restricted cash equivalents. The amendments in ASU 2016-18 are effective for the Company’s fiscal year, including interim periods within the fiscal year ending December 31, 2018. The Company does not believe the adoption of ASU 2016-18 will have a significant effect on the Company’s consolidated statement of cash flows.

Subsequent Events

12 Months Ended

Dec. 31, 2017

Subsequent Events

Subsequent Events

Note 29—Subsequent Events

·

Through December 31, 2017, the Company accounted for certain of its MSRs using the amortization method. Beginning January 1, 2018, the Company will account for all MSRs at fair value prospectively. Management determined that a single accounting treatment across all MSRs is consistent with lender valuation under its financing arrangements and simplifies hedging activities. The accounting change will result in a $0.8 million increase in MSRs, a $71,000 increase in deferred tax liability and a $0.7 million increase in stockholders’ equity. The consolidated statement of income will not be affected by this change.

·

On February 1, 2018, the Company, through PLS, entered into a Loan and Security Agreement with Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as lender (the “CS Loan Agreement”). Pursuant to the CS Loan Agreement, PLS may finance certain mortgage servicing rights and related excess servicing spread relating to mortgage loans pooled into Fannie Mae and Freddie Mac securities. Pursuant to the terms of the CS Loan Agreement, the Company may, subject to certain conditions, borrow up to a committed amount of $407 million, which amount is reduced by the aggregate outstanding amounts under various other credit facilities between the Company and its subsidiaries and CSCIB and its affiliates.

·

On February 28, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of $650 million in secured term notes (the “2018-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The 2018-GT1 Notes are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility and bear interest at a rate equal to one-month LIBOR plus 2.85% per annum, payable each month beginning in March 2018, on the 25th day of such month or, if such 25th day is not a business day, the next business day. 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). The 2018-GT1 Notes will rank pari passu with the VFN issued by the Issuer Trust to PLS and the secured term notes due August 25, 2022 issued by Issuer Trust on August 10, 2017 (the “2017-GT2 Notes”).

On February 28, 2018, the Company also redeemed all of the secured term notes due February 25, 2020 (the “2017-GT1 Notes”) previously issued by Issuer Trust. The redemption amount for the 2017-GT1 Notes was $400 million plus all accrued and unpaid interest.

Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Significant Accounting Policies

Basis of Presentation

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

Principles of Consolidation

The consolidated financial statements include the accounts of PFSI, PennyMac and all of its wholly‑owned subsidiaries. Intercompany accounts and transactions have been eliminated.

Use of Estimates

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

Fair Value

Most of the Company’s assets and certain of its liabilities are measured 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. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and other inputs.

·

Level 3—Prices determined using significant unobservable inputs. In situations where 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 their 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. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

Short-Term Investments

Short‑Term Investments

Short‑term investments, which represent investments in accounts with a depository institution such as money market funds, are carried at fair value. Changes in fair value are recognized in current period income. The Company classifies its short‑term investments as “Level 1” fair value assets.

Mortgage Loans Held for Sale at Fair Value

Management has elected to account for mortgage loans held for sale at fair value, with changes in fair value recognized in current period income, to more timely reflect the Company’s performance. All changes in fair value, including changes arising from the passage of time, are recognized as a component of Net gains on mortgage loans held for sale at fair value. The Company classifies most of the mortgage loans held for sale at fair value as “Level 2” fair value assets. Certain of the Company’s mortgage loans held for sale may not be readily saleable due to identified defects or delinquency. Such mortgage loans are classified as “Level 3” fair value assets.

Sale Recognition

The Company recognizes transfers of mortgage loans as sales when it surrenders control over the mortgage loans. Control over transferred mortgage loans is deemed to be surrendered when (i) the mortgage loans have been isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred mortgage loans, and (iii) the Company does not maintain effective control over the transferred mortgage loans through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return the specific mortgage loans.

Interest Income Recognition

Interest income on mortgage loans held for sale at fair value is recognized over the life of the mortgage loans using their contractual interest rates. Income recognition is suspended and the unpaid interest receivable is reversed against interest income when mortgage loans become 90 days delinquent, or when, in management’s opinion, a full recovery of interest and principal becomes doubtful. Income recognition is resumed when the mortgage loan becomes contractually current.

Derivative Financial Instruments

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:

·

Interest rate lock commitments (“IRLCs”) that are created when the Company commits to purchase or originate a mortgage loan acquired for sale at specified interest rates.

·

Derivatives that are embedded in a master repurchase agreement with a non-affiliate that provides for the Company to receive incentives for financing mortgage loans that satisfy certain consumer relief characteristics as provided in the master repurchase agreement.

The Company is exposed to price risk relative to its mortgage loans held for sale as well as to IRLCs. The Company bears price risk from the time a commitment to fund a mortgage loan is made to a borrower or to purchase a mortgage loan from PMT, to the time the mortgage loan is sold. During this period, the Company is exposed to losses if mortgage market interest rates increase, because the fair value of the purchase commitment or prospective mortgage loan decreases. The Company also is exposed to risk relative to the fair value of its mortgage servicing rights (“MSRs”) when interest rates decrease.

The Company 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 MSRs.

IRLCs are accounted for as derivative financial instruments. The Company manages the risk created by IRLCs relating to mortgage loans held for sale by entering into forward sale agreements to sell the mortgage loans and by the purchase and sale of mortgage‑backed securities (“MBS”) options and futures. Such agreements are also accounted for as derivative financial instruments. These instruments and other interest-rate derivatives are also used to manage the risk created by changes in prepayment speeds on certain of the MSRs the Company holds. The Company classifies its IRLCs as “Level 3” fair value assets and liabilities and the derivative financial instruments it acquires to manage the risks created by IRLCs, mortgage loans held for sale and MSRs as “Level 1” or “Level 2” fair value assets and liabilities.

The Company accounts for its derivative financial instruments as free‑standing derivatives. The Company does not designate its derivative financial instruments for hedge accounting. All derivative financial instruments are recognized on the consolidated balance sheet at fair value with changes in the fair values being reported in current period income. Changes in fair value of derivative financial instruments hedging IRLCs, mortgage loans held for sale at fair value and MSRs are included in Net gains on mortgage loans held for sale at fair value or in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities, as applicable, in the Company’s consolidated statements of income. Changes in fair value of derivative assets relating to a master repurchase agreement are included in Interest expense.

When the Company has multiple derivative financial instruments with the same counterparty subject to a master netting arrangement, it offsets the amounts recorded as assets and liabilities and amounts recognized for the right to reclaim cash collateral it has deposited with the counterparty or the obligation to return cash collateral it has collected from the counterparty arising from that master netting arrangement. Such offset amounts are presented as either a net asset or liability by counterparty on the Company’s consolidated balance sheets.

Servicing Advances

Servicing advances represent advances made on behalf of borrowers and the mortgage loans’ investors to fund property taxes, insurance premiums and out-of-pocket collection costs (e.g., preservation and restoration of mortgaged or real estate owned property, legal fees, and appraisals). Servicing advances are made in accordance with the Company’s servicing agreements and, when made, are deemed recoverable. The Company periodically reviews servicing advances for collectability and provides a valuation allowance for amounts estimated to be uncollectable. Servicing advances are written off when they are deemed uncollectable.

Carried Interest Due from Investment Funds

Carried Interest, in general terms, is the share of any profits in excess of specified levels that the general partners receive as compensation. The Company has a general partnership interest or other Carried Interest arrangement with the Investment Funds, and earns Carried Interest thereunder. The amount of Carried Interest to be recorded each period is based on the cash flows that would be realized by all partners assuming liquidation of the Investment Funds’ remaining investments as of the measurement date. The Company receives Carried Interest in the priority of distribution as provided in the charter documents relating to the respective Investment Funds.

Investment in PennyMac Mortgage Investment Trust at Fair Value

Common shares of beneficial interest in PMT are carried at their fair value with changes in fair value recognized in current period income. Fair value for purposes of the Company’s holdings in PMT is based on the published closing price of the shares as of period end. The Company classifies its investment in common shares of PMT as a “Level 1” fair value asset.

Mortgage Servicing Rights and Mortgage Servicing Liabilities

MSRs and mortgage servicing liabilities (“MSLs”) arise from contractual agreements between the Company and investors (or their agents) in mortgage securities and mortgage loans. Under these contracts, the Company performs mortgage loan servicing functions in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest; holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; supervising the acquisition of real estate in settlement of loans (“REO”) and property disposition. REO represents real estate that collateralized the mortgage loans before the properties were acquired in settlement of loans.

The fair value of MSRs and MSLs is derived from the net positive or negative, respectively, cash flows associated with the servicing contracts. The Company receives a servicing fee ranging generally from 0.19% to 0.57% annually, net of related guarantee fees, on the remaining outstanding principal balances of the mortgage loans subject to the servicing contracts. The servicing fees are collected from the monthly payments made by the mortgagors. The Company is contractually entitled to receive other remuneration including rights to various mortgagor‑contracted fees such as late charges and collateral reconveyance charges, and the Company is generally entitled to retain the interest earned on funds held pending remittance related to its collection of mortgagor payments. The Company also generally has the right to solicit the mortgagors for other products and services as well as for new mortgages for those considering refinancing or purchasing a new home.

The Company recognizes MSRs and MSLs initially at fair value, either as proceeds from or liabilities incurred in, sales of mortgage loans where the Company assumes the obligation to service the mortgage loan in the sale transaction, or from the purchase of MSRs or receipt of cash for acceptance of MSLs.

The Company’s subsequent accounting for MSRs and MSLs is based on the class of MSR or MSL. The Company has identified three classes of MSRs: originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5%; MSRs backed by mortgage loans with initial interest rates of more than 4.5%; and purchased MSRs financed in part through the transfer of the right to receive excess servicing spread (“ESS”) cash flows. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% and purchased MSRs financed in part by ESS are accounted for at fair value with changes in fair value recorded in current period income. MSLs are carried at fair value with changes in fair value recorded in current period income.

The fair value of MSRs and MSLs is difficult to determine because MSRs and MSLs are not actively traded in observable stand‑alone markets. Considerable judgment is required to estimate the fair values of MSRs and MSLs and the exercise of such judgment can significantly affect the Company’s income. Therefore, the Company classifies its MSRs and MSLs as “Level 3” fair value assets and liabilities.

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

MSRs Accounted for Using the Amortization Method

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

MSRs accounted for using the amortization method are periodically evaluated for impairment. Impairment occurs when the current fair value of the MSRs decreases below the asset’s amortized cost. If MSRs are impaired, the impairment is recognized in current‑period income and the carrying value (carrying value is the MSR’s amortized cost reduced by any related valuation allowance) of the MSRs is adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increases, the increase in fair value is recognized in current‑period income. When an increase in fair value of MSR is recognized, the valuation allowance is adjusted to increase the carrying value of the MSRs only to the extent of the valuation allowance.

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

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

Both amortization and changes in the amount of the MSR valuation allowance are recorded in current period income in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

MSRs and MSLs Accounted for at Fair Value

Changes in fair value of MSLs and MSRs accounted for at fair value are recognized in current period income in Amortization, impairment and change in fair value of mortgage servicing rights in the consolidated statements of income.

Furniture, Fixtures, Equipment and Building Improvements

Furniture, fixtures, equipment and building improvements are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight‑line method over the estimated useful lives of the various classes of assets, which range from five to seven years for furniture and equipment and the lesser of the asset’s estimated useful life or the remaining lease term for fixtures and building improvements.

Mortgage Loans Eligible for Repurchase

The Company capitalizes certain consulting, payroll, and payroll‑related costs related to computer software developed for internal use. Once development is complete and the software is placed in service, the Company amortizes the capitalized costs over five to seven years using the straight‑line method.

The Company also periodically assesses capitalized software for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. If management identifies an indicator of impairment, it assesses recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value.

The terms of the Ginnie Mae MBS program allow, but do not require, the Company to repurchase mortgage loans when the borrower has made no payments for three consecutive months. As a result of this right, the Company recognizes the mortgage loans in Mortgage loans eligible for repurchase at their unpaid principal balances and records a corresponding liability in Liability for mortgage loans eligible for repurchase on its consolidated balance sheets.

Borrowings

The carrying value of borrowings other than ESS are based on the accrued cost of the agreements. The costs of creating the facilities underlying the agreements are included in the carrying value of the agreements and are amortized to Interest expense over the terms of the respective borrowing facilities:

·

Debt issuance costs relating to revolving facilities, such as repurchase agreement and mortgage loan participation purchase and sale facilities are amortized on the straight line basis over the term of the facility;

·

Debt issuance cost relating to non-revolving debts, such as Notes payable are amortized using the interest method;

·

Premiums recorded as the results of recognition of repurchase agreement derivatives are amortized to Interest expense over the contractual term of the repurchase agreement. Unamortized premiums relating to repurchase agreements repaid before the transaction’s contractual maturity are credited to Interest expense.

Excess Servicing Spread Financing at Fair Value

The Company finances certain of its purchases of Agency MSRs through the sale to PMT of the right to receive the excess of the servicing fee rate over a specified rate of the underlying MSRs. This excess is referred to as the ESS. ESS is carried at its fair value. Changes in fair value are recognized in current period income in Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust.

Interest expense for ESS is accrued using the interest method based upon the expected cash flows from the ESS through the expected life of the underlying mortgage loans.

Liability for Losses Under Representations and Warranties

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

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

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

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

FulFillment Fees

Fulfillment Fees

Fulfillment fees represent fees the Company collects for services it performs on behalf of PMT in connection with the acquisition, packaging and sale of mortgage loans. Fulfillment fee amounts are based upon a negotiated fee schedule and the unpaid principal balance of the mortgage loans purchased by PMT. The Company’s obligation under the agreement is fulfilled when PMT completes the sale or securitization of a mortgage loan it purchases. Fulfillment fees are generally collected within 30 days of purchase by PMT, although a portion of the fulfillment fees may not be collected until 30 days following sale or securitization to the extent such sale or securitization does not occur in the month of purchase. Fulfillment fee revenue is recognized in the month the fee is earned.

Mortgage Loan Servicing Fees

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

Mortgage loan servicing fee amounts are based upon fee schedules established by the applicable investor and on the unpaid principal balance of the mortgage loans serviced in the case of prime mortgage loans or the applicable mortgage loan’s collection status in the case of special servicing.

The Company’s obligations under its mortgage loan servicing agreements are fulfilled as the Company services the mortgage loans and are collected when the mortgage loan payments are received from the borrowers in the case of prime mortgage loan servicing or within 30 days of the applicable month-end from the investor for special servicing.

Prime mortgage loan servicing fees are recorded net of Agency guarantee fees paid by the Company and are recognized when the mortgage loan payments are received from the borrowers. Mortgage loan servicing fees relating to special servicing are recognized in the month in which the mortgage loans are serviced.

Management fees

Management fees represent compensation to the Company for its management services provided to the Advised Entities. Management fees are earned based on the Investment Funds’ net assets and PMT’s shareholders’ equity amounts and profitability in excess of specified thresholds, and are recognized as services are provided and are paid to the Company on a quarterly basis within 30 days of the end of the quarter.

Stock-Based Compensation

Stock‑Based Compensation

The Company’s 2013 Equity Incentive Plan provides for awards of nonstatutory and incentive stock options, time‑based restricted stock units, performance‑based restricted stock units, stock appreciation rights, performance units and stock grants. The Company establishes the cost of its share-based awards at the awards’ fair values at the grant date of the awards. The Company estimates the fair value of time‑based restricted stock units and performance‑based restricted stock units awarded with reference to the fair value of its underlying common stock and expected forfeiture rates on the date of the award. The Company estimates the fair value of its stock option awards with reference to the expected price volatility of its shares of common stock and risk-free interest rate for the period that exercisable stock options are expected to be outstanding.

Compensation costs are fixed, except for performance‑based restricted stock units, as of the award date as all grantees are employees of PennyMac or directors of the Company. The cost of performance‑based restricted stock units is adjusted in each reporting period after the grant for changes in expected performance attainment until the performance share units vest. The Company amortizes the cost of stock based awards to compensation expense over the vesting period using the graded vesting method. Expense relating to awards is included in Compensation expense in the consolidated statements of income.

Income Taxes

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

The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs. A valuation allowance is established if, in management’s judgment, it is not more likely than not that a deferred tax asset will be realized.

The Company recognizes tax benefits relating to its tax positions only if, in the opinion of management, it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this standard is recognized as the largest amount that is greater than 50% likely to be realized upon ultimate settlement with the appropriate taxing authority. The Company will classify any penalties and interest as a component of provision for income taxes.

As a result of the PennyMac recapitalization and reorganization in 2013, the Company expects to benefit from amortization and other tax deductions due to increases in the tax basis of PennyMac’s assets from the exchange of PennyMac Class A units to the shares of the Company’s common stock. Those deductions will be allocated to the Company and will be taken into account in reporting the Company’s taxable income. The Company has entered into an agreement with the unitholders of PennyMac that will provide for the additional payment by the Company to exchanging unitholders of PennyMac equal to 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that PFSI realizes due to (i) increases in tax basis resulting from exchanges of the then‑existing unitholders and (ii) certain other tax benefits related to PFSI entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

Transactions with Affiliates (Tables)

12 Months Ended

Dec. 31, 2017

Summary of activity in Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Activity during the year:
Liability resulting from unit exchanges	$	7,723	$	2,190	$	2,728
Payments under tax receivable agreement	$	(6,726)	$	—	$	(5,132)
Repricing of liability (1)	$	(32,940)	$	(551)	$	1,695
Balance at end of year	$	44,011	$	75,954

PMT

Summary of lending activity between the Company and affiliate


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Net gain (loss) on mortgage loans held for sale at fair value:
Net gain on mortgage loans held for sale to PMT	$	28,238	$	—	$	—
Mortgage servicing rights and excess servicing spread recapture incurred		(6,249)		(8,092)		(7,836)
	$	21,989	$	(8,092)	$	(7,836)
Fair value of mortgage loans sold to PMT		904,097		21,541		28,445

Fulfillment fee revenue	$	80,359	$	86,465	$	58,607
Unpaid principal balance of mortgage loans fulfilled for PMT	$	22,971,119	$	23,188,386	$	14,014,603

Sourcing fees paid to PMT	$	12,084	$	11,976	$	8,966
Unpaid principal balance of mortgage loans purchased from PMT	$	40,561,241	$	39,908,163	$	29,867,580

Tax service fees received from PMT included in Mortgage loan origination fees	$	7,078	$	6,690	$	4,390
Property management fees received from PMT included in Other income	$	350	$	138	$	14
Early purchase program fees earned from PMT included in Mortgage loan servicing fees	$	7	$	30	$	—

Summary of mortgage loan servicing fees earned from PMT


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Mortgage loans acquired for sale at fair value:
Base and supplemental	$	305	$	330	$	260
Activity-based		649		733		371
		954		1,063		631
Mortgage loans at fair value:
Base and supplemental		6,650		11,078		16,123
Activity-based		8,960		18,521		12,437
		15,610		29,599		28,560
Mortgage servicing rights:
Base and supplemental		25,991		19,461		16,911
Activity-based		509		492		321
		26,500		19,953		17,232
	$	43,064	$	50,615	$	46,423

Summary of management fees earned


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Base management	$	22,280	$	20,657	$	22,851
Performance incentive		304		—		1,343
	$	22,584	$	20,657	$	24,194

Summary of reimbursement of expenses


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Reimbursement of:
Common overhead incurred by the Company	$	5,306	$	7,898	$	10,742
Expenses incurred on PMT's (the Company's) behalf, net		2,257		(163)		582
	$	7,563	$	7,735	$	11,324
Payments and settlements during the period (1)	$	64,945	$	143,542	$	99,967

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.

Summary of investing activity between the Company and affiliate


		Year ended December 31,
		2017		2016		2015
	(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell:
Activity during the year:
Refinancing of note receivable from PennyMac Mortgage Investment Trust		$	—	$	150,000	$	—
Sale of assets purchased from PMT under agreement to resell		$	5,872	$	—	$	—
Interest income		$	8,038	$	253	$	—
Balance at end of year		$	144,128	$	150,000	$	—
Note receivable from PennyMac Mortgage Investment Trust:
Activity during the year:
Advances to PennyMac Mortgage Investment Trust		$	—	$	—	$	168,546
Repayments and refinancing with repurchase agreement from PennyMac Mortgage Investment Trust		$	—	$	150,000	$	18,546
Interest income		$	—	$	7,577	$	3,343
Balance at end of year		$	—	$	—	$	150,000
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Activity during the year:
Dividends earned from PennyMac Mortgage Investment Trust		$	141	$	141	$	207
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust			(23)		83		(437)
		$	118	$	224	$	(230)
Balance at end of year:
Fair value		$	1,205	$	1,228
Number of shares			75		75

Summary of financing activity between the Company and affiliate


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Excess servicing spread financing:
Issuance:
Cash	$	—	$	—	$	271,554
Pursuant to recapture agreement	$	5,244	$	6,603	$	6,728
Repayment	$	54,980	$	69,992	$	78,578
Settlement	$	—	$	59,045	$	—
Change in fair value	$	(19,350)	$	(23,923)	$	(3,810)
Interest expense	$	16,951	$	22,601	$	25,365
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	$	4,820	$	6,529	$	7,049
Balance at end of year	$	236,534	$	288,669

Summary of amounts due from and payable to affiliate


	December 31,
	2017		2016
	(in thousands)
Receivable from PMT:
Allocated expenses and expenses incurred on PMT's behalf	$	11,542	$	1,046
Servicing fees		6,583		5,465
Management fees		5,901		5,081
Correspondent production fees		1,735		2,371
Conditional Reimbursement		870		900
Fulfillment fees		346		1,300
Interest on assets purchased under agreements to resell		142		253
	$	27,119	$	16,416
Payable to PMT:
Deposits made by PMT to fund servicing advances	$	132,844	$	162,945
Mortgage servicing rights recapture payable		282		707
Other		3,872		6,384
	$	136,998	$	170,036

Investment Funds

Summary of amounts due from and payable to affiliate


	December 31,
	2017		2016
	(in thousands)
Carried Interest due from Investment Funds:
PNMAC Mortgage Opportunity Fund, LLC	$	6,389	$	42,427
PNMAC Mortgage Opportunity Fund Investors, LLC		2,163		28,479
	$	8,552	$	70,906
Receivable from Investment Funds:
Mortgage loan servicing fee rebate deposit	$	300	$	250
Management fees		88		500
Expense reimbursements		27		238
Mortgage loan servicing fees		2		231
	$	417	$	1,219
Payable to Investment Funds:
Deposits received to fund servicing advances	$	2,329	$	20,221
Other		98		172
	$	2,427	$	20,393

Loan Sales and Servicing Activities (Tables)

12 Months Ended

Dec. 31, 2017

Loan Sales and Servicing Activities

Summary of cash flows between the Company and transferees upon sale of mortgage loans in transactions


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Cash flows:
Sales proceeds	$	50,235,245	$	49,633,909	$	36,679,638
Servicing fees received (1)	$	376,160	$	261,163	$	140,767
Net servicing advances	$	52,353	$	8,274	$	9,842

(1)

Net of guarantees paid to the Agencies

Summary of sale of loans between the Company and transferees upon sale of mortgage loans in transactions


	December 31,
	2017		2016
	(in thousands)
Unpaid principal balance of mortgage loans outstanding	$	120,853,138	$	89,516,155
Delinquencies:
30-89 days	$	5,097,688	$	2,545,970
90 days or more:
Not in foreclosure	$	2,303,114	$	735,263
In foreclosure	$	606,744	$	137,856
Foreclosed	$	30,310	$	2,552
Bankruptcy	$	657,368	$	256,471

Summary of mortgage servicing portfolio


	December 31, 2017
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	120,853,138	$	—	$	120,853,138
Purchased		47,016,708		—		47,016,708
		167,869,846		—		167,869,846
Advised Entities		—		74,980,268		74,980,268
Mortgage loans held for sale		2,998,377		—		2,998,377
	$	170,868,223	$	74,980,268	$	245,848,491
Delinquent mortgage loans:
30 days	$	5,326,710	$	515,922	$	5,842,632
60 days		1,935,216		215,957		2,151,173
90 days or more:
Not in foreclosure		3,690,159		541,945		4,232,104
In foreclosure		916,614		293,835		1,210,449
Foreclosed		41,244		278,890		320,134
	$	11,909,943	$	1,846,549	$	13,756,492
Bankruptcy	$	1,046,969	$	176,324	$	1,223,293
Custodial funds managed by the Company (1)	$	3,267,279	$	901,041	$	4,168,320

(1)

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


	December 31, 2016
			Contract		Total
	Servicing		servicing and		mortgage
	rights owned		subservicing		loans serviced
	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	89,516,155	$	—	$	89,516,155
Purchased		41,735,847		—		41,735,847
		131,252,002		—		131,252,002
Advised Entities		—		60,886,717		60,886,717
Mortgage loans held for sale		2,101,283		—		2,101,283
	$	133,353,285	$	60,886,717	$	194,240,002
Commercial real estate loans subserviced for the Company	$	—	$	22,338	$	22,338
Delinquent mortgage loans:
30 days	$	3,240,640	$	407,177	$	3,647,817
60 days		1,035,871		145,720		1,181,591
90 days or more:
Not in foreclosure		2,203,895		566,496		2,770,391
In foreclosure		937,204		685,001		1,622,205
Foreclosed		28,943		448,017		476,960
	$	7,446,553	$	2,252,411	$	9,698,964
Bankruptcy	$	793,517	$	280,459	$	1,073,976
Custodial funds managed by the Company (1)	$	3,097,365	$	736,398	$	3,833,763

(1)

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

Summary of the geographical distribution of loans for the top five and all other states as measured by the total unpaid principal balance (UPB)


	December 31,		December 31,
State	2017		2016
	(in thousands)
California	$	45,621,369	$	42,303,952
Texas		19,741,970		16,037,426
Florida		17,490,194		12,817,627
Virginia		16,210,673		13,143,510
Maryland		11,350,939		8,564,923
All other states		135,433,346		101,372,564
	$	245,848,491	$	194,240,002

Fair Value (Tables)

12 Months Ended

Dec. 31, 2017

Summary of financial statement items measured at estimated fair value on a recurring basis


	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	170,080	$	—	$	—	$	170,080
Mortgage loans held for sale at fair value		—		2,316,892		782,211		3,099,103
Derivative assets:
Interest rate lock commitments		—		—		60,012		60,012
Repurchase agreement derivatives		—		—		10,656		10,656
Forward purchase contracts		—		4,288		—		4,288
Forward sales contracts		—		2,101		—		2,101
MBS put options		—		3,481		—		3,481
Put options on interest rate futures purchase contracts		3,570		—		—		3,570
Call options on interest rate futures purchase contracts		938		—		—		938
Total derivative assets before netting		4,508		9,870		70,668		85,046
Netting		—		—		—		(6,867)
Total derivative assets		4,508		9,870		70,668		78,179
Investment in PennyMac Mortgage Investment Trust		1,205		—		—		1,205
Mortgage servicing rights at fair value		—		—		638,010		638,010
	$	175,793	$	2,326,762	$	1,490,889	$	3,986,577
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	236,534	$	236,534
Derivative liabilities:
Interest rate lock commitments		—		—		1,740		1,740
Forward purchase contracts		—		1,272		—		1,272
Forward sales contracts		—		7,031		—		7,031
Total derivative liabilities before netting		—		8,303		1,740		10,043
Netting		—		—		—		(4,247)
Total derivative liabilities		—		8,303		1,740		5,796
Mortgage servicing liabilities at fair value		—		—		14,120		14,120
	$	—	$	8,303	$	252,394	$	256,450


	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	85,964	$	—	$	—	$	85,964
Mortgage loans held for sale at fair value		—		2,125,544		47,271		2,172,815
Derivative assets:
Interest rate lock commitments		—		—		65,848		65,848
Forward purchase contracts		—		77,905		—		77,905
Forward sales contracts		—		28,324		—		28,324
MBS put options		—		3,934		—		3,934
MBS call options		—		217		—		217
Put options on interest rate futures purchase contracts		3,109		—		—		3,109
Call options on interest rate futures purchase contracts		203		—		—		203
Total derivative assets before netting		3,312		110,380		65,848		179,540
Netting		—		—		—		(96,635)
Total derivative assets		3,312		110,380		65,848		82,905
Investment in PennyMac Mortgage Investment Trust		1,228		—		—		1,228
Mortgage servicing rights at fair value		—		—		515,925		515,925
	$	90,504	$	2,235,924	$	629,044	$	2,858,837
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	288,669	$	288,669
Derivative liabilities:
Interest rate lock commitments		—		—		6,457		6,457
Forward purchase contracts		—		16,914		—		16,914
Forward sales contracts		—		85,035		—		85,035
Total derivative liabilities before netting		—		101,949		6,457		108,406
Netting		—		—		—		(86,044)
Total derivative liabilities		—		101,949		6,457		22,362
Mortgage servicing liabilities at fair value		—		—		15,192		15,192
	$	—	$	101,949	$	310,318	$	326,223

Summary of roll forward of items measured using Level 3 inputs on a recurring basis


	Year ended December 31, 2017
	Mortgage		Net interest		Repurchase		Mortgage
	loans held		rate lock		agreement		servicing
	for sale		commitments (1)		derivatives		rights			Total
	(in thousands)
Assets:
Balance, December 31, 2016	$	47,271	$	59,391	$	—	$	515,925	$	622,587
Purchases and issuances, net		2,928,249		302,389		10,986		183,850		3,425,474
Sales and repayments		(1,339,580)		—		—		—		(1,339,580)
Mortgage servicing rights resulting from mortgage loan sales		—		—		—		24,471		24,471
Changes in fair value included in income arising from:										—
Changes in instrument-specific credit risk		(1,794)		—		—		—		(1,794)
Other factors		—		115,434		(330)		(86,236)		28,868
		(1,794)		115,434		(330)		(86,236)		27,404
Transfers from Level 3 to Level 2		(851,935)		—		—		—		(851,935)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(418,942)		—		—		(418,942)
Balance, December 31, 2017	$	782,211	$	58,272	$	10,656	$	638,010	$	1,489,149
Changes in fair value recognized during the year relating to assets still held at December 31, 2017	$	(556)	$	58,272	$	(330)	$	(86,236)	$	(28,850)

(1)

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


	Year ended December 31, 2017
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, December 31, 2016	$	288,669	$	15,192	$	303,861
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		5,244		—		5,244
Accrual of interest		16,951		—		16,951
Repayments		(54,980)		—		(54,980)
Mortgage servicing liabilities resulting from mortgage loan sales		—		17,229		17,229
Changes in fair value included in income		(19,350)		(18,301)		(37,651)
Balance, December 31, 2017	$	236,534	$	14,120	$	250,654
Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2017	$	(19,350)	$	(18,301)	$	(37,651)


	Year ended December 31, 2016
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total
	(in thousands)
Assets:
Balance, December 31, 2015	$	48,531	$	43,773	$	660,247	$	752,551
Purchases		1,608,627		—		146		1,608,773
Sales and repayments		(1,202,621)		—		—		(1,202,621)
Interest rate lock commitments issued, net		—		429,598		—		429,598
Mortgage servicing rights resulting from mortgage loan sales		—		—		17,319		17,319
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		3,469		—		—		3,469
Other factors		—		143,867		(161,787)		(17,920)
		3,469		143,867		(161,787)		(14,451)
Transfers from Level 3 to Level 2		(410,735)		—		—		(410,735)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(557,847)		—		(557,847)
Balance, December 31, 2016	$	47,271	$	59,391	$	515,925	$	622,587
Changes in fair value recognized during the year relating to assets still held at December 31, 2016	$	936	$	59,391	$	(161,787)	$	(101,460)

(1)

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


	Year ended December 31, 2016
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance, December 31, 2015	$	412,425	$	1,399	$	413,824
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		6,603		—		6,603
Accrual of interest		22,601		—		22,601
Repayments		(69,992)		—		(69,992)
Settlement		(59,045)		—		(59,045)
Mortgage servicing liabilities resulting from mortgage loan sales		—		14,991		14,991
Mortgage servicing liabilities assumed		—		10,139		10,139
Changes in fair value included in income		(23,923)		(11,337)		(35,260)
Balance, December 31, 2016	$	288,669	$	15,192	$	303,861
Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2016	$	(16,713)	$	(11,337)	$	(28,050)


	Year ended December 31, 2015
	Mortgage		Net interest		Mortgage
	loans held		rate lock		servicing
	for sale		commitments (1)		rights		Total
	(in thousands)
Assets:
Balance December 31, 2014	$	209,908	$	32,401	$	325,383	$	567,692
Purchases		911,124		—		382,824		1,293,948
Sales and repayments		(844,419)		—		—		(844,419)
Interest rate lock commitments issued, net		—		271,692		—		271,692
Mortgage servicing rights resulting from mortgage loan sales		—		—		18,013		18,013
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		4,233		—		—		4,233
Other factors		—		73,068		(65,973)		7,095
		4,233		73,068		(65,973)		11,328
Transfers from Level 3 to Level 2		(232,315)		—		—		(232,315)
Transfers of interest rate lock commitments to mortgage loans held for sale		—		(333,388)		—		(333,388)
Balance, December 31, 2015	$	48,531	$	43,773	$	660,247	$	752,551
Changes in fair value recognized during the year relating to assets still held at December 31, 2015	$	4,305	$	43,773	$	(65,973)	$	(17,895)

(1)

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


	Year ended December 31, 2015
	Excess
	servicing		Mortgage
	spread		servicing
	financing		liabilities		Total
	(in thousands)
Liabilities:
Balance December 31, 2014	$	191,166	$	6,306	$	197,472
Issuance of excess servicing spread financing:
For cash		271,554		—		271,554
Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		6,728		—		6,728
Accrual of interest		25,365		—		25,365
Repayments		(78,578)		—		(78,578)
Mortgage servicing liabilities resulting from mortgage loan sales		—		20,442		20,442
Mortgage servicing liabilities assumed		—		—		—
Changes in fair value included in income		(3,810)		(25,349)		(29,159)
Balance, December 31, 2015	$	412,425	$	1,399	$	413,824
Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2015	$	(3,810)	$	(25,349)	$	(29,159)

Summary of net gains (losses) from changes in fair values included in earnings for financial statement items carried at fair value


	Year ended December 31,
	2017						2016						2015
	Net gains on		Net				Net gains on		Net				Net gains on		Net
	mortgage		mortgage				mortgage		mortgage				mortgage		mortgage
	loans held		loan				loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total		fair value		fees		Total
	(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	426,092	$	—	$	426,092	$	513,331	$	—	$	513,331	$	372,139	$	—	$	372,139
Mortgage servicing rights at fair value		—		(86,236)		(86,236)		—		(161,787)		(161,787)		—		(65,973)		(65,973)
	$	426,092	$	(86,236)	$	339,856	$	513,331	$	(161,787)	$	351,544	$	372,139	$	(65,973)	$	306,166
Liabilities:
Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust	$	—	$	19,350	$	19,350	$	—	$	23,923	$	23,923	$	—	$	3,810	$	3,810
Mortgage servicing liabilities at fair value		—		18,301		18,301		—		11,337		11,337		—		25,349		25,349
	$	—	$	37,651	$	37,651	$	—	$	35,260	$	35,260	$	—	$	29,159	$	29,159

Schedule of fair value and related principal amounts due upon maturity of assets and liabilities accounted for under the fair value option


	December 31, 2017
			Principal
			amount
	Fair		due upon
	value		maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,430,517	$	2,326,772	$	103,745
90 days or more delinquent:
Not in foreclosure		614,329		614,357		(28)
In foreclosure		54,257		57,248		(2,991)
	$	3,099,103	$	2,998,377	$	100,726


	December 31, 2016
			Principal
			amount
	Fair		due upon
	value		maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	2,148,947	$	2,077,034	$	71,913
90 days or more delinquent:
Not in foreclosure		19,227		19,399		(172)
In foreclosure		4,641		4,850		(209)
	$	2,172,815	$	2,101,283	$	71,532

Summary of financial statement items measured at estimated fair value on a nonrecurring basis


	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	1,463,552	$	1,463,552
Real estate acquired in settlement of loans		—		—		2,355		2,355
	$	—	$	—	$	1,465,907	$	1,465,907


	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	1,093,242	$	1,093,242
Real estate acquired in settlement of loans		—		—		1,152		1,152
	$	—	$	—	$	1,094,394	$	1,094,394

Summary of total gains (losses) on assets measured at estimated fair values on a nonrecurring basis


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	(6,853)	$	(60,487)	$	(37,437)
Real estate acquired in settlement of loans		(125)		(86)		—
	$	(6,978)	$	(60,573)	$	(37,437)

Quantitative summary of key inputs used in the valuation of the MSRs at year end and the effect on estimated fair value from adverse changes in those inputs


	December 31, 2017		December 31, 2016
	Fair	Amortized	Fair	Amortized
	value	cost	value	cost
	(Carrying value, unpaid principal balance of underlying
	mortgage loans and effect on fair value amounts in thousands)
MSR and pool characteristics:
Carrying value	$638,010	$1,481,578	$515,925	$1,111,747
Unpaid principal balance of underlying mortgage loans	$51,883,539	$114,365,698	$43,667,165	$85,509,941
Weighted average note interest rate	4.0%	3.8%	4.1%	3.7%
Weighted average servicing fee rate (in basis points)	32	31	32	31
Key inputs:
Pricing spread (1):
Range	7.6% – 14.1%	7.6% – 14.1%	7.6% – 14.9%	7.6% – 14.9%
Weighted average	9.8%	10.3%	10.1%	10.7%
Effect on fair value of (2):
5% adverse change	($10,760)	($27,700)	($9,097)	($22,382)
10% adverse change	($21,155)	($54,376)	($17,872)	($43,889)
20% adverse change	($40,916)	($104,869)	($34,516)	($84,464)
Prepayment speed (3):
Range	7.9% – 46.2%	7.4% – 44.1%	7.0% – 46.7%	6.6% – 43.9%
Weighted average	10.5%	9.7%	10.3%	8.7%
Average life (in years):
Range	1.2 – 7.8	2.0 – 8.3	1.3 – 8.6	1.6 – 9.4
Weighted average	6.6	7.5	6.7	8.1
Effect on fair value of (2):
5% adverse change	($10,809)	($23,544)	($8,818)	($16,636)
10% adverse change	($21,239)	($46,284)	($17,336)	($32,750)
20% adverse change	($41,038)	($89,514)	($33,533)	($63,513)
Annual per-loan cost of servicing:
Range	$78 – $97	$79 – $97	$78 – $101	$79 – $101
Weighted average	$89	$89	$92	$92
Effect on fair value of (2):
5% adverse change	($6,247)	($11,216)	($5,612)	($8,890)
10% adverse change	($12,494)	($22,431)	($11,225)	($17,781)
20% adverse change	($24,987)	($44,863)	($22,450)	($35,562)

(1)

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

(2)

For MSRs carried at fair value, an adverse change in one of the above-mentioned key inputs is expected to result in a reduction in fair value which will be recognized in income. For MSRs carried at lower of amortized cost or fair value, an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of the recognized MSR impairment will depend on the relationship of fair value to the carrying value of such MSRs.

(3)

Prepayment speed is measured using Life Total CPR.

Schedule of key inputs used in determining the fair value of liabilities


	December 31,
	2017	2016
Carrying value (in thousands)	$236,534	$288,669
ESS and pool characteristics:
Unpaid principal balance of underlying mortgage loans (in thousands)	$27,217,199	$32,376,359
Average servicing fee rate (in basis points)	34	34
Average excess servicing spread (in basis points)	19	19
Key inputs:
Pricing spread (1):
Range	3.8% – 4.3%	3.8% – 4.8%
Weighted average	4.1%	4.4%
Annualized prepayment speed (2):
Range	8.4% – 41.4%	7.0% – 41.3%
Weighted average	10.8%	10.5%
Average life (in years):
Range	1.4 – 7.7	1.4 – 8.6
Weighted average	6.5	6.8

(1)

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

(2)

Prepayment speed is measured using Life Total CPR.

Mortgage servicing liabilities

Schedule of key inputs used in determining the fair value of liabilities


		December 31,
		2017		2016
MSL and pool characteristics:
Carrying value (in thousands)	$	14,120	$	15,192
Unpaid principal balance of underlying mortgage loans (in thousands)	$	1,620,609	$	2,074,896
Weighted average servicing fee rate (in basis points)		25		25
Key inputs:
Pricing spread (1)		7.7%		8.0%
Prepayment speed (2)		32.9%		31.7%
Average life (in years)		3.5		3.7
Annual per-loan cost of servicing	$	404	$	497

(1)

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

Prepayment speed is measured using Life Total CPR.

Interest rate lock commitments

Quantitative summary of key inputs or assumptions used in the valuation of financial statement items


	December 31,
Key inputs	2017	2016
Pull-through rate:
Range	25.0% – 100%	35.0% – 100.0%
Weighted average	85.6%	84.9%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range	1.4 – 5.8	1.2 – 5.9
Weighted average	4.0	4.3
Percentage of unpaid principal balance:
Range	0.3% – 3.0%	0.3% – 2.8%
Weighted average	1.4%	1.3%

Mortgage servicing rights

Quantitative summary of key inputs or assumptions used in the valuation of financial statement items, excluding MSR purchases


	Year ended December 31,
	2017		2016		2015
	Fair	Amortized	Fair	Amortized	Fair	Amortized
	value	cost	value	cost	value	cost
	(Amount recognized and unpaid principal balance of underlying mortgage loans amounts in thousands)
MSR and pool characteristics:
Amount recognized	$24,471	$556,630	$17,319	$560,212	$18,013	$454,840
Unpaid principal balance of underlying mortgage loans	$2,316,539	$44,664,551	$1,452,779	$44,827,516	$1,463,150	$32,849,718
Weighted average servicing fee rate (in basis points)	31	31	33	30	33	34
Key inputs:
Pricing spread (1):
Range	7.6% – 11.2%	7.6% – 15.2%	7.2% – 10.5%	7.2% – 14.4%	7.0% – 14.4%	6.8% – 16.2%
Weighted average	10.5%	10.7%	9.2%	9.5%	9.3%	9.2%
Annual total prepayment speed (2):
Range	3.9% – 71.8%	3.4% – 47.6%	3.3% – 53.8%	2.8% – 50.9%	1.9% – 62.4%	2.5% – 50.0%
Weighted average	12.6%	9.1%	11.8%	9.0%	11.8%	8.9%
Life (in years):
Range	0.8 – 11.7	1.5 – 12.2	0.5 – 11.9	1.3 – 12.9	1.1 – 12.3	1.3 – 12.0
Weighted average	6.6	8.1	6.8	8.1	6.5	7.2
Per-loan annual cost of servicing:
Range	$78 – $101	$79 – $101	$68 – $105	$68 – $106	$59 – $101	$59 – $95
Weighted average	$89	$89	$88	$89	$77	$78

(1)

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

(2)

Prepayment speed is measured using Life Total CPR.

Mortgage loans held for sale

Quantitative summary of key inputs or assumptions used in the valuation of financial statement items


	December 31,
Key inputs	2017	2016
Discount rate:
Range	2.9% – 10.0%	2.6% – 8.8%
Weighted average	2.9%	3.0%
Twelve-month projected housing price index change:
Range	3.1% – 5.6%	2.0% – 4.5%
Weighted average	3.6%	3.7%
Voluntary prepayment / resale speed (1):
Range	0.2% – 72.2%	0.1% – 24.4%
Weighted average	44.6%	20.9%
Total prepayment speed (2):
Range	0.2% – 75.2%	0.1% – 39.8%
Weighted average	55.8%	34.3%

(1)

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

(2)

Total prepayment speed is measured using Life Total CPR.

Mortgage Loans Held for Sale at Fair Value (Tables)

12 Months Ended

Dec. 31, 2017

Mortgage Loans Held for Sale at Fair Value

Summary of mortgage loans held for sale at fair value


	December 31,		December 31,
	2017		2016
	(in thousands)
Government-insured or guaranteed	$	2,085,764	$	1,984,020
Conventional conforming		231,128		141,524
Purchased from Ginnie Mae pools serviced by the Company		777,300		40,437
Repurchased pursuant to representations and warranties		4,911		6,834
	$	3,099,103	$	2,172,815
Fair value of mortgage loans pledged to secure:
Assets sold under agreements to repurchase	$	2,530,299	$	1,422,255
Mortgage loan participation purchase and sale agreements		551,688		702,919
	$	3,081,987	$	2,125,174

Derivative Activities (Tables)

12 Months Ended

Dec. 31, 2017

Derivative Activities

Summary of derivative financial instruments


	December 31, 2017					December 31, 2016
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount	assets		liabilities		amount	assets		liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Not subject to master netting arrangements:
Interest rate lock commitments	3,654,955	$	60,012	$	1,740	4,279,611	$	65,848	$	6,457
Repurchase agreement derivatives			10,656		—			—		—
Used for hedging purposes:
Forward purchase contracts	4,920,883		4,288		1,272	12,746,191		77,905		16,914
Forward sales contracts	5,204,796		2,101		7,031	16,577,942		28,324		85,035
MBS put options	4,925,000		3,481		—	1,175,000		3,934		—
MBS call options	—		—		—	1,600,000		217		—
Put options on interest rate futures purchase contracts	2,125,000		3,570		—	1,125,000		3,109		—
Call options on interest rate futures purchase contracts	100,000		938		—	900,000		203		—
Treasury futures purchase contracts	100,000		—		—	—		—		—
Interest rate swap futures purchase contracts	1,400,000		—		—	200,000		—		—
Total derivatives before netting			85,046		10,043			179,540		108,406
Netting			(6,867)		(4,247)			(96,635)		(86,044)
		$	78,179	$	5,796		$	82,905	$	22,362
Deposits placed with derivative counterparties		$	2,620				$	10,591

Summary of the notional value activity for derivative contracts used to hedge the IRLCs and inventory of mortgage loans held for sale at fair value and MSRs


	Year ended December 31, 2017
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	year	Additions	expirations	year
	(in thousands)
Forward purchase contracts	12,746,191	181,761,564	(189,586,872)	4,920,883
Forward sale contracts	16,577,942	226,000,107	(237,373,253)	5,204,796
MBS put options	1,175,000	25,050,000	(21,300,000)	4,925,000
MBS call options	1,600,000	17,700,000	(19,300,000)	—
Put options on interest rate futures purchase contracts	1,125,000	11,360,000	(10,360,000)	2,125,000
Call options on interest rate futures purchase contracts	900,000	1,939,300	(2,739,300)	100,000
Put options on interest rate futures sale contracts	—	10,010,000	(10,010,000)	—
Call options on interest rate futures sale contracts	—	2,739,300	(2,739,300)	—
Treasury futures purchase contracts	—	544,900	(444,900)	100,000
Treasury futures sale contracts	—	444,900	(444,900)	—
Interest rate swap futures purchase contracts	200,000	2,100,000	(900,000)	1,400,000
Interest rate swap futures sale contracts	—	900,000	(900,000)	—


	Year ended December 31, 2016
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	year	Additions	expirations	year
	(in thousands)
Forward purchase contracts	5,254,293	210,412,697	(202,920,799)	12,746,191
Forward sale contracts	6,230,811	262,202,884	(251,855,753)	16,577,942
MBS put options	1,275,000	19,225,000	(19,325,000)	1,175,000
MBS call options	—	1,600,000	—	1,600,000
Put options on interest rate futures purchase contracts	1,650,000	15,331,000	(15,856,000)	1,125,000
Call options on interest rate futures purchase contracts	600,000	5,687,500	(5,387,500)	900,000
Put options on interest rate futures sale contracts	—	9,436,000	(9,436,000)	—
Call options on interest rate futures sale contracts	—	550,000	(550,000)	—
Treasury futures purchase contracts	—	585,800	(585,800)	—
Treasury futures sale contracts	—	585,800	(585,800)	—
Interest rate swap futures purchase contracts	—	400,000	(200,000)	200,000
Interest rate swap futures sale contracts	—	200,000	(200,000)	—


	Year ended December 31, 2015
	Balance			Balance
	beginning of		Dispositions/	end of
Instrument	year	Additions	expirations	year
	(in thousands)
Forward purchase contracts	2,634,218	103,571,212	(100,951,137)	5,254,293
Forward sale contracts	3,901,851	137,061,118	(134,732,158)	6,230,811
MBS put options	340,000	3,902,500	(2,967,500)	1,275,000
MBS call options	—	160,000	(160,000)	—
Put options on interest rate futures purchase contracts	755,000	8,790,000	(7,895,000)	1,650,000
Call options on interest rate futures purchase contracts	630,000	6,055,000	(6,085,000)	600,000
Put options on interest rate futures sale contracts	50,000	50,000	(100,000)	—
Call options on interest rate futures sale contracts	—	35,100	(35,100)	—

Summaries of derivative assets and related netting amounts


	December 31, 2017						December 31, 2016
	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	$	60,012	$	—	$	60,012	$	65,848	$	—	$	65,848
Repurchase agreement derivatives		10,656		—		10,656		—		—		—
		70,668		—		70,668		65,848		—		65,848
Derivatives subject to master netting arrangements:
Forward purchase contracts		4,288		—		4,288		77,905		—		77,905
Forward sale contracts		2,101		—		2,101		28,324		—		28,324
MBS put options		3,481		—		3,481		3,934		—		3,934
MBS call options		—		—		—		217		—		217
Put options on interest rate futures purchase contracts		3,570		—		3,570		3,109		—		3,109
Call options on interest rate futures purchase contracts		938		—		938		203		—		203
Netting		—		(6,867)		(6,867)		—		(96,635)		(96,635)
		14,378		(6,867)		7,511		113,692		(96,635)		17,057
	$	85,046	$	(6,867)	$	78,179	$	179,540	$	(96,635)	$	82,905

Summary of the amount of derivative asset positions by significant counterparty after considering master netting arrangements and financial instruments or cash pledged


	December 31, 2017								December 31, 2016
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
			balance sheet								balance sheet
	Net amount								Net amount
	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	$	60,012	$	—	$	—	$	60,012	$	65,848	$	—	$	—	$	65,848
Deutsche Bank		10,656		—		—		10,656		—		—		—		—
RJ O'Brien		4,508		—		—		4,508		2,750		—		—		2,750
Federal National Mortgage Association		1,092		—		—		1,092		—		—		—		—
Goldman Sachs		540		—		—		540		—		—		—		—
Jefferies & Co.		514		—		—		514		540		—		—		540
Cantor Fitzgerald LP		472		—		—		472		265		—		—		265
Barclays Capital		—		—		—		—		12,002		—		—		12,002
Others		385		—		—		385		1,500		—		—		1,500
	$	78,179	$	—	$	—	$	78,179	$	82,905	$	—	$	—	$	82,905

Summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts


	December 31, 2017						December 31, 2016
					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	$	1,740	$	—	$	1,740	$	6,457	$	—	$	6,457
Derivatives subject to a master netting arrangement:
Forward purchase contracts		1,272		—		1,272		16,914		—		16,914
Forward sale contracts		7,031		—		7,031		85,035		—		85,035
Netting		—		(4,247)		(4,247)		—		(86,044)		(86,044)
		8,303		(4,247)		4,056		101,949		(86,044)		15,905
Total derivatives		10,043		(4,247)		5,796		108,406		(86,044)		22,362
Mortgage loans sold under agreements to repurchase:
Amount outstanding		2,380,866		—		2,380,866		1,736,922		—		1,736,922
Unamortized premiums and debt issuance costs, net		672		—		672		(1,808)		—		(1,808)
		2,381,538		—		2,381,538		1,735,114		—		1,735,114
	$	2,391,581	$	(4,247)	$	2,387,334	$	1,843,520	$	(86,044)	$	1,757,476

Summary of amount of derivative liabilities and assets sold under agreements to repurchase by significant counterparty after considering master netting arrangements and financial instruments or cash pledged


	December 31, 2017								December 31, 2016
			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)
IRLCs	$	1,740	$	—	$	—	$	1,740	$	6,457	$	—	$	—	$	6,457
Credit Suisse First Boston Mortgage Capital LLC		1,010,562		(1,010,320)		—		242		961,533		(960,988)		—		545
Deutsche Bank		593,864		(593,864)		—		—		—		—		—		—
Bank of America, N.A.		406,787		(406,355)		—		432		349,638		(342,769)		—		6,869
Morgan Stanley Bank, N.A.		139,491		(138,983)		—		508		189,756		(188,851)		—		905
JPMorgan Chase Bank, N.A.		90,442		(90,442)		—		—		135,322		(135,322)		—		—
BNP Paribas		87,753		(87,753)		—		—		1,151		—		—		1,151
Royal Bank of Canada		24,835		(23,752)		—		1,083		2,937		—		—		2,937
Citibank, N.A.		23,010		(23,010)		—		—		81,555		(80,525)		—		1,030
Barclays Capital		6,387		(6,387)		—		—		28,467		(28,467)		—		—
Others		1,791		—		—		1,791		2,468		—		—		2,468
	$	2,386,662	$	(2,380,866)	$	—	$	5,796	$	1,759,284	$	(1,736,922)	$	—	$	22,362

Summary of gains (losses) recognized on derivative financial instruments and the respective income statement line items


		Year ended December 31,
Derivative activity	Income statement line	2017		2016		2015
		(in thousands)
Repurchase agreement derivative	Interest expense	$	(330)	$	—	$	—
Hedged item:
Interest rate lock commitments and mortgage loans held for sale	Net gains on mortgage loans held for sale	$	(21,255)	$	20,619	$	(48,960)
Mortgage servicing rights	Net mortgage loan servicing fees–Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	(37,855)	$	26,405	$	(7,717)

Carried Interest Due from Investment Funds

Tabular disclosure of pertinent information about a derivative or group of derivatives on a disaggregated basis, such as for individual instruments, or small groups of similar instruments. May include a combination of the type of instrument, risks being hedged, notional amount, hedge designation, related hedged item, inception date, maturity date, or other relevant item.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 5
-URI http://asc.fasb.org/extlink&oid=84234895&loc=d3e41641-113959

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
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-Publisher FASB
-Name Accounting Standards Codification
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-Section 50
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Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
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-Publisher FASB
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-Publisher FASB
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+ Details

Carried Interest Due from Investment Funds (Tables)

12 Months Ended

Dec. 31, 2017

Summary of activity in the Company's Carried interest due from Investment Funds


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	70,906	$	69,926	$	67,298
Carried Interest recognized during the year		(1,040)		980		2,628
Cash received during the year		(61,314)		—		—
Balance at end of year	$	8,552	$	70,906	$	69,926

Mortgage Servicing Rights and Mortgage Servicing Liabilities (Tables)

12 Months Ended

Dec. 31, 2017

Mortgage Servicing Rights and Mortgage Servicing Liabilities

Schedule of activity in MSRs carried at fair value


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	515,925	$	660,247	$	325,383
Additions:
Purchases		183,850		146		382,824
Mortgage servicing rights resulting from mortgage loan sales		24,471		17,319		18,013
		208,321		17,465		400,837
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)		(4,771)		(80,244)		7,352
Other changes in fair value (2)		(81,465)		(81,543)		(73,325)
Total change in fair value		(86,236)		(161,787)		(65,973)
Balance at end of year	$	638,010	$	515,925	$	660,247

	December 31,
	2017		2016
		(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable	$	630,711	$	509,847

(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.

Schedule of activity in MSRs carried at lower of amortized cost or fair value


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Amortized cost:
Balance at beginning of year	$	1,206,694	$	798,925	$	415,245
Mortgage servicing rights resulting from mortgage loan sales		556,630		560,212		454,840
Amortization		(179,946)		(139,666)		(71,160)
Application of valuation allowance to recognize other-than-temporary impairment		—		(12,777)		—
Balance at end of year		1,583,378		1,206,694		798,925

Valuation allowance:
Balance at beginning of year		(94,947)		(47,237)		(9,800)
Additions		(6,853)		(60,487)		(37,437)
Application of valuation allowance to recognize other-than-temporary impairment		—		12,777		—
Balance at end of year		(101,800)		(94,947)		(47,237)
Mortgage servicing rights, net	$	1,481,578	$	1,111,747	$	751,688
Fair value of mortgage servicing rights at end of year	$	1,482,426	$	1,112,302	$	766,345
Fair value of mortgage servicing rights at beginning of year	$	1,112,302	$	766,345	$	416,802

	December 31,
	2017		2016
	(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable	$	1,467,356	$	1,107,824

Summary of estimate of future amortization of existing MSRs


	Estimated MSR
Year ending December 31,	amortization
	(in thousands)
2018	$	195,154
2019		174,729
2020		155,777
2021		138,141
2022		122,541
Thereafter		797,036
	$	1,583,378

Schedule of activity in mortgage servicing liability carried at fair value


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	15,192	$	1,399	$	6,306
Mortgage servicing liabilities resulting from mortgage loan sales		17,229		14,991		20,442
Mortgage servicing liabilities assumed		—		10,139		—
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		6,526		5,264		(15,653)
Other changes in fair value (2)		(24,827)		(16,601)		(9,696)
Total change in fair value		(18,301)		(11,337)		(25,349)
Balance at end of year	$	14,120	$	15,192	$	1,399

Summary of servicing fees, late fees and ancillary and other fees relating to MSRs recorded on the consolidated statements of income


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Contractual servicing fees	$	475,848	$	385,633	$	290,474
Ancillary and other fees:
Late charges		25,097		19,341		5,835
Other		4,603		4,706		2,266
	$	505,548	$	409,680	$	298,575

Furniture, Fixtures, Equipment and Building Improvements (Tables)

12 Months Ended

Dec. 31, 2017

Furniture, fixtures, equipment and building improvements

Summary of depreciation and amortization expenses


	Year ended December 31,
	2017		2016		2015
	(in thousands)
Depreciation and amortization expenses	$	8,150	$	6,842	$	4,149
Less: Depreciation and amortization allocated to PMT(1)		(1,396)		(1,350)		(2,051)
Depreciation and amortization expenses included in Occupancy and equipment	$	6,754	$	5,492	$	2,098

The Company’s management agreement with PMT provides for allocation by the Company of certain common overhead costs to PMT.

Furniture, Fixtures, Equipment and Building Improvements [Member]

Furniture, fixtures, equipment and building improvements

Schedule of furniture, fixtures, equipment and building improvements


	December 31,
	2017		2016
	(in thousands)
Furniture, fixtures, equipment and building improvements	$	54,186	$	48,713
Less: Accumulated depreciation and amortization		(24,733)		(17,392)
	$	29,453	$	31,321
Fixed assets pledged to secure obligations under capital lease	$	23,915	$	25,134

Capitalized Software (Tables)

12 Months Ended

Dec. 31, 2017