UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One) | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, | |
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission file number: 001-38727
PennyMac Financial Services, Inc.
(formerly known as New PennyMac Financial Services, Inc.)
(Exact name of registrant as specified in its charter)
Delaware | 83-1098934 |
3043 Townsgate Road, Westlake Village, California | 91361 |
(818) 224-7442
(Registrant’s telephone number, including area code)
| | Securities registered pursuant to Section 12(b) of the Act: | | |
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, $0.0001 par value | | PFSI | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ | |||
Non-accelerated filer ☐ | | | Smaller reporting company ☐ | |
| | | Emerging growth company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 20202022 the aggregate market value of the registrant’s Common Stock, $0.0001 par value (“common stock”), held by non-affiliates was $1,739,903,749$1,244,422,870 based on the closing price as reported on the New York Stock Exchange on that date.
As of February 22, 2021,20, 2023, the number of outstanding shares of common stock of the registrant was 69,244,063.50,033,203.
Documents Incorporated by Reference
Document | Parts Into Which Incorporated |
Definitive Proxy Statement for | Part III |
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-K
December 31, 20202022
TABLE OF CONTENTS
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
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| Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | | 82 | |||
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| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
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| Certain Relationships and Related Transactions, and Director Independence | |
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2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Report”(this “Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:
| ● | projections of our revenues, income, earnings per share, capital structure or other financial items; |
| ● | descriptions of our plans or objectives for future operations, products or services; |
| ● | forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and |
| ● | descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues. |
Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and as set forth in Item IA.1A. of Part I hereof and any subsequent Quarterly Reports on Form 10-Q.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
| ● |
| ● |
| ● | the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; |
| ● | lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses; |
| ● | the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations; |
| ● | our dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines; |
| ● | declines in real estate values or significant changes in U.S. housing prices or activity in the U.S. housing market; |
| ● | changes to government mortgage modification programs; |
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| ● | the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject; |
| ● | our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements; |
| ● |
| ● | difficulties inherent in adjusting the size of our operations to reflect changes in business levels; |
| ● | maintaining sufficient capital and liquidity |
| ● | our substantial amount of indebtedness; |
| ● | increases in the number of loan delinquencies and defaults; |
| ● | failure to modify, resell or refinance early buyout loans or defaults of early buyout loans beyond our expectations; |
| ● | our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant |
| ● | our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances; |
| ● | our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans; |
| ● | our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing |
| ● | our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances; |
| ● | decreases in the returns on the assets that we select and manage for |
| ● | the extensive amount of regulation applicable to our investment management segment; |
| ● | conflicts of interest in allocating our services and investment opportunities among ourselves and PMT; |
| ● | the effect of public opinion on our reputation; |
| ● | our |
| ● | our initiation of new business activities or expansion of existing business activities; |
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| ● | our ability to effectively deploy new information technology applications and infrastructure; |
| ● | our ability to mitigate cybersecurity risks and cyber incidents; |
| ● | our ability to pay dividends to our stockholders; and |
| ● | our organizational structure and certain requirements in our charter documents. |
Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
5
PART I
Item 1. Business
The following description of our business should be read in conjunction with the information included elsewhere in this Report. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the projections and results discussed in the forward-looking statements due to the factors described under the caption “Risk Factors” and elsewhere in this Report. References in this Report to “we,” “our,” “us,” and the “Company” refer to PennyMac Financial Services, Inc. (formerly known as New PennyMac Financial Services, Inc.)(“PFSI”). and its consolidated subsidiaries.
Our Company
We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities over time and capitalize on other related opportunities as they arise in the future.arise.
We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PennyMac”). PennyMac was founded in 2008 by members of our executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC (“BlackRock” or “BlackRock, Inc.”PNMAC”) and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates (“Highfields”).subsidiaries described below:
We were formed as a Delaware corporation on July 2, 2018. We became the top-level parent holding company for the consolidated PennyMac business pursuant to a corporate reorganization (the “Reorganization”) that was consummated on November 1, 2018. Before the Reorganization, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings”) was our top-level parent holding company and our public company registrant.
| ● | Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity (“GSE”). PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the Veterans Administration (“VA”) and the United States Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Puerto Rico, Guam and the United States Virgin Islands, and originate loans in all 50 states and the District of Columbia, either because it is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction. |
One result of the consummation of the Reorganization was that our equity structure was changed to create a single class of publicly-held common stock as opposed to the two classes that were in place before the Reorganization. PNMAC Holdings’ financial statements remain our historical financial statements.
Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity (“GSE”). PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because it is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”), as amended. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT. PCM previously managed PNMAC Mortgage Opportunity Fund, LLC, PNMAC Mortgage Opportunity Fund, LP, an affiliate of these funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our Investment Funds. The Investment Funds were dissolved during 2018.
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| ● | Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”), as amended. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT. |
We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.
| ● | The production segment performs loan origination, acquisition and sale |
| ● | The servicing segment performs loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT. |
| ● | The investment management segment |
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Following is a summary of our segments’ results:
| | | | | | | | | | |
| | Year ended December 31, | | |||||||
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| 2020 |
| 2019 |
| 2018 | | |||
| | (in thousands) | | |||||||
Net revenues: | | | | | | | | | | |
Production | | $ | 2,824,999 | | $ | 993,884 | | $ | 385,995 | |
Servicing | | | 840,762 | | | 440,784 | | | 567,921 | |
Investment management | | | 39,836 | | | 42,736 | | | 29,587 | |
| | $ | 3,705,597 | | $ | 1,477,404 | | $ | 983,503 | |
Income (loss) before income taxes: | | | | | | | | | | |
Production | | $ | 1,964,121 | | $ | 527,834 | | $ | 87,266 | |
Servicing | | | 262,144 | | | (14,751) | | | 172,302 | |
Investment management | | | 14,344 | | | 16,361 | | | 7,003 | |
Non-segment activities (1) | | | — | | | — | | | 1,126 | |
| | $ | 2,240,609 | | $ | 529,444 | | $ | 267,697 | |
Total assets at year end: | | | | | | | | | | |
Production | | $ | 7,870,398 | | $ | 4,836,472 | | $ | 2,434,897 | |
Servicing | | | 23,709,122 | | | 5,347,549 | | | 5,031,920 | |
Investment management | | | 18,275 | | | 19,996 | | | 11,681 | |
| | $ | 31,597,795 | | $ | 10,204,017 | | $ | 7,478,498 | |
| | | | | | | | | |
| | Year ended December 31, | |||||||
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| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
Net revenues: | | | | | | | | | |
Production | | $ | 865,177 | | $ | 2,306,764 | | $ | 2,824,999 |
Servicing | | | 1,080,500 | | | 817,295 | | | 840,762 |
Investment management | | | 40,078 | | | 43,302 | | | 39,836 |
| | $ | 1,985,755 | | $ | 3,167,361 | | $ | 3,705,597 |
Income before income taxes: | | | | | | | | | |
Production | | $ | 48,480 | | $ | 1,044,411 | | $ | 1,964,121 |
Servicing | | | 613,626 | | | 306,678 | | | 262,144 |
Investment management | | | 3,141 | | | 8,094 | | | 14,344 |
| | $ | 665,247 | | $ | 1,359,183 | | $ | 2,240,609 |
Total assets at year end: | | | | | | | | | |
Production | | $ | 3,866,934 | | $ | 8,934,032 | | $ | 7,870,398 |
Servicing | | | 12,929,233 | | | 9,821,436 | | | 23,709,122 |
Investment management | | | 26,417 | | | 21,144 | | | 18,275 |
| | $ | 16,822,584 | | $ | 18,776,612 | | $ | 31,597,795 |
| | | | | | | | | |
Unpaid principal balance ("UPB") of loans purchased and originated for our account and for PMT | | $ | 109,115,829 | | $ | 234,597,882 | | $ | 196,589,353 |
UPB of loans serviced for PMT and non-affiliates at year end | | $ | 551,674,682 | | $ | 509,708,281 | | $ | 426,750,830 |
PMT assets under management at year end | | $ | 1,962,815 | | $ | 2,367,518 | | $ | 2,296,859 |
Mortgage Banking
Loan Production
Our loan production segment sources new prime credit quality first-lien residential conventional and government-insured or guaranteed mortgage loans through three channels: correspondent production, consumer direct lending and broker direct lending as described below.
Correspondent Production
In correspondent production we manage, on behalf of PMT and for our own account, the purchase from non-affiliates of mortgage loans that have been underwritten to investor guidelines. Our correspondent loans arehistorically have been directed to each entity based on the guarantor of the mortgage-backed securities (“MBS”) created from the loans: our production focus has primarily been on loans insured or guaranteed by the FHA, VA or USDA for sale into MBS guaranteed by Ginnie Mae-guaranteed MBS,Mae, whereas PMT’s production focus has been on loans that can be sold into MBS guaranteed by Fannie Mae or Freddie Mac. During 2022, we began to acquire certain loans for our own account that can be sold into MBS guaranteed by Fannie Mae and Freddie Mac.
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This mortgage loan production arrangement between us and PMT exists, in part, because PMT is not approved as an issuer of Ginnie Mae-guaranteedMae guaranteed MBS. As a result, PMT sells the government-insured or guaranteed loans that it purchases from correspondent sellers to us and we pay PMT a sourcing fee ranging from one to two basis points, generally based on the average number of calendar days that PMT holds the loans before our purchase. We generally pool the government-insured or guaranteed loans into Ginnie Mae guaranteed MBS and then sell such MBS to institutional investors. We also acquire certain conventional loans from PMT under the same agreement.
7
In our correspondent production activities, for loans we source for our own account, we earn loan origination fees from the correspondent sellers, interest income on the loans during the time we hold such loans, gains or losses from the date we make a commitment to purchase the loans through the sale of these loans, and, in connection with such sales, to entities other than PMT, we generally retain and recognize the fair value of the contractual rights to service the loans on behalf of the purchaser of the loans. These contracts are referred to as mortgage servicing rights (“MSRs”).
In our loan fulfillment activities in support of PMT’s correspondent production activities and only for loans purchased for PMT’s account, we earn fulfillment fees and tax service fees. We may also serve as a correspondent seller of newly originated loans from our consumer direct and broker direct lending channels to PMT under a mortgage loan purchase agreement. When we sell loans to PMT, PMT obtains the mortgage servicing rights relating to such loans. As such, our gains on sale of loans to PMT are primarily cash gains. During our 2017, 2018, 2019 and early 2020 fiscal years, we sold newly originated conventional conforming loans to PMT as PMT had available a selling arrangement that offered us more attractive pricing for certain conventional conforming loans than was otherwise available to us. We ceased such sales to PMT during the second quarter of 2020 as the more attractive pricing was no longer available to us. However, we may in the future enter into other sales arrangements with PMT where such arrangements are attractive to us and approved by the related party matters committees of both companies’ boards. Both companies’ related party matters committees are comprised of independent directors/trustees from the respective board.
Consumer Direct Lending
Through our consumer direct lending channel, we originate mortgage loans on a national basis. Our consumer direct model relies on the Internet and call center-based staff to acquire and interact with customers across the country. We do not have a “brick and mortar” branch network.
In our consumer direct lending activities, we earn loan origination fees from the borrower, interest income during the time we hold the loan before sale, gains or losses from the date we make a commitment to fund the loan through the sale of these loans, and, in sales to entities other than to PMT, we retain and recognize the fair value of the associated MSRs. To the extent we refinance loans that we subservice for PMT where PMT owns the related MSRs, we are generally required to transfer and convey topay PMT a recapture fee payable in cash.fee.
Broker Direct Lending
In broker direct lending, we obtain loan application packages from nonaffiliated mortgage loan brokers, underwrite and fund the resulting loans for sale to PMT or investors.sale. In our broker direct lending activities, we earn interest income, gains or losses from the date we make a commitment to fund the loan through the sale of these loans, and, in sales to entities other than PMT, we retain and recognize the fair value of the associated MSRs.
Our loan production activities are summarized below:
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| | Year ended December 31, | |||||||
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| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
UPB of loans purchased and originated for sale through our: | | |
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Correspondent lending channel, from PennyMac Mortgage Investment Trust | | $ | 49,680,267 | | $ | 64,774,728 | | $ | 60,540,530 |
Consumer direct channel | | | 15,405,697 | | | 43,060,266 | | | 23,491,465 |
Broker direct channel | | | 6,939,834 | | | 16,759,314 | | | 12,168,106 |
| | | 72,025,798 | | | 124,594,308 | | | 96,200,101 |
UPB of conventional loans fulfilled for PennyMac Mortgage Investment Trust | | | 37,090,031 | | | 110,003,574 | | | 100,389,252 |
Total loan production | | $ | 109,115,829 | | $ | 234,597,882 | | $ | 196,589,353 |
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Our loan production activity is summarized below:
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| | Year ended December 31, | | |||||||
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| 2020 |
| 2019 |
| 2018 |
| |||
| | (in thousands) | | |||||||
Unpaid principal balance ("UPB") of loans purchased and originated for sale: | | |
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| | |
| |
Loans sourced through our correspondent lending channel, from PennyMac Mortgage Investment Trust | | $ | 60,540,530 | | $ | 47,937,306 | | $ | 36,415,933 | |
Loans sourced through our consumer direct channel | | | 23,491,465 | | | 9,752,500 | | | 4,650,316 | |
Loans sourced through our broker direct channel | | | 12,168,106 | | | 3,841,289 | | | 378,544 | |
| | | 96,200,101 | | | 61,531,095 | | | 41,444,793 | |
UPB of conventional loans fulfilled for PennyMac Mortgage Investment Trust | | | 100,389,252 | | | 56,033,704 | | | 26,194,303 | |
Total loan production | | $ | 196,589,353 | | $ | 117,564,799 | | $ | 67,639,096 | |
The effect of our loan production transactions with PMT on our financial statements are summarized below:
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| | Year ended December 31, | |||||||
|
| 2020 |
| 2019 |
| 2018 | |||
| | (in thousands) | |||||||
Net gains on loans held for sale at fair value: | | | | | | | | | |
Net gains on loans held for sale to PMT | | $ | 81,295 | | $ | 190,416 | | $ | 69,359 |
Mortgage servicing rights and excess servicing spread recapture incurred | | | (30,614) | | | (7,051) | | | (4,776) |
| | $ | 50,681 | | $ | 183,365 | | $ | 64,583 |
| | | | | | | | | |
Fulfillment fee revenue |
| $ | 222,200 |
| $ | 160,610 |
| $ | 81,350 |
Tax service fees earned from PMT included in Loan origination fees | | $ | 23,408 | | $ | 14,695 | | $ | 7,433 |
Sourcing fees paid to PMT included in cost of loans purchased | | $ | 11,037 | | $ | 14,381 | | $ | 10,925 |
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
Net (losses) gains on loans held for sale at fair value: | | | | | | | | | |
Net (losses) gains on loans held for sale to PMT | | $ | (2,820) | | $ | — | | $ | 81,295 |
Mortgage servicing rights and excess servicing spread recapture incurred | | | (13,744) | | | (51,473) | | | (30,614) |
| | $ | (16,564) | | $ | (51,473) | | $ | 50,681 |
| | | | | | | | | |
Fulfillment fee revenue |
| $ | 67,991 |
| $ | 178,927 |
| $ | 222,200 |
Tax service fees earned from PMT included in Loan origination fees | | $ | 8,418 | | $ | 26,126 | | $ | 23,408 |
Sourcing fees paid to PMT included in cost of loans purchased | | $ | 4,968 | | $ | 6,472 | | $ | 11,037 |
9
Loan Servicing
Our loan servicing segment performs loan administration, collection, and default management activities, including the collection and remittance of loan payments; responseresponding to customer inquiries; providing accounting for principal and interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent borrowers; administering loss mitigation activities, including modification and forbearance programs; and supervising foreclosures and property dispositions.
We service loans both as the owner of MSRs and mortgage servicing liabilities (“MSLs”) and as the subservicer on behalf of PMT.
The UPB of our loan servicing portfolio is summarized below:
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| | December 31, | | December 31, | ||||||||
|
| 2020 |
| 2019 |
| 2022 |
| 2021 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Investor: | | | | | | | ||||||
Non-affiliated entities: | | | | | | | ||||||
Mortgage servicing rights and mortgage servicing liabilities: | | | | | | | ||||||
Originated | | $ | 199,655,361 | | $ | 168,842,011 | | $ | 295,032,674 | | $ | 254,524,015 |
Purchased | | | 41,612,940 | | | 59,703,547 | | | 19,568,122 | | | 23,861,358 |
| | | 241,268,301 | | | 228,545,558 | | | 314,600,796 | | | 278,385,373 |
Loans held for sale | | | 11,063,938 | | | 4,724,006 | | | 3,498,214 | | | 9,430,766 |
Total owned servicing | | | 252,332,239 | | | 233,269,564 | | | 318,099,010 | | | 287,816,139 |
PennyMac Mortgage Investment Trust | | | 174,418,591 | | | 135,414,668 | ||||||
Subserviced for PennyMac Mortgage Investment Trust | | | 233,575,672 | | | 221,892,142 | ||||||
Total | | $ | 426,750,830 | | $ | 368,684,232 | | $ | 551,674,682 | | $ | 509,708,281 |
Our responsibilities and risks relating to loans we service in arrangements where we own the MSRs or mortgage servicing liabilities (“MSLs”)MSLs differ from those where we act as subservicer for the owner of the servicing rights. As the owner of the servicing rights:
| ● | We recognize our investment in the servicing rights received in loan sale transactions where we retain the contractual obligation to service the loans as well the investment we make when we buy MSRs or liability we incur when we assume MSLs. We carry these assets and liabilities at fair value and as such they are subject to subsequent changes in fair value owing to the anticipated realization of the cash flows from the asset or liability or to changes in the market for such MSRs and MSLs; |
| ● | Because our investment in MSRs can be significant and the fair value of this asset is sensitive to changes in prepayment activity, the cost to service the loans and marketplace return requirements, we incur costs to hedge this investment – primarily the risk of changes in fair value arising from changes in prepayment speeds in response to changes in interest rates; |
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| ● | We are responsible for advancing our corporate funds to protect the loan owners’ interest in the collateral securing such loans for such items as hazard insurance, property taxes and foreclosure-related costs, subject to future reimbursement, as well as advancing delinquent principal and interest payments to MBS holders; and |
| ● | As the |
As the subservicer for the owner of servicing rights, we do not carry the related MSRs or MSLs on our balance sheet and therefore do not recognize changes in the fair value of MSRs or MSLs and are generally not responsible for financing the advance of corporate funds to protect the loan owners’ interest in the collateral securing such loans. As a result, the fees we earn from such arrangements are generally less on a per-loan basis than those we earn from holding MSRs and MSLs.
Following is a summary of our net loan servicing fees:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
Net loan servicing fees: | | | | | | | | | |
From non-affiliates: | | | | | | | | | |
Loan servicing fees: | | | | | | | | | |
Contractually specified | | $ | 1,054,828 | | $ | 875,570 | | $ | 814,646 |
Other | | | 91,894 | | | 118,884 | | | 116,464 |
| | | 1,146,722 | | | 994,454 | | | 931,110 |
Effect of MSRs and MSLs: | | | | | | | | | |
Realization of cash flows | | | (523,495) | | | (347,576) | | | (392,152) |
Other changes in fair value of MSRs and MSLs | | | 877,671 | | | (68,330) | | | (1,109,841) |
Hedging results | | | (631,484) | | | (475,215) | | | 918,180 |
| | | (277,308) | | | (891,121) | | | (583,813) |
Net loans servicing fees from non-affiliates | | | 869,414 | | | 103,333 | | | 347,297 |
From affiliates: | | | | | | | | | |
Loan servicing fees from PennyMac Mortgage Investment Trust | | | 81,915 | | | 80,658 | | | 67,181 |
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | | — | | | (1,037) | | | 24,970 |
Net loans servicing fees from affiliates | | | 81,915 | | | 79,621 | | | 92,151 |
Net loan servicing fees | | $ | 951,329 | | $ | 182,954 | | $ | 439,448 |
Average UPB of loan serviced for: | | | | | | | | | |
Non-affiliates | | $ | 297,207,950 | | $ | 258,759,523 | | $ | 235,567,838 |
Subserviced for PMT | | $ | 226,817,005 | | $ | 202,047,495 | | $ | 151,379,311 |
Investment Management
We are an investment manager through our subsidiary, PCM, which provides investment management services to PMT. We earn management fees as a percentage of PMT’s net assets and may earn incentive compensation based on PMT’s investment performance.
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Following is a summary of our net loan servicing fees:management fee revenue:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2020 |
| 2019 |
| 2018 | |||
| | (in thousands) | |||||||
Net loan servicing fees: | | | | | | | | | |
From non-affiliates: | | | | | | | | | |
Loan servicing fees: | | | | | | | | | |
Contractually specified | | $ | 814,646 | | $ | 730,165 | | $ | 585,101 |
Other | | | 116,464 | | | 98,564 | | | 64,133 |
| | | 931,110 | | | 828,729 | | | 649,234 |
Realization of cash flows | | | (392,152) | | | (429,571) | | | (280,015) |
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities | | | (1,109,841) | | | (559,043) | | | 163,671 |
Hedging results | | | 918,180 | | | 395,497 | | | (121,045) |
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | | 24,970 | | | 9,256 | | | (8,500) |
| | | (558,843) | | | (583,861) | | | (245,889) |
Net loans servicing fees from non-affiliates | | | 372,267 | | | 244,868 | | | 403,345 |
From affiliates: | | | | | | | | | |
Loan servicing fees: | | | | | | | | | |
From PennyMac Mortgage Investment Trust | | | 67,181 | | | 48,797 | | | 42,045 |
From Investment Funds | | | — | | | — | | | 3 |
Net loans servicing fees from affiliates | | | 67,181 | | | 48,797 | | | 42,048 |
Net loan servicing fees | | $ | 439,448 | | $ | 293,665 | | $ | 445,393 |
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
Base management | | $ | 31,065 |
| $ | 34,794 |
| $ | 34,538 |
Performance incentive | | | — | | | 3,007 | | | — |
| | $ | 31,065 | | $ | 37,801 | | $ | 34,538 |
Net assets of PMT at end of year | | $ | 1,962,815 | | $ | 2,367,518 | | $ | 2,296,859 |
Investment ManagementOur Business Strategies
Our business strategies include:
Consumer Direct Lending
We are an investment managerexpect to grow our consumer direct lending business over time by leveraging our growing servicing portfolio through the recapture of existing customers for refinance and purchase-money loans as well as increasing our non-portfolio originations. As our servicing portfolio grows, we will have a greater number of leads to pursue, which we believe will lead to greater origination activity through our subsidiary, PCM. PCM currently manages PMTconsumer direct business. As of December 31, 2022, we serviced 2.3 million loans. In 2022, 2021 and before 2019, managed the Investment Funds. For these activities,2020, we earn management fees as a percentagefunded $15.4 billion, $43.1 billion and $23.5 billion of net assetsmortgage loans, respectively, through our consumer direct lending channel. We believe that our national call center model and may earn incentive compensation based on investment performance. During 2018, we completed the liquidation of the Investment Funds.our technology will enable us to drive origination process efficiencies and best-in-class customer service.
The net assets of PMT are summarized below:Broker Direct Lending
| | | | | | | |
| | December 31, | | ||||
| | 2020 |
| 2019 | | ||
| | (in thousands) | | ||||
PennyMac Mortgage Investment Trust | | $ | 2,296,859 | | $ | 2,450,916 | |
According to Inside Mortgage Finance, the broker lending channel represented approximately 15% of U.S. residential mortgage originations in 2022. In 2022, 2021 and 2020, we funded $6.9 billion, $16.8 billion and $12.2 billion of mortgage loans, respectively, through our wholesale-broker channel, which is comprised of loans from both the broker segment as well as loans purchased through our non-delegated correspondent segment. We plan on growing our mortgage loan volume in this channel through the addition of new broker and non-delegated partner relationships, as well as expansion of existing relationships enabled by our leading broker technology platform.
Correspondent Lending
We expect to support our correspondent production market share by expanding the number and types of sellers from which we purchase loans and increasing the proportion of our sellers’ production volumes that we purchase as we continue to expand to the loan products and services we offer. We believe that we are well positioned to continue taking advantage of this opportunity based on our management expertise in the correspondent production business, our relationships with correspondent sellers, and our supporting systems and processes. In 2022, 2021 and 2020, we purchased $49.7 billion, $64.8 billion and $60.5 billion of mortgage loans, respectively, through our correspondent lending channel.
Mortgage Loan Servicing Portfolio
We expect to grow our servicing portfolio through loan production activities, as our correspondent production for our own account and consumer and broker direct lending add new servicing for owned MSRs, and correspondent conventional production for PMT’s account adds new subservicing. We or PMT may also grow our servicing portfolio through acquisitions. In 2022, our loan production totaled $109.1 billion in UPB and we purchased MSRs backed by loans with UPBs totaling $375.4 million. Our MSRs were backed by loans with UPBs totaling $314.6 billion as of December 31, 2022.
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Expansion into New Markets and Products
We regularly evaluate opportunities to grow our business, including expansion into new markets and providing additional services to our customers directly or through external partnerships. To date, we have entered into partnerships or joint ventures that can provide insurance and closing and title services to our customers and others. We also continue to develop new products to satisfy demand from customers in each of our production channels and respond to changing circumstances in the market for mortgage-related financing.
U.S. Mortgage Market
The U.S. residential mortgage market is one of the largest financial markets in the world, with approximately $15.2 trillion of outstanding debt as of September 30, 2022. According to Inside Mortgage Finance, first lien mortgage loan origination volume was approximately $2.2 trillion in 2022. Many of the largest financial institutions, primarily banks which have traditionally held the majority of the market share in mortgage origination and servicing, have reduced their participation in the mortgage market creating opportunities for non-bank participants.
The residential mortgage industry is characterized by high barriers to entry, including the necessity for approvals required to sell loans to and service loans for the Agencies, state licensing requirements for non-federally chartered banks, sophisticated infrastructure, technology, risk management, and processes required for successful operations, and financial capital requirements.
Competition
Given the diverse and specialized nature of our businesses, we do not believe we have a direct competitor for the totality of our business. We compete with a number of nationally-focused companies in each of our businesses.
In our loan production and servicing segments, we compete with large financial institutions, including the cash windows of the GSEs, and with other independent residential mortgage loan producers and servicers, such as Rocket Mortgage, Mr. Cooper and United Wholesale Mortgage.
In our loan production segment, we compete primarily on the basis of customer service, marketing penetration, customer network, product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees.
In our servicing segment, we compete primarily on the basis of experience in the residential loan servicing business, quality and efficiency of execution and servicing performance.
In our investment management segment, we compete for capital with both traditional and alternative investment managers. We compete primarily on the basis of historical track record of risk-adjusted returns, experience of investment management team, the return profile of prospective investment opportunities and on the level of fees and expenses.
Seasonality/Cyclicality
The demand for loan originations is affected by consumer demand for home loans. Demand for home loans generally comes from the demand for loans made to finance the purchase of homes and the demand for loans made to refinance existing loans.
The demand for loans made to finance the purchase of homes is most significantly influenced by the overall strength of the economy, housing prices and availability and societal factors such as household formation and government support for homeownership.
The demand for loans made to refinance existing loans is most significantly influenced by movements in interest rates and to a lesser extent, to changes in property values and employment.
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Human Capital Resources
Our long-term growth and success is highly dependent upon our employees and our ability to maintain a diverse, equitable and inclusive workplace that representsrepresenting a broad spectrum of backgrounds, ideas and perspectives. As part of these efforts, we strive to offer competitive compensation and benefits, foster a community where everyone feels a greater sense of belonging and purpose, and provide employees with the opportunity to give back and make an impact in the communities where we live and serve.
During 2020, our workforce grew fromWe had over 4,000 domestic employees as of the end of fiscal year ended December 31, 2019 to over 6,000 domestic employees2022. In addition, as of the fiscal year ended December 31, 2020. At the end of fiscal year 2020,2022, our workforce was 53.3%49.9% female and 46.7%50.1% male, and the ethnicity of our workforce was 43.7%44.4% White, 23.4%22.6% Hispanic 16.8%or Latino, 14.3% Black 10.3%or African American, 14.2% Asian and 5.8% other.4.5% other (which includes American Indian or Alaska Native, Native Hawaiian or Other Pacific Islander, and “Two or More Races” as defined in our EE0-1 Report filed with the Department Labor).
RecruitingEmployee Retention and Employee RetentionDevelopment
We believe in attracting, developing and engaging the best talent, while providing a supportive work environment that prioritizes the health and safety of our employees. Talent development is a critical component of the employee experience and ensures that all employees have career growth opportunities, including establishing development networks and relationships and fostering continued growth and learning. Employees receive regular business and compliance training to help further enhance their career development objectives. We also actively manage enterprise-wide and divisional mentoring programs and have partnered with an external vendor to establish a comprehensive, fully integrated wellness program designed to enhance the productivity of our employees.
Compensation and Succession Planning
Our compensation programs are designed to motivate and reward employees who possess the necessary skills to support our business strategy and create long-term value for our stockholders. Employee compensation may include base salary, annual cash incentives, and long-term equity incentives, as well as life and health insurance and 401(k) plan matching contributions.
Employees receive regular training We also offer a comprehensive selection of health and welfare benefits to help further enhance their career development objectivesour employees including emotional well-being support and paid parental leave programs. Succession planning is also critical to our operations and we also actively manage an enterprise-wide mentoring program. We have partnered with an external vendor to establish a comprehensive, fully integrated wellness program designed to enhance the productivityestablished ongoing evaluations of our employees. We also support the U.S. military through our continued focus on recruitingleadership depth and creating opportunities for veterans. For example, we established the Veterans Engaging Mentorships, Relationships, and Growth program to further our efforts to hire, support, and create a community of veterans and veteran families.succession capabilities.
Diversity, Equity and Inclusion
We believe that building a diverse, equitable and inclusive, high-performing workforce where our employees bring varied perspectives and experiences to work every day creates a positive influence in our workplace, community and business operations. Our Board of Directors, our Nominating and Corporate Governance Committee, Compensation Committee, and our Risk Committee provide regular oversight onof our corporate sustainability program, including our diversity, equity and inclusion programs and initiatives. During 2020, we
We have also taken proactive measures to strategically and sustainably advance equity in the workplace through our Business Resource Groups (“BRG”), a diversity hiring initiative, mentorship programs, and external partnerships with organizations such as the Mortgage Bankers Association and the National Association of Minority Mortgage Bankers of America. We also established leadership goals and created customized initiatives that focusedfocus on our continued effort to increase the number of women and underrepresented minorities in management positions throughout our company and its business divisions.
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As it relates to gender diversity,our inclusive culture, we established the Women Empowering Mentorships, Relationships, and Growth programfollowing BRGs to emphasize career growth, networking, and learning opportunities for employees and allies with shared backgrounds and experiences: the BOLD BRG (for Black and African American employees and allies), the HOLA BRG (for Hispanic, Latino and Latinx employees and allies), the InspirASIAN BRG (for our Asian American and Pacific Islander employees and allies), the Pennymac PRIDE BRG (for our LGBTQIA employees and allies), the SERVE BRG (for our veteran and military family employees and allies), and the wEMRG BRG (for our women at the management level.employees and allies). We also foster a more inclusive culture through a variety of other diversity and inclusion initiatives, including corporate training, special events, community outreach and corporate philanthropy.
Community Involvement
We have a corporate philanthropy program that is governed by a philosophy of giving that prioritizes the support of causes and issues that are important in our local communities, and drives a culture of employee engagement and collaboration throughout our organization. We are committed to empowering our employees to be a positive influence in the communities where we live and serve, and believe that this commitment supports our efforts to attract and engage employees and improve retention. During the 2020 fiscal year, we
Our philanthropy program consists of three key components: an employee matching gift program, a charitable grants program and a corporate sponsorship program. Our five philanthropic focus areas are: community development and equitable housing, financial literacy and economic inclusion, human and social services, health and medical research, and environmental sustainability.
We have established a separate donor advised fund to facilitate donations to various local and national charitable organizations.
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U.S. Mortgage Market
The U.S. residentialorganizations and have provided funding to several charitable organizations located near our office sites and national organizations that support missions such as sustainable homeownership, mortgage market is one of the largest financial markets in the world, with approximately $11.5 trillion of outstanding debt as of September 30, 2020. According to Inside Mortgage Finance, first lien mortgage loan origination volume was approximately $4.0 trillion in 2020. Many of the largest financial institutions, primarily banks which have traditionally held the majority of the market share in mortgage origination and servicing, have reduced their participation in the mortgage market creating opportunities for non-bank participants.
The residential mortgage industry is characterizedrental assistance, food insecurity, disaster recovery, family and child advocacy, and community empowerment. We also manage our environmental impact by high barriers to entry, including the necessity for approvals required to sell loans tofocusing on improving our waste reduction, energy efficiency and service loans for the Agencies, state licensing requirements for non-federally chartered banks, sophisticated infrastructure, technology, risk management, and processes required for successful operations, and financial capital requirements.water conservation.
Our Growth Strategies
Our growth strategies include:
Growing Consumer Direct Lending through Portfolio RecaptureLegal and Non-Portfolio Originations
We expect to grow our consumer direct lending business by leveraging our growing servicing portfolio through recapture of existing customers for refinance and purchase-money loans as well as increasing our non-portfolio originations. As our servicing portfolio grows, we will have a greater number of leads to pursue, which we believe will lead to greater origination activity through our consumer direct business. As of December 31, 2020, we serviced 1.9 million loans. At the same time, we are making significant investments in technology, personnel and marketing to increase our non-portfolio originations. We believe that our national call center model and our technology will enable us to drive origination process efficiencies and best-in-class customer service.
Growing Broker Direct Lending
The broker lending channel involves the underwriting and funding of mortgage loans sourced by mortgage loan brokers and other financial intermediaries. According to Inside Mortgage Finance, the broker lending channel represented approximately 14% of U.S. residential mortgage originations in 2020. In 2020, 2019 and 2018, we funded $12.2 billion, $3.8 billion and $378.5 million of mortgage loans, respectively, through our broker direct channel. We plan on growing our mortgage loan volume by adding broker relationships and offering our mortgage loan brokers access to our technology through a dedicated portal.
Growing Correspondent Production through Expanding Seller Relationships and Adding Products and Services
We expect to grow our correspondent production business by expanding the number and types of sellers from which we purchase loans and increasing the volume of loans that we purchase from our sellers as we continue to expand to the loan products and services we offer. Over the past several years, a number of large banks have exited or reduced the size of their correspondent production businesses, creating an opportunity for non-bank entities to gain market share. We believe that we are well positioned to continue taking advantage of this opportunity based on our management expertise in the correspondent production business, our relationships with correspondent sellers, and our supporting systems and processes.
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Growing our Mortgage Loan Servicing Portfolio
We expect to focus the growth of our servicing portfolio on loan production activities, as our correspondent government-insured production and consumer and broker direct lending add new servicing for owned MSRs, and correspondent conventional production adds new subservicing. In 2020, our correspondent, consumer direct and broker direct loan production totaled $196.6 billion in UPB. We may supplement our organic growth with MSR acquisitions, some of which may be concentrated in delinquent or defaulted loans for which we have expertise in servicing. We have acquired MSRs both from large mortgage servicers and independent mortgage bankers, which may sell MSRs due to continuing operational and regulatory and capital pressures. In 2020, we purchased MSRs relating to approximately $2.4 billion in UPB of underlying loans.
Expansion into New Markets and Products
We regularly evaluate opportunities to grow our business, including expansion into new markets. We also continue to develop new products to satisfy demand from customers in each of our production channels and respond to changing circumstances in the market for mortgage-related financing.
Regulatory Compliance and Regulatory
Our business is subject to extensive federal, state and local regulation. The CFPB was established on July 21, 2010 under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act.Act (the “Dodd-Frank Act”). The CFPB is responsible for ensuring consumers are provided with timely and understandable information to make responsible decisions about financial transactions, federal consumer financial laws are enforced and consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination. Although the CFPB’s actions may improve consumer protection, such actions also have resulted in a meaningful increase in costs to consumers and financial services companies including mortgage originators and servicers.
Our loan production and loan servicing operations are regulated at the state level by state licensing authorities and administrative agencies. We, along with certain PennyMacPNMAC employees who engage in regulated activities, must apply for licensing as a mortgage banker or lender, loan servicer and debt collector pursuant to applicable state law. These state licensing requirements typically require an application process, the payment of fees, background checks and administrative review.
Our servicing operations are licensed (or exempt or otherwise not required to be licensed) to service mortgage loans in all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S.United States Virgin Islands. Our consumer direct lending business is licensed to originate loans in 49all 50 states and the District of Columbia.
From time to time, we receive requests from states and Agencies and various investors for records, documents and information regarding our policies, procedures and practices regarding our loan production and loan servicing business activities, and undergo periodic examinations by federal and state regulatory agencies. We incur significant ongoing costs to comply with these licensing and examination requirements.
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The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”) requires all states to enact laws that require all individuals acting in the United States as mortgage loan originators to be individually licensed or registered if they intend to offer mortgage loan products. These licensing requirements include enrollment in the Nationwide Mortgage Licensing System, application to state regulators for individual licenses and the completion of pre-licensing education, annual education and the successful completion of both national and state exams.
We must comply with a number of federal consumer protection laws, including, among others:
| ● | the Real Estate Settlement Procedures Act (“RESPA”), and Regulation X thereunder, which require certain disclosures to mortgagors regarding the costs of mortgage loans, the administration of tax and insurance escrows, the transferring of servicing of mortgage loans, the response to consumer complaints, and payments between lenders and vendors of certain settlement services; |
| ● | the Truth in Lending Act (“TILA”), and Regulation Z thereunder, which require certain disclosures to mortgagors regarding the terms of their mortgage loans, notices of sale, assignments or transfers of |
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| ownership of mortgage loans, new servicing rules involving payment processing, and adjustable rate mortgage change notices and periodic statements; |
| ● | the Equal Credit Opportunity Act and Regulation B thereunder, which prohibit discrimination on the basis of age, race and certain other characteristics, in the extension of credit; |
| ● | the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics; |
| ● | the Home Mortgage Disclosure Act and Regulation C thereunder, which require financial institutions to report certain public loan data; |
| ● | the Homeowners Protection Act, which requires the cancellation of private mortgage insurance once certain equity levels are reached, sets disclosure and notification requirements, and requires the return of unearned premiums; |
| ● | the Servicemembers Civil Relief Act, which provides, among other things, interest and foreclosure protections for service members on active duty; |
| ● | the Gramm-Leach-Bliley Act and Regulation P thereunder, which require us to maintain privacy with respect to certain consumer data in our possession and to periodically communicate with consumers on privacy matters; |
| ● | the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications; |
| ● | the Fair Credit Reporting Act and Regulation V thereunder, which regulate the use and reporting of information related to the credit history of consumers; |
| ● | the National Flood Insurance Reform Act of 1994, which provides for lenders to require from borrowers or to purchase flood insurance on behalf of borrower/owners of properties in special flood hazard areas; and |
| ● | the Coronavirus Aid, Relief and Economic Security Act (“CARES |
Many of these laws are further impacted by the SAFE Act and implementation of new rules by the CFPB.
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Our senior management team has established a comprehensive compliance management system ("CMS") that is designed to ensure compliance with applicable mortgage origination and servicing laws and regulations. The components of our CMS include: (a) oversight by senior management and our Board of Directors to ensure that our compliance culture, guidance, and resources are appropriate; (b) a compliance program to ensure that our policies, training and monitoring activities are complete and comprehensive; (c) a complaint management program to ensure that consumer complaints are appropriately addressed and that any required actions are implemented on a timely basis; and (d) independent oversight to ensure that our CMS is functioning as designed.
An important component of the CMS is management’s Mortgage Regulatory Compliance Committee (“MRCC”). This committee oversees the CMS and supports our cultural initiatives that reinforce the importance of regulatory compliance. The MRCC also monitors changes in the internal and external environment, approves mortgage compliance policies, monitors compliance with those policies and ensures any required remediation is implemented on a timely basis. The MRCC has identified individuals throughout the organization to oversee specific areas of compliance. MRCC membership includes senior management from all areas of the Company impacted by mortgage compliance laws and regulations. The MRCC meets on a regular basis throughout the year.
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Intellectual Property
We rely on a combination of trademarks, copyrights, and trade secrets, as well as confidentiality and contractual provisions to protect our intellectual property and proprietary technologies. We hold or have otherwise applied for various registered trademarks, including trademarks with respect to the name PennyMac®, the swirl design and rooftop design appearing in certain PennyMac drawings and logosPennymac and various additional designs and word marks relating to the PennyMacPennymac name. Depending upon the jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained. We generally intend to renew our trademarks as they come up for renewal. Our other intellectual property includes proprietary know-how and technological innovations, such as our proprietary workflow driven cloud basedworkflow-driven cloud-based servicing system, as well as proprietary pricing engines, loan-level analytics systems and other trade secrets that we have developed to maintain our competitive position.
Competition
Given the diverse and specialized nature of our businesses, we do not believe we have a direct competitor for the totality of our business. We compete with a number of nationally-focused companies in each of our businesses.
In our loan production and servicing segments, we compete with large financial institutions and with other independent residential mortgage loan producers and servicers, such as Wells Fargo, JP Morgan Chase, Rocket Mortgage, Mr. Cooper and United Wholesale Mortgage. In our loan production segment, we compete primarily on the basis of product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees. In our servicing segment, we compete primarily on the basis of experience in the residential loan servicing business, quality and efficiency of execution and servicing performance. In our investment management segment, we compete for capital with both traditional and alternative investment managers. We compete primarily on the basis of historical track record of risk-adjusted returns, experience of investment management team, the return profile of prospective investment opportunities and on the level of fees and expenses.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including exhibits, proxy statements and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through the investor relations section of our website at www.pennymacfinancial.com as soon as reasonably practicable after electronically filing such material with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on those websites and should not be considered part of this document.
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Item 1A. Risk Factors
Summary Risk Factors
We are subject to a number of risks that, if realized, could have a material adverse effect on our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.stockholders. Some of our more significant challenges and risks include, but are not limited to, the following, which are described in greater detail below:
| ● | Our business |
beyond expected levels may adversely affect our business, financial condition, liquidity and results of operations.
| ● | Our mortgage banking revenues are highly dependent on macroeconomic factors and real estate market, mortgage market and financial market conditions. |
| ● | We may not be able to effectively manage significant increases or decreases in our loan production volume, which could negatively affect our business, financial condition, liquidity and results of operations. |
| ● | We have a substantial amount of indebtedness, which may limit our financial and operating activities, expose us to substantial increases in costs due to interest rate fluctuations, expose us to the risk of default under our debt obligations and may adversely affect our ability to incur additional debt to fund future needs. |
| ● | We rely on external financial arrangements to fund mortgage loans and operate our business and our inability to refinance or enter new financial arrangements could be detrimental to our business. |
| ● |
| Increases in delinquencies and defaults may |
| ● | We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable due to delinquencies, defaults and foreclosures that could adversely affect our business, financial condition, liquidity and results of operations. |
| ● | Our acquisition and ownership of mortgage servicing rights exposes us to significant risks. |
| ● | A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and results of operations. |
| ● | We may be required to indemnify the purchasers of loans that we originate, acquire or assist in the fulfillment of, or repurchase those loans, if those loans fail to meet certain criteria or characteristics or under other circumstances |
| ● | Failure to successfully modify, resell or refinance early buyout loans (“EBO”) or defaults of EBO loans beyond expected levels may adversely affect our business, financial condition, liquidity and results of operations. |
| ● | We depend on counterparties and vendors to provide services that are critical to our business, which subjects us to a variety of risks. |
| ● | Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks, and other long term physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans we own or service, as well as geographic areas where we conduct business. |
| ● | Our failure to appropriately address various issues that may give rise to reputational risk could cause harm to our business and adversely affect our earnings. |
| ● | We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition, liquidity and results of operations. |
| ● | New CFPB or state rules and regulations or more stringent enforcement of existing rules and regulations by these regulators could result in enforcement actions, fines, penalties and the inherent reputational risk that results from such actions. |
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| ● | We are highly dependent on U.S. government-sponsored entities and government agencies, and any organizational or pricing changes at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition and results of operations. |
| ● | We are required to have various Agency approvals and state licenses in order to conduct our business and there is no assurance we will be able to obtain or maintain those Agency approvals or state licenses. |
| ● | Our business, financial condition and results of operations may be adversely affected by the long term impact of the COVID-19 pandemic. |
| ● | We rely on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business, and the termination of, or material adverse change in, |
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| the terms of this relationship, or a material adverse change to PMT or its operations, could adversely affect our business, financial condition, liquidity and results of operations. |
| ● | A significant portion of our loan servicing operations are conducted pursuant to subservicing contracts with PMT, and any termination by PMT of these contracts, or a material change in the terms thereof that is adverse to us, would adversely affect our business, financial condition, liquidity and results of operations. |
| ● | Market conditions could reduce the fair value of the assets that we manage, which would reduce our management and incentive fees. |
| ● | Our failure to comply with the extensive amount of regulation applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations. |
| ● | We may encounter conflicts of interest in trying to appropriately allocate our time and services between activities for our own account and for PMT, or in trying to appropriately allocate investment opportunities among ourselves and for PMT. |
| ● | Our risk management efforts may not be effective. |
| ● | Initiating new business activities, developing new products or significantly expanding existing business activities may expose us to new risks and increase our cost of doing business. |
| ● | Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results. |
| ● |
Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the following factors, which could materially adversely affect our business, financial condition, liquidity and results of operations in future periods. The risks described below are not the only risks that we face. Additional risks not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition, liquidity and results of operations in future periods.
Risks Related to Our Mortgage Banking Segment
RegulatoryMarket and Financial Risks
Our business financial conditionis significantly impacted by changes in interest rates. Changes in prevailing interest rates, rising inflation rates, U.S. monetary policies or other macroeconomic conditions that affect interest rates may have a detrimental effect on our business and results of operations may be adversely affected by the ongoing COVID-19 pandemic.earnings.
The COVID-19 pandemic has created unprecedented economic, financial and public health disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. The extent to which COVID-19 continues to negatively affect our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to COVID-19.
The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the ongoing COVID-19 pandemic. The initial forbearance period is 180 days, subject to another 180 days extension. In addition, in February 2021 the federal government announced an additional extension of three to six months depending on loan type. As a result of the CARES Act forbearance requirements, we expect to experience continue elevated delinquencies in our servicing portfolio that may require us to finance substantial amounts of advances of principal and interest payments to the investors holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’
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interestsOur operations, financial performance and earnings are affected by factors including prevailing interest rates, United States monetary policies or other macroeconomic conditions such as inflation fluctuations, recessions, consumer confidence and demand. For example, as interest rates have risen in the properties securing the loans. In2022, our loan production volumes have decreased as compared to 2021 as fewer loans were originated or refinanced. As a result, our net revenues decreased from $3.2 billion in fiscal year 2020, elevated prepayment activity was sufficient2021 to cover principal$2.0 billion in fiscal year 2022. Inflation rates also increased in 2022 and may continue to rise. In addition, interest payment advances required underrates and the CARES Act, however, in the future elevated prepayment activity may be insufficient to cover required principal and interest advances. We also expect the effectsliquidity of the CARES Act forbearance requirements to reduce our servicing fee income and increase our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the ongoing COVID-19 pandemic. Future servicing advances will be driven by the number of borrower delinquencies, including those resulting from payment forbearance; the amount of time borrowers remain delinquent; and the level of successful resolution of delinquent payments, all of which willMBS market may be impacted by the pace at which the economy recovers from the ongoing COVID-19 pandemic. As of December 31, 2020, 7.2% of loans in our predominantly government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent resulting in an increase in the level of servicing advances we have been required to make due to borrower delinquencies. Servicing advances resulting from COVID-19 could have a significant adverse impact on our cash flows and could also have a detrimental effect on our business and financial condition.
Financial markets have experienced substantial volatility and reduced liquidity, resulting in unprecedented federal government intervention to lowerFederal Reserve increasing the federal funds rate, to near zerotapering MBS purchases or selling MBS.
Our financial performance and support market liquidityprofitability is directly affected by purchasing assetschanges in many financial markets, including the mortgage-backed securities market. The CARES Act forbearance requirements and the declineprevailing interest rates. An increase in prevailing interest rates have negatively impactedcould:
| ● | adversely affect our loan production volume, as refinancing an existing loan would be less attractive and qualifying for a loan may be more difficult; |
| ● | adversely affect our Ginnie Mae EBOs because loan modifications would become less economically feasible; and |
| ● | increase the cost of servicing our outstanding debt, including debt related to servicing assets and loan production. |
A decrease in prevailing interest rates could:
| ● | cause an increase in the expected volume of loan refinancings, which would require us to record decreases in fair value on our MSRs; and |
| ● | reduce our earnings from our custodial deposit accounts. |
Furthermore, borrowings under our warehouse lines of credit, and MSR and servicing advance facilities are at variable rates of interest, which also expose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our servicing assets. In addition,variable-rate indebtedness will increase even though the CARES Act forbearance requirementsamount borrowed remains the same, and our earnings and cash flows may correspondingly decrease. An event of default, a negative ratings agency action, the declineperception of financial weakness, an adverse action by a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the valueeconomy that constricts the availability of financial assets linked to consumer credit performance in early 2020 caused PMT to report material losses and negatively affected PMT's shareholders' equity and net assets under management. Consequently, we experienced a reduction inmay increase our base management fees from PMT in fiscal year 2020. Further market volatility or economic weakness may result in additional declines in the valuecost of our servicing assets, lower base management feesfunds and make it increasingly difficult for us to optimize our hedging activities. Also, our liquidity and/or regulatory capital could be adversely impacted by volatilityrefinance existing debt and disruptions in the capital and credit markets.borrow additional funds. In addition, if we failmay not be able to meet or satisfy any of the covenants inadjust our repurchase agreements or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could resultoperational capacity and staffing in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.
We may also have difficulty accessing debt and equity capital on attractive terms,timely manner, or at all, as a result of the impact of the COVID-19 pandemic, which may adversely affect our accessin response to capital necessary to fund our operationsincreases or address maturing liabilities on a timely basis. This includes renewals of our existing credit facilities with our lenders who may be adversely impacted by the volatility and dislocationsdecreases in the financial markets and may not be willing or able to continue to extend us credit on the same terms, or on favorable terms, or at all.
In addition, our business could be disrupted if we are unable to operate due to changing governmental restrictions such as travel bans and quarantines placed or reinstituted on our employees or operations, including, successfully operating our businessloan production volume resulting from remote locations, ensuring the protection of our employees’ health and maintaining our information technology infrastructure.
Federal, state, and local executive, legislative and regulatory responses to the ongoing COVID-19 pandemic are rapidly evolving, may be inconsistent and conflictchanges in scope or application, and may be subject to change without advance notice. These regulatory responses may impose additional compliance obligations, may extend existing CARES Act forbearance requirements and delay our licensing efforts, which may negatively impact our business. In addition, the CARES Act and other federal, state and local regulations are subject to interpretation given the existing ambiguities in the rules and regulations, which may result in future class action and other litigation risk.
Governmental authorities have taken additional measures to stabilize the financial markets and support the economy including providing monetary relief and extending foreclosure and eviction moratoria. The outcome of these measures are unknown and they may not be sufficient to address future market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic. The scope and duration of the COVID-19 pandemic and the efficacy of the extraordinary measures put in place to address it are currently unknown. Even
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after the COVID-19 pandemic subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.
To the extent the COVID-19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in this Item 1A.
Failure to successfully modify, resell or refinance early buyout loans or defaults of the early buyout loans beyond expected levels may adversely affect our business, financial condition, liquidity and results of operations.
The ongoing COVID-19 pandemic has significantly increased the number of Ginnie Mae loans that are seriously delinquent in our Ginnie Mae MSR portfolio. As a mortgage servicer, we have an early buyout repurchase option (“EBOs”) for loans at least three months delinquent in our Ginnie Mae MSR portfolio. During the year ended December 31, 2020, we have repurchased $9.6 billion delinquent Ginnie Mae loans from our Ginnie Mae MSR portfolio. Purchasing delinquent Ginnie Mae loans provides us with an alternative to our mortgage servicing obligation of advancing principal andprevailing interest at the coupon rate of the related Ginnie Mae security. While our EBO program reduces the cost of servicing the Ginnie Mae loans, it may also accelerate loss recognition when the loans are repurchased because we are required to write off accumulated non-reimbursable interest advances and other costs. In addition, after purchasing the delinquent Ginnie Mae loans, we expect to resecuritize many of the delinquent loans into another Ginnie Mae guaranteed security upon the delinquent loans becoming current either through the borrower’s reperformance or through the completion of a loan modification; however, there is no guarantee that any delinquent loan will reperform or be modified. The ongoing COVID-19 pandemic as well as changing government regulations, including Ginnie Mae’s 2020 regulations requiring reperforming loan borrowers to make six months of timely payments in certain circumstances before a loan can be repooled into another Ginnie Mae guaranteed security, has made estimating the loan amounts expected to be modified, resold or refinanced more difficult. Failure to successfully modify, resell or refinance our repurchased Ginnie Mae loans or if a significant portion of the repurchased Ginnie Mae loans default may adversely affect our business, financial condition, liquidity and results of operations.
We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition, liquidity and results of operations.
We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits and examinations by federal and state regulators. Our failure to operate effectively and in compliance with any of these laws, regulations and rules could subject us to lawsuits or governmental actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity and results of operations. In addition, our failure to comply with these laws, regulations and rules may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt, delays in the foreclosure process, increased servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations. Further, we may be required to pay substantial penalties imposed by our regulators due to compliance errors, or we may lose our licenses to originate and/or service loans.
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The failure of our correspondent sellers to comply with any applicable laws, regulations and rules may also result in these adverse consequences. We have in place a due diligence program designed to assess areas of risk with respect to loans we acquire from such correspondent sellers. However, we may not detect every violation of law and, to the extent any correspondent sellers, third party originators, servicers or brokers with whom we do business fail to comply with applicable laws or regulations and any of their mortgage loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans or MSRs, to monetary penalties or other losses. While we may have contractual rights to seek indemnity or repurchase from certain of these lenders, third party originators, servicers or brokers, if any of them are unable to fulfill their indemnity or repurchase obligations to us to a material extent, our business, liquidity, financial condition and results of operations could be materially and adversely affected. Our service providers and other vendors are also required to operate in compliance with applicable laws, regulations and rules. Our failure to adequately manage service providers and other vendors to mitigate risks of noncompliance with applicable laws may also have these negative results.
The recent outcome of the 2020 U.S. Presidential and Congressional elections could result in significant policy changes or regulatory uncertainty in our industry and may also result in increased regulatory scrutiny and enforcement actions. While it is not possible to predict when and whether significant policy or regulatory changes would occur, any such changes on the federal, state or local level could significantly impact, among other things, our operating expenses, the availability of mortgage financing, interest rates, consumer spending, the economy and the geopolitical landscape. To the extent that the new government administration takes action by proposing and/or passing regulatory policies that could have a negative impact on our industry, such actions may have a material adverse effect on our business, financial condition and results of operations.rates.
The Financial Stability Oversight Council (“FSOC”) and Conference of State Bank Supervisors (“CSBS”) have been reviewing whether state chartered nonbank mortgage servicers should be subject to “safety and soundness” standards similar to those imposed by federal law on insured depository institutions, even though nonbank mortgage servicers do not have any federally insured deposit accounts. For example, on September 29, 2020, the CSBS released proposed prudential standards for state oversight of nonbank mortgage servicers. The proposed CSBS prudential standards would include revised minimum net worth, capital ratio and liquidity standards similar to existing FHFA requirements and would require servicers to maintain sufficient allowable assets to cover normal operating expenses in addition to the amounts required for servicing expenses. In addition, the FSOC has encouraged state regulators to work to develop prudential and corporate governance standards for nonbank mortgage servicers and has issued guidance describing the process FSOC would follow if it were to consider making a determination to subject a nonbank financial company to supervision by the Board of GovernorsAny of the Federal Reserve System and prudential standards. To the extent any such state regulators impose new minimum net worth, capital ratio and liquidity standards that are overly burdensome, such actions may have a material adverse effect on our business, financial condition and results of operations.
New CFPBincreases or state rules and regulations or more stringent enforcement of existing rules and regulations by the CFPB or state regulators could result in enforcement actions, fines, penalties and the inherent reputational risk that results from such actions.
The CFPB has regulatory authority over certain aspects of our business as a result of our residential mortgage banking activities, including, without limitation, the authority to conduct investigations, bring enforcement actions, impose monetary penalties, require remediation of practices, pursue administrative proceedings or litigation, and obtain cease and desist orders for violations of applicable federal consumer financial laws. Although there was a decline in enforcement actions by the CFPB under the prior federal administration, examinations by state regulators and enforcement actions in the residential mortgage and servicing sectors by state attorneys general have increased and may continue to increase under the incoming federal administration. Failure to comply with the CFPB and state laws, rules or regulations to which we are subject, whether actual or alleged, could have a material adverse effect on our business, liquidity, financial condition and results of operations.
Our failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations and our
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ability to make distributions to our shareholders.
We are highly dependent on U.S. government-sponsored entities and government agencies, and any changes in these entities, their current roles or the leadership at such entities or their regulators could materially and adversely affect our business, financial condition, liquidity and results of operations.
Our ability to generate revenues through mortgage loan sales depends on programs administered by GSEs, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the issuance of mortgage-backed securities (“MBS”), in the secondary market. Presently, almost all of the newly originated loans that we originate directly with borrowers or assist PMT in acquiring from mortgage lenders through our correspondent production activities qualify under existing standards for inclusion in MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. We, or PMT, also derive other material financial benefits from our Agency relationships, including the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures.
A number of legislative proposals have been introduced in recent years that would wind down or phase out the GSEs, including a proposal by the prior federal administration to end the conservatorship and privatize Fannie Mae and Freddie Mac. On November 18, 2020 the FHFA finalized new regulatory capital rules for Fannie Mae and Freddie Mac that requires them to increase their capital to $280 billion. FHFA did not specify how the new regulatory capital requirements will be achieved or a timeframe for meeting the capital target, however, any increase in guaranty fees or other costs imposed by Fannie Mae and Freddie Mac to raise additional capital may have a negative impact on the mortgage market and could reduce Fannie Mae and Freddie Mac’s future role in the mortgage industry. It is not possible to predict the scope and nature of the actions that the U.S. government, including the new incoming federal administration, will ultimately take with respect to the GSEs. Any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and their regulators or the U.S. federal government, and any changes in leadership at these entities, could adversely affect our business and prospects. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or in underwriting criteria could materially and adversely affect our business, financial condition, liquidity and results of operations and our ability to make distributions to our shareholders
Elimination of the traditional roles of Fannie Mae and Freddie Mac, or any changes to the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the fees, terms and guidelines that govern our selling and servicing relationships with them, could also materially and adversely affect our ability to sell and securitize loans through our loan production segment, and the performance, liquidity and market value of our investments. Our ability to generate revenues from newly originated loans that we assist PMT in acquiring through its correspondent production business would be similarly affected. Moreover, any changes to the nature of the GSEs or their guarantee obligations could redefine what constitutes an Agency MBS and could have broad adverse implications for the market and our business, financial condition, liquidity and results of operations.
Our ability to generate revenues from newly originated loans that we assist PMT in acquiring through its correspondent production business is also highly dependent on the fact that the Agencies have not historically acquired such loans directly from mortgage lenders, but have instead relied on banks and non-bank aggregators such as us to acquire, aggregate and securitize or otherwise sell such loans to investors in the secondary market. Certain of the Agencies have approved new and smaller lenders that traditionally may not have qualified for such approvals. To the extent that these mortgage lenders choose to sell directly to the Agencies rather than through loan aggregators like us, the number of loans available for purchase by aggregators is reduced, which could materially and adversely affect our business and results of operations. Similarly, to the extent the Agencies increase the number of purchases and sales for their own accounts, our business and results of operations could be materially and adversely affected.
Our business prospects, financial condition, liquidity and results of operations could be adversely impacted by the CFPB’s final General Qualified Mortgage (“QM”) loan rule for certain GSE eligible loans and its impact on the ability to repay rules.
The Dodd-Frank Act provides that a lender must make “a reasonable, good faith determination” of each
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borrower’s ability to repay a loan, but may presume that a borrower will be able to repay a loan if such loan has certain characteristics that meet the QM definition. The CFPB adopted its QM definition that establishes rigorous underwriting and product feature requirements for a loan to be deemed a QM. Within those regulations, the CFPB created a special exemption for the GSEs that is generally referred to as the “QM patch,” which allows any GSE-eligible loan to be deemed a QM. The QM patch effectively provides QM designation for GSE eligible loans that have a debt-to-income ratio in excess of 43%, which represents a meaningful portion of the loans currently purchased by the GSEs. Without the QM patch or an alternative, loans with debt-to-income ratiosdecreases discussed above 43% would not be designated as QMs unless they were insured by a federal agency such as the FHA or VA, which have each adopted their own QM definition that does not currently have a debt-to-income ratio limitation. In October 2020, the CFPB issued a rule providing that the QM patch will expire on the earlier of the implementation of a final amendment revising the “General QM loan” definition or upon the date that the GSEs exit conservatorship. On December 11, 2020, the CFPB issued final General QM loan rules replacing the debt-to-income ratio limitations with a price-based approach that may have significant implications for the U.S. housing and mortgage market since we do not know how the credit markets and borrowers will respond to the new regulations. Failure to establish effective operational procedures to comply with the final General QM loan rules could materially and adversely affect our business, financial condition, liquidity and results of operations.
We are required to hold various Agency approvals in order to conduct our business and there is no assurance that we will be able to obtain or maintain those Agency approvals or that changes in Agency guidelines will not materially and adversely affect our business, financial condition, liquidity and results of operations.
We are required to hold certain Agency approvals in order to sell mortgage loans to the Agencies and service such mortgage loans on their behalf. Our failure to satisfy the various requirements necessary to obtain and maintain such Agency approvals over time would restrict our direct business activities and could materially and adversely impact our business, financial condition, liquidity and results of operations.
We are also required to follow specific guidelines that impact the way that we originate and service Agency loans. A significant change in these guidelines that has the effect of decreasing the fees we charge or requires us to expend additional resources in providing mortgage services could decrease our revenues or increase our costs, which would also adversely affect our business, financial condition, liquidity and results of operations.
In addition, the FHFA has directed the GSEs to align their guidelines for servicing delinquent mortgages and assess compensatory penalties against servicers in connection with the failure to meet specified timelines relating to delinquent loans and foreclosure proceedings, and other breaches of servicing obligations. Our failure to operate efficiently and effectively within the prevailing regulatory framework and in accordance with the applicable origination and servicing guidelines and/or the loss of our seller/servicer license approval or approved issuer status with the Agencies could result in our failure to benefit from available monetary incentives and/or expose us to monetary penalties and curtailments, all of which could materially and adversely affect our business, financial condition, liquidity and results of operations.
Our inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material adverse effect on our business, financial condition, liquidity and results of operation.
We are subject to minimum financial eligibility requirements established by the Agencies. These minimum financial requirements, which are described in Liquidity and Capital Resources, include net worth, capital ratio and/or liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential losses and a minimum amount of liquidity needed to service Agency mortgage loans and MBS and cover the associated financial obligations and risks.
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In order to meet these minimum financial requirements, we are required to maintain cash and cash equivalents in amounts that may adversely affect our business, financial condition, liquidity and results of operations, which could significantly impede us from growing our business and place us at a competitive disadvantage in relation to federally chartered banks and certain other financial institutions. To the extent that such minimum financial requirements are not met, the Agencies may suspend or terminate our Agency approvals or agreements, which could cause us to cross default under financing arrangements and/or have a material adverse effect on our business, financial condition liquidity and results of operations.
The failure of PennyMac Loan Services, LLC to avail itself of an appropriate exemption from registration as an investment company under the Investment Company Act of 1940 could have a material and adverse effect on our business.
We intend to operate so that we, and each of our subsidiaries, are not required to register as investment companies under the Investment Company Act of 1940, as amended, or the Investment Company Act. We believe that our subsidiary, PennyMac Loan Services, LLC (“PLS”), qualifies for one or more exemptions provided in the Investment Company Act because of the historical and current composition of its assets and income; however, there can be no assurances that the composition of PLS’ assets and income will remain the same over time such that one or more exemptions will continue to be applicable.
If PLS is required to register as an investment company, we would be required to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things: limitations on capital structure; restrictions on specified investments; prohibitions on transactions with affiliates; compliance with reporting, record keeping, voting and proxy disclosure; and, other rules and regulations that would significantly increase our operating expenses. Further, if PLS was or is required to register as an investment company, PLS would be in breach of various representations and warranties contained in its credit and other agreements resulting in a default as to certain of our contracts and obligations. This could also subject us to civil or criminal actions or regulatory proceedings, or result in a court appointed receiver to take control of us and liquidate our business, any or all of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Liability relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments.
Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator was responsible for, or aware of, the release of such hazardous substances. The presence of hazardous substances may also adversely affect an owner’s ability to sell real estate, borrow using real estate as collateral or make debt payments to us. In addition, if we take title to a property, the presence of hazardous substances may adversely affect our ability to sell the property, and we may become liable to a governmental entity or to third parties for various fines, damages or remediation costs. Any of these liabilities or events may materially and adversely affect the fair value of the relevant asset and/or our business, financial condition, liquidity and results of operations.
Market and Financial Risks
Our mortgage banking revenues are highly dependent on macroeconomic factors and real estate market, mortgage market and financial market conditions.
The success of our business strategies and our results of operations are materially affected by current or future conditions in the real estate market, mortgage markets, financial markets and the economy generally. Factors such as the COVID-19 pandemic, inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, domestic political issues, government shutdowns, climate change and the availability and cost of credit may contribute to increased volatility and unclear expectations for the economy in general and the real estate, mortgage market and financial markets in particular going forward.
A destabilization of the real estate market, mortgage market and financial markets or deterioration in these markets also could reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we originate or acquire, either at a profit or
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at all.inflation could increase our operating expenses and may affect our profitability if the additional operating costs are not recoverable through increased revenues or profit margins. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of operations.
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We may not be able to effectively manage significant increases or decreases in our loan production volume, which could negatively affect our business, financial condition, liquidity and results of operations.
We may experience significant growth in our loan production volumes. If we do not effectively manage our growthloan production volumes and are unable to consistently maintain quality of execution, our reputation and existing relationships with mortgage lenders and brokers could be damaged, we may not be able to maintain PMT’s existing relationships or develop new relationships with mortgage lenders and brokers, our new mortgage products may not gain widespread acceptance and the quality of our correspondent production, consumer direct lending and wholesale broker direct lending operations could suffer, all of which could negatively affect our brand and operating results.
Our loan production segment is also subject to overall market factors that could adversely impact our ability to grow our loan production volume.volumes. For example, increased competition from new and existing market participants, reductions in the overall level of refinancing activity or slow growtha decrease in the level of new home purchase activity can impact our ability to continue to growdecrease our loan production volumes, and wevolumes. We may be forced to accept lower margins in our respective businesses in order to continue to compete and keep our volume of activityloan production volumes consistent with past or projected levels or be forced to reduce our levels of production activity. In addition, we may not be able to adjust our operational capacity and staffing in a timely manner, or at all, in response to increases or decreases in loan production volume resulting from changes in prevailing interest rates.
We have a substantial amount of indebtedness, which may limit our financial and operating activities, expose us to substantial increases in costs due to interest rate fluctuations, expose us to the risk of default under our debt obligations and may adversely affect our ability to incur additional debt to fund future needs.
As of December 31, 2020,2022, we had $12.3$7.0 billion of total indebtedness outstanding (approximately $11.6$5.2 billion of which was secured) and up to $2.5$6.5 billion of additional capacity under our secured borrowings and other secured debt financing arrangements. This substantial indebtedness and any future indebtedness we incur could have adverse consequences and, for example, could:
| ● | require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on indebtedness, including indebtedness we may incur in the future, thereby reducing the funds available for operations, capital expenditures and other general corporate purposes; |
| ● | make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including any restrictive covenants, could result in an event of default under the |
| ● | subject us to increased sensitivity to interest rate increases; |
| ● | make us more vulnerable to economic downturns, adverse industry conditions or catastrophic |
| ● | reduce our flexibility in planning for or responding to changing business, industry and economic |
| ● | place us at a competitive disadvantage to competitors that have relatively less debt than we have. |
In addition, our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes. Our liquidity needs vary significantly from time to time and may be affected by general economic conditions, industry trends, performance and many other factors outside our control.
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We rely on external financial arrangements to fund mortgage loans and operate our business and our inability to refinance or enter new financial arrangements could be detrimental to our business.
Our ability to finance our business operations and repay maturing obligations rests in large part on our ability to borrow money. Unlike some of our competitors who fund mortgage loans through bank deposits, we generally fund our
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mortgage loans through borrowings under warehouse facilities and other financialfinancing arrangements as well as funds from our operations. Our borrowings are generally repaid with the proceeds we receive from mortgage loan sales. We require new and continued financing to facilitatefund mortgage loans and operate our anticipated growth.business. We are generally required to renew many of our financing arrangements each year,on a regular basis, which exposes us to refinancing and interest rate risks. Our ability to refinance our existing financial obligations and borrow additional funds is affected by a variety of factors beyond our control including:
| ● | limitations imposed on us under our financing agreements that contain restrictive covenants and borrowing conditions, which may limit our ability to raise additional debt; |
| ● | restrictions imposed upon us by regulatory agencies that mandate certain minimum capital and liquidity requirements and additional scrutiny from such regulatory agencies; |
| ● | liquidity in the credit markets; |
| ● | prevailing interest rates; |
| ● | the strength of the lenders from which we borrow, and the regulatory environment in which they operate, including proposed capital strengthening requirements; |
| ● | limitations on borrowings |
| ● | accounting changes that may impact calculations of covenants in our |
We are also dependent on a limited number of banking institutions that extend us credit on terms that we have determined to be commercially reasonable. These banking institutions are subject to their own regulatory supervision, liquidity and capital requirements, risk management frameworks, profitability and risk thresholds and tolerances, any of which may change materially and negatively impact their business strategies, including their extension of credit to us specifically or mortgage lenders and servicers generally. Certain banking institutions have already exited, and others may in the future decide to exit the mortgage business. Such actions may increase our cost of capital and limit or otherwise eliminate our access to capital, in which case our business, financial condition, liquidity and results of operations would be materially and adversely affected.
In the event that any of our financial arrangements is terminated or is not renewed, or if the principal amount that may be drawn under our funding agreements that provide for immediate funding at closing were to significantly decrease, we may be unable to find replacement financing on commercially favorable terms, or at all, which could be detrimental to our business.
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We leveragefinance our loans and other assets under credit and othersecured financing agreements and utilize various other sources of borrowings, which exposes us to significant risk and may materially and adversely affect our business, financial condition, liquidity and results of operations.
We currently leveragefinance and, to the extent available, we intend to continue to leverage the mortgage loans produced through our consumer and broker direct lending business and the government-insured loans acquired through our correspondentloan production activities from PMTbusinesses with borrowings under repurchase agreements. When we enter into repurchase agreements, we sell mortgage loans to lenders, which are the repurchase agreement counterparties, and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash that we receive from a lender when we initially sell the assets to that lender is less than the fair value of those assets (this difference is referred to as the haircut)haircut or margin), if the lender defaults on its obligation to resell the same assets back to us we could incur a loss on the transaction equal to the amount of the haircut or margin reduced by interest accrued on the repurchase agreement (assuming that there was no change in the fair value of the assets). In addition, repurchaseRepurchase agreements generally allow the counterparties, to varying degrees, to determine a new fair value of the collateral to reflect current market conditions. If a counterparty lender determines that the fair value of the collateral has decreased, it may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. Should this occur, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, our counterparty may sell the collateral, which may result in significant losses to us.
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In addition, we invest in certain assets, including MSRs and EBOs, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs and EBOs under secured financing arrangements. Our FannieFreddie Mae MSRs are pledged through a special purpose entity to secure borrowings under a master repurchase agreementagreement. Fannie Mae and our and Freddie MacGinnie Mae MSRs are pledged to secure borrowings under a loan and security agreement. Our Ginnie Mae MSRs and related excess servicing spread financing (“ESS”) are pledged to a special purpose entity,entities, each of which issues variable funding notes and term notes that are secured by such Fannie Mae or Ginnie Mae assets, as applicable, and repaid through the servicing cash flows received by the special purpose entity as the lender under a repurchase agreement with PLS.. Some of our EBOs are contributed to a special purpose entity, which issues participation certificates pledged to secure borrowings under a master repurchase agreement. In fiscal year 2020, we amended some master repurchase agreements to pledge other EBOs as an additional asset type under those agreements. In each case, similar to our repurchase agreements, the cash that we receive under these secured financing arrangements is less than the fair value of the assets and a decrease in the fair value of the pledged collateral can result in a margin call. Should a margin call occur, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, the secured parties may sell the collateral, which may result in significant losses to us.
Each of the secured financing arrangements pursuant to which we finance MSRs and ESS is further subject to the terms of an acknowledgement agreement with Fannie Mae, Freddie Mac or Ginnie Mae, as applicable, pursuant to which our and the secured parties’ rights are subordinate in all respects to the rights of the applicable Agency. Accordingly, the exercise by any of Fannie Mae, Freddie Mac or Ginnie Mae of its rights under the applicable acknowledgment agreement could result in the extinguishment of our and the secured parties’ rights in the related collateral and result in significant losses to us.
We may in the future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our available capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of, among other things, the stability of our cash flows. We can provide no assurance that we will have access to any debt or equity capital on favorable terms or at the desired times, or at all. Our inability to raise such capital or obtain financing on favorable terms could materially and adversely impact our business, financial condition, liquidity and results of operations.
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Our financing agreements contain financial and restrictive covenants that could adversely affect our business, financial condition, liquidity and results of operations.
Our various financing agreements require us and/or our subsidiaries to comply with various restrictive covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Incurring substantial debt subjects us to the risk that our cash flows from operations may be insufficient to repurchase the assets that we have sold under our repurchase agreements or otherwise service the debt incurred under our other financing agreements. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. In addition, the repayment of the unsecured senior notes will depend in part on our restricted subsidiaries’ generation of cash flow and our restricted subsidiaries’ ability to make such cash available to us, by dividend, debt repayment or other means. The Unsecured Notes’ indentureunsecured senior note indentures contain additional restrictive covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions, including our ability and/or the ability of our restricted subsidiaries to:
| ● | pay dividends or distributions, redeem or repurchase equity, prepay subordinated debt and make certain loans or investments; |
| ● | merge or consolidate with another person or sell all or substantially all of our assets to another person; |
| ● | transfer, sell or otherwise dispose of certain assets including capital stock of subsidiaries; |
| ● | enter into transactions with affiliates; and |
| ● | allow to exist certain restrictions on the ability of non-guarantor restricted subsidiaries to pay dividends or make other payments to us. |
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If we fail to comply with the restrictive covenants and are unable to obtain a waiver or amendment, an event of default would result under the terms of our financing arrangement or could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes.
Our earnings may decrease because of changes in prevailing interest rates.
Our profitability is directly affected by changes in prevailing interest rates. An increase in prevailing interest rates could:
A decrease in prevailing interest rates could:
An event of default a negative ratings agency action, the perception of financial weakness, an adverse action by a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the economy that constricts the availability of credit may increaseoccurs, our cost of fundsfinancing arrangements could be immediately due and make it difficult forpayable, requiring us to apply all available cash to repay our financing arrangements, and if we were unable to repay or refinance existing debt and borrow additional funds. In addition, weour financial arrangements then any collateral securing the financial arrangements may not be able to adjustsold by our operational capacity in a timely manner, or at all, in response to increases or decreases in mortgage production volume resulting from changes in prevailing interest rates. In addition, due to the ongoing COVID-19 pandemic, the Federal Reserve has enacted monetary policies to purchase MBS on the open market which could impact interest rates and the liquidity of the MBS market.
Any of the increases or decreases discussed above could have a material adverse effect on our business, financial condition, liquidity and results of operations.lenders.
We are subject to risks associated with the expected discontinuation of LIBOR.
As of December 31, 2021, one-week and two-month United States Dollar LIBOR (and certain non-U.S. dollar LIBOR settings) were discontinued, while the remaining non-U.S. dollar LIBOR settings ceased to be representative and thereafter began to be published only on a “synthetic basis”. In July 2017,addition, the head of the United KingdomUK Financial Conduct Authority (“FCA”(the “FCA”), which regulatesis the regulator of the LIBOR administrator, has announced the phase out of the use of LIBOR by the end of 2021. However, for U.S. dollar LIBOR, it now appears that the relevant date may be deferred to June 30, 2023 for the most common ratesprincipal United States Dollar LIBOR tenors (overnight and one, three, six and 12 months). The LIBORmonths) will cease to be published by any administrator has published a consultation regarding its intention to cease publication of U.S. dollar LIBORor will no longer be representative as of June 30, 2023 (instead of December 31, 2021, as previously expected) based on continued rate submissions from banks. The FCA and other regulators have stated that they welcome2023. In addition, despite the LIBOR administrator’s action. An extension to 2023 would mean that many legacy U.S. dollar LIBOR contracts would terminate before related LIBOR rates cease to be published. However, the same regulators emphasized that, despite any continuedexpected publication of U.S. dollarthe principal United States Dollar LIBOR settings through June 30, 2023, nothe FCA has prohibited the firms it regulates from using such settings in new contracts using U.S. dollar(subject to limited exceptions).
Accordingly, many LIBOR should be entered into after December 31, 2021. Moreover, the LIBOR administrator’s consultation also relatesobligations have transitioned to the LIBOR administrator’s intentionanother benchmark or will soon do so. Different types of financial products have transitioned, or are expected to cease publication of non-U.S. dollar LIBOR after December 31, 2021. Theretransition, to different benchmarks; and there is no assurance that any alternative benchmark will be the economic equivalent of any LIBOR setting. For some existing LIBOR-based obligations, the contractual consequences of the discontinuation of LIBOR may not be clear. Although the foregoing reflects the timing (or expected timing) of LIBOR discontinuation and certain consequences, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published until any particular date.
To identify a setdate or in any particular form, and there is no assurance regarding the consequences of LIBOR discontinuation. Uncertainty as to the foregoing and the nature of alternative interest reference rates to LIBOR, the U.S. Federal Reserve established the Alternative Reference Rates Committee (“ARRC”), a U.S. based working group composed of large U.S. financial institutions. ARRC has identified the Secured Overnight Financing Rate as its preferred replacement for LIBOR, but it is unclear how their preference may adversely impact the risks we maintain to the cessationavailability and costs of LIBOR, or if other benchmarks may emerge as a replacement for LIBOR.borrowings.
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The expected and actual discontinuation of LIBOR could have a significant impact on the financial markets and our business activities. We rely on financing arrangements and liabilities under which ourThe cost of borrowing under certain of our financing arrangements is based on LIBOR. We also may hold assets and instruments used to hedge the value of certain assets that depend for their value onwith values or cash flows determined by reference to LIBOR. We anticipate significantexpect to face challenges as it relates toduring the transition away from LIBOR for all of our LIBOR-based assets,LIBOR based financing arrangements, and liabilities, regardless of whether their maturity dates (as applicable) fall before or after the anticipated discontinuation date after December 31, 2021 or June 30, 2023, as applicable.2023. These challenges will include, but willare not be limited to, amending agreements or instruments underlying our existing and/or new LIBOR-based assets, financing arrangements, securities and liabilities with appropriate fallback language in such a way as to ensure economic equivalence with our LIBOR-based assets, financing arrangements and securities prior to the discontinuation of LIBOR, and the possibility that LIBOR may deteriorate as a viable benchmark to ensure a fair cost of funds for our LIBOR-linked liabilities, interest income for our LIBOR-linked assets, and/or the determination of fair value for certain of our assets and hedges using LIBOR as a benchmark rate or used to develop a market discount rate. In addition, the transition to using any new benchmark rate or other financial metric may require changes to existing transaction data, products, systems, models, operations and pricing processes.
We also anticipate additional risks to our current business activities as they relate to the discontinuation of LIBOR. We may service LIBOR-based adjustable rate mortgages (“ARMs”) for which the underlying mortgage notes incorporate fallback provisions, but we cannot anticipate the response of our borrowers or note holders to such risks. We may also rely on financial models that incorporate LIBOR into their methodologiesbase rates for financial valuation, planning and reporting.reporting in our financial models.
In the United States, there have been efforts to identify alternative reference interest rates to replace United States Dollar LIBOR. The Alternative Reference Rates Committee has recommended that U.S. dollar LIBOR be replaced by rates based on the Secured Overnight Financing Rate (“SOFR”) plus, in the case of existing LIBOR contracts and obligations, a spread adjustment. The derivatives markets are also expected to use SOFR-based rates to replace U.S. dollar LIBOR. SOFR is intended to be a broad measure of the cost of borrowing funds overnight in transactions that are collateralized by U.S. Treasury securities. LIBOR is intended to be an unsecured rate that represents interbank funding costs for different short-term tenors and, other than its overnight setting, reflects expectations regarding future interest rates. Thus, LIBOR is generally intended to be sensitive to bank credit risk and to short-term interest rate expectations and SOFR is intended to be insensitive to credit risk and to risks related to interest rates other than overnight rates. These fundamental differences between LIBOR and SOFR mean we are unable to clearly assess the risk of transitioning from LIBOR to SOFR for any of our LIBOR-based liabilities or assets.
Due to these risks, we expect that both the impending and actual discontinuation of LIBOR could materially affect our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their fair value. For the same reason, we also can provide no assurance that changes in the fair value of our hedge instruments will effectively offset changes in the fair value of the assets they are expected to hedge. Furthermore, the transition away from widely used benchmark rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes. Our inability to manage these risks effectively may materially and adversely affect our business, financial condition, liquidity and results of operations.
Hedging against interest rate exposure may materially and adversely affect our results of operations and cash flows.
We pursue hedging strategies primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCsinterest rate lock commitments (“IRLCs”) and our inventory of loans held for sale. For example, with respect to our IRLCs and inventory of loans held for sale, we may use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. In addition, with respect to our MSRs, we may use MBS forward purchase and sale contracts to address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.
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Our hedging activity will vary in scope based on the risks being mitigated, the level of interest rates, the type of investments held, and other changing market conditions such as those resulting from the ongoinglong term impact of the COVID-19 pandemic. Hedging instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities, and our interest rate hedging may fail to protect or could adversely affect us because, among other things:
| ● | interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; |
| ● | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought; |
| ● | the duration of the hedge may not match the duration of the related liability or asset; |
| ● | the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |
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| ● | the hedging counterparty owing the money in the hedging transaction may default on its obligation to pay. |
In addition, we may fail to recalculate, re-adjust and execute hedges in an efficient manner. Any hedging activity, which is intended to limit losses, may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in worse overall investment performance than if we had not engaged in any such hedging transactions. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We utilize derivative financial instruments, which could subject us to risk of loss.
We utilize derivative financial instruments for hedging purposes, which may include swaps, options and futures; however, the prices of derivative financial instruments are highly volatile. As a result, the cost of utilizing derivatives may reduce our income that would otherwise be available for distribution to stockholders or for other purposes, and the derivative instruments that we utilize may fail to effectively hedge our positions. We are also subject to credit risk with regard to the counterparties involved in the derivative transactions.
We are exposed to a number of risks relating to holding derivative instruments. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
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The use of derivative instruments is also subject to an increasing number of laws and regulations, including the Dodd-Frank Act and other federal regulations. These laws and regulations are complex, compliance with them may be costly and time consuming, and our failure to comply with any of these laws and regulations could subject us to lawsuits or government actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
We use estimates in determining the fair value of our MSRs, which are highly volatile assets with continually changing fair values. If our estimates of their value prove to be inaccurate, we may be required to write down the fair values of the MSRs which could adversely affect our business, financial condition, liquidity and results of operations.
Our estimates of the fair value of our MSRs is based on the cash flows projected to result from the servicing of the related mortgage loans and continually fluctuates due to a number of factors. These factors include prepayment speeds, interest rate changes, costs to service the ongoing COVID-19 pandemicloans and other market conditions, which affect the number of loans that are repaid or refinanced and thus no longer result in cash flows, and the number of loans that become delinquent.conditions.
We use internal financial models that utilize our understanding of inputs and assumptions used by market participants to value our MSRs for purposes of financial reporting and for purposes of determining the price that we pay for portfolios of MSRs and to acquire loans for which we will retain MSRs. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our inputs and the results of the models.
If loan delinquencies or prepayment speeds are different than anticipated or other factors perform differently than modeled, the recorded fair value of certain of our MSRs may change. Significant differences in performance could increase the chance that we do not adequately estimate the impacteffect of these factors on our valuations which could result in misstatements of our financial results, restatements of our financial statements, or otherwise materially and adversely affect our business, financial condition, liquidity and results of operations.
The geographic concentration of our servicing portfolio may be affected by weaker economic conditions or adverse events specific to certain regions which could decrease the fair value of our MSRs and adversely affect our business, financial condition, liquidity and results of operations.
A decline in the economy, the ongoinglong term impact of the COVID-19 pandemic or other difficulties in certain real estate markets may cause a decline in the value of residential and commercial properties. To the extent that certain states in which we have greater concentrations of business in the future experience weaker economic conditions or greater rates of decline in real estate values than the United States generally, such concentration may disproportionately decrease the fair value of our MSRs and adversely affect our loan production businesses. The impact of property value declines may increase in magnitude and it may continue for a long period of time. Additionally, if states in which we have greater concentrations of business were to change their licensing or other regulatory requirements to make our business cost-prohibitive, we
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may be required to stop doing business in those states or may be subject to a higher cost of doing business in those states, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Increases in delinquencies and defaults may adversely affect our business, financial condition, liquidity and results of operations.
Delinquencies can result from many factors including unemployment, weak economic conditions or real estate values, or catastrophic events such as man-made or natural disasters, pandemic,pandemics, war or terrorist attacks. A decrease in home prices may result in higher loan-to-value ratios (“LTVs”), lower recoveries in foreclosure and an increase in loss severities above those that would have been realized had property values remained the same or continued to increase. Some borrowers do not have sufficient equity in their homes to permit them to refinance their existing loans, which may reduce the volume or growth of our loan production business. This may also provide borrowers with an incentive to default on their mortgage loans even if they have the ability to make principal and interest payments. Further, despite recent increases, interest rates have remained near historical lows for an extended period of time.
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Increased mortgage delinquencies, defaults and foreclosures may result in lower revenue for loans that we service for the Agencies because we only collect servicing fees from the Agencies for performing loans, and our failure to service delinquent and defaulted loans in accordance with the applicable servicing guidelines could result in our failure to benefit from available monetary incentives and/or expose us to monetary penalties and curtailments. Additionally, while increased delinquencies generate higher ancillary fees, including late fees, these fees aremay not likely to be recoverable in the event thatif the related loan is liquidated.liquidated or due to CARES Act restrictions or other requirements or as a result of the COVID-19 pandemic. In addition, an increase in delinquencies lowers the interest income that we receive on cash held in collection and other accounts because there is less cash in those accounts. Also, increased mortgage defaults may ultimately reduce the number of mortgages that we service.
Increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those loans due to the increased time and effort required to collect payments from delinquent borrowers and to acquire and liquidate the properties securing the loans or otherwise resolve loan defaults if payment collection is unsuccessful, and only a portion of these increased costs are recoverable under our servicing agreements. Increased mortgage delinquencies, defaults and foreclosures may also result in an increase in servicing advances we are obligated to make to fulfill our obligations to MBS holders and to protect our investors’ interests in the properties securing the delinquent mortgage loans. An increase in required advances also may cause an increase in our interest expense and affect our liquidity as a result of increased borrowings under our financing agreements to fund any such increase in the advances.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable due to delinquencies, defaults and foreclosures that could adversely affect our business, financial condition, liquidity and results of operations.
During any period in which a borrower is not making payments, we may be required under our servicing agreements in respect of our MSRs to advance our own funds to pay property taxes and insurance premiums, legal expenses and other protective advances, and may be required to advance principal and interest payments to security holders of the MBS into which the loans are sold. We also advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. In addition, if a loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the loan is repaid or refinanced or a liquidation occurs. Federal, state or local regulatory actions may also result in an increase in the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred while the loan is delinquent. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
In addition, increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those loans due to the increased time and effort required to collect payments from delinquent borrowers, to foreclose on the loan and to liquidate properties or otherwise resolve loan defaults if payment collection is unsuccessful.
Any significant increases in delinquencies, defaults and foreclosures on loans that we service in respect of FHA,VA, and USDA related MSRs could result in an increase in servicing expenses as well as losses since the loans may not be fully insured or guaranteed under each of the VA, the FHA and the USDA government loan programs.
| ● | FHA Insurance - FHA loans are insured for the entire unpaid principal balance of the loan. However, if the FHA loan defaults or goes into foreclosure, the servicer is only compensated for two-thirds of its incurred foreclosure costs. In addition, the servicer is only reimbursed for any interest accrued and unpaid from a date 60 days after the borrower’s first uncorrected failure to perform, and the interest is reimbursed at the HUD debenture interest rate that may be lower than the actual loan rate. |
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| ● | VA and USDA Guarantees - VA and USDA loans are only partially guaranteed by the government and if such loan defaults or goes into foreclosure, the VA or USDA guarantees may not fully cover all principal, interest and other fees and advances we may have incurred on the outstanding VA or USDA loan, and we may suffer a loss. |
We may also be subject to additional curtailments to servicing and advance reimbursements if we have not satisfied VA, USDA or FHA timing, service and other regulatory requirements during the foreclosure and conveyance process.
We have MSR and MSL servicing agreements of $253.0 billion of UPB consisting of FHA, VA, and USDA mortgage loans that represent approximately 80% of our total outstanding UPB of MSRs as of December 31, 2022. Any significant increase in delinquencies, defaults and foreclosures on loans that increase our servicing advances, reduce property value or otherwise delay our ability to dispose of the properties underlying the loan could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our acquisition and ownership of mortgage servicing rights exposes us to significant risks.
MSRs arise from contractual agreements between us and the investors (or their agents) in loans and MBS that we service on their behalf. We generally acquire MSRs in connection with our sale of loans to the Agencies where we assume the obligation to service such loans on their behalf. Any MSRs we acquire are initially recorded at fair value on our balance sheet. The determination of the fair value of MSRs requires our management to make numerous estimates and assumptions. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced loans. The ultimate realization of the MSRs may be materially different than the values of such MSRs as may be reflected in our consolidated balance sheet as of any particular date. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs and assumptions used to determine MSR fair value. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Prepayment speeds significantly affect MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We base the price we pay for MSRs on, among other things, our projection of the cash flows from the related pool of loans. Our expectation of prepayment speeds is a significant input to our cash flow projections. If prepayment speed expectations increase significantly, the fair value of the MSRs could decline and we may be required to record a non-cash charge that would have a negative impact on our financial results.
Furthermore, a significant increase in prepayment speeds could materially reduce the cash flows we receive from MSRs, and we could ultimately receive substantially less than what we paid for such assets. Delinquency rates have a significant impact on the valuation of MSRs. An increase in delinquencies generally results in lower revenue because typically we only collect servicing fees from Agencies or mortgage owners when we collect payments from the borrower. Our expectation of delinquencies is also a significant input underlying our cash flow projections. If delinquencies are significantly greater than we expect, the estimated fair value of the MSRs could be diminished. When the estimated fair value of MSRs is reduced, we could suffer a loss, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
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Changes in interest rates are a key driver of the performance of MSRs. Historically, the fair value of MSRs has increased when interest rates increase and decrease when interest rates decrease due to the effect those changes in interest rates have on prepayment estimates. We may pursue various hedging strategies to seek to reduce our exposure to adverse changes in fair value resulting from changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us. To the extent we do not utilize derivative financial instruments to hedge against changes in fair value of MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders would be more susceptible to volatility due to changes in the fair value of, or cash flows from, MSRs as interest rates change. Furthermore, MSRs and the related servicing activities are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on our business. For example, the CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the long term impact of the COVID-19 pandemic.
Our failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which we or they are subject by virtue of ownership of MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and results of operations.
Most of the loans that we produce are pooled into MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. In addition, due to the ongoing COVID-19 pandemic, the Federal Reserve has enacted monetary policies to purchase MBS on the open market that hasinterest rates and may continue to impact the liquidity of the MBS market.market could be impacted by Federal Reserve increasing the federal funds rate, tapering future MBS purchases or selling MBS. Any significant disruption or period of illiquidity in the general MBS market would directly affect our own liquidity and the liquidity of PMT because no existing alternative secondary market would likely be willing and able to accommodate on a timely basis the volume of loans that we typically sell in any given period. Furthermore, we would remain contractually obligated to fund loans under our outstanding IRLCs without being able to sell our existing inventory of mortgage loans. Accordingly, if the MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we produce into the secondary market in a timely manner or at favorable prices and we would be required to hold a larger inventory of loans than we have committed facilities to fund or we may be required to repay a portion of the debt secured by these assets, which could have a material adverse effect onmaterially and adversely affect our business, financial condition liquidity and results of operations.
We may be required to indemnify the purchasers of loans that we originate, acquire or assist in the fulfillment of, or repurchase those loans, if those loans fail to meet certain criteria or characteristics or under other circumstances.circumstances and we may be unable to seek indemnity or require our counterparties to repurchase loans if they breach representations and warranties they make to us.
Our contracts with purchasers of newly originated loans that we fund or acquire through our consumer direct lendingloan production business or acquire from PMT through our correspondent production activities contain provisions that require us to
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indemnify the purchaser of the related loans or repurchase such loans under certain circumstances. Our loan sale agreements with purchasers, including the Agencies, contain provisions that generally require us to indemnify or repurchase these loans if our representations and warranties concerning loan quality and loan characteristics are inaccurate; or the loans fail to comply with the respective Agency’s underwriting or regulatory requirements.
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RepurchasedWhen we purchase mortgage loans, our counterparty typically can only be financed at a steep discountmakes customary representations and warranties to their repurchase price, if at all. They are also typically valuedus about such loans and therefore, can generally only be sold at a significant discount to the underlying UPBs. In certain cases involving mortgage lenders from whom loans were acquired through our correspondent production activities, we may havebe entitled to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual rightsright to either recover somedemand repurchase or all ofsubstitution, or that our indemnification lossescounterparty will remain solvent or otherwise demand repurchase of these loans.be willing and able to honor its obligations under our loan purchase agreements. Depending on the volume of repurchase and indemnification requests, some of these mortgage lenders may not be able to financially fulfill their obligation to indemnify us or repurchase the affected loans. If a material amount of recovery cannot be obtained from these mortgage lenders, our business, financial condition, liquidity and results of operations could be materially and adversely affected.
Repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. Although our indemnification and repurchase exposure cannot be quantified with certainty, to recognize these potential indemnification and repurchase losses, we have recorded a liability of $32.7$32.4 million as of December 31, 2020.2022. Because of the increase in our loan production over time, we expect that indemnification and repurchase requests are also likely to increase. Should home values decrease and negatively impact the related loan values, our realized loan losses from indemnifications and repurchases may increase as well. As such, our indemnification and repurchase costs may increase well beyond our current expectations. In addition, our mortgage banking services agreement with PMT requires us to indemnify it with respect to loans for which we provide fulfillment services in certain instances. If we are required to indemnify PMT or other purchasers against losses, or repurchase loans from PMT or other purchasers, that result in losses that exceed the recorded liability, this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition, liquidity and results of operations.
In deciding whether to approve loans or to enter into other transactions across our businesses with borrowers and counterparties, including borrowers, brokers correspondent lenders and non-delegated correspondent lenders, we may rely on information furnished to us by or on behalf of borrowers and such counterparties, including financial statements and other financial information. We also may rely on representations of borrowers and such counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.
If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information in our loan originations or acquisitions. Any such misrepresented information could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our counterparties may terminate our MSRs, which could adversely affect our business, financial condition, liquidity and results of operations.
As is standard in the industry, under the terms of our master servicing agreements with the Agencies in respect of Agency MSRs that we retain in connection with our loan production, the Agencies have the right to terminate us as servicer of the loans we service on their behalf at any time (and, in certain instances, without the payment of any termination fee) and also have the right to cause us to sell the MSRs to a third party. In addition, our failure to comply with applicable servicing guidelines could result in our termination under such master servicing agreements by the Agencies with little or no notice and without any compensation. The owners of other non-Agency loans that we service may also terminate certain of our MSRs if we fail to comply with applicable servicing guidelines. If the MSRs are terminated on a material portion of our servicing portfolio, our business, financial condition, liquidity and results of operations could be adversely affected.
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We are requiredFailure to make servicing advances that can be subject to delays in recoverysuccessfully modify, resell or refinance EBO loans or defaults of the EBO loans beyond expected levels may not be recoverable in certain circumstances, which could adversely affect our business, financial condition, liquidity and results of operations.
During any periodAs a mortgage servicer, we have an early buyout repurchase option for loans that are at least three months delinquent in which a borrower is not making payments, we are required under mostour Ginnie Mae MSR portfolio. Purchasing delinquent Ginnie Mae loans provides us with an alternative to our mortgage servicing obligation of our servicing agreements in respect of our MSRs to advance our own funds to pay property taxesadvancing principal and insurance premiums, legal expenses and other protective advances. We also advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certaininterest at the coupon rate of the assumptions underlyingrelated Ginnie Mae security. While our decisions to make advances and, in certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. In addition, if a mortgage loan serviced by us is in default or becomes delinquent,EBO program reduces the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or a liquidation occurs.
Federal, state or local regulatory actions may increase the amountcost of servicing advances thatthe Ginnie Mae loans, it may also accelerate loss recognition when the loans are repurchased because we are required to make, lengthenwrite off accumulated non-reimbursable interest advances and other costs at the time it takes for usof repurchase. After purchasing delinquent Ginnie Mae loans, we expect to be reimbursed for such advances and increase the costs incurred while the loan is delinquent. For example, the federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the COVID-19 pandemic. As a resultrepool many of the CARES Act forbearance requirements, we have experienced elevated delinquencies indelinquent loans into another Ginnie Mae guaranteed security upon the delinquent loans becoming current either through the borrower’s reperformance or through the completion of a loan modification; however, there is no guarantee that any delinquent loan will reperform or be modified or resold. Failure to successfully modify, resell or refinance our servicing portfolio that may require us to finance substantial amounts of advances of principal and interest payments to the investors holding thoserepurchased Ginnie Mae loans as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans. In fiscal year 2020, elevated prepayment activity was sufficient to cover principal and interest payment advances due to the impactor a significant portion of the CARES Act; however, in the future prepayment activity may be insufficient to cover required principal and interest advances. Future servicing advances will be driven by the number of borrower delinquencies, including those resulting from payment forbearance; the amount of time borrowers remain delinquent; and the level of successful resolution of delinquent payments, all of which will be impacted by the pace at which the economy recovers from the COVID-19 pandemic. As of December 31, 2020, 7.2% ofrepurchased Ginnie Mae loans in UPB in our predominantly government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent.
A delay in our ability to collect advancesdefaulting beyond expectations may adversely affect our liquidity, and our inability to be reimbursed for advances could have a material adverse effect on our business, financial condition, liquidity and results of operationsoperations.
We may not realize all of the anticipated benefits of potential future acquisitions of MSRs, which could adversely affect our business, financial condition, liquidity and results of operations.
Our ability to realize the anticipated benefits of potential future acquisitions of servicing portfolios will depend, in part, on our ability to appropriately service any such assets. The process of acquiring these assets may disrupt our business and may not result in the full benefits expected. The risks associated with these acquisitions include, among others, unanticipated issues in integrating information regarding the new loans to be serviced into our information technology systems, and the diversion of management’s attention from other ongoing business concerns. Moreover, if we inappropriately value the assets that we acquire or the fair value of the assets that we acquire declines after we acquire them, the resulting charges may negatively affect both the carrying value of the assets on our balance sheet and our earnings. Furthermore, if we incur additional indebtedness to finance an acquisition, the acquired servicing portfolio may not be able to generate sufficient cash flows to service that additional indebtedness. Unsuitable or unsuccessful acquisitions could have a material adverse effect on our business, financial condition, liquidity and results of operations.
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We are subject to significant financial and reputational risks from potential liability arising from lawsuits, and regulatory and government action.
We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions remains high. For example, in 2019 Black Knight Servicing Technologies, LLC filed a legal claim against us for alleged breach of contract and misappropriation of trade secrets. Greater than expected investigation costs and litigation, including class action lawsuits associated with compliance related issues, substantial legal liability or significant regulatory or government action against us could have adverse effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn could adversely impact our business results and prospects. We may experience a significant volume of litigation and other disputes, including claims for contractual indemnification, with counterparties regarding relative rights and responsibilities. Consumers, clients and other counterparties may also become increasingly litigious.
We also may be exposed to the risk of litigation by investors in clientsand entities that we manage from time to time if our management advice is alleged to constitute gross negligence or willful misconduct. Investors could sue us to recover amounts lost by those entities due to our alleged misconduct, up to the entire amount of loss. Further, we may be subject to litigation arising from investor dissatisfaction with thePMT’s financial performance of any such entities that we manage or from allegations thatif we improperly exercised control or influence over those entities.PMT. In addition, we are exposed to risks of litigation or investigation relating to transactions which presented conflicts of interest that were not properly addressed. In such actions, we would be obligated to bear legal, settlement and other costs (which may be in excess of available insurance coverage). In addition, although we are generally indemnified by the entities that we manage,PMT, our rights to indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification, from the entities that we manage, our business, financial condition, liquidity and results of operations would be materially and adversely affected.
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We depend on counterparties and vendors to provide services that are critical to our business, which subjects us to a variety of risks.
We have a number of counterparties and vendors, who provide us with financial, technology and other services that are critical to support our businesses. If our current counterparties and vendors were to stop providing services to us on acceptable terms or if we had a disruption in service due to a vendor dispute, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on similarly acceptable terms, or at all. Some of these counterparties and vendors have significant operations outside of the United States. If we or our vendors had to curtail or cease operations in these countries due to political unrest or natural disasters and then transfer some or all of these operations to another geographic area, we could experience disruptions in service and incur significant transition costs as well as higher future overhead costs. We may also outsource certain services to vendors located in foreign countries such as India and the Philippines with emerging technology, political and regulatory infrastructures that could result in future business disruptions or reputational damages. With respect to vendors engaged to perform certain servicing activities, we are required to assess their compliance with various regulations and establish procedures to provide reasonable assurance that the vendor’s activities comply in all material respects with such regulations. In the event that a vendor’s activities are not in compliance, it could negatively impact our relationships with our regulators, as well as our business and operations. Further, we may incur significant costs to resolve any such disruptions in service which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our failure to appropriately address various issues that may give rise to reputational risk could cause harm to our business and adversely affect our earnings.
Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may give rise to reputational risk, we could significantly harm our business prospects and earnings. Such issues include, but are not limited to, actual or perceived conflicts of interest, violations of legal or regulatory requirements, and any of the other risks discussed in this Item 1A. Similarly, market rumors and actual or perceived association with counterparties whose own reputations are under question could harm our business.
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Certain of our officers also serve as officers of PMT. As we expand the scope of our businesses, we increasingly confront potential conflicts of interest relating to investment activities that we manage for PMT. The SEC and certain regulators have increased their scrutiny of potential conflicts of interest, and as we experience growth in our businesses, we continue to monitor and mitigate or otherwise address any conflicts between our interests and those of PMT through the implementation of procedures and controls. Reputational risk incurred in connection with conflicts of interest could negatively affect our business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain clients, customers, trading counterparties, investors and employees and adversely affect our results of operations.
Reputational damage can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. Our reputation may also be negatively impacted by our environmental, social and governance (“ESG”) practices and disclosures, including climate change practices and disclosures. In addition, various private third party organizations have developed ratings processes for evaluating companies on their approach to environmental, social and governance (“ESG”)ESG matters. These third party ESG ratings may be used by some investors to assist with their investment and voting decisions. Any unfavorable ESG ratings may lead to reputational damage and negative sentiment among our investors and other stakeholders. These factors could impair our working relationships with government agencies and investors, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading counterparties and employees, significantly harm our stock price and ability to raise capital, and adversely affect our results of operations.
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Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our financial statements.
Accounting rules for mortgage loan sales and securitizations, valuations of financial instruments and MSRs, investment consolidations, income taxes and other aspects of our operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders and also increase the risk of errors and restatements, as well as the cost of compliance. Changes in accounting interpretations or assumptions could impact our financial statements and our ability to timely prepare our financial statements. Our inability to timely prepare our financial statements in the future would likely be considered a breach of our financial covenants and adversely affect our share price significantly. Changes in accounting interpretations or assumptions as well as accounting rule misinterpretations could result in differences in our financial results or otherwise have a material adverse effect on our business, financial condition, liquidity and results of operations.
The success and growth of our business depends upon our ability to adapt to and implement technological changes and to successfully develop, implement and protect proprietary technology.
Our success in the mortgage industry is highly dependent upon our ability to adapt to constant technological changes, successfully enhance our current information technology solutions through the use of third-party and our proprietary technologies, and introduce new solutions and services that more efficiently address the needs of our customers.
Our mortgage loan production businesses are dependent upon our ability to effectively interface with our borrowers, mortgage lenders and other third parties and to efficiently process loan applications and closings. The direct lending processes are becoming more dependent upon technological advancement, such as our continued ability to process applications over the Internet, accept electronic signatures, provide process status updates instantly and other borrower- or counterparty-expected conveniences. In our correspondent production activities, our and PMT’s correspondent sellers also expect and require certain conveniences and service levels that are dependent on technological advancement. In this regard, we
We have recently transitioned todeveloped a workflow-driven, cloud-based loan acquisition platform. Whileplatform and while we anticipate that the cloud-based system will increase scalability and produce other efficiencies, there can be no assurance that the cloud-based system will prove to be effective or that such correspondent sellers will easily adapt to the cloud-based system. Any failure to effectively or timely transition to our new system and meet our expectations and the expectations of our correspondent sellers could have a material adverse effect on our business, financial condition and results of operations.
Similarly, our servicing business is dependent on our ability to effectively interface with our customers and investors, as well as service mortgage loans in compliance with applicable laws and regulations and the contractual requirements of such investors. For example, we have recently transitioned to aour proprietary workflow-driven, cloud-
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basedcloud-based servicing system that provides for real-time processing and advanced workflow management thereby reducing servicing costs, increasing scalability and creating sustainable efficiencies.
The development, implementation and protection of these technologies and becoming more proficient with them may also require significant capital and operating expenditures. As these technological advancements increase in the future, we will need to further develop and invest in these technological capabilities to remain competitive. Moreover, litigation has become required to protect our technologies and such litigation is expected to be time consuming and result in substantial costs and diversion of resources.
We rely on a combination of trademarks, copyrights, and trade secrets, as well as confidentiality and contractual provisions to protect our intellectual property and proprietary technologies. In addition, we also license and utilize third party proprietary technologies and loss of rights to significant third party proprietary technologies may result in decreased product functionality. The development, implementation and protection of our intellectual property and proprietary technologies requires significant human resources and capital expenditures. As these technological advancements and investor and compliance requirements increase in the future, we will need to further develop these technological capabilities in order to remain competitive, and we will need to implement, execute and maintain them in an operating and regulatory environment that exposes us to significant risk. Moreover, litigation has become necessary to protect our intellectual property and proprietary technologies, and, such litigation is expected to be time consuming and result in substantial costs and diversion of resources.
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There is no assurance that we will be able to successfully adopt new technologies as critical systems and applications become obsolete and better ones become available. Any failure by us to develop, implement, integrate, execute or maintain our technological capabilities and any litigation costs associated with protection of our technologies could have a material adverse effect on our business, financial condition and results of operations.
We are subject to certain risks associated with investing in real estate and real estate related assets, including risks of loss fromClimate change, adverse weather conditions, man-made or natural disasters, pandemics, such as COVID-19, terrorist attacks, and the effects of climate changeother long term physical and which may cause disruptions in our operationsenvironmental changes and could materially and adversely affect the real estate industry generally and our business, financial condition, liquidity and results of operations.
Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, pandemics, such as COVID-19, floods, droughts, fires and other environmental conditions cancould adversely impact properties that we own or that collateralize loans we own or service, as well as propertiesgeographic areas where we conduct business. Future
Climate change, adverse weather conditions, and man-made or natural disasters, pandemics, terrorist attacks and other long term physical and environmental changes and conditions could also adversely impact properties that we own or that collateralize loans we own or service, as well as geographic areas where we conduct business. In addition, such adverse conditions and long term physical and environmental changes could impact the demand for, and value of, our assets, as well as the cost to service or manage such assets, or directly impact the value of our assets through damage, destruction or loss, and thereafter materially impact the availability or cost of insurance to protect against these events. Terrorist attacksUpon the occurrence of a catastrophic event, we may be unable to continue our operations and other actsmay endure significant business interruptions, reputational harm, delays in servicing our customers and working with our partners, interruptions in the availability of violenceour technology and systems, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results. Catastrophic events may cause disruptions in U.S. financial marketsalso be uninsurable or not economically insurable and negatively impactmight make the U.S. economy in general.insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed.
Potentially adverse consequencesThere is an increasing global concern over the risks of global warming and climate change includingand related environmental sustainability matters. The physical risks of climate change may include rising average global temperatures, rising sea levels and increased intensityan increase in the frequency and severity of extreme weather events and natural disasters, including floods, wildfires, hurricanes, earthquakes and tornados, and these events could similarly have an impact on our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets and the local economies of certain areas in which we operate. Although we believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets are appropriately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance. There also is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to payment claims payments due to a deterioration in its financial condition or may even cancel policies due to increasing costs of providing insurance coverage in certain geographic areas. Further, numerous treaties, laws and regulations have been enacted or proposed in an effort to regulate climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of “green” building codes. These laws and regulations may impact the rates at which we obtain property insurance and result in increased operating costs, or impose substantial costs on our borrowers or affect their ability to obtain appropriate coverage at reasonable costs. We may also incur costs associated with increased regulations or investor requirements for increased environmental and social disclosures and reporting. Additionally, climate change concerns could result in transition risk. Changes in consumer preferences and additional legislation and regulatory requirements, including those associated with a transition to a low-carbon economy, could increase expenses or otherwise adversely impact our operations and business.
Certain types
Regulatory Risks
We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition, liquidity and results of losses,operations.
We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits and examinations by federal and state regulators. Our failure to operate effectively and in compliance with any of these laws, regulations and rules could subject us to lawsuits or governmental actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity and results of operations. In addition, our failure to comply with these laws, regulations and rules may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt, delays in the foreclosure process, increased
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servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations. Further, we may be required to pay substantial penalties imposed by our regulators due to compliance errors, or we may lose our licenses to originate and/or service loans.
We must also comply with a number of federal, state and local consumer protection and state foreclosure laws. These statutes apply to loan origination, servicing, debt collection, marketing, use of credit reports, safeguarding of non-public, personally identifiable information about our clients, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to customers.
Because we are not a federally chartered depository institution, we generally do not benefit from federal pre-emption of state mortgage loan banking, loan servicing or debt collection licensing and regulatory requirements and must comply with multiple state licensing and compliance requirements. These state rules and regulations generally provide for, but are not limited to: originator, servicer and debt collector licensing requirements, requirements as to the form and content of contracts and other documentation, employee licensing and background check requirements, fee requirements, interest rate limits, and disclosure and record-keeping requirements.
Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting fair lending, fair housing and other claims that the practices of lenders and loan servicers result in a catastrophic nature, that result from events described abovedisparate impact on protected classes. Antidiscrimination statutes, such as earthquakes, floods, hurricanes, tornados, terrorism, acts of warthe Fair Housing Act and pandemics,the Equal Credit Opportunity Act, prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as COVID-19,race, religion and national origin. Various federal regulatory agencies and departments take the position that these laws apply not only to intentional discrimination, but also to neutral practices that have a disparate impact on a group that shares a characteristic that a creditor may not consider in making credit decisions (i.e., creditor or servicing practices that have a disproportionately negative affect on a protected class of individuals).
The failure of our correspondent sellers to comply with any applicable laws, regulations and rules may also result in these adverse consequences. We have in place a due diligence program designed to assess areas of risk with respect to loans we acquire from such correspondent sellers. However, we may not detect every violation of law and, to the extent any correspondent sellers, third party originators, servicers or brokers with which we do business fail to comply with applicable laws or regulations and any of their mortgage loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans or MSRs, to monetary penalties or other losses. While we may have contractual rights to seek indemnity or repurchase from certain of these lenders, third party originators, servicers or brokers, if any of them are unable to fulfill their indemnity or repurchase obligations to us to a material extent, our business, liquidity, financial condition and results of operations could be uninsurable or not economically insurable. Inflation, changes in building codesmaterially and ordinances, environmental considerationsadversely affected. Our service providers and other factors, including terrorism or actsvendors are also required to operate in compliance with applicable laws, regulations and rules. Our failure to adequately manage service providers and other vendors to mitigate risks of war,noncompliance with applicable laws may also might make the insurance proceeds insufficient to repair or replace a property ifhave these negative results.
Federal and state administrations could enact significant policy changes increasing regulatory scrutiny and enforcement actions in our industry. While it is damagednot possible to predict when and whether significant policy or destroyed. Underregulatory changes would occur, any such changes on the federal, state or local level could significantly impact, among other things, our operating expenses, the availability of mortgage financing, interest rates, consumer spending, the economy and the geopolitical landscape. To the extent that the current government administration takes action by proposing and/or passing regulatory policies that could have a negative impact on our industry, such actions may have a material adverse effect on our business, financial condition and results of operations.
The Financial Stability Oversight Council (“FSOC”) and Conference of State Bank Supervisors (“CSBS”) have been reviewing whether state chartered nonbank mortgage servicers should be subject to “safety and soundness” standards similar to those imposed by federal law on insured depository institutions, even though nonbank mortgage servicers do not have any federally insured deposit accounts. For example, on July 26, 2021, the CSBS released model state regulatory prudential standards for state oversight of nonbank mortgage servicers. The model CSBS prudential standards include revised minimum net worth, capital ratio and liquidity standards similar to current FHFA requirements and require servicers to maintain sufficient allowable assets to cover normal operating expenses in addition to the amounts required for servicing expenses. In addition, on August 17, 2022, the FHFA and Ginnie Mae announced
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enhanced minimum net capital and liquidity eligibility requirements for sellers, servicers and issuers that will go into effect in 2023 and 2024. To the extent any new minimum net worth, capital ratio and liquidity standards and requirements are overly burdensome, complying with such standards and requirements may have a material adverse effect on our business, financial condition and results of operations.
New CFPB or state rules and regulations or more stringent enforcement of existing rules and regulations by these circumstances,regulators could result in enforcement actions, fines, penalties and the insurance proceeds received mightinherent reputational risk that results from such actions.
The CFPB has regulatory authority over certain aspects of our business as a result of our residential mortgage banking activities, including, without limitation, the authority to conduct investigations, bring enforcement actions, impose monetary penalties, require remediation of practices, pursue administrative proceedings or litigation, and obtain cease and desist orders for violations of applicable federal consumer financial laws. The current CFPB administration has stated its intention to aggressively supervise, investigate and, where it deems appropriate, bring enforcement actions against lenders and servicers the CFPB believes are engaged in activities that violate federal laws and regulations. In addition, examinations by state regulators and enforcement actions in the residential mortgage origination and servicing sectors by state attorneys general have increased and may continue to increase.Failure to comply with the CFPB and state laws, rules or regulations to which we are subject, whether actual or alleged, could have a material adverse effect on our business, liquidity, financial condition and results of operations.
Our failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations and our ability to make distributions to our stockholders.
We are highly dependent on U.S. government-sponsored entities and government agencies, and any organizational or pricing changes at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition and results of operations.
Our ability to generate revenues through mortgage loan sales depends on programs administered by GSEs, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the issuance of MBS in the secondary market. We originate mortgage loans directly with borrowers and brokers and assist PMT in acquiring loans from mortgage lenders through our correspondent production activities that qualify under existing standards for inclusion in MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. We, or PMT, also derive other material financial benefits from our Agency relationships, including the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures.
A number of legislative proposals have been introduced in recent years that would wind down or phase out the GSEs in their current form, including a proposal by the prior federal administration to end the conservatorship and privatize Fannie Mae and Freddie Mac. It is not be adequatepossible to restore our economic positionpredict the scope and nature of the actions that the U.S. government, including the current federal administration, will ultimately take with respect to the affected real property.GSEs. Any uninsured losschanges in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and their regulators or the U.S. federal government, and any changes in leadership at these entities, could adversely affect our business and prospects. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or in underwriting criteria could materially and adversely affect our business, financial condition, liquidity and results of operations and our ability to make distributions to our stockholders.
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Our ability to generate revenue from newly originated loans that we acquire or assist PMT in acquiring is highly dependent on the fact that the Agencies have not historically acquired such loans directly from mortgage lenders, but have instead relied on banks and non-bank aggregators such as us to acquire, aggregate and securitize or otherwise sell such loans to investors in the secondary market. Certain of the Agencies have approved new and smaller lenders that traditionally may not have qualified for such approvals. To the extent that these mortgage lenders choose to sell directly to the Agencies rather than through loan aggregators like us, the number of loans available for purchase by aggregators is reduced, which could materially and adversely affect our business and results of operations. In addition, under certain Agency capital rules, loans sourced from loan aggregators such as PMT that we assist have higher capital requirements and may incur higher Agency fees for third party originated loans that PMT aggregates and delivers to the Agencies as compared to individual loans delivered by third party mortgage lenders directly to the Agencies’ cash windows without the assistance of a loan aggregator. To the extent the Agencies increase the number of purchases and sales directly for their own accounts, our business and results of operations could be materially and adversely affected.
We are required to have various Agency approvals and state licenses in order to conduct our business and there is no assurance we will be able to obtain or maintain those Agency approvals or state licenses.
Because we are not a federally chartered depository institutions we do not benefit from exemptions to state mortgage lending, loan servicing or debt collection licensing and regulatory requirements. We are licensed in all state jurisdictions, and for those activities, where we are required to be licensed and believe it is cost effective and appropriate to become licensed. Our failure to maintain any necessary licenses, comply with applicable licensing laws or satisfy the various requirements to maintain them over time could restrict our direct business activities, result in litigation or civil and other monetary penalties, or cause us to default under certain of our lending arrangements, any of which could materially and adversely impact our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
We are also required to hold the lossAgency approvals in order to sell loans to the Agencies and service such loans on their behalf. Our failure to satisfy the various requirements necessary to maintain such Agency approvals over time would also restrict our business activities and could adversely impact our business. We are subject to periodic examinations by federal, state and Agency auditors and regulators, which can result in increases in our administrative costs, and we may be required to pay substantial penalties imposed by these regulators due to compliance errors, or we may lose our licenses. Negative publicity or fines and penalties incurred in one jurisdiction may cause investigations or other actions by regulators in other jurisdictions and could adversely impact our business.
Our inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material adverse effect on our business, financial condition, liquidity and results of operation.
We are subject to minimum financial eligibility requirements established by the Agencies. For example, on August 2022, the FHFA and Ginnie Mae announced enhanced minimum net capital and liquidity eligibility requirements for sellers, servicers and issuers that will go into effect in 2023 and 2024. These eligibility requirements align the minimum financial requirements for mortgage sellers/servicers and MBS issuers to do business with the Agencies. These minimum financial requirements include net worth, capital ratio and/or liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential losses and a minimum amount of liquidity needed to service Agency loans and MBS and cover the associated financial obligations and risks.
In order to meet these minimum financial requirements, we are required to maintain rather than spend or invest, cash flowand cash equivalents in amounts that may adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders, and this could significantly impede us, as a non-bank mortgage lender, from growing our respective businesses and place us at a competitive disadvantage in relation to federally chartered banks and certain other financial institutions. To the asset valueextent that such minimum financial requirements are not met, the Agencies may suspend or terminate Agency approval or certain agreements with us, which could cause us to cross default under financing arrangements and/or have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
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The failure of PennyMac Loan Services, LLC to avail itself of an appropriate exemption from registration as an investment company under the Investment Company Act of 1940 could have a material and adverse effect on our business.
We intend to operate so that we, and each of our subsidiaries, are not required to register as investment companies under the Investment Company Act of 1940, as amended (“Investment Company Act”). We believe that our subsidiary, PLS, qualifies for one or more exemptions provided in the Investment Company Act because of the affected property,historical and current composition of its assets and income; however, there can be no assurances that the composition of PLS’ assets and income will remain the same over time such that one or more exemptions will continue to be applicable.
If PLS is required to register as an investment company, we would be required to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things: limitations on capital structure; restrictions on specified investments; prohibitions on transactions with affiliates; compliance with reporting, record keeping, voting and proxy disclosure; and, other rules and regulations that would significantly increase our operating expenses. Further, if PLS was or is required to register as an investment company, PLS would be in breach of various representations and warranties contained in its credit and other agreements resulting in a default as to certain of our contracts and obligations. This could also subject us to civil or criminal actions or regulatory proceedings, or result in a court appointed receiver to take control of us and liquidate our business, any or all of which could have ana material adverse effect on our business, financial condition, liquidity and results of operations.
Our business, financial condition and results of operations may be adversely affected by the long term impact of the COVID-19 pandemic.
The COVID-19 pandemic, inclusive of any variants, has created unprecedented economic, financial and public health disruptions that may continue to adversely affect, our business, financial condition and results of operations. The extent to which COVID-19 continues to affect our business, financial condition and results of operations will depend on future developments, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the long term impact of the COVID-19 pandemic. As a result of the CARES Act and other forbearance requirements, we may experience delinquencies in our servicing portfolio that require us to finance advances of principal and interest payments to the investors holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans. The CARES Act and other forbearance requirements have reduced our servicing fee income and increased our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the long term impact of the COVID-19 pandemic. Future servicing advances will be driven by a number of factors, including: the number of borrower delinquencies, including those resulting from payment forbearance; the length of time borrowers remain delinquent; and the level of successful resolution of delinquent payments, all of which will be impacted by the pace at which the economy recovers from the long term impact of the COVID-19 pandemic. As of December 31, 2022, 1.3% of loans in our predominantly government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent, resulting in an increase in the level of servicing advances we have been required to make due to borrower delinquencies. Servicing advances resulting from the COVID-19 pandemic could have a significant adverse impact on our cash flows and could also have a detrimental effect on our business and financial condition.
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The CARES Act and other forbearance requirements have negatively impacted the fair value of our servicing assets and further Catastrophic eventsmarket volatility or economic weakness may disruptresult in additional reductions in the value of our business.servicing assets and make it increasingly difficult to optimize our hedging activities. Our liquidity and/or regulatory capital could also be adversely impacted by volatility and disruptions in the capital and credit markets. If we fail to meet or satisfy any of the covenants in our repurchase agreements or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.
We may have difficulty accessing debt and equity capital on attractive terms, or at all, as a numberresult of offices located throughout Californiathe impact of the COVID-19 pandemic, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities on a timely basis. This includes renewals of our existing credit facilities with our lenders who may be adversely impacted by the volatility and a growing regional presence in several other states across the United States. Our corporate headquarters is located in Westlake Village, California and we have additional locations around the greater Los Angeles metropolitan area and elsewheredislocations in the State of California. Many areas of California, includingfinancial markets and may not be willing or able to continue to extend us credit on the immediate area around our corporate headquarters, have experienced extensive damage and property losssame terms, or on favorable terms, or at all.
Our business could be disrupted if we are unable to operate due to a serieschanging governmental restrictions such as travel bans and quarantines placed or reinstituted on our employees or operations, including, successfully operating our business from remote locations, ensuring the protection of large wildfiresour employees’ health and maintaining our information technology infrastructure. Further, increased operational expenses to address these restrictions and widespread employee illnesses could negatively affect staffing within our various businesses and geographies.
Federal, state, and local executive, legislative and regulatory responses to the long term impact of the COVID-19 pandemic may be inconsistent and conflict in scope or application, and may be subject to change without advance notice. These regulatory responses may impose additional compliance obligations, and may extend existing CARES Act and other forbearance requirements. In addition, the CARES Act and other federal, state and local regulations are subject to interpretation given the existing ambiguities in the past several years. Californiarules and regulations, which may result in future class action and other litigation risk.
The outcome of the COVID-19 related governmental measures are unknown and they may not be sufficient to address future market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic. The final scope and duration of the COVID-19 pandemic and the other statesefficacy of the extraordinary government measures put in which we operateplace to address it are also prone to other types of natural disasters. Incurrently unknown. Even after the event of a major earthquake, hurricane, or catastrophic event such as fire, flood, power loss, telecommunications failure, cyber attack,COVID-19 pandemic war, or terrorist attack,subsides, the economy may not fully recover for some time and we may be unable to continue our operationsmaterially and may endure significant business interruptions, reputational harm, delays in servicing our customers and working with our partners, interruptions in the availabilityadversely affected by a prolonged recession or economic downturn.
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Related Party Risks
We rely on PMT as a significant source of financing for, and revenue related to, our mortgage banking business, and the termination of, or material adverse change in, the terms of this relationship, or a material adverse change to PMT or its operations, could adversely affect our business, financial condition, liquidity and results of operations.
PMT is the counterparty that currently acquires all of the newly originated mortgage loans in connection with our correspondent production activities. A significant portion of our income is derived from a fulfillment fee earned in connection with PMT’s acquisition of conventional loans. We are able to conduct our correspondent production activities without having to incur the significant additional debt financing that would be required for us to purchase those loans from the originating lender. In the case ofWe also purchase all government-insured and some conventional loans we purchase them from PMT at PMT’s cost plus a sourcing fee and fulfill these loans for our own account and sell them, typically by pooling the federally insured or guaranteed loans together into an MBS which Ginnie Mae guarantees.account. We earn interest income and gains or losses during the holding period and upon the sale of these securities, and we retain the MSRs with respect to the loans. If this relationship with PMT is terminated by PMT or PMT reduces the volume of these loans that it acquires for any reason, we would have to acquire these loans from the correspondent sellers for our own account, something that we may be unable to do, or enter into another similar counterparty arrangement with a third party, which we may not be able to enter into on terms that are as favorable to us, or at all.
The management agreement, the mortgage banking services agreement and certain of the other agreements that we have entered into with PMT contain cross-termination provisions that allow PMT to terminate one or more of those agreements under certain circumstances where another one of such agreements is terminated. Accordingly, the termination of this relationship with PMT, or a material change in the terms thereof that is adverse to us, would likely have a material adverse effect our business, financial condition, liquidity and results of operations. The terms of these agreements extend until June 30, 2025, subject to automatic renewal for additional 18-month periods, but any of the agreements may be terminated earlier under certain circumstances or otherwise non-renewed. If any agreement is terminated or non-renewed and not replaced by a new agreement, it would materially and adversely affect our ability to continue to execute our business plan.
We expect that PMT will continue to qualify as a REIT for U.S. federal income tax purposes. However, it is possible that PMT may not meet the requirements for qualification as a REIT. If PMT were to lose its REIT status, corporate-level income taxes, would apply to all of PMT's taxable income at federal and state tax rates. Either of these scenarios would potentially impair PMT’s financial position and its ability to raise capital, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
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A significant portion of our loan servicing operations are conducted pursuant to subservicing contracts with PMT, and any termination by PMT of these contracts, or a material change in the terms thereof that is adverse to us, would adversely affect our business, financial condition, liquidity and results of operations.
PMT, as the owner of a substantial number of MSRs or mortgage loans that we subservice, may, under certain circumstances, terminate our subservicing contract with or without cause, in some instances with little notice and little to no compensation. Upon any such termination, it would be difficult to replace such a large volume of subservicing in a short period of time, or perhaps at all. Accordingly, we may not generate as much revenue from subservicing for other third parties. If we were to have our subservicing terminated by PMT, or if there was a change in the terms under which we perform subservicing for PMT that was material and adverse to us, this would have a material adverse effect on our business, financial condition, liquidity and results of operations.
PMT has an exclusive right to acquire theconventional conforming loans that are produced through our correspondent production activities, which may limit the revenues that we could otherwise earn in respect of those loans.
Our mortgage banking services agreement with PMT requires PLS to provide fulfillment services for correspondent production activities exclusively to PMT as long as PMT has the legal and financial capacity to purchase correspondent loans. As a result, the revenue that we earn with respect to these loans will be limited to the fulfillment fees that we earn in connection with the production of these loans, which may be less than the revenues that we might otherwise be able to realize by acquiring these loans ourselves and selling them in the secondary loan market.
Our financings of MSRs using excess servicing spread (“ESS”) exposes us to significant risks.
We have previously sold to PMT or its subsidiaries, from time to time, the right to receive certain ESS arising from MSRs that we owned or acquired. The ESS represents the difference between our contractual servicing fee with the applicable Agency and the base servicing fee that we retain as compensation for servicing the related mortgage loans upon our sale of the ESS.
As a condition of our sale of the ESS, PMT was required to subordinate its interests in the ESS to those of the applicable Agency. With respect to our Ginnie Mae MSRs, we pledged our interest in such MSRs and PMT’s interest in the related ESS to a special purpose entity, which issues variable funding notes and term notes that are secured by such Ginnie Mae assets and repaid through the cash flows received by the special purpose entity as the lender under a repurchase agreement with PLS. Accordingly, our interest in the Ginnie Mae MSRs and PMT’s interest in the related ESS are also subordinated to the rights of an indenture trustee on behalf of the note holders to which the special purpose entity issues its variable funding notes and term notes under an indenture, pursuant to which the indenture trustee has a blanket lien on all of our Ginnie Mae MSRs (including the ESS we sell to PMT and record as a financing).
The indenture trustee, on behalf of the note holders, may liquidate our Ginnie Mae MSRs along with PMT’s interest in the ESS to the extent there exists an event of default under the indenture. In the event PMT’s ESS is liquidated as a result of certain of our actions or inactions, we generally would be required to indemnify PMT under the applicable spread acquisition agreement. A claim by PMT for the loss of its ESS as a result of our actions or inactions would likely be significant in size. Either of these occurrences could have a material adverse effect on our business, financial condition, liquidity and results of operations.
In connection with PLS’ repurchase agreement with the special purpose entity, we also provide pass through financing to PMT under a repurchase agreement to facilitate its financing of the ESS it acquires from us. The repurchase agreement subjects us to the credit risk of PMT. To the extent PMT defaults in its payments of principal and interest under its repurchase agreement with us, we would still be required to make the allocable and corresponding payments under our repurchase agreement with the special purpose entity. To the extent PMT fails to make such payments of principal and interest to us or otherwise defaults under its repurchase agreement and we are unable to make the allocable and corresponding payments under our repurchase agreement with the special purpose entity, this could also create an event of default that could cause a cross default under other financing arrangements and/or have a material adverse effect on our business, financial condition, liquidity and results of operations.
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Risks Related to Our Investment Management Segment
Market conditions could reduce the fair value of the assets that we manage, which would reduce our management and incentive fees.
A portion of the fees that we earn under our investment management agreement is based on the fair value of the assets that we manage. The fair values of the securities and other assets held in the portfolios that we manage and, therefore, our assets under management may decline due to any number of factors beyond our control, including, among others, a decline in housing demand or value, the ongoinglong term impact of the COVID-19 pandemic, changes to interest rates, stock or bond market movements or volatility, a general economic downturn, inflation, political uncertainty, acts of terrorism, military conflict or acts of terrorism.war, cyber-attacks or infrastructure outages. The economic outlook cannot be predicted with certainty and we continue to operate in a challenging business environment. If volatile market conditions cause a decline in the fair value of our assets under management, that decline in fair value could materially reduce our management fees and incentive fees under our management contractagreement with PMT and adversely affect our revenues. If our revenues decline without a commensurate reduction in our expenses, our net income will be reduced.
We currently manage assets for a single client, the loss of which couldwould significantly reduce our management and incentive fees and have a material adverse effect on our results of operations.
Our management and incentive fees result from our management of PMT. The term of the management agreement that we have entered into with PMT, as amended, expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of a termination of one or more related party agreements by PMT in certain circumstances, we may be entitled to a termination fee under our management agreement. However, the termination of such management agreement and the loss of PMT as a client would significantly affect our investment management segment and negatively impact our management fees and incentive fees.
The historical returns on the assets that we select and manage for PMT, and our resulting management and incentive fees, may not be indicative of future results.
The historical returns of the assets that we manage should not be considered indicative of the future returns on those assets or future returns on other assets that we may select for investment by PMT. The investment performance that is achieved for the assets that we manage varies over time, and the nature and mix of assets we manage has changed significantly over the past several years. As a result, the change and variance in investment performance can be significant. For example, although we earned performance incentive fees in prior years, in fiscal year 2022, we did not earn any performance incentive fees due to losses incurred by PMT during the associated performance measurement periods.Accordingly, the management and incentive fees that we have earned in the past based on those returns should not be considered indicative of the management or incentive fees that we may earn in the future from managing those same assets or from managing other assets for PMT.
Changes in regulations applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations.
The legislative and regulatory environment in which we operate is constantly evolving. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and PMT, may adversely affect our business. Our ability to succeed in this environment will depend on our ability to monitor and comply with regulatory changes. Regulatory changes that will affect other market participants are likely to change the way in which we conduct business with our counterparties. The uncertainty regarding the continued implementation of laws and regulations and their impact on the investment management industry and us cannot be predicted with certainty at this time but will continue to be a risk for our business.
We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules
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by these governmental authorities and self-regulatory organizations, as well as by U.S. and non-U.S. courts. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be imposed on us or the markets in which we trade, or whether any of the proposals will become law. Compliance with any new laws or
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regulations could add to our compliance burden and costs and adversely affect the manner in which we conduct business, as well as our financial condition, liquidity and results of operations.
Our failure to comply with the extensive amount of regulation applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations.
Our investment management segment is subject to extensive regulation in the United States. These regulations are designed primarily to ensure the integrity of the financial markets and to protect investors in any entity that we advise and are not designed to protect our stockholders. Consequently, these regulations often serve tomay limit our activities. These requirements relate to, among other things, fiduciary duties to clients, solicitation agreements, conflicts of interest, recordkeeping and reporting requirements, disclosure requirements, limitations on Agency cross trades and principal transactions between an adviser and an advisory clients and general anti-fraud prohibitions. We are required to maintain an effective compliance program, and are subject to routine periodicinspection and examinations by the staff of the SEC.SEC and state regulators.
The failure by us or our service providers to comply with applicable laws or regulations, or our failure to design and successfully implement and administer our compliance program, could result in fines, suspensions of individual employees, orlimitations on engaging in other businesses and other sanctions, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. Even if an investigation or proceeding did not result in a fine or sanction or the fine or sanction imposed against us or our employees by a regulator were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions could harm our reputation.
We may encounter conflicts of interest in trying to appropriately allocate our time and services between activities for our own account and for PMT, or in trying to appropriately allocate investment opportunities among ourselves and for PMT.
Pursuant to our management agreement with PMT, we are obligated to provide PMT with the services of our senior management team, and the members of that team are required to devote such time as is necessary and appropriate, commensurate with the level of activity of PMT. The members of our senior management team may have conflicts in allocating their time and services between our operations and the activities of PMT and any other entities or accounts that we may manage in the future.
In addition, we and the other entities or accounts that we may manage may participate in some of PMT’s investmentsinvestment strategies now or in the future, which may not be the result of arm’s length negotiations and may involve or later result in potential conflicts between our interests in the investments and those of PMT or such other entities. Any such perceived or actual conflicts of interest could damage our reputation and materially and adversely affect our business, financial condition, liquidity and results of operations.
Risks Related to Our Organizational Structure
HC Partners may be able to significantly influence the outcome of votes of our common stock, or exercise certain other rights pursuant to a stockholder agreement we have entered into with it, and its interests may differ from those of our other public stockholders.
HC Partners, one of our largest investors,stockholder, has the right under a stockholder agreement to nominate one orup to two individuals for election to our board of directors depending on the percentage of the voting power of our outstanding shares common stock that it holds, and we are obligated to use our best efforts to cause the election of those director nominees. In addition, the HC Partners’ stockholder agreement requires that we obtain their consent with respect to amendments to our certificate of incorporation or bylaws. As a result, HC Partners may be able to significantly influence our management and affairs. In addition, as a result of the size of its individual equity holding it may be able to
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significantly influence the outcome of all matters requiring stockholder approval, including mergers and other material transactions, and may be able to cause or prevent a change in the composition of our board of directors or a change in control of our Company that could deprive our other public stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
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We have not established a minimum dividend payment level and no assurance can be given that we will be able to make dividends to our stockholders in the future at current levels or at all.
In October 2019, we announced the initiation of a quarterly dividend for our common stockholders. We have not established a minimum dividend payment level, and our ability to pay dividends to our stockholders may be materially and adversely affected by the risk factors discussed in our SEC periodic reports. Although we paid, and anticipate continuing to pay, quarterly dividends to our stockholders, our board of directors has the sole discretion to determine the timing, form and amount of any future dividends to our stockholders, and such determination will depend upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, capital requirements and other expense obligations, debt covenants, contractual legal, tax, regulatory and other restrictions and such other factors as our board of directors may deem relevant from time to time.
As a result, no assurance can be given that we will be able to continue to pay dividends to our stockholders in the future or that the level of any future dividends will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect the market price of our common stock.
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that youother stockholders might consider favorable.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:
| ● | authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval; |
| ● | prohibit stockholder action by written consent unless the matter as to which action is being taken has been approved by our board of directors; |
| ● | provide that our board of directors is expressly authorized to make, alter, or repeal our bylaws (provided that, if that action adversely affects HC Partners when that entity, together with its affiliates, holds at least 5% of the voting power of our outstanding shares of capital stock, our stockholder agreements provide that such action must be approved by that entity); |
| ● | establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and |
| ● | prevent a sale of substantially all of our assets or completion of a merger or other business combination that constitutes a change of control without the approval of a majority of our independent directors. |
These and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of and take other corporate actions.
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Our bylaws include an exclusive forum provision that could limit our stockholders’ ability to obtain a judicial forum viewed by the stockholders as more favorable for disputes with us or our directors, officers or other employees.
Our bylaws provide that the state or federal court located within the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other associates, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the exclusive forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition, liquidity and results of operations.
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PART II
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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Certain Relationships and Related Transactions, and Director Independence
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:
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Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below. You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and as set forth in Item 1A. of Part I hereof and any subsequent Quarterly Reports on Form 10-Q. Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
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Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. 5 PART I Item 1. Business The following description of our business should be read in conjunction with the information included elsewhere in this Report. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the projections and results discussed in the forward-looking statements due to the factors described under the caption “Risk Factors” and elsewhere in this Report. References in this Report to “we,” “our,” “us,” and the “Company” refer to PennyMac Financial Services, Inc. (“PFSI”) and its consolidated subsidiaries. Our Company We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities over time and capitalize on other related opportunities as they arise. We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PNMAC”) and its subsidiaries described below:
We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.
6 Following is a summary of our segments’ results:
Mortgage Banking Loan Production Our loan production segment sources new prime credit quality residential conventional and government-insured or guaranteed mortgage loans through three channels: correspondent production, consumer direct lending and broker direct lending as described below. Correspondent Production In correspondent production we manage, on behalf of PMT and for our own account, the purchase from non-affiliates of mortgage loans that have been underwritten to investor guidelines. Our correspondent loans historically have been directed to each entity based on the guarantor of the mortgage-backed securities (“MBS”) created from the loans: our production focus has primarily been on loans insured or guaranteed by the FHA, VA or USDA for sale into MBS guaranteed by Ginnie Mae, whereas PMT’s production focus has been on loans that can be sold into MBS guaranteed by Fannie Mae or Freddie Mac. During 2022, we began to acquire certain loans for our own account that can be sold into MBS guaranteed by Fannie Mae and Freddie Mac. This mortgage loan production arrangement between us and PMT exists, in part, because PMT is not approved as an issuer of Ginnie Mae guaranteed MBS. As a result, PMT sells the government-insured or guaranteed loans that it purchases from correspondent sellers to us and we pay PMT a sourcing fee ranging from one to two basis points, generally based on the average number of calendar days that PMT holds the loans before our purchase. We generally pool the government-insured or guaranteed loans into Ginnie Mae guaranteed MBS and then sell such MBS to institutional investors. We also acquire certain conventional loans from PMT under the same agreement. 7 In our correspondent production activities, for loans we source for our own account, we earn loan origination fees from the correspondent sellers, interest income on the loans during the time we hold such loans, gains or losses from the date we make a commitment to purchase the loans through the sale of these loans, and, in connection with such sales, we generally retain and recognize the fair value of the contractual rights to service the loans on behalf of the purchaser of the loans. These contracts are referred to as mortgage servicing rights (“MSRs”). In our loan fulfillment activities in support of PMT’s correspondent production activities and only for loans purchased for PMT’s account, we earn fulfillment fees and tax service fees. We may also serve as a correspondent seller of newly originated loans from our consumer direct and broker direct lending channels to PMT under a mortgage loan purchase agreement. When we sell loans to PMT, PMT obtains the mortgage servicing rights relating to such loans. As such, our gains on sale of loans to PMT are primarily cash gains. Consumer Direct Lending Through our consumer direct lending channel, we originate mortgage loans on a national basis. Our consumer direct model relies on the Internet and call center-based staff to acquire and interact with customers across the country. We do not have a “brick and mortar” branch network. In our consumer direct lending activities, we earn loan origination fees from the borrower, interest income during the time we hold the loan before sale, gains or losses from the date we make a commitment to fund the loan through the sale of these loans, and, in sales to entities other than to PMT, we retain and recognize the fair value of the associated MSRs. To the extent we refinance loans that we subservice for PMT where PMT owns the related MSRs, we are generally required to pay PMT a recapture fee. Broker Direct Lending In broker direct lending, we obtain loan application packages from nonaffiliated mortgage loan brokers, underwrite and fund the resulting loans for sale. In our broker direct lending activities, we earn interest income, gains or losses from the date we make a commitment to fund the loan through the sale of these loans, and, in sales to entities other than PMT, we retain and recognize the fair value of the associated MSRs. Our loan production activities are summarized below:
8 The effect of our loan production transactions with PMT on our financial statements are summarized below:
Loan Servicing Our loan servicing segment performs loan administration, collection, and default management activities, including the collection and remittance of loan payments; responding to customer inquiries; providing accounting for principal and interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent borrowers; administering loss mitigation activities, including modification and forbearance programs; and supervising foreclosures and property dispositions. We service loans both as the owner of MSRs and mortgage servicing liabilities (“MSLs”) and as the subservicer on behalf of PMT. The UPB of our loan servicing portfolio is summarized below:
Our responsibilities and risks relating to loans we service in arrangements where we own the MSRs or MSLs differ from those where we act as subservicer for the owner of the servicing rights. As the owner of the servicing rights:
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As the subservicer for the owner of servicing rights, we do not carry the related MSRs or MSLs on our balance sheet and therefore do not recognize changes in the fair value of MSRs or MSLs and are generally not responsible for financing the advance of corporate funds to protect the loan owners’ interest in the collateral securing such loans. As a result, the fees we earn from such arrangements are generally less on a per-loan basis than those we earn from holding MSRs and MSLs. Following is a summary of our net loan servicing fees:
Investment Management We are an investment manager through our subsidiary, PCM, which provides investment management services to PMT. We earn management fees as a percentage of PMT’s net assets and may earn incentive compensation based on PMT’s investment performance. 10 Following is a summary of our management fee revenue:
Our Business Strategies Our business strategies include: Consumer Direct Lending We expect to grow our consumer direct lending business over time by leveraging our growing servicing portfolio through the recapture of existing customers for refinance and purchase-money loans as well as increasing our non-portfolio originations. As our servicing portfolio grows, we will have a greater number of leads to pursue, which we believe will lead to greater origination activity through our consumer direct business. As of December 31, 2022, we serviced 2.3 million loans. In 2022, 2021 and 2020, we funded $15.4 billion, $43.1 billion and $23.5 billion of mortgage loans, respectively, through our consumer direct lending channel. We believe that our national call center model and our technology will enable us to drive origination process efficiencies and best-in-class customer service. Broker Direct Lending According to Inside Mortgage Finance, the broker lending channel represented approximately 15% of U.S. residential mortgage originations in 2022. In 2022, 2021 and 2020, we funded $6.9 billion, $16.8 billion and $12.2 billion of mortgage loans, respectively, through our wholesale-broker channel, which is comprised of loans from both the broker segment as well as loans purchased through our non-delegated correspondent segment. We plan on growing our mortgage loan volume in this channel through the addition of new broker and non-delegated partner relationships, as well as expansion of existing relationships enabled by our leading broker technology platform. Correspondent Lending We expect to support our correspondent production market share by expanding the number and types of sellers from which we purchase loans and increasing the proportion of our sellers’ production volumes that we purchase as we continue to expand to the loan products and services we offer. We believe that we are well positioned to continue taking advantage of this opportunity based on our management expertise in the correspondent production business, our relationships with correspondent sellers, and our supporting systems and processes. In 2022, 2021 and 2020, we purchased $49.7 billion, $64.8 billion and $60.5 billion of mortgage loans, respectively, through our correspondent lending channel. Mortgage Loan Servicing Portfolio We expect to grow our servicing portfolio through loan production activities, as our correspondent production for our own account and consumer and broker direct lending add new servicing for owned MSRs, and correspondent conventional production for PMT’s account adds new subservicing. We or PMT may also grow our servicing portfolio through acquisitions. In 2022, our loan production totaled $109.1 billion in UPB and we purchased MSRs backed by loans with UPBs totaling $375.4 million. Our MSRs were backed by loans with UPBs totaling $314.6 billion as of December 31, 2022. 11 Expansion into New Markets and Products We regularly evaluate opportunities to grow our business, including expansion into new markets and providing additional services to our customers directly or through external partnerships. To date, we have entered into partnerships or joint ventures that can provide insurance and closing and title services to our customers and others. We also continue to develop new products to satisfy demand from customers in each of our production channels and respond to changing circumstances in the market for mortgage-related financing. U.S. Mortgage Market The U.S. residential mortgage market is one of the largest financial markets in the world, with approximately $15.2 trillion of outstanding debt as of September 30, 2022. According to Inside Mortgage Finance, first lien mortgage loan origination volume was approximately $2.2 trillion in 2022. Many of the largest financial institutions, primarily banks which have traditionally held the majority of the market share in mortgage origination and servicing, have reduced their participation in the mortgage market creating opportunities for non-bank participants. The residential mortgage industry is characterized by high barriers to entry, including the necessity for approvals required to sell loans to and service loans for the Agencies, state licensing requirements for non-federally chartered banks, sophisticated infrastructure, technology, risk management, and processes required for successful operations, and financial capital requirements. Competition Given the diverse and specialized nature of our businesses, we do not believe we have a direct competitor for the totality of our business. We compete with a number of nationally-focused companies in each of our businesses. In our loan production and servicing segments, we compete with large financial institutions, including the cash windows of the GSEs, and with other independent residential mortgage loan producers and servicers, such as Rocket Mortgage, Mr. Cooper and United Wholesale Mortgage. In our loan production segment, we compete primarily on the basis of customer service, marketing penetration, customer network, product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees. In our servicing segment, we compete primarily on the basis of experience in the residential loan servicing business, quality and efficiency of execution and servicing performance. In our investment management segment, we compete for capital with both traditional and alternative investment managers. We compete primarily on the basis of historical track record of risk-adjusted returns, experience of investment management team, the return profile of prospective investment opportunities and on the level of fees and expenses. Seasonality/Cyclicality The demand for loan originations is affected by consumer demand for home loans. Demand for home loans generally comes from the demand for loans made to finance the purchase of homes and the demand for loans made to refinance existing loans. The demand for loans made to finance the purchase of homes is most significantly influenced by the overall strength of the economy, housing prices and availability and societal factors such as household formation and government support for homeownership. The demand for loans made to refinance existing loans is most significantly influenced by movements in interest rates and to a lesser extent, to changes in property values and employment. 12 Human Capital Resources Our long-term growth and success is highly dependent upon our employees and our ability to maintain a diverse, equitable and inclusive workplace representing a broad spectrum of backgrounds, ideas and perspectives. As part of these efforts, we strive to offer competitive compensation and benefits, foster a community where everyone feels a greater sense of belonging and purpose, and provide employees with the opportunity to give back and make an impact in the communities where we live and serve. We had over 4,000 domestic employees as of the end of fiscal year 2022. In addition, as of the end of fiscal year 2022, our workforce was 49.9% female and 50.1% male, and the ethnicity of our workforce was 44.4% White, 22.6% Hispanic or Latino, 14.3% Black or African American, 14.2% Asian and 4.5% other (which includes American Indian or Alaska Native, Native Hawaiian or Other Pacific Islander, and “Two or More Races” as defined in our EE0-1 Report filed with the Department Labor). Employee Retention and Development We believe in attracting, developing and engaging the best talent, while providing a supportive work environment that prioritizes the health and safety of our employees. Talent development is a critical component of the employee experience and ensures that all employees have career growth opportunities, including establishing development networks and relationships and fostering continued growth and learning. Employees receive regular business and compliance training to help further enhance their career development objectives. We also actively manage enterprise-wide and divisional mentoring programs and have partnered with an external vendor to establish a comprehensive, fully integrated wellness program designed to enhance the productivity of our employees. Compensation and Succession Planning Our compensation programs are designed to motivate and reward employees who possess the necessary skills to support our business strategy and create long-term value for our stockholders. Employee compensation may include base salary, annual cash incentives, and long-term equity incentives, as well as life insurance and 401(k) plan matching contributions. We also offer a comprehensive selection of health and welfare benefits to our employees including emotional well-being support and paid parental leave programs. Succession planning is also critical to our operations and we have established ongoing evaluations of our leadership depth and succession capabilities. Diversity, Equity and Inclusion We believe that building a diverse, equitable and inclusive, high-performing workforce where our employees bring varied perspectives and experiences to work every day creates a positive influence in our workplace, community and business operations. Our Board of Directors, our Nominating and Corporate Governance Committee, Compensation Committee, and Risk Committee provide regular oversight of our corporate sustainability program, including our diversity, equity and inclusion programs and initiatives. We have also taken proactive measures to strategically and sustainably advance equity in the workplace through our Business Resource Groups (“BRG”), a diversity hiring initiative, mentorship programs, and external partnerships with organizations such as the Mortgage Bankers Association and the National Association of Minority Mortgage Bankers of America. We also established leadership goals and created customized initiatives that focus on our continued effort to increase the number of women and underrepresented minorities in management positions throughout our company and its business divisions. 13 As it relates to our inclusive culture, we established the following BRGs to emphasize career growth, networking, and learning opportunities for employees and allies with shared backgrounds and experiences: the BOLD BRG (for Black and African American employees and allies), the HOLA BRG (for Hispanic, Latino and Latinx employees and allies), the InspirASIAN BRG (for our Asian American and Pacific Islander employees and allies), the Pennymac PRIDE BRG (for our LGBTQIA employees and allies), the SERVE BRG (for our veteran and military family employees and allies), and the wEMRG BRG (for our women employees and allies). We also foster a more inclusive culture through a variety of initiatives, including corporate training, special events, community outreach and corporate philanthropy. Community Involvement We have a corporate philanthropy program that is governed by a philosophy of giving that prioritizes the support of causes and issues that are important in our local communities, and drives a culture of employee engagement and collaboration throughout our organization. We are committed to empowering our employees to be a positive influence in the communities where we live and serve, and believe that this commitment supports our efforts to attract and engage employees and improve retention. Our philanthropy program consists of three key components: an employee matching gift program, a charitable grants program and a corporate sponsorship program. Our five philanthropic focus areas are: community development and equitable housing, financial literacy and economic inclusion, human and social services, health and medical research, and environmental sustainability. We have established a separate donor advised fund to facilitate donations to various local and national charitable organizations and have provided funding to several charitable organizations located near our office sites and national organizations that support missions such as sustainable homeownership, mortgage and rental assistance, food insecurity, disaster recovery, family and child advocacy, and community empowerment. We also manage our environmental impact by focusing on improving our waste reduction, energy efficiency and water conservation. Legal and Regulatory Compliance Our business is subject to extensive federal, state and local regulation. The CFPB was established on July 21, 2010 under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The CFPB is responsible for ensuring consumers are provided with timely and understandable information to make responsible decisions about financial transactions, federal consumer financial laws are enforced and consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination. Although the CFPB’s actions may improve consumer protection, such actions also have resulted in a meaningful increase in costs to consumers and financial services companies including mortgage originators and servicers. Our loan production and loan servicing operations are regulated at the state level by state licensing authorities and administrative agencies. We, along with certain PNMAC employees who engage in regulated activities, must apply for licensing as a mortgage banker or lender, loan servicer and debt collector pursuant to applicable state law. These state licensing requirements typically require an application process, the payment of fees, background checks and administrative review. Our servicing operations are licensed (or exempt or otherwise not required to be licensed) to service mortgage loans in all 50 states, the District of Columbia, Puerto Rico, Guam and the United States Virgin Islands. Our consumer direct lending business is licensed to originate loans in all 50 states and the District of Columbia. From time to time, we receive requests from states and Agencies and various investors for records, documents and information regarding our policies, procedures and practices regarding our loan production and loan servicing business activities, and undergo periodic examinations by federal and state regulatory agencies. We incur significant ongoing costs to comply with these licensing and examination requirements. 14 The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”) requires all states to enact laws that require all individuals acting in the United States as mortgage loan originators to be individually licensed or registered if they intend to offer mortgage loan products. These licensing requirements include enrollment in the Nationwide Mortgage Licensing System, application to state regulators for individual licenses and the completion of pre-licensing education, annual education and the successful completion of both national and state exams. We must comply with a number of federal consumer protection laws, including, among others:
Many of these laws are further impacted by the SAFE Act and implementation of new rules by the CFPB. 15 Our senior management team has established a comprehensive compliance management system ("CMS") that is designed to ensure compliance with applicable mortgage origination and servicing laws and regulations. The components of our CMS include: (a) oversight by senior management and our Board of Directors to ensure that our compliance culture, guidance, and resources are appropriate; (b) a compliance program to ensure that our policies, training and monitoring activities are complete and comprehensive; (c) a complaint management program to ensure that consumer complaints are appropriately addressed and that any required actions are implemented on a timely basis; and (d) independent oversight to ensure that our CMS is functioning as designed. An important component of the CMS is management’s Mortgage Regulatory Compliance Committee (“MRCC”). This committee oversees the CMS and supports our cultural initiatives that reinforce the importance of regulatory compliance. The MRCC also monitors changes in the internal and external environment, approves mortgage compliance policies, monitors compliance with those policies and ensures any required remediation is implemented on a timely basis. The MRCC has identified individuals throughout the organization to oversee specific areas of compliance. MRCC membership includes senior management from all areas of the Company impacted by mortgage compliance laws and regulations. The MRCC meets on a regular basis throughout the year. Intellectual Property We rely on a combination of trademarks, copyrights, and trade secrets, as well as confidentiality and contractual provisions to protect our intellectual property and proprietary technologies. We hold or have otherwise applied for various registered trademarks, including trademarks with respect to the name Pennymac and various additional designs and word marks relating to the Pennymac name. Depending upon the jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained. We generally intend to renew our trademarks as they come up for renewal. Our other intellectual property includes proprietary know-how and technological innovations, such as our proprietary workflow-driven cloud-based servicing system, as well as proprietary pricing engines, loan-level analyticssystems and other trade secrets that we have developed to maintain our competitive position. Available Information Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including exhibits, proxy statements and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through the investor relations section of our website at www.pennymacfinancial.com as soon as reasonably practicable after electronically filing such material with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on those websites and should not be considered part of this document. 16 Item 1A. Risk Factors Summary Risk Factors We are subject to a number of risks that, if realized, could have a material adverse effect on our business, financial condition, liquidity, results of operations and our ability to make distributions to our stockholders. Some of our more significant challenges and risks include, but are not limited to, the following, which are described in greater detail below:
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Risk Factors In addition to the other information set forth in this Report, you should carefully consider the following factors, which could materially adversely affect our business, financial condition, liquidity and results of operations in future periods. The risks described below are not the only risks that we face. Additional risks not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition, liquidity and results of operations in future periods. Risks Related to Our Mortgage Banking Segment Market and Financial Risks Our business is significantly impacted by changes in interest rates. Changes in prevailing interest rates, rising inflation rates, U.S. monetary policies or other macroeconomic conditions that affect interest rates may have a detrimental effect on our business and earnings. 18 Our operations, financial performance and earnings are affected by factors including prevailing interest rates, United States monetary policies or other macroeconomic conditions such as inflation fluctuations, recessions, consumer confidence and demand. For example, as interest rates have risen in 2022, our loan production volumes have decreased as compared to 2021 as fewer loans were originated or refinanced. As a result, our net revenues decreased from $3.2 billion in fiscal year 2021 to $2.0 billion in fiscal year 2022. Inflation rates also increased in 2022 and may continue to rise. In addition, interest rates and the liquidity of the MBS market may be impacted by the Federal Reserve increasing the federal funds rate, tapering MBS purchases or selling MBS. Our financial performance and profitability is directly affected by changes in prevailing interest rates. An increase in prevailing interest rates could:
A decrease in prevailing interest rates could:
Furthermore, borrowings under our warehouse lines of credit, and MSR and servicing advance facilities are at variable rates of interest, which also expose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our variable-rate indebtedness will increase even though the amount borrowed remains the same, and our earnings and cash flows may correspondingly decrease. An event of default, a negative ratings agency action, the perception of financial weakness, an adverse action by a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to refinance existing debt and borrow additional funds. In addition, we may not be able to adjust our operational capacity and staffing in a timely manner, or at all, in response to increases or decreases in loan production volume resulting from changes in prevailing interest rates. Any of the increases or decreases discussed above could have a material adverse effect on our business, financial condition, liquidity and results of operations. Our mortgage banking revenues are highly dependent on macroeconomic factors and real estate market, mortgage market and financial market conditions. The success of our business strategies and our results of operations are materially affected by current or future conditions in the real estate market, mortgage markets, financial markets and the economy generally. Factors such as the COVID-19 pandemic, inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, domestic political issues, government shutdowns, climate change and the availability and cost of credit may contribute to increased volatility and unclear expectations for the economy in general and the real estate, mortgage market and financial markets in particular going forward. A destabilization of the real estate market, mortgage market and financial markets or deterioration in these markets also could reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we originate or acquire, either at a profit or at all. Inflation and future expectations of inflation could increase our operating expenses and may affect our profitability if the additional operating costs are not recoverable through increased revenues or profit margins. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of operations. 19 We may not be able to effectively manage significant increases or decreases in our loan production volume, which could negatively affect our business, financial condition, liquidity and results of operations. If we do not effectively manage loan production volumes and are unable to consistently maintain quality of execution, our reputation and existing relationships with mortgage lenders and brokers could be damaged, we may not be able to maintain PMT’s existing relationships or develop new relationships with mortgage lenders and brokers, our new mortgage products may not gain widespread acceptance and the quality of our correspondent production, consumer direct lending and wholesale broker lending operations could suffer, all of which could negatively affect our brand and operating results. Our loan production segment is also subject to overall market factors that could adversely impact our loan production volumes. For example, increased competition from new and existing market participants, reductions in the overall level of refinancing activity or a decrease in home purchase activity can decrease our loan production volumes. We may be forced to accept lower margins in our respective businesses to continue to compete and keep our loan production volumes consistent with past or projected levels or be forced to reduce our levels of production activity. In addition, we may not be able to adjust our operational capacity and staffing in a timely manner, or at all, in response to increases or decreases in loan production volume resulting from changes in prevailing interest rates. We have a substantial amount of indebtedness, which may limit our financial and operating activities, expose us to substantial increases in costs due to interest rate fluctuations, expose us to the risk of default under our debt obligations and may adversely affect our ability to incur additional debt to fund future needs. As of December 31, 2022, we had $7.0 billion of total indebtedness outstanding (approximately $5.2 billion of which was secured) and up to $6.5 billion of additional capacity under our secured borrowings and other secured debt financing arrangements. This substantial indebtedness and any future indebtedness we incur could have adverse consequences and, for example, could:
In addition, our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes. Our liquidity needs vary significantly from time to time and may be affected by general economic conditions, industry trends, performance and many other factors outside our control. 20 We rely on external financial arrangements to fund mortgage loans and operate our business and our inability to refinance or enter new financial arrangements could be detrimental to our business. Our ability to finance our business operations and repay maturing obligations rests in large part on our ability to borrow money. Unlike some of our competitors who fund mortgage loans through bank deposits, we generally fund our mortgage loans through borrowings under warehouse facilities and other financing arrangements as well as funds from our operations. Our borrowings are generally repaid with the proceeds we receive from mortgage loan sales. We require new and continued financing to fund mortgage loans and operate our business. We are generally required to renew many of our financing arrangements on a regular basis, which exposes us to refinancing and interest rate risks. Our ability to refinance our existing financial obligations and borrow additional funds is affected by a variety of factors beyond our control including:
We are also dependent on a limited number of banking institutions that extend us credit on terms that we have determined to be commercially reasonable. These banking institutions are subject to their own regulatory supervision, liquidity and capital requirements, risk management frameworks, profitability and risk thresholds and tolerances, any of which may change materially and negatively impact their business strategies, including their extension of credit to us specifically or mortgage lenders and servicers generally. Certain banking institutions have already exited, and others may in the future decide to exit the mortgage business. Such actions may increase our cost of capital and limit or otherwise eliminate our access to capital, in which case our business, financial condition, liquidity and results of operations would be materially and adversely affected. In the event that any of our financial arrangements is terminated or is not renewed, or if the principal amount that may be drawn under our funding agreements that provide for immediate funding at closing were to significantly decrease, we may be unable to find replacement financing on commercially favorable terms, or at all, which could be detrimental to our business. 21 We finance our loans and other assets under secured financing agreements and utilize various other sources of borrowings, which exposes us to significant risk and may materially and adversely affect our business, financial condition, liquidity and results of operations. We finance and, to the extent available, we intend to continue to leverage the loans produced through our loan production businesses with borrowings under repurchase agreements. When we enter into repurchase agreements, we sell mortgage loans to lenders, which are the repurchase agreement counterparties, and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash that we receive from a lender when we initially sell the assets to that lender is less than the fair value of those assets (this difference is referred to as the haircut or margin), if the lender defaults on its obligation to resell the same assets back to us we could incur a loss on the transaction equal to the amount of the haircut or margin reduced by interest accrued on the repurchase agreement (assuming that there was no change in the fair value of the assets). Repurchase agreements generally allow the counterparties, to varying degrees, to determine a new fair value of the collateral to reflect current market conditions. If a counterparty lender determines that the fair value of the collateral has decreased, it may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. Should this occur, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, our counterparty may sell the collateral, which may result in significant losses to us. In addition, we invest in certain assets, including MSRs and EBOs, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs and EBOs under secured financing arrangements. Freddie Mae MSRs are pledged through a special purpose entity to secure borrowings under a master repurchase agreement. Fannie Mae and Ginnie Mae MSRs are pledged to special purpose entities, each of which issues variable funding notes and term notes that are secured by such Fannie Mae or Ginnie Mae assets, as applicable, and repaid through the servicing cash flows. Some of our EBOs are contributed to a special purpose entity, which issues participation certificates pledged to secure borrowings under a master repurchase agreement. In each case, similar to our repurchase agreements, the cash that we receive under these secured financing arrangements is less than the fair value of the assets and a decrease in the fair value of the pledged collateral can result in a margin call. Should a margin call occur, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, the secured parties may sell the collateral, which may result in significant losses to us. Each of the secured financing arrangements pursuant to which we finance MSRs is further subject to the terms of an acknowledgement agreement with Fannie Mae, Freddie Mac or Ginnie Mae, as applicable, pursuant to which our and the secured parties’ rights are subordinate in all respects to the rights of the applicable Agency. Accordingly, the exercise by any of Fannie Mae, Freddie Mac or Ginnie Mae of its rights under the applicable acknowledgment agreement could result in the extinguishment of our and the secured parties’ rights in the related collateral and result in significant losses to us. We may in the future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our available capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of, among other things, the stability of our cash flows. We can provide no assurance that we will have access to any debt or equity capital on favorable terms or at the desired times, or at all. Our inability to raise such capital or obtain financing on favorable terms could materially and adversely impact our business, financial condition, liquidity and results of operations. 22 Our financing agreements contain financial and restrictive covenants that could adversely affect our business, financial condition, liquidity and results of operations. Our various financing agreements require us and/or our subsidiaries to comply with various restrictive covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Incurring substantial debt subjects us to the risk that our cash flows from operations may be insufficient to repurchase the assets that we have sold under our repurchase agreements or otherwise service the debt incurred under our other financing agreements. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. In addition, the repayment of the unsecured senior notes will depend in part on our restricted subsidiaries’ generation of cash flow and our restricted subsidiaries’ ability to make such cash available to us, by dividend, debt repayment or other means. The unsecured senior note indentures contain additional restrictive covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions, including our ability and/or the ability of our restricted subsidiaries to:
If we fail to comply with the restrictive covenants and are unable to obtain a waiver or amendment, an event of default would result under the terms of our financing arrangement or could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes. If an event of default occurs, our financing arrangements could be immediately due and payable, requiring us to apply all available cash to repay our financing arrangements, and if we were unable to repay or refinance our financial arrangements then any collateral securing the financial arrangements may be sold by our lenders. We are subject to risks associated with the discontinuation of LIBOR. As of December 31, 2021, one-week and two-month United States Dollar LIBOR (and certain non-U.S. dollar LIBOR settings) were discontinued, while the remaining non-U.S. dollar LIBOR settings ceased to be representative and thereafter began to be published only on a “synthetic basis”. In addition, the UK Financial Conduct Authority (the “FCA”), which is the regulator of the LIBOR administrator, has announced that the principal United States Dollar LIBOR tenors (overnight and one, three, six and 12 months) will cease to be published by any administrator or will no longer be representative as of June 30, 2023. In addition, despite the expected publication of the principal United States Dollar LIBOR settings through June 30, 2023, the FCA has prohibited the firms it regulates from using such settings in new contracts (subject to limited exceptions). Accordingly, many LIBOR obligations have transitioned to another benchmark or will soon do so. Different types of financial products have transitioned, or are expected to transition, to different benchmarks; and there is no assurance that any alternative benchmark will be the economic equivalent of any LIBOR setting. For some existing LIBOR-based obligations, the contractual consequences of the discontinuation of LIBOR may not be clear. Although the foregoing reflects the timing (or expected timing) of LIBOR discontinuation and certain consequences, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published until any particular date or in any particular form, and there is no assurance regarding the consequences of LIBOR discontinuation. Uncertainty as to the foregoing and the nature of alternative reference rates may adversely impact the availability and costs of borrowings. 23 The discontinuation of LIBOR could have a significant impact on the financial markets and our business activities. The cost of borrowing under certain of our financing arrangements is based on LIBOR. We also may hold assets and instruments used to hedge the value of certain assets with values or cash flows determined by reference to LIBOR. We expect to face challenges during the transition away from LIBOR for all of our LIBOR based financing arrangements, regardless of whether their maturity dates (as applicable) fall before or after the discontinuation date after June 30, 2023. These challenges include, but are not limited to, amending agreements or instruments underlying our existing and/or new LIBOR-based assets, financing arrangements, securities and liabilities with appropriate fallback language in such a way as to ensure economic equivalence with our LIBOR-based assets, financing arrangements and securities prior to the discontinuation of LIBOR, and the possibility that LIBOR may deteriorate as a viable benchmark to ensure a fair cost of funds for our LIBOR-linked liabilities, interest income for our LIBOR-linked assets, and/or the determination of fair value for certain of our assets and hedges using LIBOR as a benchmark rate or used to develop a market discount rate. In addition, the transition to using any new benchmark rate or other financial metric may require changes to existing transaction data, products, systems, models, operations and pricing processes. We also anticipate additional risks to our current business activities as they relate to the discontinuation of LIBOR. We may service LIBOR-based adjustable rate mortgages for which the underlying mortgage notes incorporate fallback provisions, but we cannot anticipate the response of our borrowers or note holders to such risks. We may also incorporate LIBOR base rates for financial planning and reporting in our financial models. In the United States, there have been efforts to identify alternative reference interest rates to replace United States Dollar LIBOR. The Alternative Reference Rates Committee has recommended that U.S. dollar LIBOR be replaced by rates based on the Secured Overnight Financing Rate (“SOFR”) plus, in the case of existing LIBOR contracts and obligations, a spread adjustment. The derivatives markets are also expected to use SOFR-based rates to replace U.S. dollar LIBOR. SOFR is intended to be a broad measure of the cost of borrowing funds overnight in transactions that are collateralized by U.S. Treasury securities. LIBOR is intended to be an unsecured rate that represents interbank funding costs for different short-term tenors and, other than its overnight setting, reflects expectations regarding future interest rates. Thus, LIBOR is generally intended to be sensitive to bank credit risk and to short-term interest rate expectations and SOFR is intended to be insensitive to credit risk and to risks related to interest rates other than overnight rates. These fundamental differences between LIBOR and SOFR mean we are unable to clearly assess the risk of transitioning from LIBOR to SOFR for any of our LIBOR-based liabilities or assets. Due to these risks, we expect that both the impending and actual discontinuation of LIBOR could affect our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their fair value. For the same reason, we also can provide no assurance that changes in the fair value of our hedge instruments will effectively offset changes in the fair value of the assets they are expected to hedge. Furthermore, the transition away from widely used benchmark rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes. Our inability to manage these risks effectively may adversely affect our business, financial condition, liquidity and results of operations. Hedging against interest rate exposure may materially and adversely affect our results of operations and cash flows. We pursue hedging strategies primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as interest rate lock commitments (“IRLCs”) and our inventory of loans held for sale. For example, with respect to our IRLCs and inventory of loans held for sale, we may use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. In addition, with respect to our MSRs, we may use MBS forward purchase and sale contracts to address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks. 24 Our hedging activity will vary in scope based on the risks being mitigated, the level of interest rates, the type of investments held, and other changing market conditions such as those resulting from the long term impact of the COVID-19 pandemic. Hedging instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities, and our interest rate hedging may fail to protect or could adversely affect us because, among other things:
In addition, we may fail to recalculate, re-adjust and execute hedges in an efficient manner. Any hedging activity, which is intended to limit losses, may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in worse overall investment performance than if we had not engaged in any such hedging transactions. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We utilize derivative financial instruments, which could subject us to risk of loss. We utilize derivative financial instruments for hedging purposes, which may include swaps, options and futures; however, the prices of derivative financial instruments are highly volatile. As a result, the cost of utilizing derivatives may reduce our income that would otherwise be available for distribution to stockholders or for other purposes, and the derivative instruments that we utilize may fail to effectively hedge our positions. We are also subject to credit risk with regard to the counterparties involved in the derivative transactions. We are exposed to a number of risks relating to holding derivative instruments. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse effect on our business, financial condition, liquidity and results of operations. 25 The use of derivative instruments is also subject to an increasing number of laws and regulations, including the Dodd-Frank Act and other federal regulations. These laws and regulations are complex, compliance with them may be costly and time consuming, and our failure to comply with any of these laws and regulations could subject us to lawsuits or government actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders. We use estimates in determining the fair value of our MSRs, which are highly volatile assets with continually changing fair values. If our estimates of their value prove to be inaccurate, we may be required to write down the fair values of the MSRs which could adversely affect our business, financial condition, liquidity and results of operations. Our estimates of the fair value of our MSRs is based on the cash flows projected to result from the servicing of the related mortgage loans and continually fluctuates due to a number of factors. These factors include prepayment speeds, interest rate changes, costs to service the loans and other market conditions. We use internal financial models that utilize our understanding of inputs used by market participants to value our MSRs for purposes of financial reporting and for purposes of determining the price that we pay for portfolios of MSRs and to acquire loans for which we will retain MSRs. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our inputs and the results of the models. If loan delinquencies or prepayment speeds are different than anticipated or other factors perform differently than modeled, the recorded fair value of certain of our MSRs may change. Significant differences in performance could increase the chance that we do not adequately estimate the effect of these factors on our valuations which could result in misstatements of our financial results, restatements of our financial statements, or otherwise materially and adversely affect our business, financial condition, liquidity and results of operations. The geographic concentration of our servicing portfolio may be affected by weaker economic conditions or adverse events specific to certain regions which could decrease the fair value of our MSRs and adversely affect our business, financial condition, liquidity and results of operations. A decline in the economy, the long term impact of the COVID-19 pandemic or other difficulties in certain real estate markets may cause a decline in the value of residential and commercial properties. To the extent that certain states in which we have greater concentrations of business in the future experience weaker economic conditions or greater rates of decline in real estate values than the United States generally, such concentration may disproportionately decrease the fair value of our MSRs and adversely affect our loan production businesses. The impact of property value declines may increase in magnitude and it may continue for a long period of time. Additionally, if states in which we have greater concentrations of business were to change their licensing or other regulatory requirements to make our business cost-prohibitive, we may be required to stop doing business in those states or may be subject to a higher cost of doing business in those states, which could have a material adverse effect on our business, financial condition, liquidity and results of operations. Increases in delinquencies and defaults may adversely affect our business, financial condition, liquidity and results of operations. Delinquencies can result from many factors including unemployment, weak economic conditions or real estate values, or catastrophic events such as man-made or natural disasters, pandemics, war or terrorist attacks. A decrease in home prices may result in higher loan-to-value ratios (“LTVs”), lower recoveries in foreclosure and an increase in loss severities above those that would have been realized had property values remained the same or continued to increase. Some borrowers do not have sufficient equity in their homes to permit them to refinance their existing loans, which may reduce the volume of our loan production business. This may also provide borrowers with an incentive to default on their mortgage loans even if they have the ability to make principal and interest payments. 26 Increased mortgage delinquencies, defaults and foreclosures may result in lower revenue for loans that we service for the Agencies because we only collect servicing fees from the Agencies for performing loans, and our failure to service delinquent and defaulted loans in accordance with the applicable servicing guidelines could result in our failure to benefit from available monetary incentives and/or expose us to monetary penalties and curtailments. Additionally, while increased delinquencies generate higher ancillary fees, including late fees, these fees may not be recoverable if the related loan is liquidated or due to CARES Act restrictions or other requirements or as a result of the COVID-19 pandemic. In addition, an increase in delinquencies lowers the interest income that we receive on cash held in collection and other accounts because there is less cash in those accounts. Also, increased mortgage defaults may ultimately reduce the number of mortgages that we service. Increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those loans due to the increased time and effort required to collect payments from delinquent borrowers and to acquire and liquidate the properties securing the loans or otherwise resolve loan defaults if payment collection is unsuccessful, and only a portion of these increased costs are recoverable under our servicing agreements. Increased mortgage delinquencies, defaults and foreclosures may also result in an increase in servicing advances we are obligated to make to fulfill our obligations to MBS holders and to protect our investors’ interests in the properties securing the delinquent mortgage loans. An increase in required advances also may cause an increase in our interest expense and affect our liquidity as a result of increased borrowings under our financing agreements to fund any such increase in the advances. We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable due to delinquencies, defaults and foreclosures that could adversely affect our business, financial condition, liquidity and results of operations. During any period in which a borrower is not making payments, we may be required under our servicing agreements in respect of our MSRs to advance our own funds to pay property taxes and insurance premiums, legal expenses and other protective advances, and may be required to advance principal and interest payments to security holders of the MBS into which the loans are sold. We also advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. In addition, if a loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the loan is repaid or refinanced or a liquidation occurs. Federal, state or local regulatory actions may also result in an increase in the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred while the loan is delinquent. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders. In addition, increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those loans due to the increased time and effort required to collect payments from delinquent borrowers, to foreclose on the loan and to liquidate properties or otherwise resolve loan defaults if payment collection is unsuccessful. Any significant increases in delinquencies, defaults and foreclosures on loans that we service in respect of FHA,VA, and USDA related MSRs could result in an increase in servicing expenses as well as losses since the loans may not be fully insured or guaranteed under each of the VA, the FHA and the USDA government loan programs.
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We may also be subject to additional curtailments to servicing and advance reimbursements if we have not satisfied VA, USDA or FHA timing, service and other regulatory requirements during the foreclosure and conveyance process. We have MSR and MSL servicing agreements of $253.0 billion of UPB consisting of FHA, VA, and USDA mortgage loans that represent approximately 80% of our total outstanding UPB of MSRs as of December 31, 2022. Any significant increase in delinquencies, defaults and foreclosures on loans that increase our servicing advances, reduce property value or otherwise delay our ability to dispose of the properties underlying the loan could have a material adverse effect on our business, financial condition, liquidity and results of operations. Our acquisition and ownership of mortgage servicing rights exposes us to significant risks. MSRs arise from contractual agreements between us and the investors (or their agents) in loans and MBS that we service on their behalf. We generally acquire MSRs in connection with our sale of loans to the Agencies where we assume the obligation to service such loans on their behalf. Any MSRs we acquire are initially recorded at fair value on our balance sheet. The determination of the fair value of MSRs requires our management to make numerous estimates and assumptions. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced loans. The ultimate realization of the MSRs may be materially different than the values of such MSRs as may be reflected in our consolidated balance sheet as of any particular date. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs and assumptions used to determine MSR fair value. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Prepayment speeds significantly affect MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We base the price we pay for MSRs on, among other things, our projection of the cash flows from the related pool of loans. Our expectation of prepayment speeds is a significant input to our cash flow projections. If prepayment speed expectations increase significantly, the fair value of the MSRs could decline and we may be required to record a non-cash charge that would have a negative impact on our financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the cash flows we receive from MSRs, and we could ultimately receive substantially less than what we paid for such assets. Delinquency rates have a significant impact on the valuation of MSRs. An increase in delinquencies generally results in lower revenue because typically we only collect servicing fees from Agencies or mortgage owners when we collect payments from the borrower. Our expectation of delinquencies is also a significant input underlying our cash flow projections. If delinquencies are significantly greater than we expect, the estimated fair value of the MSRs could be diminished. When the estimated fair value of MSRs is reduced, we could suffer a loss, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders. 28 Changes in interest rates are a key driver of the performance of MSRs. Historically, the fair value of MSRs has increased when interest rates increase and decrease when interest rates decrease due to the effect those changes in interest rates have on prepayment estimates. We may pursue various hedging strategies to seek to reduce our exposure to adverse changes in fair value resulting from changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us. To the extent we do not utilize derivative financial instruments to hedge against changes in fair value of MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders would be more susceptible to volatility due to changes in the fair value of, or cash flows from, MSRs as interest rates change. Furthermore, MSRs and the related servicing activities are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on our business. For example, the CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the long term impact of the COVID-19 pandemic. Our failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which we or they are subject by virtue of ownership of MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders. A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and results of operations. Most of the loans that we produce are pooled into MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. In addition, interest rates and the liquidity of the MBS market could be impacted by Federal Reserve increasing the federal funds rate, tapering future MBS purchases or selling MBS. Any significant disruption or period of illiquidity in the general MBS market would directly affect our own liquidity because no existing alternative secondary market would likely be willing and able to accommodate on a timely basis the volume of loans that we typically sell in any given period. Furthermore, we would remain contractually obligated to fund loans under our outstanding IRLCs without being able to sell our existing inventory of mortgage loans. Accordingly, if the MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we produce into the secondary market in a timely manner or at favorable prices and we would be required to hold a larger inventory of loans than we have committed facilities to fund or we may be required to repay a portion of the debt secured by these assets, which could materially and adversely affect our business, financial condition and results of operations. We may be required to indemnify the purchasers of loans that we originate, acquire or assist in the fulfillment of, or repurchase those loans, if those loans fail to meet certain criteria or characteristics or under other circumstances and we may be unable to seek indemnity or require our counterparties to repurchase loans if they breach representations and warranties they make to us. Our contracts with purchasers of newly originated loans that we fund or acquire through our loan production business contain provisions that require us to indemnify the purchaser of the related loans or repurchase such loans under certain circumstances. Our loan sale agreements with purchasers, including the Agencies, contain provisions that generally require us to indemnify or repurchase these loans if our representations and warranties concerning loan quality and loan characteristics are inaccurate; or the loans fail to comply with the respective Agency’s underwriting or regulatory requirements. 29 When we purchase mortgage loans, our counterparty typically makes customary representations and warranties to us about such loans and we may be entitled to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to demand repurchase or substitution, or that our counterparty will remain solvent or otherwise be willing and able to honor its obligations under our loan purchase agreements. Depending on the volume of repurchase and indemnification requests, some of these mortgage lenders may not be able to financially fulfill their obligation to indemnify us or repurchase the affected loans. If a material amount of recovery cannot be obtained from these mortgage lenders, our business, financial condition, liquidity and results of operations could be materially and adversely affected. Repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. Although our indemnification and repurchase exposure cannot be quantified with certainty, to recognize these potential indemnification and repurchase losses, we have recorded a liability of $32.4 million as of December 31, 2022. Because of the increase in our loan production over time, we expect that indemnification and repurchase requests are also likely to increase. Should home values decrease and negatively impact the related loan values, our realized loan losses from indemnifications and repurchases may increase as well. As such, our indemnification and repurchase costs may increase well beyond our current expectations. In addition, our mortgage banking services agreement with PMT requires us to indemnify it with respect to loans for which we provide fulfillment services in certain instances. If we are required to indemnify PMT or other purchasers against losses, or repurchase loans from PMT or other purchasers, that result in losses that exceed the recorded liability, this could have a material adverse effect on our business, financial condition, liquidity and results of operations. We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition, liquidity and results of operations. In deciding whether to approve loans or to enter into other transactions across our businesses with counterparties, including borrowers, brokers and correspondent lenders, we may rely on information furnished to us by or on behalf of borrowers and such counterparties, including financial statements and other financial information. We also may rely on representations of borrowers and such counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, another party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information in our loan originations or acquisitions. Any such misrepresented information could have a material adverse effect on our business, financial condition, liquidity and results of operations. Our counterparties may terminate our MSRs, which could adversely affect our business, financial condition, liquidity and results of operations. As is standard in the industry, under the terms of our master servicing agreements with the Agencies in respect of Agency MSRs that we retain in connection with our loan production, the Agencies have the right to terminate us as servicer of the loans we service on their behalf at any time (and, in certain instances, without the payment of any termination fee) and also have the right to cause us to sell the MSRs to a third party. In addition, our failure to comply with applicable servicing guidelines could result in our termination under such master servicing agreements by the Agencies with little or no notice and without any compensation. The owners of other non-Agency loans that we service may also terminate certain of our MSRs if we fail to comply with applicable servicing guidelines. If the MSRs are terminated on a material portion of our servicing portfolio, our business, financial condition, liquidity and results of operations could be adversely affected. 30 Failure to successfully modify, resell or refinance EBO loans or defaults of the EBO loans beyond expected levels may adversely affect our business, financial condition, liquidity and results of operations. As a mortgage servicer, we have an early buyout repurchase option for loans that are at least three months delinquent in our Ginnie Mae MSR portfolio. Purchasing delinquent Ginnie Mae loans provides us with an alternative to our mortgage servicing obligation of advancing principal and interest at the coupon rate of the related Ginnie Mae security. While our EBO program reduces the cost of servicing the Ginnie Mae loans, it may also accelerate loss recognition when the loans are repurchased because we are required to write off accumulated non-reimbursable interest advances and other costs at the time of repurchase. After purchasing delinquent Ginnie Mae loans, we expect to repool many of the delinquent loans into another Ginnie Mae guaranteed security upon the delinquent loans becoming current either through the borrower’s reperformance or through the completion of a loan modification; however, there is no guarantee that any delinquent loan will reperform or be modified or resold. Failure to successfully modify, resell or refinance our repurchased Ginnie Mae loans or a significant portion of the repurchased Ginnie Mae loans defaulting beyond expectations may adversely affect our business, financial condition, liquidity and results of operations. We may not realize all of the anticipated benefits of potential future acquisitions of MSRs, which could adversely affect our business, financial condition, liquidity and results of operations. Our ability to realize the anticipated benefits of potential future acquisitions of servicing portfolios will depend, in part, on our ability to appropriately service any such assets. The process of acquiring these assets may disrupt our business and may not result in the full benefits expected. The risks associated with these acquisitions include, among others, unanticipated issues in integrating information regarding the new loans to be serviced into our information technology systems, and the diversion of management’s attention from other ongoing business concerns. Moreover, if we inappropriately value the assets that we acquire or the fair value of the assets that we acquire declines after we acquire them, the resulting charges may negatively affect both the carrying value of the assets on our balance sheet and our earnings. Furthermore, if we incur additional indebtedness to finance an acquisition, the acquired servicing portfolio may not be able to generate sufficient cash flows to service that additional indebtedness. Unsuitable or unsuccessful acquisitions could have a material adverse effect on our business, financial condition, liquidity and results of operations. We are subject to significant financial and reputational risks from potential liability arising from lawsuits, and regulatory and government action. We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions remains high. For example, in 2019 Black Knight Servicing Technologies, LLC filed a legal claim against us for alleged breach of contract and misappropriation of trade secrets. Greater than expected investigation costs and litigation, including class action lawsuits associated with compliance related issues, substantial legal liability or significant regulatory or government action against us could have adverse effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn could adversely impact our business results and prospects. We may experience a significant volume of litigation and other disputes, including claims for contractual indemnification, with counterparties regarding relative rights and responsibilities. Consumers, clients and other counterparties may also become increasingly litigious. We also may be exposed to the risk of litigation by investors and entities that we manage from time to time if our management advice is alleged to constitute gross negligence or willful misconduct, up to the entire amount of loss. Further, we may be subject to litigation arising from investor dissatisfaction with PMT’s financial performance or if we improperly exercised control or influence over PMT. In addition, we are exposed to risks of litigation or investigation relating to transactions which presented conflicts of interest that were not properly addressed. In such actions, we would be obligated to bear legal, settlement and other costs (which may be in excess of available insurance coverage). In addition, although we are generally indemnified by PMT, our rights to indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification, our business, financial condition, liquidity and results of operations would be materially and adversely affected. 31 We depend on counterparties and vendors to provide services that are critical to our business, which subjects us to a variety of risks. We have a number of counterparties and vendors, who provide us with financial, technology and other services that are critical to support our businesses. If our current counterparties and vendors were to stop providing services to us on acceptable terms or if we had a disruption in service due to a vendor dispute, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on similarly acceptable terms, or at all. Some of these counterparties and vendors have significant operations outside of the United States. If we or our vendors had to curtail or cease operations in these countries due to political unrest or natural disasters and then transfer some or all of these operations to another geographic area, we could experience disruptions in service and incur significant transition costs as well as higher future overhead costs. We may also outsource certain services to vendors located in foreign countries such as India and the Philippines with emerging technology, political and regulatory infrastructures that could result in future business disruptions or reputational damages. With respect to vendors engaged to perform certain servicing activities, we are required to assess their compliance with various regulations and establish procedures to provide reasonable assurance that the vendor’s activities comply in all material respects with such regulations. In the event that a vendor’s activities are not in compliance, it could negatively impact our relationships with our regulators, as well as our business and operations. Further, we may incur significant costs to resolve any such disruptions in service which could have a material adverse effect on our business, financial condition, liquidity and results of operations. Our failure to appropriately address various issues that may give rise to reputational risk could cause harm to our business and adversely affect our earnings. Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may give rise to reputational risk, we could significantly harm our business prospects and earnings. Such issues include, but are not limited to, actual or perceived conflicts of interest, violations of legal or regulatory requirements, and any of the other risks discussed in this Item 1A. Similarly, market rumors and actual or perceived association with counterparties whose own reputations are under question could harm our business. Certain of our officers also serve as officers of PMT. As we expand the scope of our businesses, we increasingly confront potential conflicts of interest relating to investment activities that we manage for PMT. The SEC and certain regulators have increased their scrutiny of potential conflicts of interest, and as we experience growth in our businesses, we continue to monitor and mitigate or otherwise address any conflicts between our interests and those of PMT through the implementation of procedures and controls. Reputational risk incurred in connection with conflicts of interest could negatively affect our business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain clients, customers, trading counterparties, investors and employees and adversely affect our results of operations. Reputational damage can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. Our reputation may also be negatively impacted by our environmental, social and governance (“ESG”) practices and disclosures, including climate change practices and disclosures. In addition, various private third party organizations have developed ratings processes for evaluating companies on their approach to ESG matters. These third party ESG ratings may be used by some investors to assist with their investment and voting decisions. Any unfavorable ESG ratings may lead to reputational damage and negative sentiment among our investors and other stakeholders. These factors could impair our working relationships with government agencies and investors, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading counterparties and employees, significantly harm our stock price and ability to raise capital, and adversely affect our results of operations. 32 Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our financial statements. Accounting rules for mortgage loan sales and securitizations, valuations of financial instruments and MSRs, investment consolidations, income taxes and other aspects of our operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders and also increase the risk of errors and restatements, as well as the cost of compliance. Our inability to timely prepare our financial statements in the future would likely be considered a breach of our financial covenants and adversely affect our share price significantly. Changes in accounting interpretations or assumptions as well as accounting rule misinterpretations could result in differences in our financial results or otherwise have a material adverse effect on our business, financial condition, liquidity and results of operations. The success and growth of our business depends upon our ability to adapt to and implement technological changes and to successfully develop, implement and protect proprietary technology. Our success in the mortgage industry is highly dependent upon our ability to adapt to constant technological changes, successfully enhance our current information technology solutions through the use of third-party and our proprietary technologies, and introduce new solutions and services that more efficiently address the needs of our customers. Our mortgage loan production businesses are dependent upon our ability to effectively interface with our borrowers, mortgage lenders and other third parties and to efficiently process loan applications and closings. The direct lending processes are becoming more dependent upon technological advancement, such as our continued ability to process applications over the Internet, accept electronic signatures, provide process status updates instantly and other borrower- or counterparty-expected conveniences. In our correspondent production activities, our and PMT’s correspondent sellers also expect and require certain conveniences and service levels that are dependent on technological advancement. We have developed a workflow-driven, cloud-based loan acquisition platform and while we anticipate that the cloud-based system will increase scalability and produce other efficiencies, there can be no assurance that the cloud-based system will prove to be effective or that such correspondent sellers will easily adapt to the cloud-based system. Any failure to effectively or timely transition to our new system and meet our expectations and the expectations of our correspondent sellers could have a material adverse effect on our business, financial condition and results of operations. Similarly, our servicing business is dependent on our ability to effectively interface with our customers and investors, as well as service mortgage loans in compliance with applicable laws and regulations and the contractual requirements of such investors. For example, our proprietary workflow-driven, cloud-based servicing system provides for real-time processing and advanced workflow management thereby reducing servicing costs, increasing scalability and creating sustainable efficiencies. The development, implementation and protection of these technologies and becoming more proficient with them may also require significant capital and operating expenditures. As these technological advancements increase in the future, we will need to further develop and invest in these technological capabilities to remain competitive. Moreover, litigation has become required to protect our technologies and such litigation is expected to be time consuming and result in substantial costs and diversion of resources. We rely on a combination of trademarks, copyrights, and trade secrets, as well as confidentiality and contractual provisions to protect our intellectual property and proprietary technologies. In addition, we also license and utilize third party proprietary technologies and loss of rights to significant third party proprietary technologies may result in decreased product functionality. The development, implementation and protection of our intellectual property and proprietary technologies requires significant human resources and capital expenditures. As these technological advancements and investor and compliance requirements increase in the future, we will need to further develop these technological capabilities to remain competitive, and we will need to implement, execute and maintain them in an operating and regulatory environment that exposes us to significant risk. 33 There is no assurance that we will be able to successfully adopt new technologies as critical systems and applications become obsolete and better ones become available. Any failure by us to develop, implement, integrate, execute or maintain our technological capabilities and any litigation costs associated with protection of our technologies could have a material adverse effect on our business, financial condition and results of operations. Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks, and other long term physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans we own or service, as well as geographic areas where we conduct business. Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks and other long term physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans we own or service, as well as geographic areas where we conduct business. In addition, such adverse conditions and long term physical and environmental changes could impact the demand for, and value of, our assets, as well as the cost to service or manage such assets, or directly impact the value of our assets through damage, destruction or loss, and thereafter materially impact the availability or cost of insurance to protect against these events. Upon the occurrence of a catastrophic event, we may be unable to continue our operations and may endure significant business interruptions, reputational harm, delays in servicing our customers and working with our partners, interruptions in the availability of our technology and systems, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results. Catastrophic events may also be uninsurable or not economically insurable and might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. There is an increasing global concern over the risks of climate change and related environmental sustainability matters. The physical risks of climate change may include rising average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters, including floods, wildfires, hurricanes, earthquakes and tornados, and these events could impact our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets and the local economies of certain areas in which we operate. Although we believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets are appropriately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance. There also is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to payment claims due to a deterioration in its financial condition or may even cancel policies due to increasing costs of providing insurance coverage in certain geographic areas. Further, numerous treaties, laws and regulations have been enacted or proposed in an effort to regulate climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of “green” building codes. These laws and regulations may impact the rates at which we obtain property insurance and result in increased operating costs, or impose substantial costs on our borrowers or affect their ability to obtain appropriate coverage at reasonable costs. We may also incur costs associated with increased regulations or investor requirements for increased environmental and social disclosures and reporting. Additionally, climate change concerns could result in transition risk. Changes in consumer preferences and additional legislation and regulatory requirements, including those associated with a transition to a low-carbon economy, could increase expenses or otherwise adversely impact our operations and business. Regulatory Risks We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition, liquidity and results of operations. We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits and examinations by federal and state regulators. Our failure to operate effectively and in compliance with any of these laws, regulations and rules could subject us to lawsuits or governmental actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity and results of operations. In addition, our failure to comply with these laws, regulations and rules may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt, delays in the foreclosure process, increased 34 servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations. Further, we may be required to pay substantial penalties imposed by our regulators due to compliance errors, or we may lose our licenses to originate and/or service loans. We must also comply with a number of federal, state and local consumer protection and state foreclosure laws. These statutes apply to loan origination, servicing, debt collection, marketing, use of credit reports, safeguarding of non-public, personally identifiable information about our clients, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to customers. Because we are not a federally chartered depository institution, we generally do not benefit from federal pre-emption of state mortgage loan banking, loan servicing or debt collection licensing and regulatory requirements and must comply with multiple state licensing and compliance requirements. These state rules and regulations generally provide for, but are not limited to: originator, servicer and debt collector licensing requirements, requirements as to the form and content of contracts and other documentation, employee licensing and background check requirements, fee requirements, interest rate limits, and disclosure and record-keeping requirements. Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting fair lending, fair housing and other claims that the practices of lenders and loan servicers result in a disparate impact on protected classes. Antidiscrimination statutes, such as the Fair Housing Act and the Equal Credit Opportunity Act, prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory agencies and departments take the position that these laws apply not only to intentional discrimination, but also to neutral practices that have a disparate impact on a group that shares a characteristic that a creditor may not consider in making credit decisions (i.e., creditor or servicing practices that have a disproportionately negative affect on a protected class of individuals). The failure of our correspondent sellers to comply with any applicable laws, regulations and rules may also result in these adverse consequences. We have in place a due diligence program designed to assess areas of risk with respect to loans we acquire from such correspondent sellers. However, we may not detect every violation of law and, to the extent any correspondent sellers, third party originators, servicers or brokers with which we do business fail to comply with applicable laws or regulations and any of their mortgage loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans or MSRs, to monetary penalties or other losses. While we may have contractual rights to seek indemnity or repurchase from certain of these lenders, third party originators, servicers or brokers, if any of them are unable to fulfill their indemnity or repurchase obligations to us to a material extent, our business, liquidity, financial condition and results of operations could be materially and adversely affected. Our service providers and other vendors are also required to operate in compliance with applicable laws, regulations and rules. Our failure to adequately manage service providers and other vendors to mitigate risks of noncompliance with applicable laws may also have these negative results. Federal and state administrations could enact significant policy changes increasing regulatory scrutiny and enforcement actions in our industry. While it is not possible to predict when and whether significant policy or regulatory changes would occur, any such changes on the federal, state or local level could significantly impact, among other things, our operating expenses, the availability of mortgage financing, interest rates, consumer spending, the economy and the geopolitical landscape. To the extent that the current government administration takes action by proposing and/or passing regulatory policies that could have a negative impact on our industry, such actions may have a material adverse effect on our business, financial condition and results of operations. The Financial Stability Oversight Council (“FSOC”) and Conference of State Bank Supervisors (“CSBS”) have been reviewing whether state chartered nonbank mortgage servicers should be subject to “safety and soundness” standards similar to those imposed by federal law on insured depository institutions, even though nonbank mortgage servicers do not have any federally insured deposit accounts. For example, on July 26, 2021, the CSBS released model state regulatory prudential standards for state oversight of nonbank mortgage servicers. The model CSBS prudential standards include revised minimum net worth, capital ratio and liquidity standards similar to current FHFA requirements and require servicers to maintain sufficient allowable assets to cover normal operating expenses in addition to the amounts required for servicing expenses. In addition, on August 17, 2022, the FHFA and Ginnie Mae announced 35 enhanced minimum net capital and liquidity eligibility requirements for sellers, servicers and issuers that will go into effect in 2023 and 2024. To the extent any new minimum net worth, capital ratio and liquidity standards and requirements are overly burdensome, complying with such standards and requirements may have a material adverse effect on our business, financial condition and results of operations. New CFPB or state rules and regulations or more stringent enforcement of existing rules and regulations by these regulators could result in enforcement actions, fines, penalties and the inherent reputational risk that results from such actions. The CFPB has regulatory authority over certain aspects of our business as a result of our residential mortgage banking activities, including, without limitation, the authority to conduct investigations, bring enforcement actions, impose monetary penalties, require remediation of practices, pursue administrative proceedings or litigation, and obtain cease and desist orders for violations of applicable federal consumer financial laws. The current CFPB administration has stated its intention to aggressively supervise, investigate and, where it deems appropriate, bring enforcement actions against lenders and servicers the CFPB believes are engaged in activities that violate federal laws and regulations. In addition, examinations by state regulators and enforcement actions in the residential mortgage origination and servicing sectors by state attorneys general have increased and may continue to increase.Failure to comply with the CFPB and state laws, rules or regulations to which we are subject, whether actual or alleged, could have a material adverse effect on our business, liquidity, financial condition and results of operations. Our failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations and our ability to make distributions to our stockholders. We are highly dependent on U.S. government-sponsored entities and government agencies, and any organizational or pricing changes at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition and results of operations. Our ability to generate revenues through mortgage loan sales depends on programs administered by GSEs, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the issuance of MBS in the secondary market. We originate mortgage loans directly with borrowers and brokers and assist PMT in acquiring loans from mortgage lenders through our correspondent production activities that qualify under existing standards for inclusion in MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. We, or PMT, also derive other material financial benefits from our Agency relationships, including the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures. A number of legislative proposals have been introduced in recent years that would wind down or phase out the GSEs in their current form, including a proposal by the prior federal administration to end the conservatorship and privatize Fannie Mae and Freddie Mac. It is not possible to predict the scope and nature of the actions that the U.S. government, including the current federal administration, will ultimately take with respect to the GSEs. Any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and their regulators or the U.S. federal government, and any changes in leadership at these entities, could adversely affect our business and prospects. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or in underwriting criteria could materially and adversely affect our business, financial condition, liquidity and results of operations and our ability to make distributions to our stockholders. 36 Our ability to generate revenue from newly originated loans that we acquire or assist PMT in acquiring is highly dependent on the fact that the Agencies have not historically acquired such loans directly from mortgage lenders, but have instead relied on banks and non-bank aggregators such as us to acquire, aggregate and securitize or otherwise sell such loans to investors in the secondary market. Certain of the Agencies have approved new and smaller lenders that traditionally may not have qualified for such approvals. To the extent that these mortgage lenders choose to sell directly to the Agencies rather than through loan aggregators like us, the number of loans available for purchase by aggregators is reduced, which could materially and adversely affect our business and results of operations. In addition, under certain Agency capital rules, loans sourced from loan aggregators such as PMT that we assist have higher capital requirements and may incur higher Agency fees for third party originated loans that PMT aggregates and delivers to the Agencies as compared to individual loans delivered by third party mortgage lenders directly to the Agencies’ cash windows without the assistance of a loan aggregator. To the extent the Agencies increase the number of purchases and sales directly for their own accounts, our business and results of operations could be materially and adversely affected. We are required to have various Agency approvals and state licenses in order to conduct our business and there is no assurance we will be able to obtain or maintain those Agency approvals or state licenses. Because we are not a federally chartered depository institutions we do not benefit from exemptions to state mortgage lending, loan servicing or debt collection licensing and regulatory requirements. We are licensed in all state jurisdictions, and for those activities, where we are required to be licensed and believe it is cost effective and appropriate to become licensed. Our failure to maintain any necessary licenses, comply with applicable licensing laws or satisfy the various requirements to maintain them over time could restrict our direct business activities, result in litigation or civil and other monetary penalties, or cause us to default under certain of our lending arrangements, any of which could materially and adversely impact our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders. We are also required to hold the Agency approvals in order to sell loans to the Agencies and service such loans on their behalf. Our failure to satisfy the various requirements necessary to maintain such Agency approvals over time would also restrict our business activities and could adversely impact our business. We are subject to periodic examinations by federal, state and Agency auditors and regulators, which can result in increases in our administrative costs, and we may be required to pay substantial penalties imposed by these regulators due to compliance errors, or we may lose our licenses. Negative publicity or fines and penalties incurred in one jurisdiction may cause investigations or other actions by regulators in other jurisdictions and could adversely impact our business. Our inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material adverse effect on our business, financial condition, liquidity and results of operation. We are subject to minimum financial eligibility requirements established by the Agencies. For example, on August 2022, the FHFA and Ginnie Mae announced enhanced minimum net capital and liquidity eligibility requirements for sellers, servicers and issuers that will go into effect in 2023 and 2024. These eligibility requirements align the minimum financial requirements for mortgage sellers/servicers and MBS issuers to do business with the Agencies. These minimum financial requirements include net worth, capital ratio and/or liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential losses and a minimum amount of liquidity needed to service Agency loans and MBS and cover the associated financial obligations and risks. In order to meet these minimum financial requirements, we are required to maintain rather than spend or invest, cash and cash equivalents in amounts that may adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders, and this could significantly impede us, as a non-bank mortgage lender, from growing our respective businesses and place us at a competitive disadvantage in relation to federally chartered banks and certain other financial institutions. To the extent that such minimum financial requirements are not met, the Agencies may suspend or terminate Agency approval or certain agreements with us, which could cause us to cross default under financing arrangements and/or have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders. 37 The failure of PennyMac Loan Services, LLC to avail itself of an appropriate exemption from registration as an investment company under the Investment Company Act of 1940 could have a material and adverse effect on our business. We intend to operate so that we, and each of our subsidiaries, are not required to register as investment companies under the Investment Company Act of 1940, as amended (“Investment Company Act”). We believe that our subsidiary, PLS, qualifies for one or more exemptions provided in the Investment Company Act because of the historical and current composition of its assets and income; however, there can be no assurances that the composition of PLS’ assets and income will remain the same over time such that one or more exemptions will continue to be applicable. If PLS is required to register as an investment company, we would be required to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things: limitations on capital structure; restrictions on specified investments; prohibitions on transactions with affiliates; compliance with reporting, record keeping, voting and proxy disclosure; and, other rules and regulations that would significantly increase our operating expenses. Further, if PLS was or is required to register as an investment company, PLS would be in breach of various representations and warranties contained in its credit and other agreements resulting in a default as to certain of our contracts and obligations. This could also subject us to civil or criminal actions or regulatory proceedings, or result in a court appointed receiver to take control of us and liquidate our business, any or all of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. Our business, financial condition and results of operations may be adversely affected by the long term impact of the COVID-19 pandemic. The COVID-19 pandemic, inclusive of any variants, has created unprecedented economic, financial and public health disruptions that may continue to adversely affect, our business, financial condition and results of operations. The extent to which COVID-19 continues to affect our business, financial condition and results of operations will depend on future developments, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic. The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the long term impact of the COVID-19 pandemic. As a result of the CARES Act and other forbearance requirements, we may experience delinquencies in our servicing portfolio that require us to finance advances of principal and interest payments to the investors holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans. The CARES Act and other forbearance requirements have reduced our servicing fee income and increased our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the long term impact of the COVID-19 pandemic. Future servicing advances will be driven by a number of factors, including: the number of borrower delinquencies, including those resulting from payment forbearance; the length of time borrowers remain delinquent; and the level of successful resolution of delinquent payments, all of which will be impacted by the pace at which the economy recovers from the long term impact of the COVID-19 pandemic. As of December 31, 2022, 1.3% of loans in our predominantly government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent, resulting in an increase in the level of servicing advances we have been required to make due to borrower delinquencies. Servicing advances resulting from the COVID-19 pandemic could have a significant adverse impact on our cash flows and could also have a detrimental effect on our business and financial condition. 38 The CARES Act and other forbearance requirements have negatively impacted the fair value of our servicing assets and further market volatility or economic weakness may result in additional reductions in the value of our servicing assets and make it increasingly difficult to optimize our hedging activities. Our liquidity and/or regulatory capital could also be adversely impacted by volatility and disruptions in the capital and credit markets. If we fail to meet or satisfy any of the covenants in our repurchase agreements or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. We may have difficulty accessing debt and equity capital on attractive terms, or at all, as a result of the impact of the COVID-19 pandemic, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities on a timely basis. This includes renewals of our existing credit facilities with our lenders who may be adversely impacted by the volatility and dislocations in the financial markets and may not be willing or able to continue to extend us credit on the same terms, or on favorable terms, or at all. Our business could be disrupted if we are unable to operate due to changing governmental restrictions such as travel bans and quarantines placed or reinstituted on our employees or operations, including, successfully operating our business from remote locations, ensuring the protection of our employees’ health and maintaining our information technology infrastructure. Further, increased operational expenses to address these restrictions and widespread employee illnesses could negatively affect staffing within our various businesses and geographies. Federal, state, and local executive, legislative and regulatory responses to the long term impact of the COVID-19 pandemic may be inconsistent and conflict in scope or application, and may be subject to change without advance notice. These regulatory responses may impose additional compliance obligations, and may extend existing CARES Act and other forbearance requirements. In addition, the CARES Act and other federal, state and local regulations are subject to interpretation given the existing ambiguities in the rules and regulations, which may result in future class action and other litigation risk. The outcome of the COVID-19 related governmental measures are unknown and they may not be sufficient to address future market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic. The final scope and duration of the COVID-19 pandemic and the efficacy of the extraordinary government measures put in place to address it are currently unknown. Even after the COVID-19 pandemic subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn. 39 Related Party Risks We rely on PMT as a significant source of financing for, and revenue related to, our mortgage banking business, and the termination of, or material adverse change in, the terms of this relationship, or a material adverse change to PMT or its operations, could adversely affect our business, financial condition, liquidity and results of operations. PMT is the counterparty that currently acquires newly originated mortgage loans in connection with our correspondent production activities. A portion of our income is derived from a fulfillment fee earned in connection with PMT’s acquisition of conventional loans. We are able to conduct our correspondent production activities without having to incur the significant additional debt financing that would be required for us to purchase those loans from the originating lender. We also purchase all government-insured and some conventional loans from PMT at PMT’s cost plus a sourcing fee and fulfill these loans for our own account. We earn interest income and gains or losses during the holding period and upon the sale of these securities, and we retain the MSRs with respect to the loans. If this relationship with PMT is terminated by PMT or PMT reduces the volume of these loans that it acquires for any reason, we would have to acquire these loans from the correspondent sellers for our own account, something that we may be unable to do, or enter into another similar counterparty arrangement with a third party, which we may not be able to enter into on terms that are as favorable to us, or at all. The management agreement, the mortgage banking services agreement and certain of the other agreements that we have entered into with PMT contain cross-termination provisions that allow PMT to terminate one or more of those agreements under certain circumstances where another one of such agreements is terminated. Accordingly, the termination of this relationship with PMT, or a material change in the terms thereof that is adverse to us, would likely have a material adverse effect our business, financial condition, liquidity and results of operations. The terms of these agreements extend until June 30, 2025, subject to automatic renewal for additional 18-month periods, but any of the agreements may be terminated earlier under certain circumstances or otherwise non-renewed. If any agreement is terminated or non-renewed and not replaced by a new agreement, it would materially and adversely affect our ability to continue to execute our business plan. We expect that PMT will continue to qualify as a REIT for U.S. federal income tax purposes. However, it is possible that PMT may not meet the requirements for qualification as a REIT. If PMT were to lose its REIT status, corporate-level income taxes, would apply to all of PMT's taxable income at federal and state tax rates. Either of these scenarios would potentially impair PMT’s financial position and its ability to raise capital, which could have a material adverse effect on our business, financial condition, liquidity and results of operations. A significant portion of our loan servicing operations are conducted pursuant to subservicing contracts with PMT, and any termination by PMT of these contracts, or a material change in the terms thereof that is adverse to us, would adversely affect our business, financial condition, liquidity and results of operations. PMT, as the owner of a substantial number of MSRs or mortgage loans that we subservice, may, under certain circumstances, terminate our subservicing contract with or without cause, in some instances with little notice and little to no compensation. Upon any such termination, it would be difficult to replace such a large volume of subservicing in a short period of time, or perhaps at all. Accordingly, we may not generate as much revenue from subservicing for other third parties. If we were to have our subservicing terminated by PMT, or if there was a change in the terms under which we perform subservicing for PMT that was material and adverse to us, this would have a material adverse effect on our business, financial condition, liquidity and results of operations. PMT has an exclusive right to acquire conventional conforming loans that are produced through our correspondent production activities, which may limit the revenues that we could otherwise earn in respect of those loans. Our mortgage banking services agreement with PMT requires PLS to provide fulfillment services for correspondent production activities exclusively to PMT as long as PMT has the legal and financial capacity to purchase correspondent loans. As a result, the revenue that we earn with respect to these loans will be limited to the fulfillment fees that we earn in connection with the production of these loans, which may be less than the revenues that we might otherwise be able to realize by acquiring these loans ourselves and selling them in the secondary loan market. 40 Risks Related to Our Investment Management Segment Market conditions could reduce the fair value of the assets that we manage, which would reduce our management and incentive fees. A portion of the fees that we earn under our investment management agreement is based on the fair value of the assets that we manage. The fair values of the securities and other assets held in the portfolios that we manage and, therefore, our assets under management may decline due to any number of factors beyond our control, including, among others, a decline in housing demand or value, the long term impact of the COVID-19 pandemic, changes to interest rates, stock or bond market movements or volatility, a general economic downturn, inflation, political uncertainty, acts of terrorism, military conflict or acts of war, cyber-attacks or infrastructure outages. The economic outlook cannot be predicted with certainty and we continue to operate in a challenging business environment. If volatile market conditions cause a decline in the fair value of our assets under management, that decline in fair value could materially reduce our management fees and incentive fees under our management agreement with PMT and adversely affect our revenues. If our revenues decline without a commensurate reduction in our expenses, our net income will be reduced. We currently manage assets for a single client, the loss of which would significantly reduce our management and incentive fees and have a material adverse effect on our results of operations. Our management and incentive fees result from our management of PMT. The term of the management agreement that we have entered into with PMT, as amended, expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of a termination of one or more related party agreements by PMT in certain circumstances, we may be entitled to a termination fee under our management agreement. However, the termination of such management agreement and the loss of PMT as a client would significantly affect our investment management segment and negatively impact our management fees and incentive fees. The historical returns on the assets that we select and manage for PMT, and our resulting management and incentive fees, may not be indicative of future results. The historical returns of the assets that we manage should not be considered indicative of the future returns on those assets or future returns on other assets that we may select for investment by PMT. The investment performance that is achieved for the assets that we manage varies over time, and the nature and mix of assets we manage has changed significantly over the past several years. As a result, the change and variance in investment performance can be significant. For example, although we earned performance incentive fees in prior years, in fiscal year 2022, we did not earn any performance incentive fees due to losses incurred by PMT during the associated performance measurement periods. Accordingly, the management and incentive fees that we have earned in the past based on those returns should not be considered indicative of the management or incentive fees that we may earn in the future from managing those same assets or from managing other assets for PMT. Changes in regulations applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations. The legislative and regulatory environment in which we operate is constantly evolving. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and PMT, may adversely affect our business. Our ability to succeed in this environment will depend on our ability to monitor and comply with regulatory changes. Regulatory changes that will affect other market participants are likely to change the way in which we conduct business with our counterparties. The uncertainty regarding the continued implementation of laws and regulations and their impact on the investment management industry and us cannot be predicted with certainty at this time but will continue to be a risk for our business. We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules 41 by these governmental authorities and self-regulatory organizations, as well as by U.S. and non-U.S. courts. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be imposed on us or the markets in which we trade, or whether any of the proposals will become law. Compliance with any new laws or regulations could add to our compliance burden and costs and adversely affect the manner in which we conduct business, as well as our financial condition, liquidity and results of operations. Our failure to comply with the extensive amount of regulation applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations. Our investment management segment is subject to extensive regulation in the United States. These regulations are designed primarily to ensure the integrity of the financial markets and to protect investors in any entity that we advise and are not designed to protect our stockholders. Consequently, these regulations may limit our activities. These requirements relate to, among other things, fiduciary duties to clients, solicitation agreements, conflicts of interest, recordkeeping and reporting requirements, disclosure requirements, limitations on cross trades and principal transactions between an adviser and an advisory clients and general anti-fraud prohibitions. We are required to maintain an effective compliance program, and are subject to inspection and examinations by the SEC and state regulators. The failure by us or our service providers to comply with applicable laws or regulations, or our failure to design and successfully implement and administer our compliance program, could result in fines, suspensions of individual employees, limitations on engaging in other businesses and other sanctions, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. Even if an investigation or proceeding did not result in a fine or sanction or the fine or sanction imposed against us or our employees by a regulator were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions could harm our reputation. We may encounter conflicts of interest in trying to appropriately allocate our time and services between activities for our own account and for PMT, or in trying to appropriately allocate investment opportunities among ourselves and for PMT. Pursuant to our management agreement with PMT, we are obligated to provide PMT with the services of our senior management team, and the members of that team are required to devote such time as is necessary and appropriate, commensurate with the level of activity of PMT. The members of our senior management team may have conflicts in allocating their time and services between our operations and the activities of PMT and any other entities or accounts that we may manage in the future. In addition, we and the other entities or accounts that we may manage may participate in some of PMT’s investment strategies now or in the future, which may not be the result of arm’s length negotiations and may involve or later result in potential conflicts between our interests and those of PMT or such other entities. Any such perceived or actual conflicts of interest could damage our reputation and materially and adversely affect our business, financial condition, liquidity and results of operations. Risks Related to Our Organizational Structure HC Partners may be able to significantly influence the outcome of votes of our common stock, or exercise certain other rights pursuant to a stockholder agreement we have entered into with it, and its interests may differ from those of our other public stockholders. HC Partners, our largest stockholder, has the right under a stockholder agreement to nominate up to two individuals for election to our board of directors depending on the percentage of the voting power of our outstanding shares common stock that it holds, and we are obligated to use our best efforts to cause the election of those director nominees. In addition, the HC Partners’ stockholder agreement requires that we obtain their consent with respect to amendments to our certificate of incorporation or bylaws. As a result, HC Partners may be able to significantly influence our management and affairs. In addition, as a result of the size of its individual equity holding it may be able to 42 significantly influence the outcome of all matters requiring stockholder approval, including mergers and other material transactions, and may be able to cause or prevent a change in the composition of our board of directors or a change in control of our Company that could deprive our other public stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock. We have not established a minimum dividend payment level and no assurance can be given that we will be able to make dividends to our stockholders in the future at current levels or at all. We have not established a minimum dividend payment level, and our ability to pay dividends to our stockholders may be materially and adversely affected by the risk factors discussed in our SEC periodic reports. Although we paid, and anticipate continuing to pay, quarterly dividends to our stockholders, our board of directors has the sole discretion to determine the timing, form and amount of any future dividends to our stockholders, and such determination will depend upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, capital requirements and other expense obligations, debt covenants, contractual legal, tax, regulatory and other restrictions and such other factors as our board of directors may deem relevant from time to time. As a result, no assurance can be given that we will be able to continue to pay dividends to our stockholders in the future or that the level of any future dividends will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect the market price of our common stock. Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that other stockholders might consider favorable. Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:
These and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of and take other corporate actions. 43 Our bylaws include an exclusive forum provision that could limit our stockholders’ ability to obtain a judicial forum viewed by the stockholders as more favorable for disputes with us or our directors, officers or other employees. Our bylaws provide that the state or federal court located within the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other associates, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the exclusive forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition, liquidity and results of operations.
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 50 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | | 79 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | 79 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | 82 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | | 82 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| | 82 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | 82 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 82 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Certain Relationships and Related Transactions, and Director Independence | | 83 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | 83 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | 84 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | 95 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 93 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:
| ● | projections of our revenues, income, earnings per share, capital structure or other financial items; |
| ● | descriptions of our plans or objectives for future operations, products or services; |
| ● | forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and |
| ● | descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues. |
Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and as set forth in Item 1A. of Part I hereof and any subsequent Quarterly Reports on Form 10-Q.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
| ● | interest rate changes; |
| ● | changes in macroeconomic and U.S. real estate market conditions; |
| ● | the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; |
| ● | lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses; |
| ● | the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations; |
| ● | our dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines; |
| ● | declines in real estate values or significant changes in U.S. housing prices or activity in the U.S. housing market; |
| ● | changes to government mortgage modification programs; |
3
| ● | foreclosure delays and changes in foreclosure practices; |
| ● | the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject; |
| ● | our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements; |
| ● | our exposure to risks of loss resulting from adverse weather conditions, man-made or natural disasters, the effect of climate change, and pandemics, such as the coronavirus (“COVID-19”); |
| ● | difficulties inherent in adjusting the size of our operations to reflect changes in business levels; |
| ● | maintaining sufficient capital and liquidity and compliance with financial covenants; |
| ● | our substantial amount of indebtedness; |
| ● | increases in the number of loan delinquencies and defaults; |
| ● | failure to modify, resell or refinance early buyout loans or defaults of early buyout loans beyond our expectations; |
| ● | our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant contributor to our mortgage banking business; |
| ● | our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances; |
| ● | our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans; |
| ● | our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights; |
| ● | our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances; |
| ● | decreases in the returns on the assets that we select and manage for PMT, and our resulting management and incentive fees; |
| ● | the extensive amount of regulation applicable to our investment management segment; |
| ● | conflicts of interest in allocating our services and investment opportunities among ourselves and PMT; |
| ● | the effect of public opinion on our reputation; |
| ● | our ability to effectively identify, manage and hedge our credit, interest rate, prepayment, liquidity and climate risks; |
| ● | our initiation of new business activities or expansion of existing business activities; |
| ● | our ability to detect misconduct and fraud; |
4
| ● | our ability to effectively deploy new information technology applications and infrastructure; |
| ● | our ability to mitigate cybersecurity risks and cyber incidents; |
| ● | our ability to pay dividends to our stockholders; and |
| ● | our organizational structure and certain requirements in our charter documents. |
Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
5
PART I
Item 1. Business
The following description of our business should be read in conjunction with the information included elsewhere in this Report. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the projections and results discussed in the forward-looking statements due to the factors described under the caption “Risk Factors” and elsewhere in this Report. References in this Report to “we,” “our,” “us,” and the “Company” refer to PennyMac Financial Services, Inc. (“PFSI”) and its consolidated subsidiaries.
Our Company
We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities over time and capitalize on other related opportunities as they arise.
We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PNMAC”) and its subsidiaries described below:
| ● | Our |
| ● | Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”), as amended. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange |
We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.
| ● | The production segment performs loan origination, acquisition and sale activities for our account as well as for PMT. |
| ● | The servicing segment performs loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT. |
| ● | The investment management segment performs investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement. |
6
Following is a summary of our segments’ results:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
Net revenues: | | | | | | | | | |
Production | | $ | 865,177 | | $ | 2,306,764 | | $ | 2,824,999 |
Servicing | | | 1,080,500 | | | 817,295 | | | 840,762 |
Investment management | | | 40,078 | | | 43,302 | | | 39,836 |
| | $ | 1,985,755 | | $ | 3,167,361 | | $ | 3,705,597 |
Income before income taxes: | | | | | | | | | |
Production | | $ | 48,480 | | $ | 1,044,411 | | $ | 1,964,121 |
Servicing | | | 613,626 | | | 306,678 | | | 262,144 |
Investment management | | | 3,141 | | | 8,094 | | | 14,344 |
| | $ | 665,247 | | $ | 1,359,183 | | $ | 2,240,609 |
Total assets at year end: | | | | | | | | | |
Production | | $ | 3,866,934 | | $ | 8,934,032 | | $ | 7,870,398 |
Servicing | | | 12,929,233 | | | 9,821,436 | | | 23,709,122 |
Investment management | | | 26,417 | | | 21,144 | | | 18,275 |
| | $ | 16,822,584 | | $ | 18,776,612 | | $ | 31,597,795 |
| | | | | | | | | |
Unpaid principal balance ("UPB") of loans purchased and originated for our account and for PMT | | $ | 109,115,829 | | $ | 234,597,882 | | $ | 196,589,353 |
UPB of loans serviced for PMT and non-affiliates at year end | | $ | 551,674,682 | | $ | 509,708,281 | | $ | 426,750,830 |
PMT assets under management at year end | | $ | 1,962,815 | | $ | 2,367,518 | | $ | 2,296,859 |
Mortgage Banking
Loan Production
Our loan production segment sources new prime credit quality residential conventional and government-insured or guaranteed mortgage loans through three channels: correspondent production, consumer direct lending and broker direct lending as described below.
Correspondent Production
In correspondent production we manage, on behalf of PMT and for our own account, the purchase from non-affiliates of mortgage loans that have been underwritten to investor guidelines. Our correspondent loans historically have been directed to each entity based on the guarantor of the mortgage-backed securities (“MBS”) created from the loans: our production focus has primarily been on loans insured or guaranteed by the FHA, VA or USDA for sale into MBS guaranteed by Ginnie Mae, whereas PMT’s production focus has been on loans that can be sold into MBS guaranteed by Fannie Mae or Freddie Mac. During 2022, we began to acquire certain loans for our own account that can be sold into MBS guaranteed by Fannie Mae and Freddie Mac.
This mortgage loan production arrangement between us and PMT exists, in part, because PMT is not approved as an issuer of Ginnie Mae guaranteed MBS. As a result, PMT sells the government-insured or guaranteed loans that it purchases from correspondent sellers to us and we pay PMT a sourcing fee ranging from one to two basis points, generally based on the average number of calendar days that PMT holds the loans before our purchase. We generally pool the government-insured or guaranteed loans into Ginnie Mae guaranteed MBS and then sell such MBS to institutional investors. We also acquire certain conventional loans from PMT under the same agreement.
7
In our correspondent production activities, for loans we source for our own account, we earn loan origination fees from the correspondent sellers, interest income on the loans during the time we hold such loans, gains or losses from the date we make a commitment to purchase the loans through the sale of these loans, and, in connection with such sales, we generally retain and recognize the fair value of the contractual rights to service the loans on behalf of the purchaser of the loans. These contracts are referred to as mortgage servicing rights (“MSRs”).
In our loan fulfillment activities in support of PMT’s correspondent production activities and only for loans purchased for PMT’s account, we earn fulfillment fees and tax service fees. We may also serve as a correspondent seller of newly originated loans from our consumer direct and broker direct lending channels to PMT under a mortgage loan purchase agreement. When we sell loans to PMT, PMT obtains the mortgage servicing rights relating to such loans. As such, our gains on sale of loans to PMT are primarily cash gains.
Consumer Direct Lending
Through our consumer direct lending channel, we originate mortgage loans on a national basis. Our consumer direct model relies on the Internet and call center-based staff to acquire and interact with customers across the country. We do not have a “brick and mortar” branch network.
In our consumer direct lending activities, we earn loan origination fees from the borrower, interest income during the time we hold the loan before sale, gains or losses from the date we make a commitment to fund the loan through the sale of these loans, and, in sales to entities other than to PMT, we retain and recognize the fair value of the associated MSRs. To the extent we refinance loans that we subservice for PMT where PMT owns the related MSRs, we are generally required to pay PMT a recapture fee.
Broker Direct Lending
In broker direct lending, we obtain loan application packages from nonaffiliated mortgage loan brokers, underwrite and fund the resulting loans for sale. In our broker direct lending activities, we earn interest income, gains or losses from the date we make a commitment to fund the loan through the sale of these loans, and, in sales to entities other than PMT, we retain and recognize the fair value of the associated MSRs.
Our loan production activities are summarized below:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
UPB of loans purchased and originated for sale through our: | | |
| | |
| | |
|
Correspondent lending channel, from PennyMac Mortgage Investment Trust | | $ | 49,680,267 | | $ | 64,774,728 | | $ | 60,540,530 |
Consumer direct channel | | | 15,405,697 | | | 43,060,266 | | | 23,491,465 |
Broker direct channel | | | 6,939,834 | | | 16,759,314 | | | 12,168,106 |
| | | 72,025,798 | | | 124,594,308 | | | 96,200,101 |
UPB of conventional loans fulfilled for PennyMac Mortgage Investment Trust | | | 37,090,031 | | | 110,003,574 | | | 100,389,252 |
Total loan production | | $ | 109,115,829 | | $ | 234,597,882 | | $ | 196,589,353 |
| | | | | | | | | |
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The effect of our loan production transactions with PMT on our financial statements are summarized below:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
Net (losses) gains on loans held for sale at fair value: | | | | | | | | | |
Net (losses) gains on loans held for sale to PMT | | $ | (2,820) | | $ | — | | $ | 81,295 |
Mortgage servicing rights and excess servicing spread recapture incurred | | | (13,744) | | | (51,473) | | | (30,614) |
| | $ | (16,564) | | $ | (51,473) | | $ | 50,681 |
| | | | | | | | | |
Fulfillment fee revenue |
| $ | 67,991 |
| $ | 178,927 |
| $ | 222,200 |
Tax service fees earned from PMT included in Loan origination fees | | $ | 8,418 | | $ | 26,126 | | $ | 23,408 |
Sourcing fees paid to PMT included in cost of loans purchased | | $ | 4,968 | | $ | 6,472 | | $ | 11,037 |
Loan Servicing
Our loan servicing segment performs loan administration, collection, and default management activities, including the collection and remittance of loan payments; responding to customer inquiries; providing accounting for principal and interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent borrowers; administering loss mitigation activities, including modification and forbearance programs; and supervising foreclosures and property dispositions.
We service loans both as the owner of MSRs and mortgage servicing liabilities (“MSLs”) and as the subservicer on behalf of PMT.
The UPB of our loan servicing portfolio is summarized below:
| | | | | | |
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Mortgage servicing rights and mortgage servicing liabilities: | | | | | | |
Originated | | $ | 295,032,674 | | $ | 254,524,015 |
Purchased | | | 19,568,122 | | | 23,861,358 |
| | | 314,600,796 | | | 278,385,373 |
Loans held for sale | | | 3,498,214 | | | 9,430,766 |
Total owned servicing | | | 318,099,010 | | | 287,816,139 |
Subserviced for PennyMac Mortgage Investment Trust | | | 233,575,672 | | | 221,892,142 |
Total | | $ | 551,674,682 | | $ | 509,708,281 |
Our responsibilities and risks relating to loans we service in arrangements where we own the MSRs or MSLs differ from those where we act as subservicer for the owner of the servicing rights. As the owner of the servicing rights:
| ● | We |
| ● | Because our investment in MSRs can be significant and the fair value of this asset is sensitive to changes in prepayment activity, the cost to service the loans and marketplace return requirements, we incur costs to hedge this investment – primarily the risk of changes in fair value arising from changes in prepayment speeds in response to changes in interest rates; |
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| ● | We are responsible for advancing our corporate funds to protect the loan owners’ interest in the collateral securing such loans for such items as hazard insurance, property taxes and foreclosure-related costs, subject to future reimbursement, as well as advancing delinquent principal and interest payments to MBS holders; and |
| ● | As the owner of Ginnie Mae MSRs, we have the option to purchase loans that are at least three months delinquent out of the underlying Ginnie Mae securities as an alternative to continuing to advance principal and interest payments to the holders of the Ginnie Mae securities, or we may be required to purchase loans out of Ginnie Mae securities if there has been a |
As the subservicer for the owner of servicing rights, we do not carry the related MSRs or MSLs on our balance sheet and therefore do not recognize changes in the fair value of MSRs or MSLs and are generally not responsible for financing the advance of corporate funds to protect the loan owners’ interest in the collateral securing such loans. As a result, the fees we earn from such arrangements are generally less on a per-loan basis than those we earn from holding MSRs and MSLs.
Following is a summary of our net loan servicing fees:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
Net loan servicing fees: | | | | | | | | | |
From non-affiliates: | | | | | | | | | |
Loan servicing fees: | | | | | | | | | |
Contractually specified | | $ | 1,054,828 | | $ | 875,570 | | $ | 814,646 |
Other | | | 91,894 | | | 118,884 | | | 116,464 |
| | | 1,146,722 | | | 994,454 | | | 931,110 |
Effect of MSRs and MSLs: | | | | | | | | | |
Realization of cash flows | | | (523,495) | | | (347,576) | | | (392,152) |
Other changes in fair value of MSRs and MSLs | | | 877,671 | | | (68,330) | | | (1,109,841) |
Hedging results | | | (631,484) | | | (475,215) | | | 918,180 |
| | | (277,308) | | | (891,121) | | | (583,813) |
Net loans servicing fees from non-affiliates | | | 869,414 | | | 103,333 | | | 347,297 |
From affiliates: | | | | | | | | | |
Loan servicing fees from PennyMac Mortgage Investment Trust | | | 81,915 | | | 80,658 | | | 67,181 |
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | | — | | | (1,037) | | | 24,970 |
Net loans servicing fees from affiliates | | | 81,915 | | | 79,621 | | | 92,151 |
Net loan servicing fees | | $ | 951,329 | | $ | 182,954 | | $ | 439,448 |
Average UPB of loan serviced for: | | | | | | | | | |
Non-affiliates | | $ | 297,207,950 | | $ | 258,759,523 | | $ | 235,567,838 |
Subserviced for PMT | | $ | 226,817,005 | | $ | 202,047,495 | | $ | 151,379,311 |
Investment Management
We are an investment manager through our subsidiary, PCM, which provides investment management services to PMT. We earn management fees as a percentage of PMT’s net assets and may earn incentive compensation based on PMT’s investment performance.
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Following is a summary of our management fee revenue:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
| | (in thousands) | |||||||
Base management | | $ | 31,065 |
| $ | 34,794 |
| $ | 34,538 |
Performance incentive | | | — | | | 3,007 | | | — |
| | $ | 31,065 | | $ | 37,801 | | $ | 34,538 |
Net assets of PMT at end of year | | $ | 1,962,815 | | $ | 2,367,518 | | $ | 2,296,859 |
Our Business Strategies
Our business strategies include:
Consumer Direct Lending
We expect to grow our consumer direct lending business over time by leveraging our growing servicing portfolio through the recapture of existing customers for refinance and purchase-money loans as well as increasing our non-portfolio originations. As our servicing portfolio grows, we will have a greater number of leads to pursue, which we believe will lead to greater origination activity through our consumer direct business. As of December 31, 2022, we serviced 2.3 million loans. In 2022, 2021 and 2020, we funded $15.4 billion, $43.1 billion and $23.5 billion of mortgage loans, respectively, through our consumer direct lending channel. We believe that our national call center model and our technology will enable us to drive origination process efficiencies and best-in-class customer service.
Broker Direct Lending
According to Inside Mortgage Finance, the broker lending channel represented approximately 15% of U.S. residential mortgage originations in 2022. In 2022, 2021 and 2020, we funded $6.9 billion, $16.8 billion and $12.2 billion of mortgage loans, respectively, through our wholesale-broker channel, which is comprised of loans from both the broker segment as well as loans purchased through our non-delegated correspondent segment. We plan on growing our mortgage loan volume in this channel through the addition of new broker and non-delegated partner relationships, as well as expansion of existing relationships enabled by our leading broker technology platform.
Correspondent Lending
We expect to support our correspondent production market share by expanding the number and types of sellers from which we purchase loans and increasing the proportion of our sellers’ production volumes that we purchase as we continue to expand to the loan products and services we offer. We believe that we are well positioned to continue taking advantage of this opportunity based on our management expertise in the correspondent production business, our relationships with correspondent sellers, and our supporting systems and processes. In 2022, 2021 and 2020, we purchased $49.7 billion, $64.8 billion and $60.5 billion of mortgage loans, respectively, through our correspondent lending channel.
Mortgage Loan Servicing Portfolio
We expect to grow our servicing portfolio through loan production activities, as our correspondent production for our own account and consumer and broker direct lending add new servicing for owned MSRs, and correspondent conventional production for PMT’s account adds new subservicing. We or PMT may also grow our servicing portfolio through acquisitions. In 2022, our loan production totaled $109.1 billion in UPB and we purchased MSRs backed by loans with UPBs totaling $375.4 million. Our MSRs were backed by loans with UPBs totaling $314.6 billion as of December 31, 2022.
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Expansion into New Markets and Products
We regularly evaluate opportunities to grow our business, including expansion into new markets and providing additional services to our customers directly or through external partnerships. To date, we have entered into partnerships or joint ventures that can provide insurance and closing and title services to our customers and others. We also continue to develop new products to satisfy demand from customers in each of our production channels and respond to changing circumstances in the market for mortgage-related financing.
U.S. Mortgage Market
The U.S. residential mortgage market is one of the largest financial markets in the world, with approximately $15.2 trillion of outstanding debt as of September 30, 2022. According to Inside Mortgage Finance, first lien mortgage loan origination volume was approximately $2.2 trillion in 2022. Many of the largest financial institutions, primarily banks which have traditionally held the majority of the market share in mortgage origination and servicing, have reduced their participation in the mortgage market creating opportunities for non-bank participants.
The residential mortgage industry is characterized by high barriers to entry, including the necessity for approvals required to sell loans to and service loans for the Agencies, state licensing requirements for non-federally chartered banks, sophisticated infrastructure, technology, risk management, and processes required for successful operations, and financial capital requirements.
Competition
Given the diverse and specialized nature of our businesses, we do not believe we have a direct competitor for the totality of our business. We compete with a number of nationally-focused companies in each of our businesses.
In our loan production and servicing segments, we compete with large financial institutions, including the cash windows of the GSEs, and with other independent residential mortgage loan producers and servicers, such as Rocket Mortgage, Mr. Cooper and United Wholesale Mortgage.
In our loan production segment, we compete primarily on the basis of customer service, marketing penetration, customer network, product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees.
In our servicing segment, we compete primarily on the basis of experience in the residential loan servicing business, quality and efficiency of execution and servicing performance.
In our investment management segment, we compete for capital with both traditional and alternative investment managers. We compete primarily on the basis of historical track record of risk-adjusted returns, experience of investment management team, the return profile of prospective investment opportunities and on the level of fees and expenses.
Seasonality/Cyclicality
The demand for loan originations is affected by consumer demand for home loans. Demand for home loans generally comes from the demand for loans made to finance the purchase of homes and the demand for loans made to refinance existing loans.
The demand for loans made to finance the purchase of homes is most significantly influenced by the overall strength of the economy, housing prices and availability and societal factors such as household formation and government support for homeownership.
The demand for loans made to refinance existing loans is most significantly influenced by movements in interest rates and to a lesser extent, to changes in property values and employment.
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Human Capital Resources
Our long-term growth and success is highly dependent upon our employees and our ability to maintain a diverse, equitable and inclusive workplace representing a broad spectrum of backgrounds, ideas and perspectives. As part of these efforts, we strive to offer competitive compensation and benefits, foster a community where everyone feels a greater sense of belonging and purpose, and provide employees with the opportunity to give back and make an impact in the communities where we live and serve.
We had over 4,000 domestic employees as of the end of fiscal year 2022. In addition, as of the end of fiscal year 2022, our workforce was 49.9% female and 50.1% male, and the ethnicity of our workforce was 44.4% White, 22.6% Hispanic or Latino, 14.3% Black or African American, 14.2% Asian and 4.5% other (which includes American Indian or Alaska Native, Native Hawaiian or Other Pacific Islander, and “Two or More Races” as defined in our EE0-1 Report filed with the Department Labor).
Employee Retention and Development
We believe in attracting, developing and engaging the best talent, while providing a supportive work environment that prioritizes the health and safety of our employees. Talent development is a critical component of the employee experience and ensures that all employees have career growth opportunities, including establishing development networks and relationships and fostering continued growth and learning. Employees receive regular business and compliance training to help further enhance their career development objectives. We also actively manage enterprise-wide and divisional mentoring programs and have partnered with an external vendor to establish a comprehensive, fully integrated wellness program designed to enhance the productivity of our employees.
Compensation and Succession Planning
Our compensation programs are designed to motivate and reward employees who possess the necessary skills to support our business strategy and create long-term value for our stockholders. Employee compensation may include base salary, annual cash incentives, and long-term equity incentives, as well as life insurance and 401(k) plan matching contributions. We also offer a comprehensive selection of health and welfare benefits to our employees including emotional well-being support and paid parental leave programs. Succession planning is also critical to our operations and we have established ongoing evaluations of our leadership depth and succession capabilities.
Diversity, Equity and Inclusion
We believe that building a diverse, equitable and inclusive, high-performing workforce where our employees bring varied perspectives and experiences to work every day creates a positive influence in our workplace, community and business operations. Our Board of Directors, our Nominating and Corporate Governance Committee, Compensation Committee, and Risk Committee provide regular oversight of our corporate sustainability program, including our diversity, equity and inclusion programs and initiatives.
We have also taken proactive measures to strategically and sustainably advance equity in the workplace through our Business Resource Groups (“BRG”), a diversity hiring initiative, mentorship programs, and external partnerships with organizations such as the Mortgage Bankers Association and the National Association of Minority Mortgage Bankers of America. We also established leadership goals and created customized initiatives that focus on our continued effort to increase the number of women and underrepresented minorities in management positions throughout our company and its business divisions.
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As it relates to our inclusive culture, we established the following BRGs to emphasize career growth, networking, and learning opportunities for employees and allies with shared backgrounds and experiences: the BOLD BRG (for Black and African American employees and allies), the HOLA BRG (for Hispanic, Latino and Latinx employees and allies), the InspirASIAN BRG (for our Asian American and Pacific Islander employees and allies), the Pennymac PRIDE BRG (for our LGBTQIA employees and allies), the SERVE BRG (for our veteran and military family employees and allies), and the wEMRG BRG (for our women employees and allies). We also foster a more inclusive culture through a variety of initiatives, including corporate training, special events, community outreach and corporate philanthropy.
Community Involvement
We have a corporate philanthropy program that is governed by a philosophy of giving that prioritizes the support of causes and issues that are important in our local communities, and drives a culture of employee engagement and collaboration throughout our organization. We are committed to empowering our employees to be a positive influence in the communities where we live and serve, and believe that this commitment supports our efforts to attract and engage employees and improve retention.
Our philanthropy program consists of three key components: an employee matching gift program, a charitable grants program and a corporate sponsorship program. Our five philanthropic focus areas are: community development and equitable housing, financial literacy and economic inclusion, human and social services, health and medical research, and environmental sustainability.
We have established a separate donor advised fund to facilitate donations to various local and national charitable organizations and have provided funding to several charitable organizations located near our office sites and national organizations that support missions such as sustainable homeownership, mortgage and rental assistance, food insecurity, disaster recovery, family and child advocacy, and community empowerment. We also manage our environmental impact by focusing on improving our waste reduction, energy efficiency and water conservation.
Legal and Regulatory Compliance
Our business is subject to extensive federal, state and local regulation. The CFPB was established on July 21, 2010 under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The CFPB is responsible for ensuring consumers are provided with timely and understandable information to make responsible decisions about financial transactions, federal consumer financial laws are enforced and consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination. Although the CFPB’s actions may improve consumer protection, such actions also have resulted in a meaningful increase in costs to consumers and financial services companies including mortgage originators and servicers.
Our loan production and loan servicing operations are regulated at the state level by state licensing authorities and administrative agencies. We, along with certain PNMAC employees who engage in regulated activities, must apply for licensing as a mortgage banker or lender, loan servicer and debt collector pursuant to applicable state law. These state licensing requirements typically require an application process, the payment of fees, background checks and administrative review.
Our servicing operations are licensed (or exempt or otherwise not required to be licensed) to service mortgage loans in all 50 states, the District of Columbia, Puerto Rico, Guam and the United States Virgin Islands. Our consumer direct lending business is licensed to originate loans in all 50 states and the District of Columbia.
From time to time, we receive requests from states and Agencies and various investors for records, documents and information regarding our policies, procedures and practices regarding our loan production and loan servicing business activities, and undergo periodic examinations by federal and state regulatory agencies. We incur significant ongoing costs to comply with these licensing and examination requirements.
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The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”) requires all states to enact laws that require all individuals acting in the United States as mortgage loan originators to be individually licensed or registered if they intend to offer mortgage loan products. These licensing requirements include enrollment in the Nationwide Mortgage Licensing System, application to state regulators for individual licenses and the completion of pre-licensing education, annual education and the successful completion of both national and state exams.
We must comply with a number of federal consumer protection laws, including, among others:
| ● | the Real Estate Settlement Procedures Act (“RESPA”), and Regulation X thereunder, which require certain disclosures to mortgagors regarding the costs of mortgage loans, the administration of tax and insurance escrows, the transferring of servicing of mortgage loans, the response to consumer complaints, and payments between lenders and vendors of certain settlement services; |
| ● | the Truth in |
| ● | the Equal Credit Opportunity Act and Regulation B thereunder, which prohibit discrimination on |
| ● | the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics; |
| ● | the Home Mortgage Disclosure Act and Regulation C thereunder, which require financial institutions to report certain public loan data; |
| ● | the Homeowners Protection Act, which requires the cancellation of private mortgage insurance once certain equity levels are reached, sets disclosure and notification requirements, and requires the return of unearned premiums; |
| ● | the Servicemembers Civil Relief Act, which provides, among other things, interest and foreclosure protections for service members on active duty; |
| ● | the Gramm-Leach-Bliley Act and Regulation P thereunder, which require us to maintain privacy with respect to certain consumer data in our possession and to periodically communicate with consumers on privacy matters; |
| ● | the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications; |
| ● | the Fair Credit Reporting Act and Regulation V thereunder, which regulate the use and reporting of information related to the credit history of consumers; |
| ● | the National Flood Insurance Reform Act of 1994, which provides for lenders to require from borrowers or to purchase flood insurance on behalf of borrower/owners of properties in special flood hazard areas; and |
| ● | the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the ongoing COVID-19 pandemic. |
Many of these laws are further impacted by the SAFE Act and implementation of new rules by the CFPB.
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Our senior management team has established a comprehensive compliance management system ("CMS") that is designed to ensure compliance with applicable mortgage origination and servicing laws and regulations. The components of our CMS include: (a) oversight by senior management and our Board of Directors to ensure that our compliance culture, guidance, and resources are appropriate; (b) a compliance program to ensure that our policies, training and monitoring activities are complete and comprehensive; (c) a complaint management program to ensure that consumer complaints are appropriately addressed and that any required actions are implemented on a timely basis; and (d) independent oversight to ensure that our CMS is functioning as designed.
An important component of the CMS is management’s Mortgage Regulatory Compliance Committee (“MRCC”). This committee oversees the CMS and supports our cultural initiatives that reinforce the importance of regulatory compliance. The MRCC also monitors changes in the internal and external environment, approves mortgage compliance policies, monitors compliance with those policies and ensures any required remediation is implemented on a timely basis. The MRCC has identified individuals throughout the organization to oversee specific areas of compliance. MRCC membership includes senior management from all areas of the Company impacted by mortgage compliance laws and regulations. The MRCC meets on a regular basis throughout the year.
Intellectual Property
We rely on a combination of trademarks, copyrights, and trade secrets, as well as confidentiality and contractual provisions to protect our intellectual property and proprietary technologies. We hold or have otherwise applied for various registered trademarks, including trademarks with respect to the name Pennymac and various additional designs and word marks relating to the Pennymac name. Depending upon the jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained. We generally intend to renew our trademarks as they come up for renewal. Our other intellectual property includes proprietary know-how and technological innovations, such as our proprietary workflow-driven cloud-based servicing system, as well as proprietary pricing engines, loan-level analyticssystems and other trade secrets that we have developed to maintain our competitive position.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including exhibits, proxy statements and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through the investor relations section of our website at www.pennymacfinancial.com as soon as reasonably practicable after electronically filing such material with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on those websites and should not be considered part of this document.
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Item 1A. Risk Factors
Summary Risk Factors
We are subject to a number of risks that, if realized, could have a material adverse effect on our business, financial condition, liquidity, results of operations and our ability to make distributions to our stockholders. Some of our more significant challenges and risks include, but are not limited to, the following, which are described in greater detail below:
| ● | Our business is significantly impacted by changes in interest rates. Changes in prevailing interest rates, rising inflation rates, U.S. monetary policies or other macroeconomic conditions that affect interest rates may have a detrimental effect on our business and earnings. |
| ● | Our mortgage banking revenues are highly dependent on macroeconomic factors and real estate market, mortgage market and financial market conditions. |
| ● | We may not be able to effectively manage significant increases or decreases in our loan production volume, which could negatively affect our business, financial condition, liquidity and results of operations. |
| ● | We have a substantial amount of indebtedness, which may limit our financial and operating activities, expose us to substantial increases in costs due to interest rate fluctuations, expose us to the risk of default under our debt obligations and may adversely affect our ability to incur additional debt to fund future needs. |
| ● | We rely on external financial arrangements to fund mortgage loans and operate our business and our inability to refinance or enter new financial arrangements could be detrimental to our business. |
| ● | Increases in delinquencies and defaults may adversely affect our business, financial condition, liquidity and results of operations. |
| ● | We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable due to delinquencies, defaults and foreclosures that could adversely affect our business, financial condition, liquidity and results of operations. |
| ● | Our acquisition and ownership of mortgage servicing rights exposes us to significant risks. |
| ● | A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and results of operations. |
| ● | We may be required to indemnify the purchasers of loans that we originate, acquire or assist in the fulfillment of, or repurchase those loans, if those loans fail to meet certain criteria or characteristics or under other circumstances and we may be unable to seek indemnity or require our counterparties to repurchase loans if they breach representations and warranties they make to us. |
| ● | Failure to successfully modify, resell or refinance early buyout loans (“EBO”) or defaults of EBO loans beyond expected levels may adversely affect our business, financial condition, liquidity and results of operations. |
| ● | We depend on counterparties and vendors to provide services that are critical to our business, which subjects us to a variety of risks. |
| ● | Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks, and other long term physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans we own or service, as well as geographic areas where we conduct business. |
| ● | Our failure to appropriately address various issues that may give rise to reputational risk could cause harm to our business and adversely affect our earnings. |
| ● | We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition, liquidity and results of operations. |
| ● | New CFPB or state rules and regulations or more stringent enforcement of existing rules and regulations by these regulators could result in enforcement actions, fines, penalties and the inherent reputational risk that results from such actions. |
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| ● | We are highly dependent on U.S. government-sponsored entities and government agencies, and any organizational or pricing changes at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition and results of operations. |
| ● | We are required to have various Agency approvals and state licenses in order to conduct our business and there is no assurance we will be able to obtain or maintain those Agency approvals or state licenses. |
| ● | Our business, financial condition and results of operations may be adversely affected by the long term impact of the COVID-19 pandemic. |
| ● | We rely on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business, and the termination of, or material adverse change in, the terms of this relationship, or a material adverse change to PMT or its operations, could adversely affect our business, financial condition, liquidity and results of operations. |
| ● | A significant portion of our loan servicing operations are conducted pursuant to subservicing contracts with PMT, and any termination by PMT of these contracts, or a material change in the terms thereof that is adverse to us, would adversely affect our business, financial condition, liquidity and results of operations. |
| ● | Market conditions could reduce the fair value of the assets that we manage, which would reduce our management and incentive fees. |
| ● | Our failure to comply with the extensive amount of regulation applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations. |
| ● | We may encounter conflicts of interest in trying to appropriately allocate our time and services between activities for our own account and for PMT, or in trying to appropriately allocate investment opportunities among ourselves and for PMT. |
| ● | Our risk management efforts may not be effective. |
| ● | Initiating new business activities, developing new products or significantly expanding existing business activities may expose us to new risks and increase our cost of doing business. |
| ● | Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results. |
| ● | We operate in a highly competitive market and decreased margins resulting from increased competition or our inability to compete successfully could adversely affect our business, financial condition, liquidity and results of operations. |
Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the following factors, which could materially adversely affect our business, financial condition, liquidity and results of operations in future periods. The risks described below are not the only risks that we face. Additional risks not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition, liquidity and results of operations in future periods.
Risks Related to Our Mortgage Banking Segment
Market and Financial Risks
Our business is significantly impacted by changes in interest rates. Changes in prevailing interest rates, rising inflation rates, U.S. monetary policies or other macroeconomic conditions that affect interest rates may have a detrimental effect on our business and earnings.
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Our operations, financial performance and earnings are affected by factors including prevailing interest rates, United States monetary policies or other macroeconomic conditions such as inflation fluctuations, recessions, consumer confidence and demand. For example, as interest rates have risen in 2022, our loan production volumes have decreased as compared to 2021 as fewer loans were originated or refinanced. As a result, our net revenues decreased from $3.2 billion in fiscal year 2021 to $2.0 billion in fiscal year 2022. Inflation rates also increased in 2022 and may continue to rise. In addition, interest rates and the liquidity of the MBS market may be impacted by the Federal Reserve increasing the federal funds rate, tapering MBS purchases or selling MBS.
Our financial performance and profitability is directly affected by changes in prevailing interest rates. An increase in prevailing interest rates could:
| ● | adversely affect our loan production volume, as refinancing an existing loan would be less attractive and qualifying for a loan may be more difficult; |
| ● | adversely affect our Ginnie Mae EBOs because loan modifications would become less economically feasible; and |
| ● | increase the cost of servicing our outstanding debt, including debt related to servicing assets and loan production. |
A decrease in prevailing interest rates could:
| ● | cause an increase in the expected volume of loan refinancings, which would require us to record decreases in fair value on our MSRs; and |
| ● | reduce our earnings from our |
Furthermore, borrowings under our warehouse lines of credit, and MSR and servicing advance facilities are at variable rates of interest, which also expose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our variable-rate indebtedness will increase even though the amount borrowed remains the same, and our earnings and cash flows may correspondingly decrease. An event of default, a negative ratings agency action, the perception of financial weakness, an adverse action by a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to refinance existing debt and borrow additional funds. In addition, we may not be able to adjust our operational capacity and staffing in a timely manner, or at all, in response to increases or decreases in loan production volume resulting from changes in prevailing interest rates.
Any of the increases or decreases discussed above could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our mortgage banking revenues are highly dependent on macroeconomic factors and real estate market, mortgage market and financial market conditions.
The success of our business strategies and our results of operations are materially affected by current or future conditions in the real estate market, mortgage markets, financial markets and the economy generally. Factors such as the COVID-19 pandemic, inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, domestic political issues, government shutdowns, climate change and the availability and cost of credit may contribute to increased volatility and unclear expectations for the economy in general and the real estate, mortgage market and financial markets in particular going forward.
A destabilization of the real estate market, mortgage market and financial markets or deterioration in these markets also could reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we originate or acquire, either at a profit or at all. Inflation and future expectations of inflation could increase our operating expenses and may affect our profitability if the additional operating costs are not recoverable through increased revenues or profit margins. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of operations.
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We may not be able to effectively manage significant increases or decreases in our loan production volume, which could negatively affect our business, financial condition, liquidity and results of operations.
If we do not effectively manage loan production volumes and are unable to consistently maintain quality of execution, our reputation and existing relationships with mortgage lenders and brokers could be damaged, we may not be able to maintain PMT’s existing relationships or develop new relationships with mortgage lenders and brokers, our new mortgage products may not gain widespread acceptance and the quality of our correspondent production, consumer direct lending and wholesale broker lending operations could suffer, all of which could negatively affect our brand and operating results.
Our loan production segment is also subject to overall market factors that could adversely impact our loan production volumes. For example, increased competition from new and existing market participants, reductions in the overall level of refinancing activity or a decrease in home purchase activity can decrease our loan production volumes. We may be forced to accept lower margins in our respective businesses to continue to compete and keep our loan production volumes consistent with past or projected levels or be forced to reduce our levels of production activity. In addition, we may not be able to adjust our operational capacity and staffing in a timely manner, or at all, in response to increases or decreases in loan production volume resulting from changes in prevailing interest rates.
We have a substantial amount of indebtedness, which may limit our financial and operating activities, expose us to substantial increases in costs due to interest rate fluctuations, expose us to the risk of default under our debt obligations and may adversely affect our ability to incur additional debt to fund future needs.
As of December 31, 2022, we had $7.0 billion of total indebtedness outstanding (approximately $5.2 billion of which was secured) and up to $6.5 billion of additional capacity under our secured borrowings and other secured debt financing arrangements. This substantial indebtedness and any future indebtedness we incur could have adverse consequences and, for example, could:
| ● | require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on indebtedness, including indebtedness we may incur in the future, thereby reducing the funds available for operations, capital |
| ● | make it more difficult for us to |
| ● | subject us to increased sensitivity to interest rate increases; |
| ● | make us more vulnerable to economic downturns, adverse industry conditions or catastrophic events, including the COVID-19 pandemic and |
| ● | reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/or |
| ● | place us at a competitive disadvantage to competitors that have relatively less debt than we have. |
In addition, our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes. Our liquidity needs vary significantly from time to time and may be affected by general economic conditions, industry trends, performance and many other factors outside our control.
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We rely on external financial arrangements to fund mortgage loans and operate our business and our inability to refinance or enter new financial arrangements could be detrimental to our business.
Our ability to finance our business operations and repay maturing obligations rests in large part on our ability to borrow money. Unlike some of our competitors who fund mortgage loans through bank deposits, we generally fund our mortgage loans through borrowings under warehouse facilities and other financing arrangements as well as funds from our operations. Our borrowings are generally repaid with the proceeds we receive from mortgage loan sales. We require new and continued financing to fund mortgage loans and operate our business. We are generally required to renew many of our financing arrangements on a regular basis, which exposes us to refinancing and interest rate risks. Our ability to refinance our existing financial obligations and borrow additional funds is affected by a variety of factors beyond our control including:
| ● | limitations imposed on us under our financing agreements that contain restrictive covenants and borrowing conditions, which may limit our ability to raise additional debt; |
| ● | restrictions imposed upon us by regulatory agencies that mandate certain minimum capital and liquidity requirements and additional scrutiny from such regulatory agencies; |
| ● | liquidity in the credit markets; |
| ● | prevailing interest rates; |
| ● | the strength of the lenders from which we borrow, and the regulatory environment in which they operate, including proposed capital strengthening requirements; |
| ● | limitations on borrowings from financing arrangements imposed by the amount of eligible collateral pledged, which may be less than the borrowing capacity of the credit facility; and |
| ● | accounting changes that may impact calculations of covenants in our financing arrangements. |
We are also dependent on a limited number of banking institutions that extend us credit on terms that we have determined to be commercially reasonable. These banking institutions are subject to their own regulatory supervision, liquidity and capital requirements, risk management frameworks, profitability and risk thresholds and tolerances, any of which may change materially and negatively impact their business strategies, including their extension of credit to us specifically or mortgage lenders and servicers generally. Certain banking institutions have already exited, and others may in the future decide to exit the mortgage business. Such actions may increase our cost of capital and limit or otherwise eliminate our access to capital, in which case our business, financial condition, liquidity and results of operations would be materially and adversely affected.
In the event that any of our financial arrangements is terminated or is not renewed, or if the principal amount that may be drawn under our funding agreements that provide for immediate funding at closing were to significantly decrease, we may be unable to find replacement financing on commercially favorable terms, or at all, which could be detrimental to our business.
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We finance our loans and other assets under secured financing agreements and utilize various other sources of borrowings, which exposes us to significant risk and may materially and adversely affect our business, financial condition, liquidity and results of operations.
We finance and, to the extent available, we intend to continue to leverage the loans produced through our loan production businesses with borrowings under repurchase agreements. When we enter into repurchase agreements, we sell mortgage loans to lenders, which are the repurchase agreement counterparties, and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash that we receive from a lender when we initially sell the assets to that lender is less than the fair value of those assets (this difference is referred to as the haircut or margin), if the lender defaults on its obligation to resell the same assets back to us we could incur a loss on the transaction equal to the amount of the haircut or margin reduced by interest accrued on the repurchase agreement (assuming that there was no change in the fair value of the assets). Repurchase agreements generally allow the counterparties, to varying degrees, to determine a new fair value of the collateral to reflect current market conditions. If a counterparty lender determines that the fair value of the collateral has decreased, it may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. Should this occur, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, our counterparty may sell the collateral, which may result in significant losses to us.
In addition, we invest in certain assets, including MSRs and EBOs, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs and EBOs under secured financing arrangements. Freddie Mae MSRs are pledged through a special purpose entity to secure borrowings under a master repurchase agreement. Fannie Mae and Ginnie Mae MSRs are pledged to special purpose entities, each of which issues variable funding notes and term notes that are secured by such Fannie Mae or Ginnie Mae assets, as applicable, and repaid through the servicing cash flows. Some of our EBOs are contributed to a special purpose entity, which issues participation certificates pledged to secure borrowings under a master repurchase agreement. In each case, similar to our repurchase agreements, the cash that we receive under these secured financing arrangements is less than the fair value of the assets and a decrease in the fair value of the pledged collateral can result in a margin call. Should a margin call occur, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, the secured parties may sell the collateral, which may result in significant losses to us.
Each of the secured financing arrangements pursuant to which we finance MSRs is further subject to the terms of an acknowledgement agreement with Fannie Mae, Freddie Mac or Ginnie Mae, as applicable, pursuant to which our and the secured parties’ rights are subordinate in all respects to the rights of the applicable Agency. Accordingly, the exercise by any of Fannie Mae, Freddie Mac or Ginnie Mae of its rights under the applicable acknowledgment agreement could result in the extinguishment of our and the secured parties’ rights in the related collateral and result in significant losses to us.
We may in the future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our available capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of, among other things, the stability of our cash flows. We can provide no assurance that we will have access to any debt or equity capital on favorable terms or at the desired times, or at all. Our inability to raise such capital or obtain financing on favorable terms could materially and adversely impact our business, financial condition, liquidity and results of operations.
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Our financing agreements contain financial and restrictive covenants that could adversely affect our business, financial condition, liquidity and results of operations.
Our various financing agreements require us and/or our subsidiaries to comply with various restrictive covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Incurring substantial debt subjects us to the risk that our cash flows from operations may be insufficient to repurchase the assets that we have sold under our repurchase agreements or otherwise service the debt incurred under our other financing agreements. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. In addition, the repayment of the unsecured senior notes will depend in part on our restricted subsidiaries’ generation of cash flow and our restricted subsidiaries’ ability to make such cash available to us, by dividend, debt repayment or other means. The unsecured senior note indentures contain additional restrictive covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions, including our ability and/or the ability of our restricted subsidiaries to:
| ● | pay dividends or distributions, redeem or repurchase equity, prepay subordinated debt and make certain loans or investments; |
| ● | merge or consolidate with another person or sell all or substantially all of our assets to another person; |
| ● | transfer, sell or otherwise dispose of certain assets including capital stock of subsidiaries; |
| ● | enter into transactions with affiliates; and |
| ● | allow to exist certain restrictions on the ability of non-guarantor restricted subsidiaries to pay dividends or make other payments to us. |
If we fail to comply with the restrictive covenants and are unable to obtain a waiver or amendment, an event of default would result under the terms of our financing arrangement or could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes. If an event of default occurs, our financing arrangements could be immediately due and payable, requiring us to apply all available cash to repay our financing arrangements, and if we were unable to repay or refinance our financial arrangements then any collateral securing the financial arrangements may be sold by our lenders.
We are subject to risks associated with the discontinuation of LIBOR.
As of December 31, 2021, one-week and two-month United States Dollar LIBOR (and certain non-U.S. dollar LIBOR settings) were discontinued, while the remaining non-U.S. dollar LIBOR settings ceased to be representative and thereafter began to be published only on a “synthetic basis”. In addition, the UK Financial Conduct Authority (the “FCA”), which is the regulator of the LIBOR administrator, has announced that the principal United States Dollar LIBOR tenors (overnight and one, three, six and 12 months) will cease to be published by any administrator or will no longer be representative as of June 30, 2023. In addition, despite the expected publication of the principal United States Dollar LIBOR settings through June 30, 2023, the FCA has prohibited the firms it regulates from using such settings in new contracts (subject to limited exceptions).
Accordingly, many LIBOR obligations have transitioned to another benchmark or will soon do so. Different types of financial products have transitioned, or are expected to transition, to different benchmarks; and there is no assurance that any alternative benchmark will be the economic equivalent of any LIBOR setting. For some existing LIBOR-based obligations, the contractual consequences of the discontinuation of LIBOR may not be clear. Although the foregoing reflects the timing (or expected timing) of LIBOR discontinuation and certain consequences, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published until any particular date or in any particular form, and there is no assurance regarding the consequences of LIBOR discontinuation. Uncertainty as to the foregoing and the nature of alternative reference rates may adversely impact the availability and costs of borrowings.
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The discontinuation of LIBOR could have a significant impact on the financial markets and our business activities. The cost of borrowing under certain of our financing arrangements is based on LIBOR. We also may hold assets and instruments used to hedge the value of certain assets with values or cash flows determined by reference to LIBOR. We expect to face challenges during the transition away from LIBOR for all of our LIBOR based financing arrangements, regardless of whether their maturity dates (as applicable) fall before or after the discontinuation date after June 30, 2023. These challenges include, but are not limited to, amending agreements or instruments underlying our existing and/or new LIBOR-based assets, financing arrangements, securities and liabilities with appropriate fallback language in such a way as to ensure economic equivalence with our LIBOR-based assets, financing arrangements and securities prior to the discontinuation of LIBOR, and the possibility that LIBOR may deteriorate as a viable benchmark to ensure a fair cost of funds for our LIBOR-linked liabilities, interest income for our LIBOR-linked assets, and/or the determination of fair value for certain of our assets and hedges using LIBOR as a benchmark rate or used to develop a market discount rate. In addition, the transition to using any new benchmark rate or other financial metric may require changes to existing transaction data, products, systems, models, operations and pricing processes.
We also anticipate additional risks to our current business activities as they relate to the discontinuation of LIBOR. We may service LIBOR-based adjustable rate mortgages for which the underlying mortgage notes incorporate fallback provisions, but we cannot anticipate the response of our borrowers or note holders to such risks. We may also incorporate LIBOR base rates for financial planning and reporting in our financial models.
In the United States, there have been efforts to identify alternative reference interest rates to replace United States Dollar LIBOR. The Alternative Reference Rates Committee has recommended that U.S. dollar LIBOR be replaced by rates based on the Secured Overnight Financing Rate (“SOFR”) plus, in the case of existing LIBOR contracts and obligations, a spread adjustment. The derivatives markets are also expected to use SOFR-based rates to replace U.S. dollar LIBOR. SOFR is intended to be a broad measure of the cost of borrowing funds overnight in transactions that are collateralized by U.S. Treasury securities. LIBOR is intended to be an unsecured rate that represents interbank funding costs for different short-term tenors and, other than its overnight setting, reflects expectations regarding future interest rates. Thus, LIBOR is generally intended to be sensitive to bank credit risk and to short-term interest rate expectations and SOFR is intended to be insensitive to credit risk and to risks related to interest rates other than overnight rates. These fundamental differences between LIBOR and SOFR mean we are unable to clearly assess the risk of transitioning from LIBOR to SOFR for any of our LIBOR-based liabilities or assets.
Due to these risks, we expect that both the impending and actual discontinuation of LIBOR could affect our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their fair value. For the same reason, we also can provide no assurance that changes in the fair value of our hedge instruments will effectively offset changes in the fair value of the assets they are expected to hedge. Furthermore, the transition away from widely used benchmark rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes. Our inability to manage these risks effectively may adversely affect our business, financial condition, liquidity and results of operations.
Hedging against interest rate exposure may materially and adversely affect our results of operations and cash flows.
We pursue hedging strategies primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as interest rate lock commitments (“IRLCs”) and our inventory of loans held for sale. For example, with respect to our IRLCs and inventory of loans held for sale, we may use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. In addition, with respect to our MSRs, we may use MBS forward purchase and sale contracts to address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.
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Our hedging activity will vary in scope based on the risks being mitigated, the level of interest rates, the type of investments held, and other changing market conditions such as those resulting from the long term impact of the COVID-19 pandemic. Hedging instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities, and our interest rate hedging may fail to protect or could adversely affect us because, among other things:
| ● | interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; |
| ● | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought; |
| ● | the duration of the hedge may not match the duration of the related liability or asset; |
| ● | the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |
| ● | the hedging counterparty owing the money in the hedging transaction may default on its obligation to pay. |
In addition, we may fail to recalculate, re-adjust and execute hedges in an efficient manner. Any hedging activity, which is intended to limit losses, may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in worse overall investment performance than if we had not engaged in any such hedging transactions. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We utilize derivative financial instruments, which could subject us to risk of loss.
We utilize derivative financial instruments for hedging purposes, which may include swaps, options and futures; however, the prices of derivative financial instruments are highly volatile. As a result, the cost of utilizing derivatives may reduce our income that would otherwise be available for distribution to stockholders or for other purposes, and the derivative instruments that we utilize may fail to effectively hedge our positions. We are also subject to credit risk with regard to the counterparties involved in the derivative transactions.
We are exposed to a number of risks relating to holding derivative instruments. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
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The use of derivative instruments is also subject to an increasing number of laws and regulations, including the Dodd-Frank Act and other federal regulations. These laws and regulations are complex, compliance with them may be costly and time consuming, and our failure to comply with any of these laws and regulations could subject us to lawsuits or government actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
We use estimates in determining the fair value of our MSRs, which are highly volatile assets with continually changing fair values. If our estimates of their value prove to be inaccurate, we may be required to write down the fair values of the MSRs which could adversely affect our business, financial condition, liquidity and results of operations.
Our estimates of the fair value of our MSRs is based on the cash flows projected to result from the servicing of the related mortgage loans and continually fluctuates due to a number of factors. These factors include prepayment speeds, interest rate changes, costs to service the loans and other market conditions.
We use internal financial models that utilize our understanding of inputs used by market participants to value our MSRs for purposes of financial reporting and for purposes of determining the price that we pay for portfolios of MSRs and to acquire loans for which we will retain MSRs. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our inputs and the results of the models.
If loan delinquencies or prepayment speeds are different than anticipated or other factors perform differently than modeled, the recorded fair value of certain of our MSRs may change. Significant differences in performance could increase the chance that we do not adequately estimate the effect of these factors on our valuations which could result in misstatements of our financial results, restatements of our financial statements, or otherwise materially and adversely affect our business, financial condition, liquidity and results of operations.
The geographic concentration of our servicing portfolio may be affected by weaker economic conditions or adverse events specific to certain regions which could decrease the fair value of our MSRs and adversely affect our business, financial condition, liquidity and results of operations.
A decline in the economy, the long term impact of the COVID-19 pandemic or other difficulties in certain real estate markets may cause a decline in the value of residential and commercial properties. To the extent that certain states in which we have greater concentrations of business in the future experience weaker economic conditions or greater rates of decline in real estate values than the United States generally, such concentration may disproportionately decrease the fair value of our MSRs and adversely affect our loan production businesses. The impact of property value declines may increase in magnitude and it may continue for a long period of time. Additionally, if states in which we have greater concentrations of business were to change their licensing or other regulatory requirements to make our business cost-prohibitive, we may be required to stop doing business in those states or may be subject to a higher cost of doing business in those states, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Increases in delinquencies and defaults may adversely affect our business, financial condition, liquidity and results of operations.
Delinquencies can result from many factors including unemployment, weak economic conditions or real estate values, or catastrophic events such as man-made or natural disasters, pandemics, war or terrorist attacks. A decrease in home prices may result in higher loan-to-value ratios (“LTVs”), lower recoveries in foreclosure and an increase in loss severities above those that would have been realized had property values remained the same or continued to increase. Some borrowers do not have sufficient equity in their homes to permit them to refinance their existing loans, which may reduce the volume of our loan production business. This may also provide borrowers with an incentive to default on their mortgage loans even if they have the ability to make principal and interest payments.
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Increased mortgage delinquencies, defaults and foreclosures may result in lower revenue for loans that we service for the Agencies because we only collect servicing fees from the Agencies for performing loans, and our failure to service delinquent and defaulted loans in accordance with the applicable servicing guidelines could result in our failure to benefit from available monetary incentives and/or expose us to monetary penalties and curtailments. Additionally, while increased delinquencies generate higher ancillary fees, including late fees, these fees may not be recoverable if the related loan is liquidated or due to CARES Act restrictions or other requirements or as a result of the COVID-19 pandemic. In addition, an increase in delinquencies lowers the interest income that we receive on cash held in collection and other accounts because there is less cash in those accounts. Also, increased mortgage defaults may ultimately reduce the number of mortgages that we service.
Increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those loans due to the increased time and effort required to collect payments from delinquent borrowers and to acquire and liquidate the properties securing the loans or otherwise resolve loan defaults if payment collection is unsuccessful, and only a portion of these increased costs are recoverable under our servicing agreements. Increased mortgage delinquencies, defaults and foreclosures may also result in an increase in servicing advances we are obligated to make to fulfill our obligations to MBS holders and to protect our investors’ interests in the properties securing the delinquent mortgage loans. An increase in required advances also may cause an increase in our interest expense and affect our liquidity as a result of increased borrowings under our financing agreements to fund any such increase in the advances.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable due to delinquencies, defaults and foreclosures that could adversely affect our business, financial condition, liquidity and results of operations.
During any period in which a borrower is not making payments, we may be required under our servicing agreements in respect of our MSRs to advance our own funds to pay property taxes and insurance premiums, legal expenses and other protective advances, and may be required to advance principal and interest payments to security holders of the MBS into which the loans are sold. We also advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. In addition, if a loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the loan is repaid or refinanced or a liquidation occurs. Federal, state or local regulatory actions may also result in an increase in the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred while the loan is delinquent. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
In addition, increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those loans due to the increased time and effort required to collect payments from delinquent borrowers, to foreclose on the loan and to liquidate properties or otherwise resolve loan defaults if payment collection is unsuccessful.
Any significant increases in delinquencies, defaults and foreclosures on loans that we service in respect of FHA,VA, and USDA related MSRs could result in an increase in servicing expenses as well as losses since the loans may not be fully insured or guaranteed under each of the VA, the FHA and the USDA government loan programs.
| ● | FHA Insurance - FHA loans are |
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| ● | VA and USDA Guarantees - VA and USDA loans are only partially guaranteed by the government and if such loan defaults or goes into foreclosure, the VA or USDA guarantees may not fully cover all principal, interest and other fees and advances we may have incurred on the outstanding VA or USDA loan, and we may suffer a loss. |
We may also be subject to additional curtailments to servicing and advance reimbursements if we have not satisfied VA, USDA or FHA timing, service and other regulatory requirements during the foreclosure and conveyance process.
We have MSR and MSL servicing agreements of $253.0 billion of UPB consisting of FHA, VA, and USDA mortgage loans that represent approximately 80% of our total outstanding UPB of MSRs as of December 31, 2022. Any significant increase in delinquencies, defaults and foreclosures on loans that increase our servicing advances, reduce property value or otherwise delay our ability to dispose of the properties underlying the loan could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our acquisition and ownership of mortgage servicing rights exposes us to significant risks.
MSRs arise from contractual agreements between us and the investors (or their agents) in loans and MBS that we service on their behalf. We generally acquire MSRs in connection with our sale of loans to the Agencies where we assume the obligation to service such loans on their behalf. Any MSRs we acquire are initially recorded at fair value on our balance sheet. The determination of the fair value of MSRs requires our management to make numerous estimates and assumptions. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced loans. The ultimate realization of the MSRs may be materially different than the values of such MSRs as may be reflected in our consolidated balance sheet as of any particular date. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs and assumptions used to determine MSR fair value. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Prepayment speeds significantly affect MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We base the price we pay for MSRs on, among other things, our projection of the cash flows from the related pool of loans. Our expectation of prepayment speeds is a significant input to our cash flow projections. If prepayment speed expectations increase significantly, the fair value of the MSRs could decline and we may be required to record a non-cash charge that would have a negative impact on our financial results.
Furthermore, a significant increase in prepayment speeds could materially reduce the cash flows we receive from MSRs, and we could ultimately receive substantially less than what we paid for such assets. Delinquency rates have a significant impact on the valuation of MSRs. An increase in delinquencies generally results in lower revenue because typically we only collect servicing fees from Agencies or mortgage owners when we collect payments from the borrower. Our expectation of delinquencies is also a significant input underlying our cash flow projections. If delinquencies are significantly greater than we expect, the estimated fair value of the MSRs could be diminished. When the estimated fair value of MSRs is reduced, we could suffer a loss, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
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Changes in interest rates are a key driver of the performance of MSRs. Historically, the fair value of MSRs has increased when interest rates increase and decrease when interest rates decrease due to the effect those changes in interest rates have on prepayment estimates. We may pursue various hedging strategies to seek to reduce our exposure to adverse changes in fair value resulting from changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us. To the extent we do not utilize derivative financial instruments to hedge against changes in fair value of MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders would be more susceptible to volatility due to changes in the fair value of, or cash flows from, MSRs as interest rates change. Furthermore, MSRs and the related servicing activities are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on our business. For example, the CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the long term impact of the COVID-19 pandemic.
Our failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which we or they are subject by virtue of ownership of MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and results of operations.
Most of the loans that we produce are pooled into MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. In addition, interest rates and the liquidity of the MBS market could be impacted by Federal Reserve increasing the federal funds rate, tapering future MBS purchases or selling MBS. Any significant disruption or period of illiquidity in the general MBS market would directly affect our own liquidity because no existing alternative secondary market would likely be willing and able to accommodate on a timely basis the volume of loans that we typically sell in any given period. Furthermore, we would remain contractually obligated to fund loans under our outstanding IRLCs without being able to sell our existing inventory of mortgage loans. Accordingly, if the MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we produce into the secondary market in a timely manner or at favorable prices and we would be required to hold a larger inventory of loans than we have committed facilities to fund or we may be required to repay a portion of the debt secured by these assets, which could materially and adversely affect our business, financial condition and results of operations.
We may be required to indemnify the purchasers of loans that we originate, acquire or assist in the fulfillment of, or repurchase those loans, if those loans fail to meet certain criteria or characteristics or under other circumstances and we may be unable to seek indemnity or require our counterparties to repurchase loans if they breach representations and warranties they make to us.
Our contracts with purchasers of newly originated loans that we fund or acquire through our loan production business contain provisions that require us to indemnify the purchaser of the related loans or repurchase such loans under certain circumstances. Our loan sale agreements with purchasers, including the Agencies, contain provisions that generally require us to indemnify or repurchase these loans if our representations and warranties concerning loan quality and loan characteristics are inaccurate; or the loans fail to comply with the respective Agency’s underwriting or regulatory requirements.
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When we purchase mortgage loans, our counterparty typically makes customary representations and warranties to us about such loans and we may be entitled to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to demand repurchase or substitution, or that our counterparty will remain solvent or otherwise be willing and able to honor its obligations under our loan purchase agreements. Depending on the volume of repurchase and indemnification requests, some of these mortgage lenders may not be able to financially fulfill their obligation to indemnify us or repurchase the affected loans. If a material amount of recovery cannot be obtained from these mortgage lenders, our business, financial condition, liquidity and results of operations could be materially and adversely affected.
Repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. Although our indemnification and repurchase exposure cannot be quantified with certainty, to recognize these potential indemnification and repurchase losses, we have recorded a liability of $32.4 million as of December 31, 2022. Because of the increase in our loan production over time, we expect that indemnification and repurchase requests are also likely to increase. Should home values decrease and negatively impact the related loan values, our realized loan losses from indemnifications and repurchases may increase as well. As such, our indemnification and repurchase costs may increase well beyond our current expectations. In addition, our mortgage banking services agreement with PMT requires us to indemnify it with respect to loans for which we provide fulfillment services in certain instances. If we are required to indemnify PMT or other purchasers against losses, or repurchase loans from PMT or other purchasers, that result in losses that exceed the recorded liability, this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition, liquidity and results of operations.
In deciding whether to approve loans or to enter into other transactions across our businesses with counterparties, including borrowers, brokers and correspondent lenders, we may rely on information furnished to us by or on behalf of borrowers and such counterparties, including financial statements and other financial information. We also may rely on representations of borrowers and such counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.
If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, another party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information in our loan originations or acquisitions. Any such misrepresented information could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our counterparties may terminate our MSRs, which could adversely affect our business, financial condition, liquidity and results of operations.
As is standard in the industry, under the terms of our master servicing agreements with the Agencies in respect of Agency MSRs that we retain in connection with our loan production, the Agencies have the right to terminate us as servicer of the loans we service on their behalf at any time (and, in certain instances, without the payment of any termination fee) and also have the right to cause us to sell the MSRs to a third party. In addition, our failure to comply with applicable servicing guidelines could result in our termination under such master servicing agreements by the Agencies with little or no notice and without any compensation. The owners of other non-Agency loans that we service may also terminate certain of our MSRs if we fail to comply with applicable servicing guidelines. If the MSRs are terminated on a material portion of our servicing portfolio, our business, financial condition, liquidity and results of operations could be adversely affected.
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Failure to successfully modify, resell or refinance EBO loans or defaults of the EBO loans beyond expected levels may adversely affect our business, financial condition, liquidity and results of operations.
As a mortgage servicer, we have an early buyout repurchase option for loans that are at least three months delinquent in our Ginnie Mae MSR portfolio. Purchasing delinquent Ginnie Mae loans provides us with an alternative to our mortgage servicing obligation of advancing principal and interest at the coupon rate of the related Ginnie Mae security. While our EBO program reduces the cost of servicing the Ginnie Mae loans, it may also accelerate loss recognition when the loans are repurchased because we are required to write off accumulated non-reimbursable interest advances and other costs at the time of repurchase. After purchasing delinquent Ginnie Mae loans, we expect to repool many of the delinquent loans into another Ginnie Mae guaranteed security upon the delinquent loans becoming current either through the borrower’s reperformance or through the completion of a loan modification; however, there is no guarantee that any delinquent loan will reperform or be modified or resold. Failure to successfully modify, resell or refinance our repurchased Ginnie Mae loans or a significant portion of the repurchased Ginnie Mae loans defaulting beyond expectations may adversely affect our business, financial condition, liquidity and results of operations.
We may not realize all of the anticipated benefits of potential future acquisitions of MSRs, which could adversely affect our business, financial condition, liquidity and results of operations.
Our ability to realize the anticipated benefits of potential future acquisitions of servicing portfolios will depend, in part, on our ability to appropriately service any such assets. The process of acquiring these assets may disrupt our business and may not result in the full benefits expected. The risks associated with these acquisitions include, among others, unanticipated issues in integrating information regarding the new loans to be serviced into our information technology systems, and the diversion of management’s attention from other ongoing business concerns. Moreover, if we inappropriately value the assets that we acquire or the fair value of the assets that we acquire declines after we acquire them, the resulting charges may negatively affect both the carrying value of the assets on our balance sheet and our earnings. Furthermore, if we incur additional indebtedness to finance an acquisition, the acquired servicing portfolio may not be able to generate sufficient cash flows to service that additional indebtedness. Unsuitable or unsuccessful acquisitions could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We are subject to significant financial and reputational risks from potential liability arising from lawsuits, and regulatory and government action.
We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions remains high. For example, in 2019 Black Knight Servicing Technologies, LLC filed a legal claim against us for alleged breach of contract and misappropriation of trade secrets. Greater than expected investigation costs and litigation, including class action lawsuits associated with compliance related issues, substantial legal liability or significant regulatory or government action against us could have adverse effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn could adversely impact our business results and prospects. We may experience a significant volume of litigation and other disputes, including claims for contractual indemnification, with counterparties regarding relative rights and responsibilities. Consumers, clients and other counterparties may also become increasingly litigious.
We also may be exposed to the risk of litigation by investors and entities that we manage from time to time if our management advice is alleged to constitute gross negligence or willful misconduct, up to the entire amount of loss. Further, we may be subject to litigation arising from investor dissatisfaction with PMT’s financial performance or if we improperly exercised control or influence over PMT. In addition, we are exposed to risks of litigation or investigation relating to transactions which presented conflicts of interest that were not properly addressed. In such actions, we would be obligated to bear legal, settlement and other costs (which may be in excess of available insurance coverage). In addition, although we are generally indemnified by PMT, our rights to indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification, our business, financial condition, liquidity and results of operations would be materially and adversely affected.
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We depend on counterparties and vendors to provide services that are critical to our business, which subjects us to a variety of risks.
We have a number of counterparties and vendors, who provide us with financial, technology and other services that are critical to support our businesses. If our current counterparties and vendors were to stop providing services to us on acceptable terms or if we had a disruption in service due to a vendor dispute, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on similarly acceptable terms, or at all. Some of these counterparties and vendors have significant operations outside of the United States. If we or our vendors had to curtail or cease operations in these countries due to political unrest or natural disasters and then transfer some or all of these operations to another geographic area, we could experience disruptions in service and incur significant transition costs as well as higher future overhead costs. We may also outsource certain services to vendors located in foreign countries such as India and the Philippines with emerging technology, political and regulatory infrastructures that could result in future business disruptions or reputational damages. With respect to vendors engaged to perform certain servicing activities, we are required to assess their compliance with various regulations and establish procedures to provide reasonable assurance that the vendor’s activities comply in all material respects with such regulations. In the event that a vendor’s activities are not in compliance, it could negatively impact our relationships with our regulators, as well as our business and operations. Further, we may incur significant costs to resolve any such disruptions in service which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our failure to appropriately address various issues that may give rise to reputational risk could cause harm to our business and adversely affect our earnings.
Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may give rise to reputational risk, we could significantly harm our business prospects and earnings. Such issues include, but are not limited to, actual or perceived conflicts of interest, violations of legal or regulatory requirements, and any of the other risks discussed in this Item 1A. Similarly, market rumors and actual or perceived association with counterparties whose own reputations are under question could harm our business.
Certain of our officers also serve as officers of PMT. As we expand the scope of our businesses, we increasingly confront potential conflicts of interest relating to investment activities that we manage for PMT. The SEC and certain regulators have increased their scrutiny of potential conflicts of interest, and as we experience growth in our businesses, we continue to monitor and mitigate or otherwise address any conflicts between our interests and those of PMT through the implementation of procedures and controls. Reputational risk incurred in connection with conflicts of interest could negatively affect our business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain clients, customers, trading counterparties, investors and employees and adversely affect our results of operations.
Reputational damage can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. Our reputation may also be negatively impacted by our environmental, social and governance (“ESG”) practices and disclosures, including climate change practices and disclosures. In addition, various private third party organizations have developed ratings processes for evaluating companies on their approach to ESG matters. These third party ESG ratings may be used by some investors to assist with their investment and voting decisions. Any unfavorable ESG ratings may lead to reputational damage and negative sentiment among our investors and other stakeholders. These factors could impair our working relationships with government agencies and investors, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading counterparties and employees, significantly harm our stock price and ability to raise capital, and adversely affect our results of operations.
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Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our financial statements.
Accounting rules for mortgage loan sales and securitizations, valuations of financial instruments and MSRs, investment consolidations, income taxes and other aspects of our operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders and also increase the risk of errors and restatements, as well as the cost of compliance. Our inability to timely prepare our financial statements in the future would likely be considered a breach of our financial covenants and adversely affect our share price significantly. Changes in accounting interpretations or assumptions as well as accounting rule misinterpretations could result in differences in our financial results or otherwise have a material adverse effect on our business, financial condition, liquidity and results of operations.
The success and growth of our business depends upon our ability to adapt to and implement technological changes and to successfully develop, implement and protect proprietary technology.
Our success in the mortgage industry is highly dependent upon our ability to adapt to constant technological changes, successfully enhance our current information technology solutions through the use of third-party and our proprietary technologies, and introduce new solutions and services that more efficiently address the needs of our customers.
Our mortgage loan production businesses are dependent upon our ability to effectively interface with our borrowers, mortgage lenders and other third parties and to efficiently process loan applications and closings. The direct lending processes are becoming more dependent upon technological advancement, such as our continued ability to process applications over the Internet, accept electronic signatures, provide process status updates instantly and other borrower- or counterparty-expected conveniences. In our correspondent production activities, our and PMT’s correspondent sellers also expect and require certain conveniences and service levels that are dependent on technological advancement.
We have developed a workflow-driven, cloud-based loan acquisition platform and while we anticipate that the cloud-based system will increase scalability and produce other efficiencies, there can be no assurance that the cloud-based system will prove to be effective or that such correspondent sellers will easily adapt to the cloud-based system. Any failure to effectively or timely transition to our new system and meet our expectations and the expectations of our correspondent sellers could have a material adverse effect on our business, financial condition and results of operations.
Similarly, our servicing business is dependent on our ability to effectively interface with our customers and investors, as well as service mortgage loans in compliance with applicable laws and regulations and the contractual requirements of such investors. For example, our proprietary workflow-driven, cloud-based servicing system provides for real-time processing and advanced workflow management thereby reducing servicing costs, increasing scalability and creating sustainable efficiencies.
The development, implementation and protection of these technologies and becoming more proficient with them may also require significant capital and operating expenditures. As these technological advancements increase in the future, we will need to further develop and invest in these technological capabilities to remain competitive. Moreover, litigation has become required to protect our technologies and such litigation is expected to be time consuming and result in substantial costs and diversion of resources.
We rely on a combination of trademarks, copyrights, and trade secrets, as well as confidentiality and contractual provisions to protect our intellectual property and proprietary technologies. In addition, we also license and utilize third party proprietary technologies and loss of rights to significant third party proprietary technologies may result in decreased product functionality. The development, implementation and protection of our intellectual property and proprietary technologies requires significant human resources and capital expenditures. As these technological advancements and investor and compliance requirements increase in the future, we will need to further develop these technological capabilities to remain competitive, and we will need to implement, execute and maintain them in an operating and regulatory environment that exposes us to significant risk.
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There is no assurance that we will be able to successfully adopt new technologies as critical systems and applications become obsolete and better ones become available. Any failure by us to develop, implement, integrate, execute or maintain our technological capabilities and any litigation costs associated with protection of our technologies could have a material adverse effect on our business, financial condition and results of operations.
Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks, and other long term physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans we own or service, as well as geographic areas where we conduct business.
Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks and other long term physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans we own or service, as well as geographic areas where we conduct business. In addition, such adverse conditions and long term physical and environmental changes could impact the demand for, and value of, our assets, as well as the cost to service or manage such assets, or directly impact the value of our assets through damage, destruction or loss, and thereafter materially impact the availability or cost of insurance to protect against these events. Upon the occurrence of a catastrophic event, we may be unable to continue our operations and may endure significant business interruptions, reputational harm, delays in servicing our customers and working with our partners, interruptions in the availability of our technology and systems, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results. Catastrophic events may also be uninsurable or not economically insurable and might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed.
There is an increasing global concern over the risks of climate change and related environmental sustainability matters. The physical risks of climate change may include rising average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters, including floods, wildfires, hurricanes, earthquakes and tornados, and these events could impact our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets and the local economies of certain areas in which we operate. Although we believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets are appropriately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance. There also is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to payment claims due to a deterioration in its financial condition or may even cancel policies due to increasing costs of providing insurance coverage in certain geographic areas. Further, numerous treaties, laws and regulations have been enacted or proposed in an effort to regulate climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of “green” building codes. These laws and regulations may impact the rates at which we obtain property insurance and result in increased operating costs, or impose substantial costs on our borrowers or affect their ability to obtain appropriate coverage at reasonable costs. We may also incur costs associated with increased regulations or investor requirements for increased environmental and social disclosures and reporting. Additionally, climate change concerns could result in transition risk. Changes in consumer preferences and additional legislation and regulatory requirements, including those associated with a transition to a low-carbon economy, could increase expenses or otherwise adversely impact our operations and business.
Regulatory Risks
We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition, liquidity and results of operations.
We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits and examinations by federal and state regulators. Our failure to operate effectively and in compliance with any of these laws, regulations and rules could subject us to lawsuits or governmental actions and damage our reputation, which could materially and adversely affect our business, financial condition, liquidity and results of operations. In addition, our failure to comply with these laws, regulations and rules may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt, delays in the foreclosure process, increased
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servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations. Further, we may be required to pay substantial penalties imposed by our regulators due to compliance errors, or we may lose our licenses to originate and/or service loans.
We must also comply with a number of federal, state and local consumer protection and state foreclosure laws. These statutes apply to loan origination, servicing, debt collection, marketing, use of credit reports, safeguarding of non-public, personally identifiable information about our clients, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to customers.
Because we are not a federally chartered depository institution, we generally do not benefit from federal pre-emption of state mortgage loan banking, loan servicing or debt collection licensing and regulatory requirements and must comply with multiple state licensing and compliance requirements. These state rules and regulations generally provide for, but are not limited to: originator, servicer and debt collector licensing requirements, requirements as to the form and content of contracts and other documentation, employee licensing and background check requirements, fee requirements, interest rate limits, and disclosure and record-keeping requirements.
Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting fair lending, fair housing and other claims that the practices of lenders and loan servicers result in a disparate impact on protected classes. Antidiscrimination statutes, such as the Fair Housing Act and the Equal Credit Opportunity Act, prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory agencies and departments take the position that these laws apply not only to intentional discrimination, but also to neutral practices that have a disparate impact on a group that shares a characteristic that a creditor may not consider in making credit decisions (i.e., creditor or servicing practices that have a disproportionately negative affect on a protected class of individuals).
The failure of our correspondent sellers to comply with any applicable laws, regulations and rules may also result in these adverse consequences. We have in place a due diligence program designed to assess areas of risk with respect to loans we acquire from such correspondent sellers. However, we may not detect every violation of law and, to the extent any correspondent sellers, third party originators, servicers or brokers with which we do business fail to comply with applicable laws or regulations and any of their mortgage loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans or MSRs, to monetary penalties or other losses. While we may have contractual rights to seek indemnity or repurchase from certain of these lenders, third party originators, servicers or brokers, if any of them are unable to fulfill their indemnity or repurchase obligations to us to a material extent, our business, liquidity, financial condition and results of operations could be materially and adversely affected. Our service providers and other vendors are also required to operate in compliance with applicable laws, regulations and rules. Our failure to adequately manage service providers and other vendors to mitigate risks of noncompliance with applicable laws may also have these negative results.
Federal and state administrations could enact significant policy changes increasing regulatory scrutiny and enforcement actions in our industry. While it is not possible to predict when and whether significant policy or regulatory changes would occur, any such changes on the federal, state or local level could significantly impact, among other things, our operating expenses, the availability of mortgage financing, interest rates, consumer spending, the economy and the geopolitical landscape. To the extent that the current government administration takes action by proposing and/or passing regulatory policies that could have a negative impact on our industry, such actions may have a material adverse effect on our business, financial condition and results of operations.
The Financial Stability Oversight Council (“FSOC”) and Conference of State Bank Supervisors (“CSBS”) have been reviewing whether state chartered nonbank mortgage servicers should be subject to “safety and soundness” standards similar to those imposed by federal law on insured depository institutions, even though nonbank mortgage servicers do not have any federally insured deposit accounts. For example, on July 26, 2021, the CSBS released model state regulatory prudential standards for state oversight of nonbank mortgage servicers. The model CSBS prudential standards include revised minimum net worth, capital ratio and liquidity standards similar to current FHFA requirements and require servicers to maintain sufficient allowable assets to cover normal operating expenses in addition to the amounts required for servicing expenses. In addition, on August 17, 2022, the FHFA and Ginnie Mae announced
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enhanced minimum net capital and liquidity eligibility requirements for sellers, servicers and issuers that will go into effect in 2023 and 2024. To the extent any new minimum net worth, capital ratio and liquidity standards and requirements are overly burdensome, complying with such standards and requirements may have a material adverse effect on our business, financial condition and results of operations.
New CFPB or state rules and regulations or more stringent enforcement of existing rules and regulations by these regulators could result in enforcement actions, fines, penalties and the inherent reputational risk that results from such actions.
The CFPB has regulatory authority over certain aspects of our business as a result of our residential mortgage banking activities, including, without limitation, the authority to conduct investigations, bring enforcement actions, impose monetary penalties, require remediation of practices, pursue administrative proceedings or litigation, and obtain cease and desist orders for violations of applicable federal consumer financial laws. The current CFPB administration has stated its intention to aggressively supervise, investigate and, where it deems appropriate, bring enforcement actions against lenders and servicers the CFPB believes are engaged in activities that violate federal laws and regulations. In addition, examinations by state regulators and enforcement actions in the residential mortgage origination and servicing sectors by state attorneys general have increased and may continue to increase.Failure to comply with the CFPB and state laws, rules or regulations to which we are subject, whether actual or alleged, could have a material adverse effect on our business, liquidity, financial condition and results of operations.
Our failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations and our ability to make distributions to our stockholders.
We are highly dependent on U.S. government-sponsored entities and government agencies, and any organizational or pricing changes at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition and results of operations.
Our ability to generate revenues through mortgage loan sales depends on programs administered by GSEs, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the issuance of MBS in the secondary market. We originate mortgage loans directly with borrowers and brokers and assist PMT in acquiring loans from mortgage lenders through our correspondent production activities that qualify under existing standards for inclusion in MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. We, or PMT, also derive other material financial benefits from our Agency relationships, including the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures.
A number of legislative proposals have been introduced in recent years that would wind down or phase out the GSEs in their current form, including a proposal by the prior federal administration to end the conservatorship and privatize Fannie Mae and Freddie Mac. It is not possible to predict the scope and nature of the actions that the U.S. government, including the current federal administration, will ultimately take with respect to the GSEs. Any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and their regulators or the U.S. federal government, and any changes in leadership at these entities, could adversely affect our business and prospects. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or in underwriting criteria could materially and adversely affect our business, financial condition, liquidity and results of operations and our ability to make distributions to our stockholders.
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Our ability to generate revenue from newly originated loans that we acquire or assist PMT in acquiring is highly dependent on the fact that the Agencies have not historically acquired such loans directly from mortgage lenders, but have instead relied on banks and non-bank aggregators such as us to acquire, aggregate and securitize or otherwise sell such loans to investors in the secondary market. Certain of the Agencies have approved new and smaller lenders that traditionally may not have qualified for such approvals. To the extent that these mortgage lenders choose to sell directly to the Agencies rather than through loan aggregators like us, the number of loans available for purchase by aggregators is reduced, which could materially and adversely affect our business and results of operations. In addition, under certain Agency capital rules, loans sourced from loan aggregators such as PMT that we assist have higher capital requirements and may incur higher Agency fees for third party originated loans that PMT aggregates and delivers to the Agencies as compared to individual loans delivered by third party mortgage lenders directly to the Agencies’ cash windows without the assistance of a loan aggregator. To the extent the Agencies increase the number of purchases and sales directly for their own accounts, our business and results of operations could be materially and adversely affected.
We are required to have various Agency approvals and state licenses in order to conduct our business and there is no assurance we will be able to obtain or maintain those Agency approvals or state licenses.
Because we are not a federally chartered depository institutions we do not benefit from exemptions to state mortgage lending, loan servicing or debt collection licensing and regulatory requirements. We are licensed in all state jurisdictions, and for those activities, where we are required to be licensed and believe it is cost effective and appropriate to become licensed. Our failure to maintain any necessary licenses, comply with applicable licensing laws or satisfy the various requirements to maintain them over time could restrict our direct business activities, result in litigation or civil and other monetary penalties, or cause us to default under certain of our lending arrangements, any of which could materially and adversely impact our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
We are also required to hold the Agency approvals in order to sell loans to the Agencies and service such loans on their behalf. Our failure to satisfy the various requirements necessary to maintain such Agency approvals over time would also restrict our business activities and could adversely impact our business. We are subject to periodic examinations by federal, state and Agency auditors and regulators, which can result in increases in our administrative costs, and we may be required to pay substantial penalties imposed by these regulators due to compliance errors, or we may lose our licenses. Negative publicity or fines and penalties incurred in one jurisdiction may cause investigations or other actions by regulators in other jurisdictions and could adversely impact our business.
Our inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material adverse effect on our business, financial condition, liquidity and results of operation.
We are subject to minimum financial eligibility requirements established by the Agencies. For example, on August 2022, the FHFA and Ginnie Mae announced enhanced minimum net capital and liquidity eligibility requirements for sellers, servicers and issuers that will go into effect in 2023 and 2024. These eligibility requirements align the minimum financial requirements for mortgage sellers/servicers and MBS issuers to do business with the Agencies. These minimum financial requirements include net worth, capital ratio and/or liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential losses and a minimum amount of liquidity needed to service Agency loans and MBS and cover the associated financial obligations and risks.
In order to meet these minimum financial requirements, we are required to maintain rather than spend or invest, cash and cash equivalents in amounts that may adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders, and this could significantly impede us, as a non-bank mortgage lender, from growing our respective businesses and place us at a competitive disadvantage in relation to federally chartered banks and certain other financial institutions. To the extent that such minimum financial requirements are not met, the Agencies may suspend or terminate Agency approval or certain agreements with us, which could cause us to cross default under financing arrangements and/or have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.
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The failure of PennyMac Loan Services, LLC to avail itself of an appropriate exemption from registration as an investment company under the Investment Company Act of 1940 could have a material and adverse effect on our business.
We intend to operate so that we, and each of our subsidiaries, are not required to register as investment companies under the Investment Company Act of 1940, as amended (“Investment Company Act”). We believe that our subsidiary, PLS, qualifies for one or more exemptions provided in the Investment Company Act because of the historical and current composition of its assets and income; however, there can be no assurances that the composition of PLS’ assets and income will remain the same over time such that one or more exemptions will continue to be applicable.
If PLS is required to register as an investment company, we would be required to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things: limitations on capital structure; restrictions on specified investments; prohibitions on transactions with affiliates; compliance with reporting, record keeping, voting and proxy disclosure; and, other rules and regulations that would significantly increase our operating expenses. Further, if PLS was or is required to register as an investment company, PLS would be in breach of various representations and warranties contained in its credit and other agreements resulting in a default as to certain of our contracts and obligations. This could also subject us to civil or criminal actions or regulatory proceedings, or result in a court appointed receiver to take control of us and liquidate our business, any or all of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our business, financial condition and results of operations may be adversely affected by the long term impact of the COVID-19 pandemic.
The COVID-19 pandemic, inclusive of any variants, has created unprecedented economic, financial and public health disruptions that may continue to adversely affect, our business, financial condition and results of operations. The extent to which COVID-19 continues to affect our business, financial condition and results of operations will depend on future developments, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the long term impact of the COVID-19 pandemic. As a result of the CARES Act and other forbearance requirements, we may experience delinquencies in our servicing portfolio that require us to finance advances of principal and interest payments to the investors holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans. The CARES Act and other forbearance requirements have reduced our servicing fee income and increased our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the long term impact of the COVID-19 pandemic. Future servicing advances will be driven by a number of factors, including: the number of borrower delinquencies, including those resulting from payment forbearance; the length of time borrowers remain delinquent; and the level of successful resolution of delinquent payments, all of which will be impacted by the pace at which the economy recovers from the long term impact of the COVID-19 pandemic. As of December 31, 2022, 1.3% of loans in our predominantly government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent, resulting in an increase in the level of servicing advances we have been required to make due to borrower delinquencies. Servicing advances resulting from the COVID-19 pandemic could have a significant adverse impact on our cash flows and could also have a detrimental effect on our business and financial condition.
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The CARES Act and other forbearance requirements have negatively impacted the fair value of our servicing assets and further market volatility or economic weakness may result in additional reductions in the value of our servicing assets and make it increasingly difficult to optimize our hedging activities. Our liquidity and/or regulatory capital could also be adversely impacted by volatility and disruptions in the capital and credit markets. If we fail to meet or satisfy any of the covenants in our repurchase agreements or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.
We may have difficulty accessing debt and equity capital on attractive terms, or at all, as a result of the impact of the COVID-19 pandemic, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities on a timely basis. This includes renewals of our existing credit facilities with our lenders who may be adversely impacted by the volatility and dislocations in the financial markets and may not be willing or able to continue to extend us credit on the same terms, or on favorable terms, or at all.
Our business could be disrupted if we are unable to operate due to changing governmental restrictions such as travel bans and quarantines placed or reinstituted on our employees or operations, including, successfully operating our business from remote locations, ensuring the protection of our employees’ health and maintaining our information technology infrastructure. Further, increased operational expenses to address these restrictions and widespread employee illnesses could negatively affect staffing within our various businesses and geographies.
Federal, state, and local executive, legislative and regulatory responses to the long term impact of the COVID-19 pandemic may be inconsistent and conflict in scope or application, and may be subject to change without advance notice. These regulatory responses may impose additional compliance obligations, and may extend existing CARES Act and other forbearance requirements. In addition, the CARES Act and other federal, state and local regulations are subject to interpretation given the existing ambiguities in the rules and regulations, which may result in future class action and other litigation risk.
The outcome of the COVID-19 related governmental measures are unknown and they may not be sufficient to address future market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic. The final scope and duration of the COVID-19 pandemic and the efficacy of the extraordinary government measures put in place to address it are currently unknown. Even after the COVID-19 pandemic subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.
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Related Party Risks
We rely on PMT as a significant source of financing for, and revenue related to, our mortgage banking business, and the termination of, or material adverse change in, the terms of this relationship, or a material adverse change to PMT or its operations, could adversely affect our business, financial condition, liquidity and results of operations.
PMT is the counterparty that currently acquires newly originated mortgage loans in connection with our correspondent production activities. A portion of our income is derived from a fulfillment fee earned in connection with PMT’s acquisition of conventional loans. We are able to conduct our correspondent production activities without having to incur the significant additional debt financing that would be required for us to purchase those loans from the originating lender. We also purchase all government-insured and some conventional loans from PMT at PMT’s cost plus a sourcing fee and fulfill these loans for our own account. We earn interest income and gains or losses during the holding period and upon the sale of these securities, and we retain the MSRs with respect to the loans. If this relationship with PMT is terminated by PMT or PMT reduces the volume of these loans that it acquires for any reason, we would have to acquire these loans from the correspondent sellers for our own account, something that we may be unable to do, or enter into another similar counterparty arrangement with a third party, which we may not be able to enter into on terms that are as favorable to us, or at all.
The management agreement, the mortgage banking services agreement and certain of the other agreements that we have entered into with PMT contain cross-termination provisions that allow PMT to terminate one or more of those agreements under certain circumstances where another one of such agreements is terminated. Accordingly, the termination of this relationship with PMT, or a material change in the terms thereof that is adverse to us, would likely have a material adverse effect our business, financial condition, liquidity and results of operations. The terms of these agreements extend until June 30, 2025, subject to automatic renewal for additional 18-month periods, but any of the agreements may be terminated earlier under certain circumstances or otherwise non-renewed. If any agreement is terminated or non-renewed and not replaced by a new agreement, it would materially and adversely affect our ability to continue to execute our business plan.
We expect that PMT will continue to qualify as a REIT for U.S. federal income tax purposes. However, it is possible that PMT may not meet the requirements for qualification as a REIT. If PMT were to lose its REIT status, corporate-level income taxes, would apply to all of PMT's taxable income at federal and state tax rates. Either of these scenarios would potentially impair PMT’s financial position and its ability to raise capital, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
A significant portion of our loan servicing operations are conducted pursuant to subservicing contracts with PMT, and any termination by PMT of these contracts, or a material change in the terms thereof that is adverse to us, would adversely affect our business, financial condition, liquidity and results of operations.
PMT, as the owner of a substantial number of MSRs or mortgage loans that we subservice, may, under certain circumstances, terminate our subservicing contract with or without cause, in some instances with little notice and little to no compensation. Upon any such termination, it would be difficult to replace such a large volume of subservicing in a short period of time, or perhaps at all. Accordingly, we may not generate as much revenue from subservicing for other third parties. If we were to have our subservicing terminated by PMT, or if there was a change in the terms under which we perform subservicing for PMT that was material and adverse to us, this would have a material adverse effect on our business, financial condition, liquidity and results of operations.
PMT has an exclusive right to acquire conventional conforming loans that are produced through our correspondent production activities, which may limit the revenues that we could otherwise earn in respect of those loans.
Our mortgage banking services agreement with PMT requires PLS to provide fulfillment services for correspondent production activities exclusively to PMT as long as PMT has the legal and financial capacity to purchase correspondent loans. As a result, the revenue that we earn with respect to these loans will be limited to the fulfillment fees that we earn in connection with the production of these loans, which may be less than the revenues that we might otherwise be able to realize by acquiring these loans ourselves and selling them in the secondary loan market.
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Risks Related to Our Investment Management Segment
Market conditions could reduce the fair value of the assets that we manage, which would reduce our management and incentive fees.
A portion of the fees that we earn under our investment management agreement is based on the fair value of the assets that we manage. The fair values of the securities and other assets held in the portfolios that we manage and, therefore, our assets under management may decline due to any number of factors beyond our control, including, among others, a decline in housing demand or value, the long term impact of the COVID-19 pandemic, changes to interest rates, stock or bond market movements or volatility, a general economic downturn, inflation, political uncertainty, acts of terrorism, military conflict or acts of war, cyber-attacks or infrastructure outages. The economic outlook cannot be predicted with certainty and we continue to operate in a challenging business environment. If volatile market conditions cause a decline in the fair value of our assets under management, that decline in fair value could materially reduce our management fees and incentive fees under our management agreement with PMT and adversely affect our revenues. If our revenues decline without a commensurate reduction in our expenses, our net income will be reduced.
We currently manage assets for a single client, the loss of which would significantly reduce our management and incentive fees and have a material adverse effect on our results of operations.
Our management and incentive fees result from our management of PMT. The term of the management agreement that we have entered into with PMT, as amended, expires on June 30, 2025, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of a termination of one or more related party agreements by PMT in certain circumstances, we may be entitled to a termination fee under our management agreement. However, the termination of such management agreement and the loss of PMT as a client would significantly affect our investment management segment and negatively impact our management fees and incentive fees.
The historical returns on the assets that we select and manage for PMT, and our resulting management and incentive fees, may not be indicative of future results.
The historical returns of the assets that we manage should not be considered indicative of the future returns on those assets or future returns on other assets that we may select for investment by PMT. The investment performance that is achieved for the assets that we manage varies over time, and the nature and mix of assets we manage has changed significantly over the past several years. As a result, the change and variance in investment performance can be significant. For example, although we earned performance incentive fees in prior years, in fiscal year 2022, we did not earn any performance incentive fees due to losses incurred by PMT during the associated performance measurement periods. Accordingly, the management and incentive fees that we have earned in the past based on those returns should not be considered indicative of the management or incentive fees that we may earn in the future from managing those same assets or from managing other assets for PMT.
Changes in regulations applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations.
The legislative and regulatory environment in which we operate is constantly evolving. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and PMT, may adversely affect our business. Our ability to succeed in this environment will depend on our ability to monitor and comply with regulatory changes. Regulatory changes that will affect other market participants are likely to change the way in which we conduct business with our counterparties. The uncertainty regarding the continued implementation of laws and regulations and their impact on the investment management industry and us cannot be predicted with certainty at this time but will continue to be a risk for our business.
We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules
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by these governmental authorities and self-regulatory organizations, as well as by U.S. and non-U.S. courts. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be imposed on us or the markets in which we trade, or whether any of the proposals will become law. Compliance with any new laws or regulations could add to our compliance burden and costs and adversely affect the manner in which we conduct business, as well as our financial condition, liquidity and results of operations.
Our failure to comply with the extensive amount of regulation applicable to our investment management segment could materially and adversely affect our business, financial condition, liquidity and results of operations.
Our investment management segment is subject to extensive regulation in the United States. These regulations are designed primarily to ensure the integrity of the financial markets and to protect investors in any entity that we advise and are not designed to protect our stockholders. Consequently, these regulations may limit our activities. These requirements relate to, among other things, fiduciary duties to clients, solicitation agreements, conflicts of interest, recordkeeping and reporting requirements, disclosure requirements, limitations on cross trades and principal transactions between an adviser and an advisory clients and general anti-fraud prohibitions. We are required to maintain an effective compliance program, and are subject to inspection and examinations by the SEC and state regulators.
The failure by us or our service providers to comply with applicable laws or regulations, or our failure to design and successfully implement and administer our compliance program, could result in fines, suspensions of individual employees, limitations on engaging in other businesses and other sanctions, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. Even if an investigation or proceeding did not result in a fine or sanction or the fine or sanction imposed against us or our employees by a regulator were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions could harm our reputation.
We may encounter conflicts of interest in trying to appropriately allocate our time and services between activities for our own account and for PMT, or in trying to appropriately allocate investment opportunities among ourselves and for PMT.
Pursuant to our management agreement with PMT, we are obligated to provide PMT with the services of our senior management team, and the members of that team are required to devote such time as is necessary and appropriate, commensurate with the level of activity of PMT. The members of our senior management team may have conflicts in allocating their time and services between our operations and the activities of PMT and any other entities or accounts that we may manage in the future.
In addition, we and the other entities or accounts that we may manage may participate in some of PMT’s investment strategies now or in the future, which may not be the result of arm’s length negotiations and may involve or later result in potential conflicts between our interests and those of PMT or such other entities. Any such perceived or actual conflicts of interest could damage our reputation and materially and adversely affect our business, financial condition, liquidity and results of operations.
Risks Related to Our Organizational Structure
HC Partners may be able to significantly influence the outcome of votes of our common stock, or exercise certain other rights pursuant to a stockholder agreement we have entered into with it, and its interests may differ from those of our other public stockholders.
HC Partners, our largest stockholder, has the right under a stockholder agreement to nominate up to two individuals for election to our board of directors depending on the percentage of the voting power of our outstanding shares common stock that it holds, and we are obligated to use our best efforts to cause the election of those director nominees. In addition, the HC Partners’ stockholder agreement requires that we obtain their consent with respect to amendments to our certificate of incorporation or bylaws. As a result, HC Partners may be able to significantly influence our management and affairs. In addition, as a result of the size of its individual equity holding it may be able to
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significantly influence the outcome of all matters requiring stockholder approval, including mergers and other material transactions, and may be able to cause or prevent a change in the composition of our board of directors or a change in control of our Company that could deprive our other public stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
We have not established a minimum dividend payment level and no assurance can be given that we will be able to make dividends to our stockholders in the future at current levels or at all.
We have not established a minimum dividend payment level, and our ability to pay dividends to our stockholders may be materially and adversely affected by the risk factors discussed in our SEC periodic reports. Although we paid, and anticipate continuing to pay, quarterly dividends to our stockholders, our board of directors has the sole discretion to determine the timing, form and amount of any future dividends to our stockholders, and such determination will depend upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, capital requirements and other expense obligations, debt covenants, contractual legal, tax, regulatory and other restrictions and such other factors as our board of directors may deem relevant from time to time. As a result, no assurance can be given that we will be able to continue to pay dividends to our stockholders in the future or that the level of any future dividends will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect the market price of our common stock.
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that other stockholders might consider favorable.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:
| ● | authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval; |
| ● | prohibit stockholder action by written consent unless the matter as to which action is being taken has been approved by our board of |
| ● | provide that our board of directors is expressly authorized to |
| ● | establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and |
| ● | prevent a sale of substantially all of our assets or completion of a merger or other business combination that constitutes a change of control without the |
These and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of and take other corporate actions.
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Our bylaws include an exclusive forum provision that could limit our stockholders’ ability to obtain a judicial forum viewed by the stockholders as more favorable for disputes with us or our directors, officers or other employees.
Our bylaws provide that the state or federal court located within the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other associates, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the exclusive forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition, liquidity and results of operations.
Ownership of Our Common Stock
The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
The market price and trading volume of our common stock has fluctuated significantly in the past and may be highly volatile in the future and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Further, if the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. Some of the factors that could negatively affect the market price or trading volume of our common stock include:
anticipated financial and operating results and those expected by investors and analysts; Total number Total number of Approximate dollar October 1, 2020 – October 31, 2020 — $ — — $ 236,842,078 November 1, 2020 – November 30, 2020 1,169,568 $ 55.86 1,169,568 $ 171,509,814 December 1, 2020 – December 31, 2020 389,194 $ 61.50 389,194 $ 147,572,535 Total 1,558,762 $ 57.27 1,558,762 $ 147,572,535 These broad market and industry factors may decrease the market price and trading volume of our common stock, regardless of our actual operating performance. The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock into the public trading market. We were founded in 2008 by members of our executive leadership team and strategic investors, including HC Partners, our largest stockholder. Sales of substantial numbers of shares of our common stock into the public trading market by HC Partners, or the perception that such sales could occur, could adversely affect the market price of our common stock and impede our ability to raise capital through the issuance of additional common stock or other equity securities. 44 The future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise will dilute all other stockholdings. As of December 31, 2022, we have an aggregate of 4.6 million shares of common stock authorized and remaining available for future issuance under our 2022 Equity Incentive Plan. We may issue all of these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. Any common stock issued in connection with our equity incentive plans or future acquisitions would dilute the percentage ownership held by investors who purchase our common stock. Future offerings of debt or equity securities by us may adversely affect the market price of our common stock. In the future, we may attempt to obtain financing or further increase our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including commercial paper, medium-term notes, senior or subordinated notes, convertible debt securities or shares of preferred stock. The issuance of additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred stock, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred stock, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Any issuance of securities in future offerings may reduce the market price of our common stock and dilute existing stockholders’ interests in us. General Risks Our risk management efforts may not be effective. We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk, climate risk and other market-related risks, as well as operational and legal risks related to our business, assets, and liabilities. We also are subject to various laws, regulations and rules that are not industry specific, including employment laws related to employee hiring and termination practices, health and safety laws, environmental laws and other federal, state and local laws, regulations and rules in the jurisdictions in which we operate. Our risk management policies, procedures, and techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have identified, or identify additional risks to which we may become subject in the future. Our risk management framework is designed to identify, monitor and mitigate risks that could have a negative impact on our financial condition or reputation. This framework includes divisions or groups dedicated to enterprise risk management, credit risk, climate risk, corporate sustainability and ESG, information security, disaster recovery and other information technology-related risks, business continuity, legal and compliance, compensation structures and other human resources matters, vendor management and internal audit, among others. Expansion of our business activities may also result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks, and we may not effectively identify, manage, monitor, and mitigate these risks as our business activities change or increase. 45 Initiating new business activities, developing new products or significantly expanding existing business activities may expose us to new risks and increase our cost of doing business. Initiating new business activities, developing new products, or significantly expanding existing business activities, such as our consumer direct and wholesale broker lending businesses, may expose us to new risks and regulatory compliance requirements. We cannot be certain that we will be able to manage these risks and compliance requirements effectively. Furthermore, our efforts may not succeed, and any revenues we earn from any new or expanded business initiative may not be sufficient to offset the initial and ongoing costs of that initiative, which would result in a loss with respect to that initiative. We could be harmed by misconduct or fraud that is difficult to detect. We are exposed to risks relating to misconduct by our employees, contractors we use, or other third parties with whom we have relationships. For example, our employees could execute unauthorized transactions, use our assets improperly or without authorization, perform improper activities, use confidential information for improper purposes, or misrecord or otherwise try to hide improper activities from us. This type of misconduct could also relate to assets we manage for others through our investment advisory subsidiary, and can be difficult to detect. If not prevented or detected, misconduct by employees, contractors, or others could result in losses, claims or enforcement actions against us, or could seriously harm our reputation. Our controls may not be effective in detecting this type of activity. If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could harm our business and the market value of our common stock. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires that we evaluate and report on our internal control over financial reporting. We cannot be certain that we will be successful in maintaining adequate control over our financial reporting and financial processes. Section 404(b) of the Sarbanes-Oxley Act requires our auditors to formally attest to and report on the effectiveness of our internal control over financial reporting. If we cannot maintain effective internal control over financial reporting, or our independent registered public accounting firm cannot provide an unqualified attestation report on the effectiveness of our internal control over financial reporting, investor confidence and, in turn, the market price of our common stock could decline. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could result in an event of default under one or more of our lending arrangements and/or reduce the market value of shares of our common stock. Additionally, the existence of any material weakness or significant deficiency could require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency, and management may not be able to remediate any such material weakness or significant deficiency in a timely manner, or at all. Accordingly, our failure to maintain effective internal control over financial reporting could result in misstatements of our financial results or restatements of our financial statements or otherwise have a material adverse effect on our business, financial condition, liquidity and results of operations. Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of theft of certain personally identifiable information of consumers, misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our investor relationships. 46 As our reliance on rapidly changing technology has increased, so have the risks posed to our information systems, both proprietary and those provided to us by third-party service providers including cloud-based computing service providers. System disruptions and failures caused by fire, power loss, telecommunications outages, unauthorized intrusion, malware, natural disasters and other similar events may interrupt or delay our ability to provide services to our customers. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased, which, in turn, may lead to increased costs to protect our network and systems. Despite our efforts to ensure the integrity of our systems and our investment in significant physical and technological security measures, employee training, contractual precautions, policies and procedures, board oversight and business continuity plans, there can be no assurance that any such cyber intrusions will not occur or, if they do occur, that they will be adequately addressed. We also may not be able to anticipate or implement effective preventive measures against all security breaches, especially because the methods of attack change frequently or may not be recognized until after such attack has been launched, and because security attacks can originate from a wide variety of sources, including third parties such as persons involved with organized crime or associated with external service providers. Additionally, third-party security events at our vendors or other service providers could also impact our data and operations via unauthorized access to information or disruption of services. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as the adoption of standard data protection policies. We are also held accountable for the actions and inactions of our third-party vendors regarding cybersecurity and other consumer-related matters. Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We operate in a highly competitive market and decreased margins resulting from increased competition or our inability to compete successfully could adversely affect our business, financial condition, liquidity and results of operations. We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. With respect to mortgage loan production, we face competition in such areas as mortgage loan offerings, rates, fees and customer service. With respect to servicing, we face competition in areas such as fees, cost to service and service levels, including our performance in reducing delinquencies and entering into successful modifications. Large commercial banks and savings institutions and other non-bank mortgage originators and servicers are increasingly competitive in the origination or acquisition of newly originated mortgage loans and the servicing of mortgage loans. Many of these institutions have significantly greater resources and access to capital and financing arrangements than we do, which may give them the benefit of a lower cost of funds. Additionally, our existing and potential competitors may decide to modify their business models to compete more directly with our loan production and servicing models. As new competitors enter these markets and as commercial banks aggressively compete for market share, our mortgage banking businesses may generate lower volumes and/or margins. If our loan production volumes and profit margins significantly decrease, then our business, financial condition, liquidity and results of operations could be materially and adversely affected. 47 Our future success depends on our ability to continue to hire, integrate, develop and retain highly qualified personnel. Any talent acquisition and retention challenges could reduce our operating efficiency, increase our costs of operations and harm our overall financial condition. We could face these additional challenges if competition for qualified personnel intensifies or the pool of qualified candidates becomes more limited. Additionally, we invest heavily in training our personnel, which increases their value to competitors who may seek to recruit them. If we are unable to attract and retain qualified personnel, we may not be able to take advantage of future business opportunities and this could materially affect our business, financial condition and results of operations. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. We may not be able to effectively implement new technology-driven products and services as quickly as competitors or be successful in marketing these products and services to our clients. In addition, technological advances and heightened e-commerce activities have increased consumers’ access to products and services. This has intensified competition among banks and non-banks in offering and servicing mortgage loans. To the extent we are unable to keep pace with technological advances, we may be unable to compete successfully in our mortgage banking businesses and this could materially and adversely affect our business, financial condition, liquidity and results of operations. Item 1B. Unresolved Staff Comments None. Item 2. Properties As of December 31, 2022, we have approximately 20 leased facilities in various locations throughout the United States. Our principal executive offices are located at 3043 & 3059 Townsgate Road, Westlake Village, California 91361 and total approximately 66,000 of leased square feet. Our business segment operations and support offices are primarily in the following locations in the United States: We believe that our current facilities are sufficient for the operation of our business. We periodically review our space requirements and we look to consolidate and dispose of facilities we no longer need, as and when appropriate. The financial commitments of our leases are disclosed in Note 10— Leases to our consolidated financial statements included in Item 8 of this Report. Item 3. Legal Proceedings From time to time, we may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, we currently believe that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on our financial condition, results of operations, or cash flows. See Note 16 — Commitments and Contingencies, to the financial statements contained in this Report for a discussion of legal proceedings that are incorporated by reference into this Item 3. Item 4. Mine Safety Disclosures Not applicable. 48 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our shares of common stock are listed on the New York Stock Exchange (Symbol: PFSI). As of February 17, 2023, our shares of common stock were held by 26 holders of record. Our dividend level is reviewed each quarter and determined based on a number of factors, including, among other things, our earnings, our financial condition, growth outlook, the capital required to support ongoing growth opportunities and compliance with other internal and external requirements. Payments of dividends are subject to approval by our board of directors. Our ability to pay dividends may be adversely affected for the reasons described in Item 1A of this Report in the section entitled Risk Factors. Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of unregistered equity securities during the year ended December 31, 2022. Repurchase of our Common Stock The following table summarized the stock repurchase activity for the quarter ended December 31, 2022: Total number Total number of Approximate dollar October 1, 2022 – October 31, 2022 1,002,354 $ 46.46 1,002,354 $ 288,048,024 November 1, 2022 – November 30, 2022 71,400 $ 52.51 71,400 $ 284,298,967 December 1, 2022 – December 31, 2022 18,187 $ 55.33 18,187 $ 283,292,664 Total 1,091,941 $ 47.01 1,091,941 $ 283,292,664 Item 6. Reserved 49 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Report. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in the section titled “Risk Factors” included elsewhere in this Report. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Critical Accounting Policies Preparation of financial statements in compliance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates. Fair Value We group assets measured at or based on fair value in three levels based on the markets in which the assets are traded and the observability of the inputs used to determine fair value. These levels are: December 31, 2020 December 31, 2022 Percentage of Percentage of Level/Description Level/Description Carrying value of Total assets Total stockholders' equity Level/Description Carrying value of Total assets Total stockholders' equity (in thousands) (in thousands) Level 1: Prices determined using quoted prices in active markets for identical assets or liabilities. $ 23,233 0% 1% Level 2: Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of us. 6,965,597 22% 206% Level 3: Prices determined using significant unobservable inputs. Unobservable inputs reflect our judgements about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances. 7,948,462 25% 235% 1: Prices determined using quoted prices in active markets for identical assets or liabilities. $ 45,146 0% 1% 2: Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of us. 3,193,780 19% 92% 3: Prices determined using significant unobservable inputs. Unobservable inputs reflect our judgements about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances. 6,347,618 38% 183% Total assets measured at or based on fair value (1) Total assets measured at or based on fair value (1) $ 14,937,292 47% 441% Total assets measured at or based on fair value (1) $ 9,586,544 57% 276% Total assets Total assets $ 31,597,795 Total assets $ 16,822,584 Total stockholders' equity Total stockholders' equity $ 3,389,388 Total stockholders' equity $ 3,471,049 At December 31, Changes in fair value of our holdings of assets carried at fair value have significant effects on our financial position and results of operations. As summarized above, changes in fair values of “Level 1” and “Level 2” fair value assets are determinable with reference to direct quotes in active markets on the measurement date in the case of “Level 1” fair value assets, or reference to publicly available pricing inputs (such as reference interest rates and credit spreads and prices of similar $ During the three years ended December 31, Interest Loans held Mortgage Excess Mortgage Interest Loans held Mortgage Excess Mortgage Year ended rate lock for sale at servicing servicing servicing rate lock for sale at servicing servicing servicing Pre-tax December 31, commitments fair value rights (1) spread financing liabilities (1) Total commitments fair value rights (1) spread financing liabilities (1) Total Income (positive (negative) effects on income in thousands) (positive (negative) effects on net revenues in thousands) 2022 $ (624,905) (66,639) 877,324 — 347 $ 186,127 $ 665,247 2021 $ 489,547 285,501 (136,350) (1,037) 68,020 $ 705,681 $ 1,359,183 2020 $ 1,254,235 $ 127,780 $ (1,078,084) $ 24,970 $ (31,757) $ 297,144 $ 1,254,235 127,780 (1,078,084) 24,970 (31,757) $ 297,144 $ 2,240,609 2019 $ 331,067 $ (6,332) $ (550,666) $ 9,256 $ (8,377) $ (225,052) 2018 $ 1,285 �� $ 158 $ 174,458 $ (8,500) $ (10,787) $ 156,614 The changes above primarily reflect changes attributable to our observations of changes in the markets for those assets and liabilities as opposed to changes in accounting policies or approaches to the valuation of those instruments. As a result of the difficulty in observing certain significant valuation inputs affecting our “Level 3” fair value assets and liabilities, we are required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets, subsequent transactions may be at values significantly different from those reported. Because the fair value of “Level 3” fair value assets and liabilities are difficult to estimate, our valuation process includes performance of these items’ fair value estimation by specialized staff with significant senior management oversight. We have assigned the responsibility for estimating the fair values of non-interest rate lock commitment The fair value of our Following is a discussion of our approach to measuring the balance sheet items that are most affected by “Level 3” fair value estimates. 51 Interest Rate Lock Commitments Our net gains on loans held for sale include our estimates of the gains or losses we expect to realize upon the sale of loans we have contractually committed to fund or purchase but have not yet funded, purchased or sold. We recognize a substantial portion of our net gains on loans held for sale at fair value before we fund or purchase the loans as the result of these commitments. We call these commitments IRLCs. We recognize the fair value of IRLCs at the time we make the commitment to the correspondent seller, broker or loan applicant and adjust the fair value of such IRLCs as the loan approaches the point of funding or purchase or the prospective transaction is canceled. We carry IRLCs as either Derivative assets or Derivative liabilities on our consolidated balance sheet. The fair value of an IRLC is transferred to Loans held for sale at fair value when the loan is funded or purchased. An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using methods we believe that market participants use in pricing IRLCs. We estimate the fair value of IRLCs based on observable Agency MBS prices, our estimates of the fair value of the MSRs we expect to receive in the sale of the loans and the probability that we will fund or purchase the loans (the “pull-through rate”). Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the marketplace. Our estimate of the probability that a loan will be funded and market interest rates are updated as the loans move through the funding or purchase process and as market interest rates change and may result in significant changes in our estimates of the fair value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Net gains on loans held for sale at fair value in the period of the change. The financial effects of changes in these inputs are generally inversely correlated. 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 loan principal and interest payment cash flow component, which decreases in fair value. A shift in our assessment of an input to the valuation of IRLCs can have a significant effect on the amount of Net gains on loans held for sale at fair value for the period. We believe that the most significant “Level 3” fair value input to the measurement of IRLCs is the pull-through rate. At December 31, 2022, we held $25.8 million of net IRLC assets at fair value. Following is a quantitative summary of the effect of changes in the pull-through rate input on the fair value of IRLCs at December 31, 2022: Change in input (1) Effect on fair value of IRLC of a change in pull-through rate (in thousands) (20) % $ (8,207) (10) % $ (4,095) (5) % $ (2,039) 5 % $ 2,124 10 % $ 4,161 20 % $ 7,420 52 The preceding analysis holds constant all of the other inputs to show an estimate of the effect on fair value of a change in the pull-through rate. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analysis is not a projection of the effects of a shock event or a change in our estimate of an input and should not be relied upon as an earnings projection. Loans Held for Sale We carry loans at their fair values. We recognize changes in the fair value of loans in current period income as a component of Net gains on loans held for sale at fair value. How we estimate the fair value of loans is based on whether the loans are saleable into active markets with observable fair value inputs. We use a discounted cash flow model to estimate the fair value of “Level 3” fair value loans. The significant unobservable inputs used in the fair value measurement of our “Level 3” fair value loans held for sale are discount rates, home price projections and prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Change in input (1) Effect on fair value of IRLC of a change in pull-through rate (in thousands) (20) % $ (169,132) (10) % $ (84,358) (5) % $ (41,971) 5 % $ 39,660 10 % $ 75,157 20 % $ 130,170 Mortgage Servicing Rights and Mortgage Servicing Liabilities MSRs and MSLs represent the fair value assigned to contracts that obligate us to service the mortgage loans on behalf of the owners of the mortgage loans in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We recognize MSRs and MSLs at our estimate of the fair value of the contract to service the loans. 53 We include changes in fair value of MSRs and MSLs in current period income as a component of Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities. Both our estimate of the change in fair value attributable to realization of cash flows and of We A shift in the market for MSRs and MSLs or a change in our assessment of an input to the valuation of MSRs and MSLs can have a significant effect on their fair value and in our income for the period. The net fair value of MSRs and MSLs that we held at December 31, Following is a summary of the effect on fair value of MSRs of various changes to these key inputs at December 31, Effect on fair value of MSRs of a change in input value Effect on fair value of MSRs and MSLs of a change in input value Change in input Change in input Pricing spread Prepayment speed Servicing cost Change in input Pricing spread Prepayment speed Servicing cost (in thousands) (in thousands) (20) % $ 205,305 $ 297,863 $ 101,929 % $ 347,610 $ 337,167 $ 165,053 (10) % $ 98,449 $ 142,208 $ 50,964 % $ 168,917 $ 162,725 $ 82,527 (5) % $ 48,232 $ 69,521 $ 25,482 % $ 83,283 $ 79,976 $ 41,263 5 % $ (46,356) $ (66,536) $ (25,482) % $ (81,021) $ (77,346) $ (41,263) 10 % $ (90,936) $ (130,253) $ (50,964) % $ (159,863) $ (152,192) $ (82,527) 20 % $ (175,137) $ (249,843) $ (101,929) % $ (311,329) $ (294,872) $ (165,053) The preceding analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the effect on fair value of a change in a specific input. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections. Effect on fair value of excess servicing spread of a change in input value Change in input Pricing spread Prepayment speed (in thousands) (20) % $ 5,766 $ 13,977 (10) % $ 2,824 $ 6,701 (5) % $ 1,397 $ 3,282 5 % $ (1,369) $ (3,154) 10 % $ (2,711) $ (6,185) 20 % $ (5,316) $ (11,907) Results of Operations Due to significant inflationary pressures, the U.S. Federal Reserve raised the federal funds rates throughout the year in 2022, as well as reduced its overall holdings of Year ended December 31, 2020 2019 2018 (dollars in thousands except closing prices and per share amounts) Revenues: Net gains on loans held for sale at fair value $ 2,740,785 $ 725,528 $ 249,022 Loan origination fees 285,551 174,156 101,641 Fulfillment fees from PennyMac Mortgage Investment Trust 222,200 160,610 81,350 Net loan servicing fees 439,448 293,665 445,393 Net interest (expense) income (24,525) 76,721 71,819 Management fees 34,538 36,492 24,104 Other 7,600 10,232 11,300 Total net revenue 3,705,597 1,477,404 984,629 Expenses: Compensation 738,569 503,458 403,270 Servicing 256,934 164,697 137,104 Loan origination 219,746 117,338 27,398 Other 249,739 162,467 149,160 Total expenses 1,464,988 947,960 716,932 Income before provision for income taxes 2,240,609 529,444 267,697 Provision for income taxes 593,725 136,479 23,254 Net income $ 1,646,884 $ 392,965 $ 244,443 Earnings per share Basic $ 21.91 $ 5.02 $ 2.62 Diluted $ 20.92 $ 4.89 $ 2.59 Return on average common stockholders' equity 61.4 % 21.6 % 12.7 % Income before provision for income taxes by segment: Mortgage banking: Production $ 1,964,121 $ 527,834 $ 87,266 Servicing 262,144 (14,751) 172,302 Total mortgage banking 2,226,265 513,083 259,568 Investment management 14,344 16,361 7,003 Non-segment activities (1) — — 1,126 $ 2,240,609 $ 529,444 $ 267,697 Adjusted Earning Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (2) $ 2,488,716 $ 726,140 $ 274,196 During the year: Interest rate lock commitments issued $ 125,614,670 $ 72,698,014 $ 44,786,584 Common stock closing prices: High $ 69.49 $ 34.45 $ 25.20 Low $ 16.90 $ 20.34 $ 18.77 At end of year $ 65.62 $ 34.04 $ 21.26 At end of year: Interest rate lock commitments outstanding 20,624,535 7,122,316 2,805,400 Unpaid principal balance of loan servicing portfolio: Owned: Mortgage servicing rights $ 238,410,809 $ 225,787,104 $ 201,054,144 Mortgage servicing liabilities 2,857,492 2,758,454 1,160,938 Loans held for sale 11,063,938 4,724,006 2,420,636 252,332,239 233,269,564 204,635,718 Subserviced for PMT 174,418,591 135,414,668 94,658,154 $ 426,750,830 $ 368,684,232 $ 299,293,872 Net assets of PennyMac Mortgage Investment Trust $ 2,296,859 $ 2,450,916 $ 1,556,132 Book value per share $ 47.80 $ 26.26 $ 21.34 Lower projected mortgage transaction volumes and increasing interest rates caused a decrease in all mortgage production activities, reduced gains from the redelivery of EBO loans bought from Ginnie Mae securities and increased competition in the mortgage production business, while also leading to a reduction in prepayment speeds in our mortgage servicing portfolio from the elevated levels experienced in 2021. Rising interest rates increased the costs of certain floating rate borrowings, as well as driving higher earnings rates from our placement fees on deposits and loans held for sale. We expect some of these business trends to continue in 2023. Due to the significant contraction in the mortgage market, we reduced business expenses to align with the lower mortgage production activities during the year ended December 31, 2022 and expected mortgage production activity levels in 2023. Our results of operations are summarized below: Year ended December 31, 2022 2021 2020 (dollars in thousands except per share amounts) Revenues: Net gains on loans held for sale at fair value $ 791,633 $ 2,464,401 $ 2,740,785 Loan origination fees 169,859 384,154 285,551 Fulfillment fees from PennyMac Mortgage Investment Trust 67,991 178,927 222,200 Net loan servicing fees 951,329 182,954 439,448 Net interest expense (41,365) (90,530) (24,525) Management fees 31,065 37,801 34,538 Other 15,243 9,654 7,600 Total net revenues 1,985,755 3,167,361 3,705,597 Expenses: Compensation 735,231 999,802 738,569 Loan origination 173,622 330,788 219,746 Technology 139,950 141,426 112,570 Servicing 59,628 109,835 256,934 Other 212,077 226,327 137,169 Total expenses 1,320,508 1,808,178 1,464,988 Income before provision for income taxes 665,247 1,359,183 2,240,609 Provision for income taxes 189,740 355,693 593,725 Net income $ 475,507 $ 1,003,490 $ 1,646,884 Earnings per share Basic $ 8.96 $ 15.73 $ 21.91 Diluted $ 8.50 $ 14.87 $ 20.92 Return on average stockholders' equity 13.8% 28.9% 61.4% Dividends declared per share $ 0.80 $ 0.80 $ 0.54 Income before provision for income taxes by segment: Mortgage banking: Production $ 48,480 $ 1,044,411 $ 1,964,121 Servicing 613,626 306,678 262,144 Total mortgage banking 662,106 1,351,089 2,226,265 Investment management 3,141 8,094 14,344 $ 665,247 $ 1,359,183 $ 2,240,609 Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") (1) $ 591,055 $ 2,040,581 $ 2,488,716 During the year: Interest rate lock commitments issued $ 80,143,406 $ 141,433,359 $ 125,614,670 Common stock closing per share prices: High $ 70.10 $ 70.57 $ 69.49 Low $ 39.73 $ 56.53 $ 16.90 At end of year $ 56.66 $ 70.57 $ 65.62 At end of year: Interest rate lock commitments outstanding $ 7,009,119 $ 14,111,795 $ 20,624,535 Unpaid principal balance of loan servicing portfolio: Owned: Mortgage servicing rights and liabilities $ 314,600,796 $ 278,385,373 $ 241,268,301 Loans held for sale 3,498,214 9,430,766 11,063,938 318,099,010 287,816,139 252,332,239 Subserviced for PMT 233,575,672 221,892,142 174,418,591 $ 551,674,682 $ 509,708,281 $ 426,750,830 Net assets of PennyMac Mortgage Investment Trust $ 1,962,815 $ 2,367,518 $ 2,296,859 Book value per share $ 69.44 $ 60.11 $ 47.80 We define “Adjusted EBITDA” as net income 56 our valuation We believe that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. However, other companies may define Adjusted EBITDA differently, and as a result, our measures of Adjusted EBITDA may not be directly comparable to those of other companies. Adjusted EBITDA measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under Because of these limitations, Adjusted EBITDA measures are not intended as alternatives to net income as an indicator of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. The following table presents a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each of the years indicated: Year ended December 31, 2020 2019 2018 (in thousands) Net income attributable to PFSI common stockholders $ 1,646,884 $ 392,965 $ 87,694 Net income attributable to noncontrolling interest — — 156,749 Net income 1,646,884 392,965 244,443 Provision for income taxes 593,725 136,479 23,254 Income before provisions for income taxes 2,240,609 529,444 267,697 Depreciation and amortization 25,575 15,021 12,925 Decrease (increase) in fair value of MSRs and MSLs due to changes in valuation inputs used in valuation model 1,109,841 559,043 (163,671) (Decrease) increase in fair value of ESS payable to PennyMac Mortgage Investment Trust (24,970) (9,256) 8,500 Hedging (gains) losses associated with MSRs (918,180) (395,497) 121,045 Stock‑based compensation 45,105 24,771 25,251 Interest expense on corporate debt or corporate revolving credit facilities and capital lease 10,736 2,614 2,449 Adjusted EBITDA $ 2,488,716 $ 726,140 $ 274,196 Year ended December 31, 2022 2021 2020 (in thousands) Net income $ 475,507 $ 1,003,490 $ 1,646,884 Provision for income taxes 189,740 355,693 593,725 Income before provision for income taxes 665,247 1,359,183 2,240,609 Depreciation and amortization 34,409 28,645 25,575 (Increase) decrease in fair value of MSRs net of MSLs due to changes in valuation inputs used in valuation models (877,671) 68,330 1,109,841 Increase (decrease) in fair value of ESS payable to PennyMac Mortgage Investment Trust — 1,037 (24,970) Hedging losses (gains) associated with MSRs 631,484 475,215 (918,180) Stock‑based compensation 42,552 37,794 45,105 Interest expense on corporate debt or corporate revolving credit facilities and capital lease 95,034 70,377 10,736 Adjusted EBITDA $ 591,055 $ 2,040,581 $ 2,488,716 Comparison of the years ended December 31, In the year ended December 31, Net gains on loans held for sale at fair value In the year ended December 31, 2022, we recognized Net gains on loans held for sale at fair value totaling $791.6 million, as compared to $2.5 billion and $2.7 billion 58 Our net gains on loans held for sale are summarized below: Year ended December 31, 2020 2019 2018 (in thousands) From non-affiliates: Cash gain (loss): Loans $ 2,025,260 $ (190,853) $ (469,647) Hedging activities (767,588) (175,305) 93,288 Total cash gain (loss) 1,257,672 (366,158) (376,359) Non-cash gain: Change in fair value of loans and derivative financial instruments outstanding at end of year: Interest rate lock commitments 540,376 87,312 (8,934) Loans (326,986) (42,878) (1,506) Hedging derivatives 116,690 17,499 (11,766) 330,080 61,933 (22,206) Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales 1,114,720 846,888 584,156 Provision for losses relating to representations and warranties: Pursuant to loan sales (21,035) (8,377) (5,824) Reduction in liability due to change in estimate 8,667 7,877 4,672 Total non-cash gain 1,432,432 908,321 560,798 Total gains on sale from non-affiliates 2,690,104 542,163 184,439 From PennyMac Mortgage Investment Trust (1) 50,681 183,365 64,583 $ 2,740,785 $ 725,528 $ 249,022 During the year: Interest rate lock commitments issued: Government-insured or guaranteed mortgage loans $ 91,922,406 $ 62,772,725 $ 40,193,531 Conventional mortgage loans 33,682,284 9,886,462 4,592,412 Jumbo mortgage loans 8,304 29,641 641 Home equity lines of credit 1,676 9,186 — $ 125,614,670 $ 72,698,014 $ 44,786,584 At end of year: Loans held for sale at fair value $ 11,616,400 $ 4,912,953 $ 2,521,647 Commitments to fund and purchase loans $ 20,624,535 $ 7,122,316 $ 2,805,400 Year ended December 31, 2022 2021 2020 (in thousands) From non-affiliates: Cash (losses) gains: Loans $ (2,128,195) $ 600,840 $ 2,025,260 Hedging activities 1,347,843 443,341 (767,588) Total cash (losses) gains (780,352) 1,044,181 1,257,672 Non-cash (losses) gains: Change in fair value of loans and derivative financial instruments outstanding at end of year: Interest rate lock commitments (296,349) (354,833) 540,376 Loans 188,849 210,961 (326,986) Hedging derivatives (20,879) (124,200) 116,690 (128,379) (268,072) 330,080 Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales 1,718,094 1,755,318 1,114,720 Provisions for losses relating to representations and warranties: Pursuant to loan sales (9,617) (31,590) (21,035) Reductions in liability due to change in estimate 8,451 16,037 8,667 Total non-cash gains 1,588,549 1,471,693 1,432,432 Total gains on sale from non-affiliates 808,197 2,515,874 2,690,104 From PennyMac Mortgage Investment Trust (primarily cash) (16,564) (51,473) 50,681 $ 791,633 $ 2,464,401 $ 2,740,785 During the year: Interest rate lock commitments issued: By loan type: Government-insured or guaranteed loans $ 57,882,469 $ 95,070,027 $ 91,922,406 Conventional conforming loans 22,060,564 46,363,332 33,682,284 Jumbo loans 98,158 — 8,304 Home equity loans 102,215 — — Home equity lines of credit — — 1,676 $ 80,143,406 $ 141,433,359 $ 125,614,670 By production channel: Consumer direct $ 18,925,722 $ 58,018,371 $ 39,850,344 Broker direct 9,625,043 18,920,730 18,077,816 Correspondent 51,592,641 64,494,258 67,686,510 $ 80,143,406 $ 141,433,359 $ 125,614,670 At end of year: Loans held for sale at fair value $ 3,509,300 $ 9,742,483 $ 11,616,400 Commitments to fund and purchase loans $ 7,009,119 $ 14,111,795 $ 20,624,535 Our gains on loans held for sale 59 The MSRs, Interest Rate Lock Commitments, Mortgage Servicing Rights and Mortgage Servicing Liabilities The methods and key inputs we use to measure and update our measurements of IRLCs, MSRs and MSLs is detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Annual Report. Representations and Warranties Our agreements with the purchasers and insurers include representations and warranties related to the loans we sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller. Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current UPB of loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties. The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas. The method used to estimate our losses on representations and warranties is a function of our estimate of future defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and review our liability estimate on a periodic basis. Following is a summary of mortgage loan repurchase activity and the unpaid balance of mortgage loans subject to representations and warranties: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) During the year: Indemnification activity: Loans indemnified by PFSI at beginning of year $ 15,366 $ 8,899 $ 7,579 Loans indemnified at beginning of year $ 15,079 $ 13,788 $ 15,366 New indemnifications 4,544 11,629 4,511 24,016 9,544 4,544 Less indemnified loans sold, repaid or refinanced 6,122 5,162 3,191 3,134 8,253 6,122 Loans indemnified by PFSI at end of year $ 13,788 $ 15,366 $ 8,899 Loans indemnified at end of year $ 35,961 $ 15,079 $ 13,788 Repurchase activity: Total loans repurchased by PFSI $ 58,410 $ 18,660 $ 26,025 Total loans repurchased $ 93,011 $ 99,496 $ 58,410 Less: Loans repurchased by correspondent lenders 28,658 12,396 18,127 32,660 37,280 28,658 Loans repaid by borrowers or resold with defects resolved 24,810 6,735 2,138 54,044 25,223 24,810 Net loans repurchased (resolved) with losses chargeable to liability for representations and warranties $ 4,942 $ (471) $ 5,760 Net losses charged to liability for representations and warranties $ 1,126 $ 209 $ 50 Net loans repurchased with losses chargeable to liability for representations and warranties $ 6,307 $ 36,993 $ 4,942 Losses charged to liability for representations and warranties $ 12,266 $ 4,720 $ 1,126 At end of year: Unpaid principal balance of loans subject to representations and warranties $ 210,222,447 $ 177,611,568 $ 296,774,121 $ 257,369,777 $ 210,222,447 Liability for representations and warranties $ 32,688 $ 21,446 $ 32,421 $ 43,521 $ 32,688 If the outstanding balance of loans we purchase and sell subject to representations and warranties increases, the loans sold continue to season, economic conditions change, correspondent lenders become unwilling or unable to repurchase defective loans, or investor and insurer loss mitigation strategies are adjusted, the level of repurchase and loss activity may The recent increases in market interest rates may affect certain of our correspondent sellers’ ability to honor their obligations to repurchase defective loans. Furthermore, these market factors and the expected economic slowdown may increase the level of borrower defaults, increasing the level of repurchases we are required to make, and may make it more difficult to minimize losses on repurchased loans due to reduced opportunities to refinance loans and decreasing market values for resales of loans. We expect these developments will increase the losses we incur in relation to our representations and warranties compared to our historical experience. However, we believe our recorded liability is presently adequate to absorb such losses. 61 Loan origination fees Following is a summary of our loan origination fees: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Loan origination fee revenue $ 285,551 $ 174,156 $ 101,641 $ 169,859 $ 384,154 $ 285,551 Unpaid principal balance of loans purchased and originated for sale $ 96,200,101 $ 61,531,095 $ 41,444,793 Unpaid principal balance of loans purchased and originated for sale to non-affiliates $ 72,025,798 $ 124,594,308 $ 96,200,101 Loan origination fees Fulfillment fees Following is a summary of our fulfillment fees: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Fulfillment fee revenue $ 222,200 $ 160,610 $ 81,350 $ 67,991 $ 178,927 $ 222,200 Unpaid principal balance of loans fulfilled subject to fulfillment fees $ 100,389,252 $ 56,033,704 $ 26,194,303 $ 37,090,031 $ 110,003,574 $ 100,389,252 Average fulfillment fee rate (in basis points) 18 16 22 Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. Fulfillment fees Net loan servicing fees Our net loan servicing fee income has two primary components: fees earned for servicing the loans and the effects of MSR and MSL valuation changes, net of hedging results as summarized below: Year ended December 31, 2022 2021 2020 (in thousands) Loan servicing fees $ 1,228,637 $ 1,075,112 $ 998,291 Effects of MSRs and MSLs (277,308) (892,158) (558,843) Net loan servicing fees $ 951,329 $ 182,954 $ 439,448 62 Loan Servicing Fees Following is a summary of our Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Net loan servicing fees: Loan servicing fees: From non-affiliates $ 814,646 $ 730,165 $ 585,101 $ 1,054,828 $ 875,570 $ 814,646 From PennyMac Mortgage Investment Trust 67,181 48,797 42,045 81,915 80,658 67,181 From Investment Funds — — 3 Other Late charges 48,166 34,957 41,100 Other 116,464 98,564 64,133 43,728 83,927 75,364 998,291 877,526 691,282 91,894 118,884 116,464 Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results (558,843) (583,861) (245,889) Net loan servicing fees $ 439,448 $ 293,665 $ 445,393 $ 1,228,637 $ 1,075,112 $ 998,291 Average loan servicing portfolio $ 393,503,691 $ 334,169,204 $ 269,402,670 MSRs and MSLs $ 297,207,950 $ 258,759,523 $ 235,567,838 Subserviced for PMT $ 226,817,005 $ 202,047,495 $ 151,379,311 Loan servicing fees from non-affiliates generally relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the unpaid principal balance of the loan serviced and we collect these fees from borrower payments. Loan servicing fees from PMT are primarily related to PMT’s MSRs and are established at monthly per-loan amounts based on whether the loan is a fixed-rate or adjustable-rate loan and the loan’s delinquency or foreclosure status as detailed in Note 4 – Transactions with Affiliates to the consolidated financial statements included in this Annual Report. Other loan servicing fees are comprised primarily of fees charged to correspondent lenders relating to loans that are repaid shortly after we purchase them and borrower-contracted fees such as late charges and reconveyance fees. The increases in loan servicing fees from non-affiliates and from PMT for the year ended December 31, 2022, compared to 2021 and 2020, were primarily due to growth of our loan servicing portfolio. The decrease in other loan servicing fees for the year ended December 31, 2022 compared to 2021 was primarily due to a decrease in fees charged to correspondent lenders related to borrower early loan payoffs and decreased recording and release fees charged to borrowers due to lower prepayment activity we experienced in the current rising interest rate environment compared to 2021. The increases in other loan servicing fees for the year ended December 31, 2021 compared to 2020 was primarily due to an increase in fees charged to correspondent lenders related to borrower early loan payoffs resulting from the low interest rate environment. Mortgage Servicing Rights and Mortgage Servicing Liabilities We have elected to carry our servicing assets and liabilities at fair value. Changes in fair value have two components: changes due to realization of the contractual servicing fees and changes due to changes in market inputs used to estimate the fair value of MSRs and MSLs. We endeavor to moderate the effects of changes in fair value by entering into derivatives transactions and, until March of 2021, by financing certain of our purchases of MSRs with the sale of a portion of the MSR assets’ cash flows to PMT in the form of ESS certificates. Change in fair value of Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) MSR and MSL valuation changes: Realization of cash flows $ (392,152) $ (429,571) $ (280,015) $ (523,495) $ (347,576) $ (392,152) Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities (1,109,841) (559,043) 163,671 877,671 (68,330) (1,109,841) 354,176 (415,906) (1,501,993) Change in fair value of excess servicing spread 24,970 9,256 (8,500) — (1,037) 24,970 Hedging results 918,180 395,497 (121,045) (631,484) (475,215) 918,180 Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results $ (558,843) $ (583,861) $ (245,889) $ (277,308) $ (892,158) $ (558,843) Average balances: Mortgage servicing rights $ 2,404,621 $ 2,764,105 $ 2,433,758 $ 5,117,835 $ 3,347,980 $ 2,404,621 Mortgage servicing liabilities $ 32,071 $ 18,718 $ 10,506 $ 2,397 $ 55,623 $ 32,071 Excess servicing spread financing $ 153,768 $ 195,461 $ 229,607 $ — $ 21,563 $ 153,768 At year end: At end of year: Mortgage servicing rights $ 2,581,174 $ 2,926,790 $ 2,820,612 $ 5,953,621 $ 3,878,078 $ 2,581,174 Mortgage servicing liabilities $ 45,324 $ 29,140 $ 8,681 $ 2,096 $ 2,816 $ 45,324 Excess servicing spread financing $ 131,750 $ 178,586 $ 216,110 $ — $ — $ 131,750 December 31, December 31, 2020 2019 (in thousands) Loans serviced Prime servicing: Owned: Mortgage servicing rights Originated $ 196,873,590 $ 166,188,825 Acquired 41,537,219 59,598,279 238,410,809 225,787,104 Mortgage servicing liabilities 2,857,492 2,758,454 Loans held for sale 11,063,938 4,724,006 252,332,239 233,269,564 Subserviced for PMT 174,360,317 135,288,944 Total prime servicing 426,692,556 368,558,508 Special servicing subserviced for PMT 58,274 125,724 Total loans serviced $ 426,750,830 $ 368,684,232 Hedging results reflect valuation losses attributable to the effects of interest rate increases on the fair value of the hedging instruments in the year ended December 31, December 31, 2022 2021 (in thousands) Loans serviced Prime servicing: Owned: Mortgage servicing rights and liabilities Originated $ 295,032,674 $ 254,524,015 Acquired 19,568,122 23,861,358 314,600,796 278,385,373 Loans held for sale 3,498,214 9,430,766 318,099,010 287,816,139 Subserviced for PMT 233,554,875 221,864,120 Total prime servicing 551,653,885 509,680,259 Special servicing subserviced for PMT 20,797 28,022 Total loans serviced $ 551,674,682 $ 509,708,281 Delinquencies: Owned servicing (1): 30-89 days $ 11,759,005 $ 6,943,327 90 days or more 7,758,033 9,838,648 $ 19,517,038 $ 16,781,975 Delinquent loans in COVID-19 pandemic-related forbearance: 30-89 days $ 980,597 $ 1,111,151 90 days or more 3,042,923 2,732,089 $ 4,023,520 $ 3,843,240 Subserviced for PMT (1): 30-89 days $ 1,913,495 $ 1,164,782 90 days or more 971,048 1,810,910 $ 2,884,543 $ 2,975,692 Delinquent loans in COVID-19 pandemic-related forbearance: 30-89 days $ 177,195 $ 171,114 90 days or more 466,489 638,703 $ 643,684 $ 809,817 65 Following is a summary of characteristics of our MSR and MSL servicing portfolio as of December 31, 2022: Average Loan type UPB Loan count Note rate Seasoning (months) Remaining Loan size FICO credit score at origination Original LTV (1) Current LTV (1) 60+ Delinquency (by UPB) (Dollars and loan count in thousands) Government (2): FHA $ 117,974,721 613 3.69% 42 321 $ 193 674 93% 67% 5.57% VA 113,773,349 423 3.16% 26 332 $ 269 724 90% 72% 2.25% USDA 21,278,969 144 3.58% 43 320 $ 148 698 98% 68% 5.25% Agency: Fannie Mae 29,202,887 106 3.30% 24 306 $ 275 760 69% 56% 0.46% Freddie Mac 31,754,064 112 3.44% 16 316 $ 282 753 71% 61% 0.43% Other: Other (3) 616,806 2 3.69% 15 334 $ 311 765 65% 59% 0.08% $ 314,600,796 1,400 3.43% 32 323 $ 225 710 88% 67% 3.34% Net Interest Expense Net interest expense is summarized below: Year ended December 31, 2022 2021 2020 (in thousands) Interest income: From non-affiliates: Cash and short-term investments $ 19,839 $ 3,280 $ 6,154 Loans held for sale at fair value 172,124 275,176 184,789 Placement fees relating to custodial funds 102,099 21,326 52,758 294,062 299,782 243,701 From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell — 387 3,325 294,062 300,169 247,026 Interest expense: To non-affiliates: Short-term debt 112,773 168,285 119,248 Long-term debt 174,847 110,159 55,421 Interest shortfall on repayments of mortgage loans serviced for Agency securitizations 40,741 105,430 82,285 Interest on mortgage loan impound deposits 7,066 5,545 6,179 335,427 389,419 263,133 To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value — 1,280 8,418 335,427 390,699 271,551 $ (41,365) $ (90,530) $ (24,525) 66 Net interest expense decreased $49.2 million in the year ended December 31, Net interest Management fees Management fees are summarized below: Year ended December 31, 2022 2021 2020 (in thousands) Base management $ 31,065 $ 34,794 $ 34,538 Performance incentive — 3,007 — $ 31,065 $ 37,801 $ 34,538 Net assets of PMT at end of year $ 1,962,815 $ 2,367,518 $ 2,296,859 Management fees decreased $6.7 million in the year ended December 31, 2022 compared to 2021, reflecting the decrease in PMT’s average shareholders’ equity upon which its base management fees are based and a Management fees increased $3.3 million in the year ended December 31, 2021 compared to 2020. The increase Year ended December 31, 2020 2019 2018 (in thousands) Management fees: PennyMac Mortgage Investment Trust: Base management $ 34,538 $ 29,303 $ 23,033 Performance incentive — 7,189 1,432 $ 34,538 $ 36,492 $ 24,465 Net assets of PMT at end of year $ 2,296,859 $ 2,450,916 $ 1,566,132 Change in Fair Value of Investment in and Dividends Received from PMT The results of our holdings of common shares of PMT, which is included in Changes in fair value of investment in, and dividends received from PMT are summarized below: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Dividends from PennyMac Mortgage Investment Trust $ 114 $ 141 $ 140 $ 136 $ 141 $ 114 Change in fair value of investment in PennyMac Mortgage Investment Trust (567) 275 192 (371) 195 (567) Dividends received and change in fair value $ (453) $ 416 $ 332 $ (235) $ 336 $ (453) Fair value of PennyMac Mortgage Investment Trust shares at end of year $ 1,105 $ 1,672 $ 1,397 $ 929 $ 1,300 $ 1,105 Change in fair value of investment in and dividends received from PMT decreased Expenses Compensation Our compensation expense is summarized below: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (dollars in thousands) (dollars in thousands) Salaries and wages $ 437,344 $ 293,987 $ 256,750 $ 445,779 $ 594,188 $ 437,157 Severance 18,797 156 187 Incentive compensation 171,323 124,203 70,574 135,461 248,551 171,323 Taxes and benefits 84,797 60,497 50,695 92,642 119,113 84,797 Stock and unit-based compensation 45,105 24,771 25,251 42,552 37,794 45,105 $ 738,569 $ 503,458 $ 403,270 $ 735,231 $ 999,802 $ 738,569 Head count: Average 5,313 3,709 3,335 5,508 7,118 5,313 Year end 6,632 4,215 3,460 Period end 4,135 7,208 6,632 Compensation expense Loan origination Loan origination expense decreased $157.2 million in the year ended December 31, 2022 compared to 2021 due to decreased lending activities. Loan origination expense increased $111.0 million in the year ended December 31, 2021 compared to 2020 due to increased lending activities. Servicing Servicing expense decreased $50.2 million in the year ended December 31, 2022 compared to 2021 and $147.1 million in the year ended December 31, 2021 compared to 2020. These decreases were primarily due to a larger reversal of the provision for estimated servicing advance losses recorded in prior years and decreased purchases of EBO loans from Ginnie Mae guaranteed pools. The reduction reflects the improvements in the performance of our servicing portfolio due to the resolution of delinquent loans relating to the COVID-19 pandemic. Technology Technology expense Provision for For the years ended December 31, The Balance Sheet Analysis Following is a summary of key balance sheet items as of the dates presented: December 31, December 31, December 31, 2020 2019 2022 2021 (in thousands) (in thousands) ASSETS Cash and short-term investments $ 547,933 $ 262,902 $ 1,340,730 $ 346,942 Loans held for sale at fair value 11,616,400 4,912,953 3,509,300 9,742,483 Derivative assets 711,238 159,686 99,003 333,695 Servicing advances, net 579,528 331,169 696,753 702,160 Investments in and advances to affiliates 168,972 157,343 37,301 41,391 Mortgage servicing rights 2,581,174 2,926,790 5,953,621 3,878,078 Loans eligible for repurchase 14,625,447 1,046,527 4,702,103 3,026,207 Other 767,103 406,647 483,773 705,656 Total assets $ 31,597,795 $ 10,204,017 $ 16,822,584 $ 18,776,612 LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt $ 10,176,274 $ 4,639,001 $ 3,288,875 $ 7,772,580 Long-term debt 2,085,274 1,493,466 3,722,566 3,077,330 7,011,441 10,849,910 Liability for loans eligible for repurchase 14,625,447 1,046,527 4,702,103 3,026,207 Income taxes payable 622,700 504,569 1,002,744 685,262 Other 698,712 458,947 635,247 796,908 Total liabilities 28,208,407 8,142,510 13,351,535 15,358,287 Stockholders' equity 3,389,388 2,061,507 3,471,049 3,418,325 Total liabilities and stockholders' equity $ 31,597,795 $ 10,204,017 $ 16,822,584 $ 18,776,612 Leverage ratios: Total debt / Stockholders' equity 2.0 3.2 Total debt / Tangible stockholders' equity (1) 2.1 3.3 Total assets Total liabilities Cash Flows Our cash flows for the three years ended December 31, Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Operating $ (6,198,938) $ (2,245,123) $ 572,396 $ 6,033,235 $ 2,563,061 $ (6,198,938) Investing 783,034 148,782 (322,611) (721,582) (304,369) 783,034 Financing 5,760,107 2,128,995 (132,034) (4,323,207) (2,451,380) 5,760,107 Net increase in cash and restricted cash $ 344,203 $ 32,654 $ 117,751 Net increase (decrease) in cash and restricted cash $ 988,446 $ (192,688) $ 344,203 Operating activities Net cash provided by (used in) Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Cash flows from: Loans held for sale $ (5,326,837) $ (2,487,105) $ 338,838 $ 5,676,655 $ 3,102,134 $ (5,326,837) Other operating (uses) sources (872,101) 241,982 233,558 Other operating sources 356,580 (539,073) (872,101) $ (6,198,938) $ (2,245,123) $ 572,396 $ 6,033,235 $ 2,563,061 $ (6,198,938) Net cash used in Net cash used in investing activities was $304.4 million in the Net cash provided by investing activities was $783.0 million Net cash used in Net cash used in Net cash provided by financing activities totaled $5.8 billion Liquidity and Capital Resources Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings, proceeds from and issuance of Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, On June 8, 2022, the Company, through its indirect subsidiary, PNMAC GMSR ISSUER TRUST (“Issuer Trust”), issued an aggregate principal amount of $500 million in secured term notes (the “2022-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The 2022-GT1 Notes bear interest at a rate equal to United States 30 Day Average Secured Overnight Financing Rate or SOFR plus 4.25% per annum, payable each month beginning in June 2022, on the 25th day of such month or, if such 25th day is not a business day, the next business day and In December 16, 2022, the Company issued a Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. The table below presents the average outstanding, maximum and ending Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Average balance $ 3,348,928 $ 2,185,830 $ 1,626,729 $ 2,580,513 $ 6,911,843 $ 3,348,928 Maximum daily balance $ 9,663,995 $ 4,141,680 $ 2,380,121 $ 7,289,147 $ 10,969,029 $ 9,663,995 Balance at year end $ 9,663,995 $ 4,141,680 $ 1,935,200 $ 3,004,690 $ 7,297,360 9,663,995 The differences between the average and maximum daily balances on our repurchase agreements reflect the fluctuations throughout the Our debt repurchase agreements also contain margin call provisions that, upon notice from the 72 will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice. Our secured financing agreements at PLS require us to comply with various financial covenants. The most significant financial covenants currently include the following: With respect to servicing performed for PMT, PLS is also subject to certain covenants under PMT’s debt agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants described above. Although these financial covenants limit the amount of indebtedness that we may incur and affect our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose. We are also subject to liquidity and net worth requirements established by FHFA for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity requirements and revised their net worth requirements for their approved non-depository single-family sellers/servicers or issuers as summarized below: 73 We believe that we are currently in compliance with the applicable Agency requirements. securities guaranteed by Ginnie Mae and seller/servicers of mortgage loans to Fannie Mae and Freddie Mac. We On We continue to explore a variety of means of financing our Debt Obligations As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through short-term borrowings with major financial 74 Under the terms of these financing agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of December 31, Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires PLS to maintain positive net income for at least one of the previous two consecutive quarters, or other similar measures. PLS is compliant with all such conditions. The financing agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice. In addition, the financing agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements. The Company has issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indentures under which the Unsecured Notes were issued). The Company is required to maintain certain financial covenants under terms of the Unsecured Notes, as described above in Liquidity and Capital Resources. We believe the Company was in compliance with all financial covenants in the Unsecured Notes as of December 31, 2022. �� Outstanding Total Committed Outstanding Total Committed Facility Lender indebtedness (1) facility size (2) facility (2) Maturity date (2) indebtedness (1) facility size (2) facility (2) Maturity date (2) (dollar amounts in thousands) (dollar amounts in thousands) Assets sold under agreements to repurchase Credit Suisse First Boston Mortgage Capital LLC $ 3,893,149 $ 3,950,000 $ 650,000 April 23, 2021 $ 918,804 $ 2,950,000 $ 1,200,000 May 31, 2024 Credit Suisse First Boston Mortgage Capital LLC (3) $ 50,000 $ 50,000 $ 50,000 April 23, 2021 JPMorgan Chase Bank, N.A. $ 1,739,009 $ 2,000,000 $ — September 30, 2022 JPMorgan Chase Bank, N.A. $ 1,013,270 $ 1,250,000 $ 50,000 April 7, 2021 Citibank, N.A. $ 505,625 $ 1,000,000 $ 650,000 August 3, 2021 Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. (3) $ 100,000 $ 100,000 $ 100,000 May 31, 2024 Bank of America, N.A. $ 626,550 $ 800,000 $ 500,000 March 11, 2021 $ 567,745 $ 1,425,000 $ 380,000 June 5, 2024 Barclays Bank PLC $ 596,729 $ 750,000 $ 375,000 November 3, 2022 Royal Bank of Canada $ 406,348 $ 1,000,000 $ 500,000 December 14, 2021 $ 381,893 $ 1,000,000 $ 225,000 December 14, 2023 BNP Paribas $ 336,545 $ 375,000 $ 200,000 July 30, 2021 $ 300,280 $ 600,000 $ 300,000 July 31, 2024 Wells Fargo Bank, N.A. $ 221,986 $ 500,000 $ 200,000 November 17, 2023 JP Morgan Chase Bank, N.A. (warehouse facility) $ 127,373 $ 500,000 $ 50,000 June 17, 2024 Morgan Stanley Bank, N.A. $ 331,546 $ 600,000 $ 300,000 November 2, 2022 $ 114,277 $ 250,000 $ 100,000 January 27, 2025 Wells Fargo Bank, N.A. $ 165,224 $ 175,000 $ 175,000 October 6, 2022 JP Morgan Chase Bank, N.A. (EBO facility) $ 84,340 $ 500,000 $ — October 11, 2024 Barclays Bank PLC $ 79,295 $ 350,000 $ 200,000 November 13, 2024 Goldman Sachs Bank USA $ — $ 250,000 $ 125,000 December 23, 2022 $ 64,486 $ 100,000 $ 100,000 December 23, 2023 Citibank, N.A. $ 44,211 $ 950,000 $ 600,000 April 26, 2024 Mortgage loan participation purchase and sale agreements Bank of America, N.A. $ 521,477 $ 550,000 $ — March 11, 2021 $ 287,943 $ 550,000 $ — June 7, 2023 Notes payable GMSR 2018-GT1 Term Note $ 650,000 $ 650,000 February 25, 2023 GMSR 2018-GT2 Term Note $ 650,000 $ 650,000 August 25, 2023 Unsecured senior notes $ 650,000 $ 650,000 October 15, 2025 Credit Suisse AG (3) $ — $ — $ — April 23, 2021 Obligations under capital lease Banc of America Leasing and Capital LLC $ 11,864 $ 25,000 $ — June 13, 2022 GMSR 2018-GT1 Notes $ 650,000 $ 650,000 February 25, 2025 GMSR 2018-GT2 Notes $ 650,000 $ 650,000 August 25, 2023 GMSR 2022-GT1 Notes $ 500,000 $ 500,000 May 25, 2027 MSR Note Payable (4) $ 150,000 $ 150,000 $ 150,000 November 13, 2024 Unsecured Senior Notes - 5.375% $ 650,000 $ 650,000 October 15, 2025 Unsecured Senior Notes - 4.25% $ 650,000 $ 650,000 February 15, 2029 Unsecured Senior Notes - 5.75% $ 500,000 $ 500,000 September 15, 2031 The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of December 31, Weighted average Weighted average maturity of maturity of advances under advances under Counterparty Amount at risk repurchase agreement Facility maturity Amount at risk repurchase agreement Facility maturity (in thousands) (in thousands) Credit Suisse First Boston Mortgage Capital LLC (1) $ 1,484,391 April 23, 2021 April 23, 2021 Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. (1) $ 3,831,311 May 31, 2024 May 31, 2024 Credit Suisse First Boston Mortgage Capital LLC $ 484,937 February 3, 2021 April 23, 2021 $ 75,634 March 1, 2023 May 31, 2024 Bank of America, N.A. $ 334,772 January 31, 2021 March 11, 2021 $ 68,918 March 16, 2023 June 5, 2024 JP Morgan Chase Bank, N.A. $ 136,523 June 4, 2021 September 30, 2022 JP Morgan Chase Bank, N.A. $ 117,491 February 28, 2021 April 7, 2021 Barclays Bank PLC $ 76,062 March 21, 2021 November 3, 2022 Royal Bank of Canada $ 41,107 April 17, 2021 December 14, 2021 $ 19,895 April 12, 2023 December 14, 2023 Citibank, N.A. $ 35,370 March 17, 2021 August 3, 2021 Morgan Stanley Bank, N.A. $ 27,808 March 17, 2021 November 2, 2022 JP Morgan Chase Bank, N.A. (EBO facility) $ 13,316 February 14, 2023 October 11, 2024 JP Morgan Chase Bank, N.A. (warehouse facility) $ 11,908 February 26, 2023 June 17, 2024 BNP Paribas $ 26,136 March 13, 2021 July 30, 2021 $ 11,131 March 19, 2023 July 31, 2024 Wells Fargo Bank, N.A. $ 13,474 March 19, 2021 October 6, 2022 $ 9,664 March 16, 2023 November 17, 2023 Morgan Stanley Bank, N.A. $ 8,310 March 6, 2023 January 3, 2024 Barclays Bank PLC $ 7,248 November 13, 2024 November 13, 2024 Goldman Sachs $ 4,326 March 19, 2023 December 23, 2023 Citibank, N.A. (2) $ 1,657 February 12, 2023 April 26, 2024 All debt financing arrangements that matured between December 31, Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are fair value risk, interest rate and prepayment risk. Fair Value Risk Our IRLCs, mortgage loans held for sale, MSRs, MSLs and ESS financing are reported at their fair values. The fair value of these assets fluctuates primarily due to changes in interest rates. The fair value risk we face is primarily attributable to interest rate risk and prepayment risk. 77 Interest Rate Risk Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates affect both the fair value of, and interest income we earn from, our mortgage-related investments and our derivative financial instruments. This effect is most pronounced with fixed-rate mortgage assets. In general, rising interest rates negatively affect the fair value of our IRLCs and inventory of mortgage loans held for sale Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Presently most of our secured debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, as determined by the particular financing arrangement. Prepayment Risk To the extent that the actual prepayment rate on the mortgage loans underlying our MSRs differs from what we projected when we initially recognized these assets and liabilities when we measure fair value as of the end of each reporting period, the carrying value of these assets and liabilities will be affected. In general, a decrease in the principal balances of the mortgage loans underlying our MSRs or an increase in prepayment expectations will decrease our estimates of the fair value of the MSRs, thereby reducing net servicing income, partially offset by the beneficial effect on net servicing income of a corresponding reduction in the fair value of our Risk Management Activities We engage in risk management activities primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCs and our inventory of loans held for sale. Our objective is to minimize our hedging expense and maximize our loss coverage based on a given hedge expense target. We do not use derivative financial instruments other than IRLCs Our strategies are reviewed daily within a disciplined risk management framework. We use a variety of interest rate and spread shifts and scenarios Fair Value Sensitivities The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and inputs used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts. 78 Mortgage Servicing Rights The following tables summarize the estimated change in fair value of MSRs as of December 31, several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing: Change in fair value attributable to shift in: -20% -10% -5% +5% +10% +20% (in thousands) Pricing spread $ 205,305 $ 98,449 $ 48,232 $ (46,356) $ (90,936) $ (175,137) Prepayment speed $ 297,863 $ 142,208 $ 69,521 $ (66,536) $ (130,253) $ (249,843) Annual per-loan cost of servicing $ 101,929 $ 50,964 $ 25,482 $ (25,482) $ (50,964) $ (101,929) Change in fair value attributable to shift in: -20% -10% -5% +5% +10% +20% -20% -10% -5% +5% +10% +20% (dollar amounts in thousands) (in thousands) Prepayment speed $ 337,167 $ 162,725 $ 79,976 $ (77,346) $ (152,192) $ (294,872) Pricing spread $ 5,766 $ 2,824 $ 1,397 $ (1,369) $ (2,711) $ (5,316) $ 347,610 $ 168,917 $ 83,283 $ (81,021) $ (159,863) $ (311,329) Prepayment speed $ 13,977 $ 6,701 $ 3,282 $ (3,154) $ (6,185) $ (11,907) Annual per-loan cost of servicing $ 165,053 $ 82,527 $ 41,263 $ (41,263) $ (82,527) $ (165,053) Item 8. Financial Statements and Supplementary Data The information called for by this Item 8 is hereby incorporated by reference from our Financial Statements and Auditors’ Report in Part IV of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of its internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on those criteria, management concluded that our internal control over financial reporting was effective as of December 31, The effectiveness of our internal control over financial reporting as of December 31, 79 Changes in Internal Control over Financial Reporting There have been no changes in internal control over financial reporting during the quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of PennyMac Financial Services, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of PennyMac Financial Services, Inc. and subsidiaries (“the Company”) as of December 31, We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Los Angeles, California February Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed Item 11. Executive Compensation The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information The following table provides information about our former and current equity compensation plans as of December 31, (a) (b) (c) (a) (b) (c) Number of securities Number of securities remaining available for remaining available for future issuance under future issuance under Number of securities to Weighted average equity compensation Number of securities to Weighted average equity compensation be issued upon exercise of exercise price of plans (excluding be issued upon exercise of exercise price of plans (excluding outstanding options, outstanding options, securities reflected in outstanding options, outstanding options, securities reflected in Plan category warrants and rights warrants and rights (1) column (a)) (2) warrants and rights warrants and rights (1) column (a)) (2) Equity compensation plans approved by security holders (3) 6,209,711 $ 25.78 4,204,005 5,776,124 $ 32.46 4,597,788 Equity compensation plans not approved by security holders (4) — — — — — — Total 6,209,711 $ 25.78 4,204,005 5,776,124 $ 32.46 4,597,788 The other information required by this Item 12 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed Item 14. Principal Our independent public accounting firm is Deloitte & Touche LLP, Los Angeles, CA, PCAOB Auditor ID 34. The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed PART IV Item 15. Exhibits and Financial Statement Schedules Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 2.1 8-K12B November 1, 2018 3.1 Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc. 8-K12B November 1, 2018 3.1.1 8-K12B November 1, 2018 3.2 Amended and Restated Bylaws of New PennyMac Financial Services, Inc. 8-K12B November 1, 2018 3.2.1 10-Q November 4, 2019 4.1 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. 4.2 8-K September 29, 2020 4.3 Form of Global Note for 5.375% Senior Notes due 2025 (Included in Exhibit 4.2). 8-K September 29, 2020 4.4 10-Q November 6, 2020 4.5 8-K October 8, 2021 84 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 4.6 8-K February 11, 2021 Form of Global Note for 4.25% Senior Notes due 2029 (Included in Exhibit 8-K February 11, 2021 4.8 8-K October 8, 2021 4.9 8-K September 16, 2021 4.10 Form of Global Note for 5.750% Senior Notes due 2031 (included in Exhibit 4.9). 8-K September 16, 2021 10.1 8-K12B November 1, 2018 10.2 8-K May 14, 2013 10.3 8-K12B November 1, 2018 8-K12B November 1, 2018 8-K December 8-K December 85 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date Form of PennyMac Financial Services, Inc. Indemnification February 25, 2021 10.8† September 28, 2021 PennyMac Financial Services, Inc. 2013 Equity Incentive Plan. 8-K May 14, 2013 First Amendment to the PennyMac Financial Services, Inc. 2013 Equity Incentive Plan. 10-K March 9, 2018 Second Amendment to the PennyMac Financial Services, Inc. 2013 Equity Incentive Plan. DEF14A April 17, 2018 Third Amendment to the PennyMac Financial Services, Inc. 2013 Equity Incentive PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement. 8-K June 17, 2013 10-Q August 2, 2018 10-K March 5, 2019 10-Q November 4, 2019 10-Q November 4, 2019 10-Q November 4, 2019 10-Q November 4, 2019 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 10-Q May 7, 2020 10-Q May 7, 2020 10-Q May 7, 2020 10-Q May 7, 2020 10-Q May 7, 2020 10-Q May 7, 2020 10-K February 25, 2021 10.27† 10-K February 25, 2021 10.28† 10-Q May 6, 2021 10.29† 10-Q August 5, 2021 10.30† 10-Q August 5, 2021 10.31† PennyMac Financial Services, Inc. 2022 Equity Incentive Plan. * 87 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 8-K July 2, 2020 8-K July 2, 2020 10.34 10-Q May 6, 2021 10.35 10-Q August 5, 2021 10.36 10-Q November 4, 2021 10.37 10-Q August 5, 2022 10.38 8-K July 2, 2020 10-K February 25, 2021 10.40 10-Q November 2, 2022 10.41 * Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 8-K July 2, 2020 10-K 10-K March 10, 2016 10-Q August 7, 2015 10-Q May 6, 2019 8-K April 7, 2020 10.48 8-K June 14, 2022 10.49 August 5, 2022 8-K March 6, 2018 89 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 10-Q November 2, 2018 10-Q May 7, 2020 10-Q November 6, 2020 10.54 10-Q May 6, 2021 10.55˄ 8-K August 5, 2021 10.56 10-Q May 5, 2022 10.57 10-Q August 5, 2022 90 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 8-K March 6, 2018 8-K August 15, 2018 8-K June 14, 2022 10.61 8-K December 21, 2016 8-K February 23, 2017 8-K April 7, 2020 10.64 10-Q August 5, 2022 10.65 10-K February 23, 2022 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 8-K 10-Q 8-K 8-K 10-Q 8-K April 7, 2020 10-Q May 7, 2020 92 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 10-Q November 6, 2020 10.74 10-Q May 6, 2021 10.75˄ 8-K August 5, 2021 10.76 10-K February 23, 2022 10.77 10-K February 23, 2022 10.78 8-K May 3, 2021 10.79 8-K May 3, 2021 10.80 8-K May 3, 2021 93 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 10.81 8-K May 3, 2021 10.82 10-K February 23, 2022 10.83 10-K February 23, 2022 10.84 8-K May 3, 2021 21.1 * 23.1 * 31.1 * 31.2 * 32.1 ** 32.2 ** 94 Incorporated by Reference Exhibit No. Exhibit Description Form Filing Date 101 Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) the Consolidated Balance Sheets as of December 31, * 101.INS XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document * 101.SCH Inline XBRL Taxonomy Extension Schema Document * 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document * 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document * 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document * 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document * 104 Cover Page Interactive Data File (embedded within the Inline XBRL document). ˄ Portions of the exhibit have been redacted. * Filed herewith ** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing. † Indicates management contract or compensatory plan or arrangement. Item 16. Form 10-K Summary None. PENNYMAC FINANCIAL SERVICES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS December 31, Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) F-2 Financial Statements: F-4 F-5 F-6 F-7 F-9 F-1 To the Stockholders and the Board of Directors of PennyMac Financial Services, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of PennyMac Financial Services, Inc. and subsidiaries (the ‘‘Company’’) as of December 31, We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Mortgage Servicing Rights (“MSRs”) Critical Audit Matter Description The Company accounts for MSRs at fair value and categorizes its MSRs as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (a component of the discount rate), the prepayment rates of the underlying loans (“prepayment speed”) and the annual per-loan cost of servicing, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSRs’ fair value measurement. F-2 We identified the pricing spread and prepayment speed assumptions used in the valuation of MSRs as a critical audit matter because of the significant judgments made by management in determining these assumptions. Auditing these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, to evaluate the reasonableness of management’s estimates and assumptions related to selection of the pricing spread and prepayment speed. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the pricing spread and prepayment speed assumptions used by the Company to estimate the fair value of MSRs included the following, among others: /s/Deloitte & Touche LLP Los Angeles, California February We have served as the Company’s auditor since 2008. F-3 PENNYMAC FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS December 31, December 31, December 31, 2020 2019 2022 2021 (in thousands, except share amounts) (in thousands, except share amounts) ASSETS Cash (includes $52,599 pledged to creditors at December 31, 2019) $ 532,716 $ 188,291 Short-term investments at fair value 15,217 74,611 Loans held for sale at fair value (includes $11,457,678 and $4,846,138 pledged to creditors) 11,616,400 4,912,953 Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors 80,862 107,512 Cash $ 1,328,536 $ 340,069 Short-term investment at fair value 12,194 6,873 Loans held for sale at fair value (includes $3,442,847 and $9,135,577 pledged to creditors) 3,509,300 9,742,483 Derivative assets 711,238 159,686 99,003 333,695 Servicing advances, net (includes valuation allowance of $181,433 and $82,157; $413,484 and $207,460 pledged to creditors) 579,528 331,169 Mortgage servicing rights at fair value (includes $2,577,964 and $2,920,603 pledged to creditors) 2,581,174 2,926,790 Servicing advances, net (includes valuation allowance of $78,992 and $120,940; $381,379 and $232,107 pledged to creditors) 696,753 702,160 Mortgage servicing rights at fair value (includes $5,897,613 and $3,856,791 pledged to creditors) 5,953,621 3,878,078 Operating lease right-of-use assets 74,934 73,090 65,866 89,040 Investment in PennyMac Mortgage Investment Trust at fair value 1,105 1,672 929 1,300 Receivable from PennyMac Mortgage Investment Trust 87,005 48,159 36,372 40,091 Loans eligible for repurchase 14,625,447 1,046,527 4,702,103 3,026,207 Other (includes $166,418 and $32,598 pledged to creditors) 692,169 333,557 Other (includes $12,277 and $45,294 pledged to creditors) 417,907 616,616 Total assets $ 31,597,795 $ 10,204,017 $ 16,822,584 $ 18,776,612 LIABILITIES Assets sold under agreements to repurchase $ 9,654,797 $ 4,141,053 $ 3,001,283 $ 7,292,735 Mortgage loan participation purchase and sale agreements 521,477 497,948 287,592 479,845 Obligations under capital lease 11,864 20,810 Notes payable secured by mortgage servicing assets 1,295,840 1,294,070 1,942,646 1,297,622 Unsecured senior notes 645,820 — 1,779,920 1,776,219 Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value 131,750 178,586 Obligations under capital lease — 3,489 Derivative liabilities 42,638 22,330 21,712 22,606 Mortgage servicing liabilities at fair value 45,324 29,140 2,096 2,816 Accounts payable and accrued expenses 308,398 175,273 262,358 359,413 Operating lease liabilities 94,193 91,320 85,550 110,003 Payable to PennyMac Mortgage Investment Trust 140,306 73,280 205,011 228,019 Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement 35,165 46,158 26,099 30,530 Income taxes payable 622,700 504,569 1,002,744 685,262 Liability for loans eligible for repurchase 14,625,447 1,046,527 4,702,103 3,026,207 Liability for losses under representations and warranties 32,688 21,446 32,421 43,521 Total liabilities 28,208,407 8,142,510 13,351,535 15,358,287 Commitments and contingencies – Note 15 Commitments and contingencies – Note 16 STOCKHOLDERS’ EQUITY Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 70,905,532 and 78,515,047 shares, respectively 7 8 Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 49,988,492 and 56,867,202 shares, respectively 5 6 Additional paid-in capital 1,047,052 1,335,107 — 125,396 Retained earnings 2,342,329 726,392 3,471,044 3,292,923 Total stockholders' equity 3,389,388 2,061,507 3,471,049 3,418,325 Total liabilities and stockholders’ equity $ 31,597,795 $ 10,204,017 Total liabilities and stockholders' equity $ 16,822,584 $ 18,776,612 The accompanying notes are an integral part of these consolidated financial statements. F-4 PENNYMAC FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands, except earnings per share) (in thousands, except earnings per share) Revenues Net gains on loans held for sale at fair value: From non-affiliates $ 2,690,104 $ 542,163 $ 184,439 $ 808,197 $ 2,515,874 $ 2,690,104 From PennyMac Mortgage Investment Trust 50,681 183,365 64,583 (16,564) (51,473) 50,681 2,740,785 725,528 249,022 791,633 2,464,401 2,740,785 Loan origination fees: From non-affiliates 262,143 159,461 94,208 161,441 358,028 262,143 From PennyMac Mortgage Investment Trust 23,408 14,695 7,433 8,418 26,126 23,408 285,551 174,156 101,641 169,859 384,154 285,551 Fulfillment fees from PennyMac Mortgage Investment Trust 222,200 160,610 81,350 67,991 178,927 222,200 Net loan servicing fees: Loan servicing fees: From non-affiliates 814,646 730,165 585,101 1,054,828 875,570 814,646 From PennyMac Mortgage Investment Trust 67,181 48,797 42,045 81,915 80,658 67,181 From Investment Funds — — 3 Other 116,464 98,564 64,133 91,894 118,884 116,464 998,291 877,526 691,282 1,228,637 1,075,112 998,291 Change in fair value of mortgage servicing rights and mortgage servicing liabilities (1,501,993) (988,614) (116,344) 354,176 (415,906) (1,501,993) Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust 24,970 9,256 (8,500) — (1,037) 24,970 Hedging results 918,180 395,497 (121,045) Mortgage servicing rights hedging results (631,484) (475,215) 918,180 (558,843) (583,861) (245,889) (277,308) (892,158) (558,843) Net loan servicing fees 439,448 293,665 445,393 951,329 182,954 439,448 Net interest (expense) income: Net interest expense: Interest income: From non-affiliates 243,701 282,398 208,954 294,062 299,782 243,701 From PennyMac Mortgage Investment Trust 3,325 6,302 7,462 — 387 3,325 247,026 288,700 216,416 294,062 300,169 247,026 Interest expense: To non-affiliates 263,133 201,688 129,459 335,427 389,419 263,133 To PennyMac Mortgage Investment Trust 8,418 10,291 15,138 — 1,280 8,418 271,551 211,979 144,597 335,427 390,699 271,551 Net interest (expense) income (24,525) 76,721 71,819 Management fees: From PennyMac Mortgage Investment Trust 34,538 36,492 24,465 From Investment Funds — — 4 34,538 36,492 24,469 Carried interest from Investment Funds — — (365) Net interest expense (41,365) (90,530) (24,525) Management fees from PennyMac Mortgage Investment Trust 31,065 37,801 34,538 Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust (453) 416 332 (235) 336 (453) Results of real estate acquired in settlement of loans 1,036 557 589 2,510 1,993 1,036 Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement 280 379 1,126 576 — 280 Other 6,737 8,880 9,253 12,392 7,325 6,737 Total net revenues 3,705,597 1,477,404 984,629 1,985,755 3,167,361 3,705,597 Expenses Compensation 738,569 503,458 403,270 735,231 999,802 738,569 Servicing 256,934 164,697 137,104 Loan origination 219,746 117,338 27,398 173,622 330,788 219,746 Technology 112,570 67,946 60,103 139,950 141,426 112,570 Professional services 64,064 32,859 27,615 73,270 94,283 64,064 Servicing 59,628 109,835 256,934 Marketing and advertising 46,762 44,806 8,658 Occupancy and equipment 33,357 28,916 27,152 40,124 35,810 33,357 Other 39,748 32,746 34,290 51,921 51,428 31,090 Total expenses 1,464,988 947,960 716,932 1,320,508 1,808,178 1,464,988 Income before provision for income taxes 2,240,609 529,444 267,697 665,247 1,359,183 2,240,609 Provision for income taxes 593,725 136,479 23,254 189,740 355,693 593,725 Net income 1,646,884 392,965 244,443 $ 475,507 $ 1,003,490 $ 1,646,884 Less: Net income attributable to noncontrolling interest — — 156,749 Net income attributable to PennyMac Financial Services, Inc. common stockholders $ 1,646,884 $ 392,965 $ 87,694 Earnings per share Basic $ 21.91 $ 5.02 $ 2.62 $ 8.96 $ 15.73 $ 21.91 Diluted $ 20.92 $ 4.89 $ 2.59 $ 8.50 $ 14.87 $ 20.92 Weighted average shares outstanding Basic 75,161 78,206 33,524 53,065 63,799 75,161 Diluted 78,728 80,340 35,322 55,950 67,471 78,728 The accompanying notes are an integral part of these consolidated financial statements. F-5 PENNYMAC FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Class A Common Stock Common Stock Noncontrolling interest in Private Additional National Mortgage Additional Number of Par Number of Par paid-in Retained Acceptance Number of Par paid-in Retained shares value shares value capital earnings Company, LLC Total shares value capital earnings Total (in thousands) (in thousands) Balance at December 31, 2017 23,530 $ 2 — $ — $ 204,103 $ 265,306 $ 1,250,263 $ 1,719,674 Cumulative effect of change in accounting principle - Adoption of fair value accounting for all existing classes of mortgage servicing rights at fair value — — — — — 189 587 776 Balance at January 1, 2018 23,530 2 — — 204,103 265,495 1,250,850 1,720,450 Balance at January 1, 2020 78,515 $ 8 $ 1,335,107 $ 726,392 $ 2,061,507 Net income — — — — — 87,694 156,749 244,443 — — — 1,646,884 1,646,884 Stock and unit-based compensation 299 — 23 — 10,932 — 19,636 30,568 Class A common stock dividends ($0.40 per share) — — — — — (10,054) — (10,054) Issuance of Class A common stock in settlement of directors' fees — — — — 79 — 166 245 Repurchase of Class A common stock (236) — — — (1,554) — (3,272) (4,826) Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc. 1,635 1 — — 33,155 — (33,156) — Exchange of Class A common stock of subsidiary for common stock of PennyMac Financial Services, Inc. pursuant to a reorganization (25,228) (3) 25,228 3 — — — — Exchange of Class A unit of Private National Mortgage Acceptance Company, LLC for common stock of PennyMac Financial Services, Inc. pursuant to a reorganization, net of income tax effect — — 52,263 5 1,064,315 — (1,390,973) (326,653) Issuance of common stock in settlement of directors' fees — — 4 — 85 — — 85 Repurchase of common stock — — (24) — (467) — — (467) Balance at December 31, 2018 — $ — 77,494 $ 8 $ 1,310,648 $ 343,135 $ — $ 1,653,791 Net income — — — — — 392,965 — 392,965 Stock and unit-based compensation — — 1,062 — 25,282 — — 25,282 Issuance of common stock in settlement of directors' fees — — 10 — 233 — — 233 Common stock dividends ($0.12 per share) — — — — — (9,708) — (9,708) Repurchase of common stock — — (51) — (1,056) — — (1,056) Balance at December 31, 2019 — $ — 78,515 $ 8 $ 1,335,107 $ 726,392 $ — $ 2,061,507 Net income — — — — — 1,646,884 — 1,646,884 Stock and unit-based compensation — — 1,276 — 49,229 — — 49,229 Stock based compensation 1,276 — 49,229 — 49,229 Issuance of common stock in settlement of directors' fees — — 5 — 194 — — 194 5 — 194 — 194 Common stock dividends ($0.54 per share) — — — — — (30,947) — (30,947) — — — (30,947) (30,947) Repurchase of common stock — — (8,890) (1) (337,478) — — (337,479) (8,890) (1) (337,478) — (337,479) Balance at December 31, 2020 — $ — 70,906 $ 7 $ 1,047,052 $ 2,342,329 $ — $ 3,389,388 70,906 $ 7 $ 1,047,052 $ 2,342,329 $ 3,389,388 Net income — — — 1,003,490 1,003,490 Stock based compensation 1,326 — 36,337 — 36,337 Issuance of common stock in settlement of directors' fees 3 — 200 — 200 Common stock dividends ($0.80 per share) — — — (52,896) (52,896) Repurchase of common stock (15,368) (1) (958,193) — (958,194) Balance at December 31, 2021 56,867 $ 6 $ 125,396 $ 3,292,923 $ 3,418,325 Net income — — — 475,507 475,507 Stock based compensation 905 — 37,719 — 37,719 Issuance of common stock in settlement of directors' fees 4 — 205 — 205 Common stock dividends ($0.80 per share) — — — (54,621) (54,621) Repurchase of common stock (7,788) (1) (163,320) (242,765) (406,086) Balance at December 31, 2022 49,988 $ 5 $ — $ 3,471,044 $ 3,471,049 The accompanying notes are an integral part of these consolidated financial statements. F-6 PENNYMAC FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2022 2021 2020 (in thousands) Cash flow from operating activities Net income $ 475,507 $ 1,003,490 $ 1,646,884 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net gains on loans held for sale at fair value (791,633) (2,464,401) (2,740,785) Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread (354,176) 416,943 1,477,023 Mortgage servicing rights hedging results 631,484 475,215 (918,180) Capitalization of interest on loans held for sale (3,231) (19,244) (119,740) Accrual of interest on excess servicing spread financing payable — 1,280 8,418 Amortization of debt issuance costs 19,198 24,321 19,048 Change in fair value of investment in common shares of 371 (195) 567 Results of real estate acquired in settlement in loans (2,510) (1,993) (1,036) Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement (576) — (280) Stock-based compensation expense 42,552 37,794 45,105 (Reversal of) provision for servicing advance losses (36,075) (47,878) 125,898 Depreciation and amortization 34,409 28,645 25,575 Impairment of capitalized software — 728 13,145 Amortization of operating lease right-of-use assets 15,831 14,295 12,284 Purchase of loans held for sale from PennyMac Mortgage Investment Trust (50,575,617) (67,851,634) (63,618,185) Origination of loans held for sale (20,297,064) (54,857,114) (31,783,465) Purchase of loans held for sale from non-affiliates (1,802,769) (4,896,527) (3,799,336) Purchase of loans from Ginnie Mae securities and early buyout investors (6,199,212) (23,644,025) (11,156,684) Sale to non-affiliates and principal payments of loans held for sale 84,345,379 154,450,942 102,840,312 Sale of loans held for sale to PennyMac Mortgage Investment Trust 298,862 — 2,248,896 Repurchase of loans subject to representations and warranties (92,924) (99,508) (58,375) Settlement of repurchase agreement derivatives — — 8,270 Increase in servicing advances (36,534) (232,574) (391,440) Decrease (increase) in receivable from PennyMac Mortgage Investment Trust 2,776 35,243 (48,320) Sale of real estate acquired in settlement of loans 19,761 14,555 32,555 Decrease (increase) in other assets 191,384 61,871 (334,045) (Decrease) increase in accounts payable and accrued expenses (109,485) 34,666 135,314 Decrease in operating lease liabilities (19,392) (16,310) (13,421) (Decrease) increase in payable to PennyMac Mortgage Investment Trust (36,708) 36,549 37,642 Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement (3,855) (4,635) (10,713) Increase in income taxes payable 317,482 62,562 118,131 Net cash provided by (used in) operating activities 6,033,235 2,563,061 (6,198,938) Statements continue on the next page. The accompanying notes are an integral part of these consolidated financial statements. F-7 (Continued)PENNYMAC FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2020 2019 2018 (in thousands) Cash flow from operating activities Net income $ 1,646,884 $ 392,965 $ 244,443 Adjustments to reconcile net income to net cash used in operating activities: Net gains on loans held for sale at fair value (2,740,785) (725,528) (249,022) Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread 1,477,023 979,358 124,844 Mortgage servicing rights hedging gains (918,180) (395,497) 121,045 Capitalization of interest and advance on loans held for sale at fair value (119,740) (73,611) (79,317) Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust 8,418 10,291 15,138 Amortization of net debt issuance costs and (premiums) 19,048 (4,100) (29,170) Carried Interest from Investment Funds — — 365 Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust 567 (275) (192) Results of real estate acquired in settlement in loans (1,036) (557) (589) Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement (280) (379) (1,126) Stock-based compensation expense 45,105 24,771 25,251 Provision for servicing advance losses 125,898 36,149 40,306 Impairment of capitalized software 13,145 — — Depreciation and amortization 25,575 15,021 12,925 Amortization of right-of-use assets 12,284 10,158 — Purchase of loans held for sale from PennyMac Mortgage Investment Trust (63,618,185) (50,110,085) (37,967,724) Origination of loans held for sale (31,783,465) (11,831,703) (5,000,193) Purchase of loans held for sale from non-affiliates (3,799,336) (1,725,227) (531,665) Purchase of loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale (11,156,684) (6,271,447) (4,036,147) Sale to non-affiliates and principal payments of loans held for sale 102,840,312 61,214,102 44,557,560 Sale of loans held for sale to PennyMac Mortgage Investment Trust 2,248,896 6,255,915 3,343,028 Repurchase of loans subject to representations and warranties (58,375) (18,660) (26,021) Settlement of repurchase agreement derivatives 8,270 31,993 31,907 Increase in servicing advances (391,440) (98,121) (33,415) Increase in receivable from PennyMac Mortgage Investment Trust (48,320) (20,257) (9,672) Sale of real estate acquired in settlement of loans 32,555 28,901 4,037 Increase in other assets (334,045) (62,549) (7,791) Increase in accounts payable and accrued expenses 135,314 38,551 32,750 Decrease in operating lease liabilities (13,421) (12,680) — Increase (decrease) in payable to PennyMac Mortgage Investment Trust 37,642 (36,645) (34,472) Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement (10,713) — — Increase in income taxes payable 118,131 104,023 25,313 Net cash (used in) provided by operating activities (6,198,938) (2,245,123) 572,396 Year ended December 31, 2022 2021 2020 (in thousands) Cash flow from investing activities Decrease in short-term investments 59,394 43,213 52,256 (Increase) decrease in short-term investment (5,321) 8,344 59,394 Net change in assets purchased from PMT under agreement to resell 26,650 23,513 13,103 — 80,862 26,650 Net settlement of derivative financial instruments used for hedging of mortgage servicing rights 913,064 366,137 (122,227) (871,878) (434,397) 913,064 Purchase of mortgage servicing rights (25,473) (227,445) (227,664) (3,993) — (25,473) Acquisition of capitalized software (71,935) (48,980) (48,090) Purchase of furniture, fixtures, equipment and leasehold improvements (10,671) (6,124) (13,421) (7,159) (7,899) (10,671) Acquisition of capitalized software (48,090) (29,385) (17,444) Increase in margin deposits (131,840) (21,127) (7,214) Net cash provided by (used in) investing activities 783,034 148,782 (322,611) Decrease (increase) in margin deposits 238,704 97,701 (131,840) Net cash (used in) provided by investing activities (721,582) (304,369) 783,034 Cash flow from financing activities Sale of assets under agreements to repurchase 102,232,005 63,803,260 41,375,177 75,076,185 136,179,744 102,232,005 Repurchase of assets sold under agreements to repurchase (96,709,690) (61,596,780) (41,820,843) (79,368,855) (138,546,379) (96,709,690) Issuance of mortgage loan participation purchase and sale certificates 23,607,079 23,451,400 25,284,270 19,312,943 23,784,510 23,607,079 Repayment of mortgage loan participation purchase and sale certificates (23,583,550) (23,485,918) (25,279,510) (19,504,845) (23,826,142) (23,583,550) Advance of obligations under capital lease — 25,123 — Issuance of notes payable secured by mortgage servicing assets 650,000 — — Issuance of unsecured senior notes — 1,150,000 650,000 Repayment of obligations under capital lease (8,946) (10,918) (14,366) (3,489) (8,375) (8,946) Issuance of notes payable secured by mortgage servicing assets — — 1,300,000 Repayment of notes payable secured by mortgage servicing assets — — (900,000) Issuance of unsecured senior notes 650,000 — — Repayment of excess servicing spread financing (32,377) (40,316) (46,750) — (134,624) (32,377) Payment of debt issuance costs (30,112) (6,603) (19,982) (19,606) (37,567) (30,112) Issuance of common stock pursuant to exercise of stock options 9,389 5,145 5,317 2,947 7,536 9,389 Payment of withholding taxes relating to stock-based compensation (5,265) (4,634) — (7,780) (8,993) (5,265) Payment of dividend to holders of common stock and Class A common stock (30,947) (9,708) (10,054) Payment of dividend to holders of common stock (54,621) (52,896) (30,947) Repurchase of common stock (337,479) (1,056) (5,293) (406,086) (958,194) (337,479) Net cash provided by (used in) financing activities 5,760,107 2,128,995 (132,034) Net increase in cash and restricted cash 344,203 32,654 117,751 Net cash (used in) provided by financing activities (4,323,207) (2,451,380) 5,760,107 Net increase (decrease) in cash and restricted cash 988,446 (192,688) 344,203 Cash and restricted cash at beginning of year 188,578 155,924 38,173 340,093 532,781 188,578 Cash and restricted cash at end of year $ 532,781 $ 188,578 $ 155,924 $ 1,328,539 $ 340,093 $ 532,781 Cash and restricted cash at end of year are comprised of the following: Cash $ 532,716 $ 188,291 $ 155,289 $ 1,328,536 $ 340,069 $ 532,716 Restricted cash included in Other assets 65 287 635 3 24 65 $ 532,781 $ 188,578 $ 155,924 $ 1,328,539 $ 340,093 $ 532,781 Supplemental cash flow information: Cash paid for interest $ 329,975 $ 389,527 $ 272,970 Cash (refunds received) paid for income taxes, net $ (127,742) $ 293,131 $ 475,594 Non-cash investing activities: Mortgage servicing rights resulting from loan sales $ 1,718,094 $ 1,861,949 $ 1,138,045 Operating right-of-use assets recognized $ 1,364 $ 28,401 $ 14,128 Non-cash financing activities: Mortgage servicing liabilities resulting from loan sales $ — $ 106,631 $ 23,325 Issuance of Excess servicing spread payable to PennyMac Mortgage Investment $ — $ 557 $ 2,093 Issuance of common stock in settlement of directors' fees $ 205 $ 200 $ 194 The accompanying notes are an integral part of these consolidated financial statements. F-8 PENNYMAC FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1—Organization PennyMac Financial Services, Inc. PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration Nonsupervised Title II Lender with the Note 2—Concentration of Risk A Note 3—Significant Accounting Policies A description of the Company’s significant accounting policies applied in the preparation of these consolidated financial statements follows. 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 Principles of Consolidation The consolidated financial statements include the accounts of PFSI and its wholly-owned 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. Cash Flows For the purpose of presentation in the statement of cash flows, the Company has identified tenant security deposits relating to rental properties owned by PMT and managed by the Company as restricted cash. Tenant security deposits are included in Other assets on the Company’s consolidated balance sheets. Fair Value Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are: As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported. Short-Term Short-term Loans Held for Sale at Fair Value The Company has elected to account for 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 are recognized as a component of Net gains on loans held for sale at fair value. The Company classifies most of the loans held for sale at fair value as “Level 2” fair value assets. Certain of the Company’s loans held for sale may not be saleable into active markets due to identified defects or delinquency. Such loans are classified as “Level 3” fair value assets. Sale Recognition The Company recognizes transfers of loans as sales when it surrenders control over the loans. Control over transferred loans is deemed to be surrendered when (i) the 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 loans, and (iii) the Company does not maintain effective control over the transferred 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 specific loans. Interest Income Recognition Interest income on loans held for sale at fair value is recognized over the life of the loans using their contractual interest rates. Income recognition is suspended and the interest receivable is reversed against interest income when loans become 90 days delinquent. Income recognition is resumed when the loan becomes contractually current. Derivative Financial Instruments The Company holds and issues derivative financial instruments that are created as a result of certain of its operations. 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: To manage the 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 loans held for sale and MSRs. IRLCs are accounted for as derivative financial instruments. The Company manages the risk created by IRLCs The Company classifies its IRLCs as “Level 3” fair value assets and liabilities. Fair value of The Company does not designate its derivative financial instruments for hedge accounting. Therefore, the Company accounts for its derivative financial instruments as free-standing derivatives. 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, loans held for sale at fair value and MSRs are included in Net gains on loans held for sale at fair value or in Cash flows from derivative financial instruments relating to hedging of IRLCs and loans acquired for sale are included in Cash flows from operating activities in Sale and repayment of loans acquired for sale at fair value to nonaffiliates; cash flows from derivative financial instruments relating to hedging of MSRs is included in Cash flows from investing activities; and cash flows from repurchase agreement derivatives are included in Cash flows from operating activities. 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 property or real estate acquired in the settlement of loans (“REO”), legal fees, and appraisals). Servicing advances are made in accordance with the Company’s servicing 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 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; administering loss mitigation activities, including modification and forbearance programs; and supervising The Company is contractually entitled to receive other remuneration including various mortgagor-contracted fees such as late charges and collateral reconveyance charges, and the Company is generally entitled to retain the placement fees earned on impounded funds and 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 their existing loan 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 fair value of MSRs and MSLs is derived from the net positive or negative, respectively, cash flows associated with the servicing contracts. For loans subject to MSR and MSL contracts, the Company receives a servicing fee, 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. Changes in fair value of MSLs and MSRs are recognized in current period income in Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income. Leases The Company determines if an arrangement is a lease at inception. If the arrangement is determined to be a lease, the Company recognizes both an Operating lease right-of-use asset and a corresponding Operating lease liability in its consolidated balance sheet, except leases with initial terms less than or equal to 12 months. Lease expense is recognized on the straight-line basis over the lease term and is recorded in Occupancy and equipment in the consolidated statements of income. The Company’s lease agreements include both lease and non-lease components (such as common area maintenance), which are generally included in the lease and are accounted for together with the lease as a single lease component. As such, lease payments represent payments on both lease and non-lease components. At lease commencement, lease liabilities are recognized based on the present value of the remaining lease payments and discounted using the Company’s incremental borrowing rate. Right-of-use assets initially equal the lease liability, adjusted for any lease payments made before lease commencement and for any lease incentives. 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. Capitalized Software The Company capitalizes certain consulting, payroll, and payroll-related costs related to the development of computer software for internal use. Once development is complete and the software is placed in service, the Company amortizes the capitalized costs over three to seven years using the straight-line method. F-13 The Company also periodically assesses capitalized software for recoverability when events or changes in circumstances indicate that its carrying amount may not be recoverable. If the Company 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. Investment in PennyMac Mortgage Investment Trust at Fair Value Common shares of beneficial interest in PMT are carried at 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. Loans Eligible for Repurchase The terms of the Ginnie Mae MBS program allow, but do not require, the Company to repurchase loans when the loan is at least three months delinquent. As a result of this right, the Company recognizes the loans in Loans eligible for repurchase at their unpaid principal balances and records a corresponding liability in Liability for loans eligible for repurchase on its consolidated balance sheets. Borrowings The carrying values of borrowings other than 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 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’s agreements with the Agencies and other investors include representations and warranties related to the 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 loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. F-14 In the event of a breach of its representations and warranties, the Company may be required to either repurchase the loans with the identified defects or indemnify the investor or insurer. In such cases, the Company bears any subsequent credit loss on the loans. The Company’s credit loss may be reduced by any recourse it may have to correspondent 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 loan seller, through PMT. As a result of providing representations and warranties to investors and insurers, the Company records a provision for losses relating to representations and warranties as part of its 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 loan repurchase rates, the estimated severity of loss in the event of default and the probability of reimbursement by the correspondent loan seller. The Company establishes a liability at the time 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 The level of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, investor repurchase demand or insurer claim denial strategies, and other external conditions that may change over the lives of the underlying 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 (“UPB”) of loans sold to date represents the maximum exposure to repurchases related to representations and warranties. Loan Loan origination fees represent compensation to the Company for the origination or purchase of loans. Loan origination fees are earned and recognized upon funding or purchase of the loan by the Company and are collected either at purchase from the correspondent seller, Loan Servicing Fees Loan servicing fees are received by the Company for servicing loans. Loan servicing activities Mortgage Servicing Liabilities above. Loan servicing fee amounts are based upon fee The Company’s obligations under its loan servicing agreements are fulfilled as the Company services the loans. Fees are collected when the loan payments are received from the borrowers in the case of MSRs held by the Company or within 30 days of the applicable month-end 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 loans. Fulfillment fee amounts are based upon a negotiated fee schedule. The Company’s obligation under the agreement is fulfilled when PMT issues a loan commitment, when it purchases a loan F-15 Management Management fees represent compensation to the Company for management services it provides to Stock-Based Compensation 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, expected dividend yield, expected forfeiture rates, 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. 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 compensation awards to 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 Company recognizes the effect on deferred taxes of a change in tax rates 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 Company assumed an agreement with certain of the former unitholders of Note 4—Transactions with Transactions with PMT Operating Activities Mortgage Loan Production Activities The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. The Company has typically utilized the mortgage loan purchase agreement for the purpose of selling to PMT conforming balance non-government insured or guaranteed loans, as well as prime jumbo residential mortgage loans. The Company also purchases newly originated loans from PMT and provides fulfilment services to PMT relating to its loan production activities. MSR Recapture Through June 30, 2020, pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, if the Company refinanced mortgage loans for which PMT previously held the MSRs, the Company was generally required to transfer and convey to PMT cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. On June 30, 2020, the MSR recapture agreement was amended and restated for a term of five years (the “2020 MSR Recapture Agreement”). Effective July 1, 2020, the 2020 MSR Recapture agreement changes the recapture fee payable by the Company to a tiered amount equal to: The “recapture rate” means, during each month, the ratio of (i) the aggregate The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee. Through June 30, 2020, pursuant to the terms of a mortgage banking services agreement, the monthly fulfillment fee was an amount equal to: F-17 Effective July 1, 2020, the fulfillment fees Fulfillment fees shall not exceed the following: Sourcing Fees 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 purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and, through June 30, 2020, 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. Effective July 1, 2020, sourcing fee rates were revised to range from one to two basis points of the UPB, generally based on the average number of calendar days the loans are held by PMT before purchase by PLS. The Company may also acquire conventional loans from PMT on the same terms upon mutual agreement between PMT and the Company. While the Company purchases these mortgage loans “as is” and without recourse of any kind from PMT, where the Company has a claim for repurchase, indemnity or otherwise against a correspondent seller, it is entitled, at its sole expense, to pursue any such claim through or in the name of PMT. Following is a summary of loan production activities, including MSR recapture, between the Company and PMT: Year ended December 31, 2022 2021 2020 (in thousands) Net (losses) gains on loans held for sale at fair value: Net (losses) gains on loans held for sale to PMT (primarily cash) $ (2,820) $ — $ 81,295 Mortgage servicing rights and excess servicing spread recapture incurred (13,744) (51,473) (30,614) $ (16,564) $ (51,473) $ 50,681 Sale of loans held for sale to PMT $ 298,862 $ — $ 2,248,896 Tax service fees earned from PMT included in Loan origination fees $ 8,418 $ 26,126 $ 23,408 Fulfillment fee revenue $ 67,991 $ 178,927 $ 222,200 Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees $ 37,090,031 $ 110,003,574 $ 100,389,252 Sourcing fees included in cost of loans purchased from PMT $ 4,968 $ 6,472 $ 11,037 Unpaid principal balance of loans purchased from PMT $ 49,680,267 $ 64,774,728 $ 60,540,530 Year ended December 31, 2020 2019 2018 (in thousands) Net gains on loans held for sale at fair value: Net gains on loans held for sale to PMT (primarily cash) $ 81,295 $ 190,416 $ 69,359 Mortgage servicing rights and excess servicing spread recapture incurred (30,614) (7,051) (4,776) $ 50,681 $ 183,365 $ 64,583 Sale of loans held for sale to PMT $ 2,248,896 $ 6,255,915 $ 3,343,028 Tax service fees earned from PMT included in Loan origination fees $ 23,408 $ 14,695 $ 7,433 Fulfillment fee revenue $ 222,200 $ 160,610 $ 81,350 Sourcing fees included in cost of loans purchased from PMT $ 11,037 $ 14,381 $ 10,925 Unpaid principal balance of loans purchased from PMT $ 60,540,530 $ 47,937,306 $ 36,415,933 Loan Servicing The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), pursuant to which the Company provides subservicing for PMT’s portfolio of MSRs, loans at fair value other than special servicing loans and loans held for sale (prime servicing) and its portfolio of residential mortgage loans purchased with credit deterioration Prime Servicing Special Servicing Following is a summary of loan servicing Year ended December 31, Year ended December 31, 2020 2019 2018 Loan type serviced 2022 2021 2020 (in thousands) (in thousands) Loan type serviced: Loans acquired for sale at fair value $ 2,067 $ 1,772 $ 1,037 Distressed loans 807 2,207 7,555 Loans acquired for sale $ 1,018 $ 2,363 $ 2,067 Loans at fair value 529 505 807 Mortgage servicing rights 64,307 44,818 33,453 80,368 77,790 64,307 $ 67,181 $ 48,797 $ 42,045 $ 81,915 $ 80,658 $ 67,181 Property management fees received from PMT included in Other income $ — $ 314 $ 442 The Servicing Agreement expires on June 30, 2025. Investment Management Activities The Company has a management agreement with PMT (“Management Agreement”), pursuant to which the Company oversees PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which PFSI collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that: The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income” for the quarter exceeds (i) an 8% return on For the purpose of determining the amount of the performance incentive fee: “Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non-cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees. “Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the rolling four-quarter period. The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on “equity”) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the “Target Yield”) for the four quarters then ended. If the “net income” is 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. 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. F-20 Following is a summary of the base management and performance incentive fees earned from PMT: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Base management $ 34,538 $ 29,303 $ 23,033 $ 31,065 $ 34,794 $ 34,538 Performance incentive — 7,189 1,432 — 3,007 — $ 34,538 $ 36,492 $ 24,465 $ 31,065 $ 37,801 $ 34,538 Expense Reimbursement Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company was reimbursed $120,000 per fiscal quarter through June 30, 2020. On June 30, 2020, the Management Agreement was amended and restated for a term of five years (the “2020 Management Agreement”). The terms of the 2020 Management Agreement are materially consistent with those of the prior management agreement, except that, effective July 1, 2020, PMT’s reimbursement of PCM’s and its affiliate’s compensation expenses was increased from $120,000 to $165,000 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 are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed or owned by the Company and/or its affiliates as calculated at each fiscal quarter end. The Company received reimbursements from PMT for expenses as follows: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Reimbursement of: Expenses incurred on PMT's behalf, net $ 23,829 $ 18,812 $ 22,583 Common overhead incurred by the Company $ 5,172 $ 5,340 $ 4,640 8,588 4,906 5,172 Compensation 570 480 480 660 660 570 Expenses incurred on PMT's behalf, net 22,583 4,362 1,113 $ 28,325 $ 10,182 $ 6,233 $ 33,077 $ 24,378 $ 28,325 Payments and settlements during the year (1) $ 378,162 $ 177,116 $ 71,943 $ 144,012 $ 284,381 $ 378,162 Investing Activities Master Repurchase Agreement In the first quarter of 2021, PLS repurchased the ESS from PMH at fair market value, effectively terminating the borrowing arrangements allowing PMH to finance its participation certificates representing beneficial ownership in ESS. Such ESS is now included in PLS's participation certificates representing beneficial ownership in ESS and MSRs, which PLS pledges in connection with the GNMA MSR 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, 2020 2019 2018 (in thousands) Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell: Activity during the year: Net repayments of assets purchased from PMT under agreement to resell $ 26,650 $ 23,513 $ 13,103 Interest income $ 3,325 $ 6,302 $ 7,462 Balance at end of year $ 80,862 $ 107,512 Common shares of beneficial interest of PennyMac Mortgage Investment Trust: Activity during the year: Dividends earned from PennyMac Mortgage Investment Trust $ 114 $ 141 $ 140 Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust (567) 275 192 $ (453) $ 416 $ 332 Balance at end of year: Fair value $ 1,105 $ 1,672 Number of shares 75 75 Year ended December 31, 2022 2021 2020 (in thousands) Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors: Activity during the year: Net repayments of assets purchased from PMT under agreement to resell $ 80,862 $ 26,650 Interest income $ 387 $ 3,325 Balance at end of year $ — $ 80,862 Common shares of beneficial interest of PennyMac Mortgage Investment Trust: Activity during the year: Dividends earned from PennyMac Mortgage Investment Trust $ 136 $ 141 $ 114 Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust (371) 195 (567) $ (235) $ 336 $ (453) Balance at end of year: Fair value $ 929 $ 1,300 Number of shares 75 75 Financing Activities Spread Acquisition and MSR Servicing Agreements F-22 To the extent the Company refinances any of the mortgage loans relating to the ESS it has acquired, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the During the quarter ended March 31, 2021, the Company repaid its outstanding ESS financing through the repurchase of the ESS from PMT. Following is a summary of financing activities between the Company and PMT: Year ended December 31, 2020 2019 2018 (in thousands) Excess servicing spread financing: Balance at beginning of year $ 178,586 $ 216,110 $ 236,534 Issuance pursuant to recapture agreement 2,093 1,757 2,688 Accrual of interest 8,418 10,291 15,138 Repayment (32,377) (40,316) (46,750) Change in fair value (24,970) (9,256) 8,500 Balance at end of year $ 131,750 $ 178,586 $ 216,110 Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value $ 2,241 $ 1,726 $ 2,584 Year ended December 31, 2021 2020 (in thousands) Excess servicing spread financing: Balance at beginning of year $ 131,750 $ 178,586 Issuance pursuant to recapture agreement 557 2,093 Accrual of interest 1,280 8,418 Change in fair value 1,037 (24,970) Repayment (134,624) (32,377) Balance at end of year $ — $ 131,750 Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value $ 614 $ 2,241 Receivable from and Payable to PMT Amounts December 31, December 31, December 31, 2020 2019 2022 2021 (in thousands) (in thousands) Receivable from PMT: Allocated expenses and expenses incurred on PMT's behalf $ 38,132 $ 3,724 $ 11,447 $ 15,431 Management fees 7,307 8,918 Correspondent production fees 6,835 8,894 Servicing fees 6,740 6,848 Fulfillment fees 20,873 18,285 4,043 — Correspondent production fees 13,065 10,606 Management fees 8,686 10,579 Servicing fees 6,213 4,659 Interest on assets purchased under agreements to resell 26 85 Conditional reimbursement 10 221 $ 87,005 $ 48,159 $ 36,372 $ 40,091 Payable to PMT: Amounts advanced by PMT to fund its servicing advances $ 132,154 $ 70,520 $ 201,451 $ 212,066 Mortgage servicing rights recapture payable 296 149 Other 7,856 2,611 3,560 15,953 $ 140,306 $ 73,280 $ 205,011 $ 228,019 F-23 Exchanged Private National Mortgage Acceptance Company, LLC Unitholders 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, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Activity during the year: Liability resulting from unit exchanges $ — $ — $ 3,652 Payments under tax receivable agreement $ 10,713 $ — $ — $ 3,855 $ 4,635 $ 10,713 Repricing of liability $ (280) $ (379) $ (1,126) $ (576) $ — $ (280) Balance at end of year $ 35,165 $ 46,158 $ 46,537 $ 26,099 $ 30,530 $ 35,165 Townsgate Closing Services LLC On December 27, 2022, the Company advanced $801,000 to one of its joint ventures, Townsgate Closing Services, LLC, under a revolving loan agreement. The revolving agreement has a maximum commitment amount of $1.5 million, matures on December 27, 2027 and earns interest, initially 10.75% per year, subject to semi-annual adjustment indexed to the 10+ year USD High Yield Corporate Bond Index as determined by Tradeweb/Bloomberg. The outstanding balance is included in Other assets on the Company’s consolidated balance sheet. Donor Advised Fund During the 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 loans in the form of servicing arrangements and the liability The following table summarizes cash flows between the Company and transferees as a result of the sale of loans in transactions where the Company maintains continuing involvement as servicer with the loans as servicer: Year ended December 31, 2020 2019 2018 (in thousands) Cash flows: Sales proceeds $ 102,840,312 $ 61,214,102 $ 44,557,560 Servicing fees received (1) $ 678,142 $ 587,919 $ 488,483 Net servicing advances $ 235,240 $ 36,277 $ 28,557 Year ended December 31, 2022 2021 2020 (in thousands) Cash flows: Sales proceeds $ 84,345,379 $ 154,450,942 $ 102,840,312 Servicing fees received $ 931,315 $ 840,104 $ 678,142 The following table summarizes December 31, December 31, 2020 2019 2022 2021 (in thousands) (in thousands) Unpaid principal balance of loans outstanding $ 199,655,361 $ 168,842,011 $ 295,032,674 $ 254,524,015 Delinquencies (1): Delinquent loans (1): 30-89 days $ 6,041,366 $ 7,947,560 $ 11,019,194 $ 6,129,597 90 days or more: Not in foreclosure $ 17,799,621 $ 3,237,563 $ 6,548,849 $ 8,399,299 In foreclosure $ 581,683 $ 888,136 $ 834,155 $ 715,016 Foreclosed $ 10,893 $ 15,387 $ 12,905 $ 6,900 Bankruptcy $ 1,230,696 $ 1,343,816 Loans in bankruptcy $ 1,143,484 $ 1,039,362 Delinquent loans in COVID-19 pandemic-related forbearance plans: 30-89 days $ 950,172 $ 1,020,290 90 days or more 2,934,718 2,550,703 $ 3,884,890 $ 3,570,993 The following tables summarize the UPB of the Company’s loan servicing portfolio: December 31, 2020 Contract December 31, 2022 Servicing servicing and Total Servicing Total rights owned subservicing loans serviced rights owned Subservicing loans serviced (in thousands) (in thousands) Investor: Non-affiliated entities: Originated $ 199,655,361 $ — $ 199,655,361 $ 295,032,674 $ — $ 295,032,674 Purchased 41,612,940 — 41,612,940 19,568,122 — 19,568,122 241,268,301 — 241,268,301 314,600,796 — 314,600,796 PennyMac Mortgage Investment Trust — 174,418,591 174,418,591 — 233,575,672 233,575,672 Loans held for sale 11,063,938 — 11,063,938 3,498,214 — 3,498,214 $ 252,332,239 $ 174,418,591 $ 426,750,830 $ 318,099,010 $ 233,575,672 $ 551,674,682 Delinquent loans (1): 30 days $ 5,217,949 $ 901,965 $ 6,119,914 $ 8,903,829 $ 1,576,414 $ 10,480,243 60 days 2,393,267 348,416 2,741,683 2,855,176 337,081 3,192,257 90 days or more: Not in foreclosure 21,781,226 4,473,217 26,254,443 6,829,985 888,057 7,718,042 In foreclosure 751,586 33,312 784,898 914,213 75,012 989,225 Foreclosed 12,938 37,131 50,069 13,835 7,979 21,814 $ 30,156,966 $ 5,794,041 $ 35,951,007 $ 19,517,038 $ 2,884,543 $ 22,401,581 Bankruptcy $ 1,698,418 $ 153,179 $ 1,851,597 Delinquent loans in COVID-19 pandemic-related forbearance: Loans in bankruptcy $ 1,291,038 $ 125,719 $ 1,416,757 Delinquent loans in COVID-19 pandemic-related forbearance plans: 30 days $ 1,745,257 $ 334,498 $ 2,079,755 $ 453,562 $ 88,024 $ 541,586 60 days 1,479,753 259,019 1,738,772 527,035 89,171 616,206 90 days or more not in foreclosure 14,904,052 3,690,505 18,594,557 90 days or more 3,042,923 466,489 3,509,412 $ 18,129,062 $ 4,284,022 $ 22,413,084 $ 4,023,520 $ 643,684 $ 4,667,204 Custodial funds managed by the Company (2) $ 10,660,517 $ 6,086,725 $ 16,747,242 $ 3,329,709 $ 1,783,157 $ 5,112,866 December 31, 2019 Contract Servicing servicing and Total rights owned subservicing loans serviced (in thousands) Investor: Non-affiliated entities: Originated $ 168,842,011 $ — $ 168,842,011 Purchased 59,703,547 — 59,703,547 228,545,558 — 228,545,558 PennyMac Mortgage Investment Trust — 135,414,668 135,414,668 Loans held for sale 4,724,006 — 4,724,006 $ 233,269,564 $ 135,414,668 $ 368,684,232 Delinquent loans: 30 days $ 7,987,132 $ 857,660 $ 8,844,792 60 days 2,490,797 172,263 2,663,060 90 days or more: Not in foreclosure 4,070,482 274,592 4,345,074 In foreclosure 1,113,806 68,331 1,182,137 Foreclosed 18,315 89,421 107,736 $ 15,680,532 $ 1,462,267 $ 17,142,799 Bankruptcy $ 1,898,367 $ 136,818 $ 2,035,185 Custodial funds managed by the Company (1) $ 6,412,291 $ 2,529,984 $ 8,942,275 December 31, 2021 Servicing Total rights owned Subservicing loans serviced (in thousands) Investor: Non-affiliated entities: Originated $ 254,524,015 $ — $ 254,524,015 Purchased 23,861,358 — 23,861,358 278,385,373 — 278,385,373 PennyMac Mortgage Investment Trust — 221,892,142 221,892,142 Loans held for sale 9,430,766 — 9,430,766 $ 287,816,139 $ 221,892,142 $ 509,708,281 Delinquent loans (1): 30 days $ 5,338,545 $ 974,055 $ 6,312,600 60 days 1,604,782 190,727 1,795,509 90 days or more: Not in foreclosure 9,001,137 1,750,628 10,751,765 In foreclosure 829,494 43,793 873,287 Foreclosed 8,017 16,489 24,506 $ 16,781,975 $ 2,975,692 $ 19,757,667 Loans in bankruptcy $ 1,261,980 $ 133,655 $ 1,395,635 Delinquent loans in COVID-19 pandemic-related forbearance plans: 30 days $ 554,161 $ 81,580 $ 635,741 60 days 556,990 89,534 646,524 90 days or more 2,732,089 638,703 3,370,792 $ 3,843,240 $ 809,817 $ 4,653,057 Custodial funds managed by the Company (2) $ 8,485,081 $ 3,823,527 $ 12,308,608 Following is a summary of the geographical distribution of loans included in the Company’s servicing portfolio for the top five and all other states as measured by UPB: December 31, December 31, December 31, State 2020 2019 2022 2021 (in thousands) (in thousands) California $ 60,591,363 $ 57,311,867 $ 68,542,279 $ 67,317,935 Florida 35,360,190 28,940,696 50,873,961 45,222,233 Texas 34,591,419 27,909,821 47,911,696 42,064,686 Virginia 26,209,701 22,115,619 33,478,151 31,442,370 Maryland 19,974,809 16,829,320 25,473,417 23,922,075 All other states 250,023,348 215,576,909 325,395,178 299,738,982 $ 426,750,830 $ 368,684,232 $ 551,674,682 $ 509,708,281 F-27 Note 6—Fair Value Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The 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 the Company has elected to carry the item at its fair value as discussed in the following paragraphs. Fair Value Accounting Elections The Company identified its MSRs, its MSLs and all of its non-cash financial assets, 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. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk. 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, 2022 Level 1 Level 2 Level 3 Total (in thousands) Assets: Short-term investment $ 12,194 $ — $ — $ 12,194 Loans held for sale at fair value — 3,163,528 345,772 3,509,300 Derivative assets: Interest rate lock commitments — — 36,728 36,728 Forward purchase contracts — 2,433 — 2,433 Forward sales contracts — 80,754 — 80,754 MBS put options — 6,057 — 6,057 Put options on interest rate futures purchase contracts 29,203 — — 29,203 Call options on interest rate futures purchase contracts 2,820 — — 2,820 Total derivative assets before netting 32,023 89,244 36,728 157,995 Netting — — — (58,992) Total derivative assets 32,023 89,244 36,728 99,003 Mortgage servicing rights at fair value — — 5,953,621 5,953,621 Investment in PennyMac Mortgage Investment Trust 929 — — 929 $ 45,146 $ 3,252,772 $ 6,336,121 $ 9,575,047 Liabilities: Derivative liabilities: Interest rate lock commitments $ — $ — $ 10,884 $ 10,884 Forward purchase contracts — 48,670 — 48,670 Forward sales contracts — 20,684 — 20,684 Put options on interest rate futures sales contracts 3,008 — — 3,008 Total derivative liabilities before netting 3,008 69,354 10,884 83,246 Netting — — — (61,534) Total derivative liabilities 3,008 69,354 10,884 21,712 Mortgage servicing liabilities at fair value — — 2,096 2,096 $ 3,008 $ 69,354 $ 12,980 $ 23,808 December 31, 2020 December 31, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (in thousands) (in thousands) Assets: Short-term investments $ 15,217 $ — $ — $ 15,217 Short-term investment $ 6,873 $ — $ — $ 6,873 Loans held for sale at fair value — 6,941,231 4,675,169 11,616,400 — 8,613,607 1,128,876 9,742,483 Derivative assets: Interest rate lock commitments — — 679,961 679,961 — — 323,473 323,473 Forward purchase contracts — 133,267 — 133,267 — 20,485 — 20,485 Forward sales contracts — 1,451 — 1,451 — 40,215 — 40,215 MBS put options — 14,302 — 14,302 — 7,655 — 7,655 Swaptions — 11,939 — 11,939 Swaption purchase contracts — 1,625 — 1,625 Put options on interest rate futures purchase contracts 5,520 — — 5,520 3,141 — — 3,141 Call options on interest rate futures purchase contracts 1,391 — — 1,391 2,078 — — 2,078 Total derivative assets before netting 6,911 160,959 679,961 847,831 5,219 69,980 323,473 398,672 Netting — — — (136,593) — — — (64,977) Total derivative assets 6,911 160,959 679,961 711,238 5,219 69,980 323,473 333,695 Mortgage servicing rights at fair value — — 2,581,174 2,581,174 — — 3,878,078 3,878,078 Investment in PennyMac Mortgage Investment Trust 1,105 — — 1,105 1,300 — — 1,300 $ 23,233 $ 7,102,190 $ 7,936,304 $ 14,925,134 $ 13,392 $ 8,683,587 $ 5,330,427 $ 13,962,429 Liabilities: Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value $ — $ — $ 131,750 $ 131,750 Derivative liabilities: Interest rate lock commitments — — 2,935 2,935 $ — $ — $ 1,280 $ 1,280 Forward purchase contracts — 1,276 — 1,276 — 18,007 — 18,007 Forward sales contracts — 251,149 — 251,149 — 35,415 — 35,415 Total derivative liabilities before netting — 252,425 2,935 255,360 — 53,422 1,280 54,702 Netting — — — (212,722) — — — (32,096) Total derivative liabilities — 252,425 2,935 42,638 — 53,422 1,280 22,606 Mortgage servicing liabilities at fair value — — 45,324 45,324 — — 2,816 2,816 $ — $ 252,425 $ 180,009 $ 219,712 $ — $ 53,422 $ 4,096 $ 25,422 December 31, 2019 Level 1 Level 2 Level 3 Total (in thousands) Assets: Short-term investments $ 74,611 $ — $ — $ 74,611 Loans held for sale at fair value — 4,529,075 383,878 4,912,953 Derivative assets: Interest rate lock commitments — — 138,511 138,511 Repurchase agreement derivatives — — 8,187 8,187 Forward purchase contracts — 12,364 — 12,364 Forward sales contracts — 17,097 — 17,097 MBS put options — 3,415 — 3,415 Swaptions — 2,409 — 2,409 Put options on interest rate futures purchase contracts 3,945 — — 3,945 Call options on interest rate futures purchase contracts 1,469 — — 1,469 Total derivative assets before netting 5,414 35,285 146,698 187,397 Netting — — — (27,711) Total derivative assets 5,414 35,285 146,698 159,686 Mortgage servicing rights at fair value — — 2,926,790 2,926,790 Investment in PennyMac Mortgage Investment Trust 1,672 — — 1,672 $ 81,697 $ 4,564,360 $ 3,457,366 $ 8,075,712 Liabilities: Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value $ — $ — $ 178,586 $ 178,586 Derivative liabilities: Interest rate lock commitments — — 1,861 1,861 Forward purchase contracts — 19,040 — 19,040 Forward sales contracts — 18,045 — 18,045 Total derivative liabilities before netting — 37,085 1,861 38,946 Netting — — — (16,616) Total derivative liabilities — 37,085 1,861 22,330 Mortgage servicing liabilities at fair value — — 29,140 29,140 $ — $ 37,085 $ 209,587 $ 230,056 As shown above, certain of the Company’s loans held for sale, IRLCs, repurchase agreement derivatives, MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” fair value inputs at either the beginning or the end of the year presented for each of the three years ended December 31, Year ended December 31, 2020 Year ended December 31, 2022 Net interest Repurchase Mortgage Net interest Mortgage Loans held rate lock agreement servicing Loans held rate lock servicing Assets for sale commitments (1) derivatives rights Total for sale commitments (1) rights Total (in thousands) (in thousands) Balance, December 31, 2019 $ 383,878 $ 136,650 $ 8,187 $ 2,926,790 $ 3,455,505 Balance, December 31, 2021 $ 1,128,876 $ 322,193 $ 3,878,078 $ 5,329,147 Purchases and issuances, net 9,672,322 2,028,957 — 25,473 11,726,752 3,338,743 369,769 3,993 3,712,505 Capitalization of interest and advances 119,037 — — — 119,037 60,589 — — 60,589 Sales and repayments (2,381,493) — (8,270) — (2,389,763) (1,378,441) — — (1,378,441) Mortgage servicing rights resulting from loan sales — — — 1,138,045 1,138,045 — — 1,718,094 1,718,094 Changes in fair value included in income arising from: Changes in instrument-specific credit risk 127,780 — — — 127,780 (41,483) — — (41,483) Other factors — 1,254,235 83 (1,509,134) (254,816) (25,156) (624,905) 353,456 (296,605) 127,780 1,254,235 83 (1,509,134) (127,036) (66,639) (624,905) 353,456 (338,088) Transfers from Level 3 to Level 2 (3,246,282) — — — (3,246,282) (2,736,940) — — (2,736,940) Transfers to real estate acquired in settlement of loans (73) — — — (73) (416) — — (416) Transfers of interest rate lock commitments to loans held for sale — (2,742,816) — — (2,742,816) Balance, December 31, 2020 $ 4,675,169 $ 677,026 $ — $ 2,581,174 $ 7,933,369 Changes in fair value recognized during the year relating to assets still held at December 31, 2020 $ 153,474 $ 677,026 $ — $ (1,509,134) $ (678,634) Transfers to loans held for sale — (41,213) — (41,213) Balance, December 31, 2022 $ 345,772 $ 25,844 $ 5,953,621 $ 6,325,237 Changes in fair value recognized during the year relating to assets still held at December 31, 2022 $ (26,699) $ 25,844 $ 353,456 $ 352,601 Year ended December 31, 2020 Excess servicing Mortgage spread servicing Liabilities financing liabilities Total (in thousands) Balance, December 31, 2019 $ 178,586 $ 29,140 $ 207,726 Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust 2,093 — 2,093 Accrual of interest 8,418 — 8,418 Repayments (32,377) — (32,377) Mortgage servicing liabilities resulting from loan sales — 23,325 23,325 Changes in fair value included in income (24,970) (7,141) (32,111) Balance, December 31, 2020 $ 131,750 $ 45,324 $ 177,074 Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2020 $ (24,970) $ (7,141) $ (32,111) Year ended Liabilities December 31, 2022 (in thousands) Mortgage servicing liabilities: Balance, December 31, 2021 $ 2,816 Changes in fair value included in income (720) Balance, December 31, 2022 $ 2,096 Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2022 $ (720) Year ended December 31, 2019 Net interest Repurchase Mortgage Loans held rate lock agreement servicing Assets for sale commitments (1) derivatives rights Total (in thousands) Balance, December 31, 2018 $ 260,008 $ 49,338 $ 26,770 $ 2,820,612 $ 3,156,728 Purchases and issuances, net 5,163,730 570,072 15,019 227,445 5,976,266 Capitalization of interest and advances 72,302 — — — 72,302 Sales and repayments (3,456,856) — (31,993) — (3,488,849) Mortgage servicing rights resulting from loan sales — — — 884,876 884,876 Changes in fair value included in income arising from: Changes in instrument-specific credit risk (6,332) — — — (6,332) Other factors — 331,067 (1,609) (1,006,143) (676,685) (6,332) 331,067 (1,609) (1,006,143) (683,017) Transfers from Level 3 to Level 2 (1,646,554) — — — (1,646,554) Transfers to real estate acquired in settlement of loans (2,420) — — — (2,420) Transfers of interest rate lock commitments to loans held for sale — (813,827) — — (813,827) Balance, December 31, 2019 $ 383,878 $ 136,650 $ 8,187 $ 2,926,790 $ 3,455,505 Changes in fair value recognized during the year relating to assets still held at December 31, 2019 $ (5,755) $ 136,650 $ 165 $ (1,006,143) $ (875,083) Year ended December 31, 2021 Net interest Mortgage Loans held rate lock servicing Assets for sale commitments (1) rights Total (in thousands) Balance, December 31, 2020 $ 4,675,169 $ 677,026 $ 2,581,174 $ 7,933,369 Purchases and issuances, net 20,330,785 1,654,476 — 21,985,261 Capitalization of interest and advances 169,053 — — 169,053 Sales and repayments (11,783,818) — — (11,783,818) Mortgage servicing rights resulting from loan sales — — 1,861,949 1,861,949 Changes in fair value included in income arising from: Changes in instrument-specific credit risk 285,501 — — 285,501 Other factors — 489,547 (565,045) (75,498) 285,501 489,547 (565,045) 210,003 Transfers from Level 3 to Level 2 (12,547,732) — — (12,547,732) Transfer to real estate acquired in settlement of loans (82) — — (82) Transfers to loans held for sale — (2,498,856) — (2,498,856) Balance, December 31, 2021 $ 1,128,876 $ 322,193 $ 3,878,078 $ 5,329,147 Changes in fair value recognized during the year relating to assets still held at December 31, 2021 $ 22,516 $ 322,193 $ (565,045) $ (220,336) Year ended December 31, 2019 Year ended December 31, 2021 Excess Excess servicing Mortgage servicing Mortgage spread servicing spread servicing Liabilities financing liabilities Total financing liabilities Total (in thousands) (in thousands) Balance, December 31, 2018 $ 216,110 $ 8,681 $ 224,791 Balance, December 31, 2020 $ 131,750 $ 45,324 $ 177,074 Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust 1,757 — 1,757 557 — 557 Accrual of interest 10,291 — 10,291 1,280 — 1,280 Repayments (40,316) — (40,316) Mortgage servicing liabilities resulting from loan sales — 37,988 37,988 — 106,631 106,631 Changes in fair value included in income (9,256) (17,529) (26,785) 1,037 (149,139) (148,102) Balance, December 31, 2019 $ 178,586 $ 29,140 $ 207,726 Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2019 $ (9,256) $ (17,529) $ (26,785) Repayments (134,624) — (134,624) Balance, December 31, 2021 $ — $ 2,816 $ 2,816 Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2021 $ — $ (3,156) $ (3,156) Year ended December 31, 2018 Net interest Repurchase Mortgage Loans held rate lock agreement servicing Assets for sale commitments (1) derivatives rights Total (in thousands) Balance, December 31, 2017 $ 782,211 $ 58,272 $ 10,656 $ 638,010 $ 1,489,149 Reclassification of MSRs previously accounted for under the amortization method pursuant to adoption of the fair value method of accounting — — — 1,482,426 1,482,426 782,211 58,272 10,656 2,120,436 2,971,575 Purchases and issuances, net 2,972,042 195,974 49,725 237,803 3,455,544 Sales and repayments (1,360,667) — (31,907) — (1,392,574) Mortgage servicing rights resulting from loan sales — — — 591,757 591,757 Changes in fair value included in income arising from: Changes in instrument-specific credit risk 158 — — — 158 Other factors — 1,285 (1,704) (129,384) (129,803) 158 1,285 (1,704) (129,384) (129,645) Transfers from Level 3 to Level 2 (2,128,551) — — — (2,128,551) Transfers to real estate acquired in settlement of loans (5,185) — — — (5,185) Transfers of interest rate lock commitments to loans held for sale — (206,193) — — (206,193) Balance, December 31, 2018 $ 260,008 $ 49,338 $ 26,770 $ 2,820,612 $ 3,156,728 Changes in fair value recognized during the year relating to assets still held at December 31, 2018 $ (263) $ 49,338 $ — $ (129,384) $ (80,309) Year ended December 31, 2020 Net interest Repurchase Mortgage Loans held rate lock agreement servicing Assets for sale commitments (1) derivatives rights Total (in thousands) Balance, December 31, 2019 $ 383,878 $ 136,650 $ 8,187 $ 2,926,790 $ 3,455,505 Purchases and issuances, net 9,672,322 2,028,957 — 25,473 11,726,752 Capitalization of interest and advances 119,037 — — — 119,037 Sales and repayments (2,381,493) — (8,270) — (2,389,763) Mortgage servicing rights resulting from loan sales — — — 1,138,045 1,138,045 Changes in fair value included in income arising from: Changes in instrument-specific credit risk 127,780 — — — 127,780 Other factors — 1,254,235 83 (1,509,134) (254,816) 127,780 1,254,235 83 (1,509,134) (127,036) Transfers from Level 3 to Level 2 (3,246,282) — — — (3,246,282) Transfers to real estate acquired in settlement of loans (73) — — — (73) Transfers to loans held for sale — (2,742,816) — — (2,742,816) Balance, December 31, 2020 $ 4,675,169 $ 677,026 $ — $ 2,581,174 $ 7,933,369 Changes in fair value recognized during the year relating to assets still held at December 31, 2020 $ 153,474 $ 677,026 $ — $ (1,509,134) $ (678,634) Year ended December 31, 2018 Excess �� servicing Mortgage spread servicing Liabilities financing liabilities Total (in thousands) Balance, December 31, 2017 $ 236,534 $ 14,120 $ 250,654 Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust 2,688 — 2,688 Accrual of interest 15,138 — 15,138 Repayments (46,750) — (46,750) Mortgage servicing liabilities resulting from loan sales — 7,601 7,601 Changes in fair value included in income 8,500 (13,040) (4,540) Balance, December 31, 2018 $ 216,110 $ 8,681 $ 224,791 Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2018 $ 8,500 $ (13,040) $ (4,540) Year ended December 31, 2020 Excess servicing Mortgage spread servicing Liabilities financing liabilities Total (in thousands) Balance, December 31, 2019 $ 178,586 $ 29,140 $ 207,726 Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust 2,093 — 2,093 Accrual of interest 8,418 — 8,418 Mortgage servicing liabilities resulting from loan sales — 23,325 23,325 Changes in fair value included in income (24,970) (7,141) (32,111) Repayments (32,377) — (32,377) Balance, December 31, 2020 $ 131,750 $ 45,324 $ 177,074 Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2020 $ (24,970) $ (7,141) $ (32,111) The Company had transfers among the fair value levels arising from the return to salability in the active secondary market of certain loans held for sale and from transfers of IRLCs to loans held for sale at fair value upon purchase or 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 the Company’s election of the fair value option by income statement line item are summarized below: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 Net gains on Net Net gains on Net Net gains on Net Net gains on Net Net gains on Net Net gains on Net loans held loan loans held loan loans held loan loans held loan loans held loan loans held loan for sale at servicing for sale at servicing for sale at servicing for sale at servicing for sale at servicing for sale at servicing fair value fees Total fair value fees Total fair value fees Total fair value fees Total fair value fees Total fair value fees Total (in thousands) (in thousands) Assets: Loans held for sale $ 2,899,314 $ — $ 2,899,314 $ 811,895 $ — $ 811,895 $ 188,611 $ — $ 188,611 $ (219,054) $ — $ (219,054) $ 2,568,318 $ — $ 2,568,318 $ 2,899,314 $ — $ 2,899,314 Mortgage servicing rights — (1,509,134) (1,509,134) — (1,006,143) (1,006,143) — (129,384) (129,384) — 353,456 353,456 — (565,045) (565,045) — (1,509,134) (1,509,134) $ 2,899,314 $ (1,509,134) $ 1,390,180 $ 811,895 $ (1,006,143) $ (194,248) $ 188,611 $ (129,384) $ 59,227 $ (219,054) $ 353,456 $ 134,402 $ 2,568,318 $ (565,045) $ 2,003,273 $ 2,899,314 $ (1,509,134) $ 1,390,180 Liabilities: Excess servicing spread financing payable to PennyMac Mortgage Investment Trust $ — $ 24,970 $ 24,970 $ — $ 9,256 $ 9,256 $ — $ (8,500) $ (8,500) $ — $ — $ — $ — $ (1,037) $ (1,037) $ — $ 24,970 $ 24,970 Mortgage servicing liabilities — 7,141 7,141 — 17,529 17,529 — 13,040 13,040 — 720 720 — 149,139 149,139 — 7,141 7,141 $ — $ 32,111 $ 32,111 $ — $ 26,785 $ 26,785 $ — $ 4,540 $ 4,540 $ — $ 720 $ 720 $ — $ 148,102 $ 148,102 $ — $ 32,111 $ 32,111 Following are the fair value and related principal amounts due upon maturity of assets accounted for under the fair value option: December 31, 2020 December 31, 2019 December 31, 2022 December 31, 2021 Principal Principal Principal Principal amount amount amount amount Fair due upon Fair due upon Fair due upon Fair due upon Loans held for sale value maturity Difference value maturity Difference value maturity Difference value maturity Difference (in thousands) (in thousands) Current through 89 days delinquent $ 11,304,308 $ 10,743,814 $ 560,494 $ 4,628,333 $ 4,431,854 $ 196,479 $ 3,450,578 $ 3,428,052 $ 22,526 $ 9,577,398 $ 9,263,242 $ 314,156 90 days or more delinquent: Not in foreclosure 275,419 280,595 (5,176) 236,650 241,958 (5,308) 47,252 53,351 (6,099) 153,162 153,875 (713) In foreclosure 36,673 39,529 (2,856) 47,970 50,194 (2,224) 11,470 16,811 (5,341) 11,923 13,649 (1,726) $ 11,616,400 $ 11,063,938 $ 552,462 $ 4,912,953 $ 4,724,006 $ 188,947 $ 3,509,300 $ 3,498,214 $ 11,086 $ 9,742,483 $ 9,430,766 $ 311,717 Assets Measured at Fair Value on a Nonrecurring Basis Following is a summary of assets held at year end that Real estate acquired in settlement of loans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (in thousands) (in thousands) December 31, 2020 $ — $ — $ 1,450 $ 1,450 December 31, 2019 $ — $ — $ 9,850 $ 9,850 December 31, 2022 $ — $ — $ 1,850 $ 1,850 December 31, 2021 $ — $ — $ 2,588 $ 2,588 The following table summarizes the total net losses recognized on assets measured Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Real estate acquired in settlement of loans $ (814) $ (1,913) $ (75) $ 523 $ 799 $ 814 Fair Value of Financial Instruments Carried at Amortized Cost The Company’s Assets These assets and liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these The Company estimates the fair value of the December 31, 2020 December 31, 2019 December 31, 2022 December 31, 2021 Fair value Carrying value Fair value Carrying value Fair value Carrying value Fair value Carrying value (in thousands) (in thousands) Notes payable secured by mortgage servicing assets $ 1,268,304 $ 1,295,840 $ 1,303,047 $ 1,294,070 Term Notes $ 1,677,476 $ 1,794,475 $ 1,302,640 $ 1,297,622 Unsecured senior notes $ 685,750 $ 645,820 $ — $ — $ 1,550,750 $ 1,779,920 $ 1,790,375 $ 1,776,219 Valuation Governance Most of the Company’s financial assets, and all of its derivatives, MSRs, ESS, Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results The Valuation Techniques and Inputs Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities: Loans Held for Sale Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling price or quoted market price or market price equivalent. Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include: Loans become eligible for resale into a new Ginnie Mae security when the loans become current either through completion of a modification of the loan’s terms or otherwise after three months of timely payments and when the issuance date of the new security is at least 120 days after the date the loan was last delinquent. The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale at fair value: December 31, December 31, 2020 December 31, 2019 2022 2021 Fair value (in thousands) $ 4,675,169 $ 383,878 $ 345,772 $ 1,128,876 Key inputs (1): Discount rate: Range 2.8% – 9.2% 3.0% – 9.2% 5.5% – 10.2% 2.2% – 9.2% Weighted average 2.8% 3.0% 5.7% 2.3% Twelve-month projected housing price index change: Range 2.7% – 3.5% 2.6% – 3.2% (1.9)% – (1.7)% 6.1% – 6.5% Weighted average 3.0% 2.8% (1.8)% 6.2% Voluntary prepayment/resale speed (2): Range 0.4% – 31.3% 0.4% – 21.4% 4.7% – 25.6% 0.4% – 30.3% Weighted average 21.9% 18.2% 21.6% 22.0% Total prepayment speed (3): Total prepayment/resale speed (3): Range 0.5% – 42.9% 0.5% – 39.2% 4.8% – 36.1% 0.4% – 39.3% Weighted average 29.2% 36.2% 29.4% 28.2% Changes in fair value relating to loans held for sale Derivative Financial Instruments Interest Rate Lock Commitments The Company categorizes IRLCs The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurement. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the MSR component of IRLC fair value, but increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs: December 31, December 31, 2020 December 31, 2019 2022 2021 Fair value (in thousands) (1) $ 677,026 $ 136,650 $ 25,844 $ 322,193 Key inputs (2): Pull-through rate: Range 10.1% – 100% 12.2% – 100% 10.3% – 100% 8.0% – 100% Weighted average 82.7% 86.5% 82.8% 78.4% Mortgage servicing rights value expressed as: Mortgage servicing rights fair value expressed as: Servicing fee multiple: Range 0.7 – 5.3 1.4 – 5.7 (1.3) – 7.7 (8.5) – 6.7 Weighted average 3.6 4.2 4.3 3.8 Percentage of loan commitment amount Range 0.1% – 2.6% 0.3% – 2.8% (0.2)% – 3.8% (1.6)% – 3.6% Weighted average 1.2% 1.6% 2.0% 1.5% Hedging Derivatives Changes in the fair value of hedging derivatives are included in Net gains on loans acquired for sale at fair value, or Net loan servicing fees – Mortgage Servicing Rights MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable prepayment rate (prepayment speed), pricing spread (discount rate), Following are the key inputs used in determining the fair value of MSRs Year ended December 31, 2020 2019 2018 (Amount recognized and unpaid principal balance of MSR and pool characteristics: Amount recognized $1,138,045 $884,876 $591,757 Unpaid principal balance of underlying mortgage loans $96,571,835 $56,038,354 $42,008,585 Weighted average servicing fee rate (in basis points) 35 41 36 Key inputs (1): Pricing spread (2): Range 6.8% – 18.1% 5.5% – 16.2% 5.8% – 16.4% Weighted average 9.4% 8.5% 9.9% Annual total prepayment speed (3): Range 7.2% – 49.8% 7.7% – 32.8% 3.9% – 61.8% Weighted average 11.9% 13.5% 10.8% Equivalent average life (in years): Range 1.5 – 9.1 2.6 – 8.2 0.5 – 11.6 Weighted average 6.7 6.2 7.3 Annual per-loan cost of servicing: Range $77 – $117 $78 – $100 $78 – $99 Weighted average $102 $97 $91 Year ended December 31, 2022 2021 2020 (Amount recognized and unpaid principal balance of Amount recognized $1,718,094 $1,861,949 $1,138,045 Pool characteristics: Unpaid principal balance of underlying loans $83,569,657 $138,319,425 $96,571,835 Weighted average servicing fee rate (in basis points) 44 34 35 Key inputs (1): Annual total prepayment speed (2): Range 5.1% – 23.4% 6.1% – 31.4% 7.2% – 49.8% Weighted average 9.4% 8.6% 11.9% Equivalent average life (in years): Range 3.7 – 9.4 3.0 – 9.2 1.5 – 9.1 Weighted average 8.1 8.1 6.7 Pricing spread (3): Range 5.5% – 16.1% 6.0% – 16.9% 6.8% – 18.1% Weighted average 7.8% 8.8% 9.4% Annual per-loan cost of servicing: Range $71 – $177 $80 – $117 $77 – $117 Weighted average $104 $103 $102 Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs at year end and the effect on the fair value from adverse changes in those inputs: December 31, December 31, 2020 December 31, 2019 2022 2021 (Fair value, unpaid principal balance of underlying (Fair value, unpaid principal balance of underlying mortgage loans and effect on fair value amounts in thousands) loans and effect on fair value amounts in thousands) Fair value $ 2,581,174 $ 2,926,790 $ 5,953,621 $ 3,878,078 Pool characteristics: Unpaid principal balance of underlying loans $ 238,410,809 $ 225,787,103 $ 314,567,639 $ 278,324,780 Weighted average note interest rate 3.6% 3.9% 3.4% 3.2% Weighted average servicing fee rate (in basis points) 35 35 36 34 Key inputs (1): Pricing spread (2): Range 8.0% – 17.6% 6.8% – 15.8% Weighted average 10.1% 8.5% Effect on fair value of: 5% adverse change ($46,356) ($44,561) 10% adverse change ($90,936) ($87,734) 20% adverse change ($175,137) ($170,155) Annual total prepayment speed (3): Annual total prepayment speed (2): Range 10.1% – 32.9% 9.3% – 40.9% 5.0% – 17.7% 7.9% – 26.7% Weighted average 13.7% 12.7% 7.5% 10.7% Equivalent average life (in years): Range 2.3 – 7.7 1.4 – 7.4 3.7 – 9.3 3.1 – 7.7 Weighted average 6.0 6.1 8.4 6.8 Effect on fair value of: Effect on fair value of (3): 5% adverse change ($66,536) ($63,569) ($77,346) ($80,109) 10% adverse change ($130,253) ($124,411) ($152,192) ($157,252) 20% adverse change ($249,843) ($238,549) ($294,872) ($303,259) Annual per-loan cost of servicing: Pricing spread (4): Range $79 – $117 $77 – $100 4.9% – 14.3% 5.3% – 15.5% Weighted average $107 $97 6.5% 7.7% Effect on fair value of: Effect on fair value of (3): 5% adverse change ($25,482) ($24,516) ($81,021) ($59,577) 10% adverse change ($50,964) ($49,032) ($159,863) ($117,352) 20% adverse change ($101,929) ($98,065) ($311,329) ($227,791) Per-loan annual cost of servicing: Range $68 – $144 $79 – $197 Weighted average $109 $108 Effect on fair value of (3): 5% adverse change ($41,263) ($32,979) 10% adverse change ($82,527) ($65,958) 20% adverse change ($165,053) ($131,916) Excess Servicing Spread Financing at Fair Value ESS is categorized as a “Level 3” fair value liability. Because The key inputs used in the estimation of ESS fair value include pricing spread (discount rate) and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not necessarily directly related. ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage interest rates normally discourage mortgage refinancing activity. Decreased refinancing activity increases the life of the mortgage loans underlying the ESS, thereby increasing its fair value. Changes in the fair value of ESS are included in Net loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust. December 31, December 31, 2020 2019 Fair value (in thousands) $ 131,750 $ 178,586 Pool characteristics: Unpaid principal balance of underlying loans (in thousands) $ 15,833,050 $ 19,904,571 Average servicing fee rate (in basis points) 34 34 Average excess servicing spread (in basis points) 19 19 Key inputs (1): Pricing spread (2): Range 4.9% – 5.3% 3.0% – 3.3% Weighted average 5.1% 3.1% Annual total prepayment speed (3): Range 9.6% – 18.3% 8.7% – 16.2% Weighted average 11.7% 11.0% Equivalent average life (in years): Range 2.3 – 6.6 2.7 – 7.2 Weighted average 5.8 6.1 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. Following are the key inputs used in determining the fair value of MSLs: December 31, December 31, 2020 2019 2022 2021 Fair value (in thousands) $ 45,324 $ 29,140 $ 2,096 $ 2,816 Pool characteristics: Unpaid principal balance of underlying loans (in thousands) $ 2,857,492 $ 2,758,454 $ 33,157 $ 60,593 Servicing fee rate (in basis points) 25 25 25 25 Key inputs: Pricing spread (1) 7.6% 8.2% Key inputs (1): Annual total prepayment speed (2) 33.3% 29.2% 17.2% 19.8% Equivalent average life (in years) 3.2 3.9 4.9 4.1 Annual per-loan cost of servicing $ 305 $ 300 Pricing spread (3) 7.8% 6.9% Per-loan annual cost of servicing $ 1,177 $ 1,406 F-40 Note 7—Loans Held for Sale at Fair Value Loans held for sale at fair value December 31, December 31, December 31, Loan type 2020 2019 2022 2021 (in thousands) (in thousands) Government-insured or guaranteed $ 5,683,786 $ 4,222,010 $ 2,006,157 $ 6,030,518 Conventional conforming 1,257,445 307,065 1,145,053 2,583,089 Purchased from Ginnie Mae pools serviced by the Company 4,661,378 374,121 Jumbo 12,318 — Home equity loans 46,589 — Purchased from Ginnie Mae securities serviced by the Company 257,175 1,082,444 Repurchased pursuant to representations and warranties 13,791 9,244 42,008 46,432 Home equity lines of credit — 513 $ 11,616,400 $ 4,912,953 $ 3,509,300 $ 9,742,483 Fair value of loans pledged to secure: Assets sold under agreements to repurchase $ 10,912,178 $ 4,322,789 $ 3,139,870 $ 8,629,861 Mortgage loan participation purchase and sale agreements 545,500 523,349 302,977 505,716 $ 11,457,678 $ 4,846,138 $ 3,442,847 $ 9,135,577 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, 2020 December 31, 2019 December 31, 2022 December 31, 2021 Fair value Fair value Fair value Fair value Notional Derivative Derivative Notional Derivative Derivative Notional Derivative Derivative Notional Derivative Derivative Instrument amount (1) assets liabilities amount (1) assets liabilities Derivative instrument amount (1) assets liabilities amount (1) assets liabilities (in thousands) (in thousands) Not subject to master netting arrangements: Interest rate lock commitments 20,624,535 $ 679,961 $ 2,935 7,122,316 $ 138,511 $ 1,861 7,009,119 $ 36,728 $ 10,884 14,111,795 $ 323,473 $ 1,280 Repurchase agreement derivatives — — 8,187 — Used for hedging purposes (2): Subject to master netting arrangements (2): Forward purchase contracts 31,689,543 133,267 1,276 13,618,361 12,364 19,040 8,320,849 2,433 48,670 22,007,383 20,485 18,007 Forward sales contracts 50,438,967 1,451 251,149 16,220,526 17,097 18,045 12,487,760 80,754 20,684 34,429,676 40,215 35,415 MBS put options 12,025,000 14,302 — 6,100,000 3,415 — 1,750,000 6,057 — 9,550,000 7,655 — Swaption purchase contracts 3,375,000 11,939 — 1,750,000 2,409 — — — — 5,375,000 1,625 — Put options on interest rate futures purchase contracts 4,750,000 5,520 — 2,250,000 3,945 — 6,800,000 29,203 — 2,450,000 3,141 — Call options on interest rate futures purchase contracts 850,000 1,391 — 750,000 1,469 — 1,350,000 2,820 — 1,250,000 2,078 — Put options on interest rate futures sale contracts 250,000 — 3,008 — — — Treasury futures purchase contracts 1,065,000 — — 1,276,000 — — 3,709,200 — — 1,544,800 — — Treasury futures sale contracts 1,555,000 — — 1,010,000 — — 3,456,900 — — 1,925,000 — — Interest rate swap futures purchase contracts 4,801,700 — — 3,210,000 — — — — — 3,010,600 — — Interest rate swap futures sale contracts 711,700 — — — — — — — — 2,187,200 — — Total derivatives before netting 847,831 255,360 187,397 38,946 157,995 83,246 398,672 54,702 Netting (136,593) (212,722) (27,711) (16,616) (58,992) (61,534) (64,977) (32,096) $ 711,238 $ 42,638 $ 159,686 $ 22,330 $ 99,003 $ 21,712 $ 333,695 $ 22,606 Collateral placed with (received from) derivative counterparties, net $ 76,129 $ (11,095) Deposits placed with (received from) derivative counterparties included in the derivative balances above, net $ 2,542 $ (32,881) December 31, 2020 December 31, 2019 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 $ 679,961 $ — $ 679,961 $ 138,511 $ — $ 138,511 Repurchase agreement derivatives — — — 8,187 — 8,187 679,961 — 679,961 146,698 — 146,698 Derivatives subject to master netting arrangements: Forward purchase contracts 133,267 — 133,267 12,364 — 12,364 Forward sale contracts 1,451 — 1,451 17,097 — 17,097 MBS put options 14,302 — 14,302 3,415 — 3,415 Swaption purchase contracts 11,939 — 11,939 2,409 — 2,409 Put options on interest rate futures purchase contracts 5,520 — 5,520 3,945 — 3,945 Call options on interest rate futures purchase contracts 1,391 — 1,391 1,469 — 1,469 Netting — (136,593) (136,593) — (27,711) (27,711) 167,870 (136,593) 31,277 40,699 (27,711) 12,988 $ 847,831 $ (136,593) $ 711,238 $ 187,397 $ (27,711) $ 159,686 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, 2020 December 31, 2019 Gross amount not Gross amount not offset in the offset in the consolidated consolidated Net amount balance sheet Net amount balance sheet of assets in the Cash of assets in the Cash consolidated Financial collateral Net consolidated Financial collateral Net balance sheet instruments received amount balance sheet instruments received amount (in thousands) Interest rate lock commitments $ 679,961 $ — $ — $ 679,961 $ 138,511 $ — $ — $ 138,511 JPMorgan Chase Bank, N.A. 17,149 — — 17,149 2,196 — — 2,196 RJ O'Brien 6,910 — — 6,910 5,414 — — 5,414 Morgan Stanley Bank, N.A. 2,443 — — 2,443 — — — — Citibank, N.A. 2,026 — — 2,026 — — — — Nomura Securities International, Inc. 1,195 — — 1,195 — — — — Deutsche Bank — — — — 9,138 — — 9,138 Goldman Sachs — — — — 2,548 — — 2,548 Mizuho Securities — — — — 1,597 — — 1,597 Others 1,554 — — 1,554 282 — — 282 $ 711,238 $ — $ — $ 711,238 $ 159,686 $ — $ — $ 159,686 December 31, 2022 December 31, 2021 December 31, 2020 December 31, 2019 Gross amount not Gross amount not Net Net offset in the offset in the amount amount consolidated consolidated Gross Gross amount of liabilities Gross Gross amount of liabilities Net amount balance sheet Net amount balance sheet amount of offset in the in the amount of offset in the in the of assets in the Cash of assets in the Cash recognized consolidated consolidated recognized consolidated consolidated consolidated Financial collateral Net consolidated Financial collateral Net liabilities balance sheet balance sheet liabilities balance sheet balance sheet balance sheet instruments received amount balance sheet instruments received amount (in thousands) (in thousands) Derivatives not subject to master netting arrangements – Interest rate lock commitments $ 2,935 $ — $ 2,935 $ 1,861 $ — $ 1,861 Derivatives subject to a master netting arrangement: Forward purchase contracts 1,276 — 1,276 19,040 — 19,040 Forward sale contracts 251,149 — 251,149 18,045 — 18,045 Netting — (212,722) (212,722) — (16,616) (16,616) Interest rate lock commitments $ 36,728 $ — $ — $ 36,728 $ 323,473 $ — $ — $ 323,473 RJ O'Brien 29,016 — — 29,016 5,219 — — 5,219 Morgan Stanley Bank, N.A. 18,501 — — 18,501 — — — — Goldman Sachs 5,757 — — 5,757 — — — — Citibank, N.A. 5,098 — — 5,098 — — — — Bank of America, N.A. 1,519 — — 1,519 3,005 — — 3,005 Others 2,384 — — 2,384 1,998 — — 1,998 252,425 (212,722) 39,703 37,085 (16,616) 20,469 $ 99,003 $ — $ — $ 99,003 $ 333,695 $ — $ — $ 333,695 Total derivatives 255,360 (212,722) 42,638 38,946 (16,616) 22,330 Assets sold under agreements to repurchase: Amount outstanding 9,663,995 — 9,663,995 4,141,680 — 4,141,680 Unamortized debt issuance cost, net (9,198) — (9,198) (627) — (627) 9,654,797 — 9,654,797 4,141,053 — 4,141,053 $ 9,910,157 $ (212,722) $ 9,697,435 $ 4,179,999 $ (16,616) $ 4,163,383 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, 2020 December 31, 2019 December 31, 2022 December 31, 2021 Gross amounts Gross amounts Gross amounts Gross amounts not offset in the not offset in the not offset in the not offset in the Net amount consolidated Net amount consolidated Net amount consolidated Net amount consolidated of liabilities balance sheet of liabilities balance sheet of liabilities balance sheet of liabilities balance sheet in the Cash in the Cash in the Cash in the Cash consolidated Financial collateral Net consolidated Financial collateral Net consolidated Financial collateral Net consolidated Financial collateral Net balance sheet instruments pledged amount balance sheet instruments pledged amount balance sheet instruments (1) pledged amount balance sheet instruments (1) pledged amount (in thousands) (in thousands) Interest rate lock commitments $ 2,935 $ — $ — $ 2,935 $ 1,861 $ — $ — $ 1,861 $ 10,884 $ — $ — $ 10,884 $ 1,280 $ — $ — $ 1,280 Credit Suisse First Boston Mortgage Capital LLC 3,947,752 (3,943,149) — 4,603 1,235,430 (1,235,430) — — 970,725 (968,804) — 1,921 1,974,278 (1,969,670) — 4,608 JPMorgan Chase Bank, N.A. 2,752,279 (2,752,279) — — 936,172 (936,172) — — Bank of America, N.A. 634,523 (626,550) — 7,973 379,400 (374,190) — 5,210 567,745 (567,745) — — 1,758,690 (1,758,690) — — Barclays Capital 596,729 (596,729) — — — — — — Citibank, N.A. 505,625 (505,625) — — 655,831 (653,170) — 2,661 Royal Bank of Canada 406,348 (406,348) — — 175,897 (175,897) — — 381,893 (381,893) — — 496,064 (496,064) — — BNP Paribas 337,823 (336,545) — 1,278 183,880 (183,880) — — 300,280 (300,280) — — 349,172 (349,172) — — Wells Fargo Bank, N.A. 228,181 (221,986) — 6,195 203,779 (200,338) — 3,441 JPMorgan Chase Bank, N.A. 211,713 (211,713) — — 300,912 (300,912) — — Morgan Stanley Bank, N.A. 331,546 (331,546) — — 582,941 (582,941) — — 114,277 (114,277) — — 299,580 (292,105) — 7,475 Wells Fargo Bank, N.A. 169,085 (165,224) — 3,861 11,212 — — 11,212 Federal Home Loan Mortgage Corporation 12,928 — — 12,928 — — — — Mizuho Securities 6,491 — — 6,491 — — — — Daiwa Capital 1,856 — — 1,856 — — — — Citibank, N.A. 94,211 (94,211) — — 403,003 (402,806) — 197 Barclays Capital 80,276 (79,295) — 981 677,419 (676,685) — 734 Goldman Sachs 64,486 (64,486) — — 853,147 (850,918) — 2,229 Others 713 — — 713 1,386 — — 1,386 1,731 — — 1,731 2,642 — — 2,642 $ 9,706,633 $ (9,663,995) $ — $ 42,638 $ 4,164,010 $ (4,141,680) $ — $ 22,330 $ 3,026,402 $ (3,004,690) $ — $ 21,712 $ 7,319,966 $ (7,297,360) $ — $ 22,606 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, Year ended December 31, Derivative activity Income statement line 2020 2019 2018 Consolidated income statement line 2022 2021 2020 (in thousands) Interest rate lock commitments Net gains on loans held for sale at fair value (1) $ 540,376 $ 87,312 $ (8,934) Net gains on loans held for sale at fair value (1) $ (296,349) $ (354,833) $ 540,376 Repurchase agreement derivatives Interest expense $ 83 $ (1,609) $ (1,704) Interest expense $ — $ — $ 83 Hedged item: Interest rate lock commitments and loans held for sale Net gains on loans held for sale at fair value $ (650,898) $ (157,806) $ 81,522 Net gains on loans held for sale at fair value $ 1,326,964 $ 319,141 $ (650,898) Mortgage servicing rights Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities $ 918,180 $ 395,497 $ (121,045) Net loan servicing fees–Mortgage servicing rights hedging results $ (631,484) $ (475,215) $ 918,180 Note 9—Mortgage Servicing Rights and Mortgage Servicing Mortgage Servicing Rights Carried at Fair Value: The activity in MSRs carried at fair value is as follows: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Balance at beginning of year $ 2,926,790 $ 2,820,612 $ 638,010 $ 3,878,078 $ 2,581,174 $ 2,926,790 Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to adoption of the fair value method of accounting — — 1,482,426 Balance after reclassification 2,926,790 2,820,612 2,120,436 Additions: Resulting from loan sales 1,138,045 884,876 591,757 MSRs resulting from loan sales 1,718,094 1,861,949 1,138,045 Purchases 25,473 227,445 237,803 3,993 — 25,473 1,163,518 1,112,321 829,560 1,722,087 1,861,949 1,163,518 Change in fair value due to: Changes in valuation inputs used in valuation model (1) (1,078,084) (550,666) 174,458 Changes in inputs used in valuation model (1) 877,324 (136,350) (1,078,084) Other changes in fair value (2) (431,050) (455,477) (303,842) (523,868) (428,695) (431,050) Total change in fair value (1,509,134) (1,006,143) (129,384) 353,456 (565,045) (1,509,134) Balance at end of year $ 2,581,174 $ 2,926,790 $ 2,820,612 $ 5,953,621 $ 3,878,078 $ 2,581,174 Unpaid principal balance of underlying loans at end of year $ 314,567,639 $ 278,324,780 $ 238,410,809 December 31, December 31, 2020 2019 2022 2021 (in thousands) (in thousands) Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets $ 2,577,964 $ 2,920,603 $ 5,897,613 $ 3,856,791 F-44 Mortgage Servicing Liabilities Carried at Fair Value: The activity in MSLs carried at fair value is summarized below: Year ended December 31, 2020 2019 2018 (in thousands) Balance at beginning of year $ 29,140 $ 8,681 $ 14,120 Mortgage servicing liabilities resulting from loan sales 23,325 37,988 7,601 Changes in fair value due to: Changes in valuation inputs used in valuation model (1) 31,757 8,377 10,787 Other changes in fair value (2) (38,898) (25,906) (23,827) Total change in fair value (7,141) (17,529) (13,040) Balance at end of year $ 45,324 $ 29,140 $ 8,681 Year ended December 31, 2022 2021 2020 (in thousands) Balance at beginning of year $ 2,816 $ 45,324 $ 29,140 Mortgage servicing liabilities resulting from loan sales — 106,631 23,325 Changes in fair value due to: Changes in inputs used in valuation model (1) (347) (68,020) 31,757 Other changes in fair value (2) (373) (81,119) (38,898) Total change in fair value (720) (149,139) (7,141) Balance at end of period $ 2,096 $ 2,816 $ 45,324 Unpaid principal balance of underlying loans at end of year $ 33,157 $ 60,593 $ 2,857,492 Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Contractual servicing fees $ 814,646 $ 730,165 $ 585,101 $ 1,054,828 $ 875,570 $ 814,646 Other fees: Late charges 36,339 43,350 27,940 40,583 29,848 36,339 Other 25,543 14,258 6,276 13,742 29,505 25,543 $ 876,528 $ 787,773 $ 619,317 $ 1,109,153 $ 934,923 $ 876,528 F-45 Note 10—Leases Substantially all of the Company’s lease agreements are operating leases and relate to its office facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to ten years; some of these operating lease agreements include options to extend Year ended December 31, 2020 2019 (dollars in thousands) Lease expense: Operating leases $ 16,223 $ 13,644 Short-term leases 1,153 821 Sublease income — (94) Net lease expense included in Occupancy and equipment $ 17,376 $ 14,371 Other information: Payments for operating leases $ 16,524 $ 16,167 Operating lease right-of-use assets recognized: Upon adoption Accounting Standards Update 2016-02, Leases (Topic 842) $ — $ 58,713 New leases 14,128 24,535 $ 14,128 $ 83,248 Period end weighted averages: Remaining lease term (in years) 6.3 7.1 Discount rate 4.1% 4.3% Year ended December 31, 2022 2021 2020 (dollars in thousands) Lease expense: Operating leases $ 19,779 $ 18,363 $ 16,223 Short-term leases 778 904 1,153 Sublease income (46) — — Net lease expense included in Occupancy and equipment $ 20,511 $ 19,267 $ 17,376 Other information: Payments for operating leases $ 23,475 $ 20,145 $ 16,524 Operating lease right-of-use assets recognized $ 1,364 $ 28,401 $ 14,128 Period end weighted averages: Remaining lease term (in years) 4.8 5.7 6.3 Discount rate 3.8% 4.0% 4.1% The maturities of the Company’s operating lease liabilities are summarized below: Year ended December 31, Operating leases Operating leases (in thousands) (in thousands) 2021 $ 19,557 2022 17,612 2023 17,456 $ 24,228 2024 15,238 19,523 2025 14,546 18,645 2026 14,322 2027 6,799 Thereafter 26,356 12,039 Total lease payments 110,765 95,556 Less imputed interest (16,572) (10,006) Operating lease liability $ 94,193 $ 85,550 December 31, December 31, 2020 2019 (in thousands) Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets $ 153,054 $ — Margin deposits 116,881 84,118 Capitalized software, net 81,434 63,130 Furniture, fixture, equipment and building improvements, net 32,217 30,480 Real estate acquired in settlement of loans 12,158 20,326 Other 296,425 135,503 $ 692,169 $ 333,557 Deposits pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets $ 153,054 $ — Assets pledged to secure Obligation under capital lease: Capitalized software, net 7,675 12,192 Furniture, fixture, equipment and building improvements, net 5,689 20,406 $ 166,418 $ 32,598 December 31, 2020 2019 (in thousands) Cost $ 111,156 $ 74,325 Less: Accumulated amortization (29,722) (11,195) $ 81,434 $ 63,130 December 31, 2020 2019 (in thousands) Furniture, fixtures, equipment and building improvements $ 67,700 $ 57,012 Less: Accumulated depreciation and amortization (35,483) (26,532) $ 32,217 $ 30,480 Year ended December 31, 2020 2019 2018 (in thousands) Depreciation and amortization expenses included in Occupancy and equipment $ 8,934 $ 9,018 $ 9,500 Note 11—Other Assets Other assets are summarized below: December 31, 2022 2021 (in thousands) Capitalized software, net $ 157,460 $ 109,480 Margin deposits 55,968 100,482 Prepaid expenses 38,780 64,924 Servicing fees receivable, net 31,356 23,672 Furniture, fixtures, equipment and building improvements, net 28,382 31,677 Other servicing receivables 24,854 113,820 Interest receivable 24,110 9,688 Deposits securing Assets sold under agreements to repurchase and 12,277 36,632 Real estate acquired in settlement of loans 11,497 7,474 Derivative settlements receivable 1,522 20,026 Other 31,701 98,741 $ 417,907 $ 616,616 Other assets pledged to secure: Assets sold under agreements to repurchase and $ 12,277 $ 36,632 Obligations under capital lease: Capitalized software, net — 4,546 Furniture, fixture, equipment and building improvements, net — 4,116 $ 12,277 $ 45,294 Capitalized software is summarized below: December 31, 2022 2021 (in thousands) Cost $ 231,341 $ 159,407 Less: Accumulated amortization (73,881) (49,927) $ 157,460 $ 109,480 Amortization and impairment expenses relating to capitalized software are summarized below: Year ended December 31, Included in Technology expense 2022 2021 2020 (in thousands) Amortization $ 23,955 $ 20,206 $ 16,641 Impairment $ — $ 728 $ 13,145 Furniture, fixtures, equipment and building improvements are summarized below: December 31, 2022 2021 (in thousands) Furniture, fixtures, equipment and building improvements $ 82,721 $ 75,562 Less: Accumulated depreciation and amortization (54,339) (43,885) $ 28,382 $ 31,677 F-47 Depreciation and amortization expenses are summarized below: Year ended December 31, 2022 2021 2020 (in thousands) Depreciation and amortization expenses included in Occupancy and equipment $ 10,454 $ 8,439 $ 8,934 Note 12—Short-TermBorrowings The borrowing facilities described throughout these Notes 12 and 13 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio and liquidity. Management believes that the Company was in compliance with these covenants as of December 31, 2022. 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 loans held for sale at fair value or participation certificates backed by mortgage servicing assets. Eligible assets are sold at advance rates based on their fair values (as determined by the lender). Interest is charged at a rate based on the Secured Overnight Financing Rate (“SOFR”). Loans and participation certificates financed under these agreements may be re-pledged by the lenders. Fannie Mae MSR Facility On April 28, 2021, the Company, through its wholly-owned subsidiaries, PLS, PNMAC, and PFSI ISSUER TRUST - FMSR, entered into a structured finance transaction, allowing PLS to finance Fannie Mae MSRs and ESS (the “Fannie Mae MSR Facility”). In connection with the Fannie Mae MSR Facility, PLS pledges and/or sells to PFSI ISSUER TRUST - FMSR participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of a master repurchase agreement, dated as of April 28, 2021, by and between PLS, PFSI Issuer Trust - FMSR and PNMAC (the “FMSR PC Repurchase Agreement”). In return, PFSI ISSUER TRUST- FMSR has issued to PLS the Series 2021-MSRVF1 Note, dated April 28, 2021, known as the “PFSI ISSUER TRUST - FMSR Collateralized Notes, Series 2021-MSRVF1” (the “FMSR VFN”), and may, from time to time, issue to institutional investors term notes, in each case secured on a pari passu basis by the participation certificates relating to the MSRs (the “FMSR Term Notes”). The maximum principal balance of the FMSR VFN is $1 billion. Under the FMSR PC Repurchase Agreement, PLS grants to PFSI ISSUER TRUST – FMSR a security interest in all of its right, title and interest in, to and under participation certificates representing beneficial interests in MSRs and ESS, including all of its rights and interests in any MSRs and ESS it thereafter owns or acquires. The principal amount paid by PFSI ISSUER TRUST - FMSR for the participation certificates under the FMSR PC Repurchase Agreement is based upon a percentage of the market value of the underlying MSRs (inclusive of the ESS). Upon PLS’s repurchase of the participation certificates, PLS is required to repay PFSI ISSUER TRUST - FMSR 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 FMSR VFN and any outstanding term notes) to the date of such repurchase. PLS also entered into a master repurchase agreement on April 28, 2021 (the “FMSR VFN Repurchase Agreement”) with Credit Cuisse First Boston Mortgage Capital LLC (“CSFB”), as administrative agent, and Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as purchaser, pursuant to which PLS sold the FMSR VFN to CSCIB with an agreement to repurchase such FMSR VFN at a later date. The FMSR VFN Repurchase Agreement has a term extending through May 31, 2024. The FMSR VFN Repurchase Agreement provides for a maximum purchase price of $250 million, all of which is committed. The principal amount paid by CSCIB for the FMSR VFN is based upon a percentage of the market value of such FMSR VFN. Upon PLS’s repurchase of the FMSR VFN, PLS is required to repay CSCIB the principal amount relating thereto plus accrued interest (at a rate reflective of the current market based on a spread above SOFR to the date of such repurchase). F-48 Ginnie Mae MSR Facility The Company, through its wholly-owned subsidiaries PLS, PNMAC, and the Issuer Trust, have a structured finance transaction, in which 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 (the “GNMA MSR Facility”). In return, the Issuer Trust has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional 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 $2 billion. On July 30, 2021, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the Issuer Trust, entered into agreements to syndicate existing variable funding note repurchase agreements as part of the Ginnie Mae MSR structured finance facility. The Company entered into an Amended and Restated Series 2016-MSRVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, N.A., as a buyer, and PNMAC, as a guarantor (the “Syndicated GMSR Servicing Spread Agreement”), related to the servicing spread. The Syndicated GMSR Servicing Spread Agreement added Citibank as a syndicate buyer of MSRs and related ESS, and increased the borrowing capacity from $400 to $500 million, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank. Ginnie Mae Servicing Advances On April 1, 2020, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the PNMAC GMSR ISSUER TRUST, issued a series of variable funding notes, the Series 2020-SPIADVF1 Notes (“GMSR Servicing Advance Notes”), to be sold under agreement to repurchase pursuant to a Master Repurchase Agreement, dated as of April 1, 2020, with Credit Suisse First Boston Mortgage Capital LLC, acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch, as buyer (the “GMSR Servicing Advances Repurchase Agreement”). The GMSR Servicing Advances Repurchase Agreement provides the Company with financing secured by servicing advance receivables to pay, in accordance with the Ginnie Mae requirements, in the event borrowers are delinquent: (i) regularly scheduled monthly principal and interest to mortgage-backed securities holders; (ii) taxes, homeowner’s insurance, and other escrowed items; and (iii) other expenses related to servicing delinquent loans as specified by (A) state and federal laws and (B) government agencies, including the FHA, the VA, and the USDA. On July 30, 2021, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the Issuer Trust, entered into agreements to syndicate existing variable funding note repurchase agreements, as part of the Ginnie Mae servicing advance facility. The Company entered into an Amended and Restated Series 2020-SPIADVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, as a buyer, and PNMAC, as a guarantor (the “Syndicated GMSR SAR Agreement”). The Syndicated GMSR SAR Agreement added Citibank as a syndicate buyer of servicing advances receivables and provides a $600 million borrowing capacity, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank. Assets sold under agreements to repurchase are summarized below: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (dollars in thousands) (dollars in thousands) Average balance of assets sold under agreements to repurchase $ 3,348,928 $ 2,185,830 $ 1,626,729 $ 2,580,513 $ 6,911,843 $ 3,348,928 Weighted average interest rate (1) 2.91 % 3.74 % 3.87 % 3.59% 2.09% 2.91% Total interest expense $ 112,778 $ 74,215 $ 22,463 $ 105,459 $ 164,132 $ 112,778 Maximum daily amount outstanding $ 9,663,995 $ 4,141,680 $ 2,380,121 $ 7,289,147 $ 10,969,029 $ 9,663,995 December 31, 2020 2019 (dollars in thousands) Carrying value: Unpaid principal balance $ 9,663,995 $ 4,141,680 Unamortized debt issuance costs (9,198) (627) $ 9,654,797 $ 4,141,053 Weighted average interest rate 1.90 % 3.29 % Available borrowing capacity (3): Committed $ 372,803 $ 125,810 Uncommitted 2,163,202 782,510 $ 2,536,005 $ 908,320 Fair value of assets securing repurchase agreements: Loans held for sale $ 10,912,178 $ 4,322,789 Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell $ 80,862 $ 107,512 Servicing advances (4) $ 413,484 $ 207,460 Mortgage servicing rights (4) $ 2,490,267 $ 2,902,721 Deposits (4) $ 153,054 $ — Margin deposits placed with counterparties (5) $ 5,625 $ 5,000 F-49 December 31, 2022 2021 (dollars in thousands) Carrying value: Unpaid principal balance funded under: Committed facilities $ 2,476,073 $ 5,079,581 Uncommitted facilities 528,617 2,217,779 3,004,690 7,297,360 Unamortized debt issuance costs (3,407) (4,625) $ 3,001,283 $ 7,292,735 Weighted average interest rate 6.00% 1.83% Available borrowing capacity (2): Committed $ 1,078,927 $ 285,419 Uncommitted 5,391,383 8,417,221 $ 6,470,310 $ 8,702,640 Fair value of assets securing repurchase agreements: Loans held for sale $ 3,139,870 $ 8,629,861 Servicing advances (3) $ 381,379 $ 232,107 Mortgage servicing rights (3) $ 5,339,513 $ 3,552,812 Deposits (3) $ 12,277 $ 36,632 Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date: Remaining maturity at December 31, 2022 (1) Unpaid principal balance (dollars in thousands) Within 30 days $ 300,240 Over 30 to 90 days 2,221,473 Over 90 to 180 days 372,517 Over 180 days to one year 10,460 Over one year to two years 100,000 Total assets sold under agreements to repurchase $ 3,004,690 Weighted average maturity (in months) 3.0 Remaining maturity at December 31, 2020 Unpaid principal balance (dollars in thousands) Within 30 days $ 2,512,553 Over 30 to 90 days 4,973,242 Over 90 to 180 days 2,178,200 Total assets sold under agreements to repurchase $ 9,663,995 Weighted average maturity (in months) 3.3 The Weighted average Weighted average Counterparty Amount at risk maturity of advances Facility maturity Counterparties Amount at risk maturity of advances Facility maturity (in thousands) (in thousands) Credit Suisse First Boston Mortgage Capital LLC (1) $ 1,484,391 April 23, 2021 April 23, 2021 Credit Suisse First Boston Mortgage Capital LLC & Citibank, N.A. (1) $ 3,831,311 May 31, 2024 May 31, 2024 Credit Suisse First Boston Mortgage Capital LLC $ 484,937 February 3, 2021 April 23, 2021 $ 75,634 March 1, 2023 May 31, 2024 Bank of America, N.A. $ 334,772 January 31, 2021 March 11, 2021 $ 68,918 March 16, 2023 June 5, 2024 JP Morgan Chase Bank, N.A. $ 136,523 June 4, 2021 September 30, 2022 JP Morgan Chase Bank, N.A. $ 117,491 February 28, 2021 April 7, 2021 Barclays Bank PLC $ 76,062 March 21, 2021 November 3, 2022 Royal Bank of Canada $ 41,107 April 17, 2021 December 14, 2021 $ 19,895 April 12, 2023 December 14, 2023 Citibank, N.A. $ 35,370 March 17, 2021 August 3, 2021 Morgan Stanley Bank, N.A. $ 27,808 March 17, 2021 November 2, 2022 JP Morgan Chase Bank, N.A. (EBO facility) $ 13,316 February 14, 2023 October 11, 2024 JP Morgan Chase Bank, N.A. (warehouse facility) $ 11,908 February 26, 2023 June 17, 2024 BNP Paribas $ 26,136 March 13, 2021 July 30, 2021 $ 11,131 March 19, 2023 July 31, 2024 Wells Fargo Bank, N.A. $ 13,474 March 19, 2021 October 6, 2022 $ 9,664 March 16, 2023 November 17, 2023 Morgan Stanley Bank, N.A. $ 8,310 March 6, 2023 January 3, 2024 Barclays Bank PLC $ 7,248 November 13, 2024 November 13, 2024 Goldman Sachs $ 4,326 March 19, 2023 December 23, 2023 Citibank, N.A. $ 1,657 February 12, 2023 April 26, 2024 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 The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price. The holdback amount is not required to be paid to the Company until the settlement of the security and its delivery to the lender. The mortgage loan participation purchase and sale agreements are summarized below: Year ended December 31, 2022 2021 2020 (dollars in thousands) Average balance $ 211,035 $ 249,255 $ 226,689 Weighted average interest rate (1) 3.16% 1.39% 1.88% Total interest expense $ 7,314 $ 4,153 $ 4,933 Maximum daily amount outstanding $ 515,043 $ 532,819 $ 540,977 F-51 December 31, 2022 2021 (dollars in thousands) Carrying value: Unpaid principal balance $ 287,943 $ 479,845 Unamortized debt issuance costs (351) — $ 287,592 $ 479,845 Weighted average interest rate 5.71% 1.48% Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements $ 302,977 $ 505,716 Note 13—Long-Term Debt Notes Payable Secured by Mortgage Servicing Assets Term Notes In connection with the GNMA MSR Facility, the Issuer Trust described in Note 4 – Transactions with Affiliates—Transactions with PMT—Investing Activities and Note 12—Short-Term Borrowings—Assets Sold Under Agreements to Repurchase, issued the GMSR GT1, the GMSR GT2 and the 2022 GT1 term notes (the “Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The Term Notes are secured by participation certificates relating to Ginnie Mae mortgage servicing assets financed pursuant to the GNMA MSR Facility, and rank pari passu with the VFNs and the GMSR Servicing Advance Notes. Following is a summary of the issued and outstanding Term Notes: Annual interest rate Issuance date Principal balance Index Spread Stated maturity date (1) (in thousands) February 28, 2018 $ 650,000 One-month LIBOR 2.85% 2/25/2023 (2) August 10, 2018 650,000 One-month LIBOR 2.65% 8/25/2023 June 3, 2022 500,000 SOFR 4.25% 5/25/2027 $ 1,800,000 MSR Note Payable On December 16, 2022, the Company issued a note payable that is secured by Freddie Mac MSRs. Interest is charged at a rate based on SOFR plus a spread as defined in the agreement. The facility expires on November 13, 2024. The maximum amount that the Company may borrow under the note payable is $400 million, $350 million of which is committed and which may be reduced by other debt outstanding with the counterparty. F-52 Notes payable secured by mortgage servicing assets are summarized below: Year ended December 31, 2022 2021 2020 (dollars in thousands) Average balance $ 1,584,383 $ 1,300,000 $ 1,300,000 Weighted average interest rate (1) 4.88% 2.89% 3.42% Total interest expense $ 79,813 $ 39,782 $ 46,222 December 31, 2022 2021 (dollars in thousands) Carrying value: Unpaid principal balance: Term Notes $ 1,800,000 $ 1,300,000 MSR Note Payable 150,000 — 1,950,000 1,300,000 Unamortized debt issuance costs (7,354) (2,378) $ 1,942,646 $ 1,297,622 Weighted average interest rate 7.46% 2.84% Assets pledged to secure notes payable (1): Servicing advances $ 381,379 $ 232,107 Mortgage servicing rights $ 5,897,613 $ 3,856,791 Deposits $ 12,277 $ 36,632 Unsecured Senior Notes The Company issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinated indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinated to any existing and future secured indebtedness of the Company to the extent of the fair value of collateral securing such indebtedness. The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by PFSI’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indenture under which the Unsecured Notes were issued). The guarantees are senior unsecured obligations of the guarantors and will rank senior in right of payment to any future subordinated indebtedness of the guarantors, equally in right of payment with all existing and future senior indebtedness of the guarantors and effectively subordinated to any existing and future secured indebtedness of the guarantors to the extent of the fair value of collateral securing such indebtedness. The Unsecured Notes and the guarantees are structurally subordinated to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes. F-53 Issuance date Principal balance Coupon interest rate Maturity date Optional redemption date (1) Year ended December 31, (in thousands) (annual) September 29, 2020 $ 500,000 5.38% October 15, 2025 October 15, 2022 October 19, 2020 150,000 5.38% October 15, 2025 October 15, 2022 February 11, 2021 650,000 4.25% February 15, 2029 February 15, 2024 September 16, 2021 500,000 5.75% September 15, 2031 September 15, 2026 2020 2019 2018 $ 1,800,000 (dollars in thousands) Average balance $ 226,689 $ 244,203 $ 248,539 Weighted average interest rate (1) 1.88 % 3.42 % 3.29 % Total interest expense $ 4,933 $ 8,874 $ 8,754 Maximum daily amount outstanding $ 540,977 $ 548,038 $ 722,611 Year ended December 31, 2022 2021 2020 (dollars in thousands) Average balance $ 1,800,000 $ 1,373,562 $ 158,743 Weighted average interest rate (1) 5.07% 4.94% 5.38% Total interest expense $ 95,014 $ 70,208 $ 8,774 December 31, December 31, December 31, 2020 2019 2022 2021 (dollars in thousands) (dollars in thousands) Carrying value: Unpaid principal balance $ 521,477 $ 497,948 $ 1,800,000 $ 1,800,000 Unamortized debt issuance costs — — Unamortized debt issuance costs and premiums, net (20,080) (23,781) $ 521,477 $ 497,948 $ 1,779,920 $ 1,776,219 Weighted average interest rate 1.39 % 3.05 % 5.07% 5.07% Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements $ 545,500 $ 523,349 Obligations Under Capital Lease The Company Obligations under capital lease are summarized below: Year ended December 31, 2020 2019 2018 (dollars in thousands) Average balance $ 16,224 $ 17,021 $ 13,498 Weighted average interest rate 2.62 % 4.07 % 3.96 % Total interest expense $ 425 $ 693 $ 536 Maximum daily amount outstanding $ 20,810 $ 28,295 $ 20,971 December 31, December 31, Year ended December 31, 2020 2019 2022 2021 2020 (dollars in thousands) (dollars in thousands) Unpaid principal balance $ 11,864 $ 20,810 Average balance $ 848 $ 7,999 $ 16,224 Weighted average interest rate 2.15 % 3.74 % 2.18% 2.11% 2.62% Assets pledged to secure obligations under capital lease: Capitalized software $ 7,675 $ 12,192 Furniture, fixtures and equipment $ 5,689 $ 20,406 Total interest expense $ 20 $ 169 $ 425 Maximum daily amount outstanding $ 3,489 $ 11,864 $ 20,810 F-54 December 31, 2021 (dollars in thousands) Unpaid principal balance $ 3,489 Weighted average interest rate 2.11% Assets pledged to secure obligations under capital lease: Capitalized software $ 4,546 Furniture, fixtures and equipment $ 4,116 Maturities of Long-Term Debt Issuance Date Principal balance Stated interest rate (1) Maturity date (2) (in thousands) (Annual) Year ended December 31, February 28, 2018 (the "2018-GT1 Notes") $ 650,000 2.85% 2/25/2023 August 10, 2018 (the "2018-GT2 Notes") 650,000 2.65% 8/25/2023 $ 1,300,000 2023 2024 2025 2026 2027 Thereafter Total (in thousands) Notes payable secured by mortgage servicing assets (1) $ 1,300,000 $ 150,000 $ — $ — $ 500,000 $ — $ 1,950,000 Unsecured senior notes — — 650,000 — — 1,150,000 1,800,000 Total $ 1,300,000 $ 150,000 $ 650,000 $ — $ 500,000 $ 1,150,000 $ 3,750,000 Year ended December 31, 2020 2019 2018 (dollars in thousands) Average balance $ 1,300,000 $ 1,300,000 $ 1,169,452 Weighted average interest rate (1) 3.42 % 5.08 % 5.29 % Total interest expense $ 46,222 $ 67,789 $ 71,697 Maximum daily amount outstanding $ 1,300,000 $ 1,300,000 $ 1,300,000 December 31, 2020 2019 (dollars in thousands) Carrying value: Unpaid principal balance $ 1,300,000 $ 1,300,000 Unamortized debt issuance costs (4,160) (5,930) $ 1,295,840 $ 1,294,070 Weighted average interest rate 2.93 % 4.46 % Assets pledged to secure notes payable (1): Servicing advances $ 413,484 $ 207,460 Mortgage servicing rights $ 2,421,326 $ 2,861,442 Deposits $ 153,054 $ — Year ended December 31, 2020 (in thousands) Average balance $ 158,743 Weighted average interest rate (1) 5.38 % Total interest expense $ 8,774 Maximum daily amount outstanding $ 650,000 December 31, 2020 (in thousands) Carrying value: Unpaid principal balance $ 650,000 Unamortized debt issuance costs, net of issuance premium (4,180) $ 645,820 Note Following is a summary of the Company’s liability for losses under representations and warranties: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Balance at beginning of year $ 21,446 $ 21,155 $ 20,053 $ 43,521 $ 32,688 $ 21,446 Provision for losses on loans sold: Provision for losses: Resulting from sales of loans 21,035 8,377 5,824 9,617 31,590 21,035 Reduction in liability due to change in estimate (8,667) (7,877) (4,672) Losses incurred, net (1,126) (209) (50) Resulting from change in estimate (8,451) (16,037) (8,667) Losses incurred (12,266) (4,720) (1,126) Balance at end of year $ 32,688 $ 21,446 $ 21,155 $ 32,421 $ 43,521 $ 32,688 Unpaid principal balance of loans subject to representations and warranties at end of year $ 210,222,447 $ 177,611,568 $ 296,774,121 $ 257,369,777 $ 210,222,447 Year ended December 31, 2020 2019 2018 (in thousands) Current expense: Federal $ 378,984 $ 17,661 $ 12 State 128,495 8,071 274 Total current expense 507,479 25,732 286 Deferred expense: Federal 61,592 85,296 23,395 State 24,654 25,451 (427) Total deferred expense 86,246 110,747 22,968 Total provision for income taxes $ 593,725 $ 136,479 $ 23,254 Note 15—Income Taxes The Company files U.S. federal and state corporate income tax returns for PFSI and partnership returns for PNMAC. The Company’s federal tax returns are subject to examination for 2019 and forward and its state tax returns are generally subject to examination for 2018 and forward. PNMAC’s federal partnership returns are subject to examination for 2019 and forward, and its state tax returns are generally subject to examination for 2018 and forward. The returns of both PFSI and PNMAC are under an examination by New York State for years 2019 and 2020, and the returns of PFSI are in the initial stages of an examination by the state of South Carolina for years 2019, 2020 and 2021. The Company does not expect any material changes from these examinations. The following table details the Company’s provision for income taxes: Year ended December 31, 2022 2021 2020 (in thousands) Current (benefit) expense: Federal $ (2,944) $ 101,659 $ 378,984 State (249) 39,551 128,495 Total current (benefit) expense (3,193) 141,210 507,479 Deferred expense: Federal 131,670 160,587 61,592 State 61,263 53,896 24,654 Total deferred expense 192,933 214,483 86,246 Total provision for income taxes $ 189,740 $ 355,693 $ 593,725 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, Year ended December 31, 2020 2019 2018 2022 2021 2020 Federal income tax statutory rate 21.0 % 21.0 % 21.0 % 21.0% 21.0% 21.0% Less: Income attributable to noncontrolling interest — % — % (12.3) % State income taxes, net of federal benefit 5.5 % 5.6 % 2.3 % 5.9% 5.4% 5.5% Tax rate revaluation (0.1) % (0.6) % (2.2) % 1.2% 0.0% (0.1)% Other 0.1 % (0.2) % (0.1) % 0.4% (0.2)% 0.1% Effective income tax rate 26.5 % 25.8 % 8.7 % 28.5% 26.2% 26.5% The components of the Company’s provision for deferred income taxes are as follows: Year ended December 31, 2020 2019 2018 (in thousands) Mortgage servicing rights $ 128,471 $ 91,592 $ 46,064 Reserves and losses (33,477) (2,945) (1,848) California franchise taxes (15,200) — — Additional tax basis in partnership from exchanges of partnership units into the Company's common stock 5,200 4,269 (1,391) Compensation accruals (647) (12,286) (3,596) Net operating loss 581 23,445 (14,902) Other 1,318 6,106 (1,302) Tax credits — 566 (57) Total provision for deferred income taxes $ 86,246 $ 110,747 $ 22,968 December 31, Year ended December 31, 2020 2019 2022 2021 2020 (in thousands) (in thousands) Income taxes currently payable (receivable) $ 25,379 $ (6,506) Deferred income tax liability, net 597,321 511,075 Income taxes payable $ 622,700 $ 504,569 Mortgage servicing rights $ 326,378 $ 196,697 $ 128,471 Net operating loss (160,605) — 581 Reserves and losses 13,480 15,736 (33,477) Compensation accruals 10,473 (11,456) (647) Additional tax basis in partnership from exchanges of partnership units into the Company's common stock 4,517 4,420 5,200 California franchise taxes 4,447 10,753 (15,200) Tax credits — 50 — Other (5,757) (1,717) 1,318 Total provision for deferred income taxes $ 192,933 $ 214,483 $ 86,246 The components of Income taxes payable are as follows: December 31, 2022 2021 (in thousands) Current income tax receivable $ (1,993) $ (126,542) Deferred income tax liability, net 1,004,737 811,804 Income taxes payable $ 1,002,744 $ 685,262 The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below: December 31, December 31, 2020 2019 2022 2021 (in thousands) (in thousands) Deferred income tax assets: Net operating loss carryforward $ 161,682 $ 1,077 Compensation accruals $ 41,685 $ 41,038 42,668 53,141 Additional tax basis in partnership from exchanges of partnership units into the Company's common stock 34,697 39,897 25,760 30,277 Reserves and losses 63,011 29,534 33,795 47,275 California franchise tax 15,200 — — 4,447 Net operating loss carryforward 1,077 1,658 Income tax credits carryforward 50 50 Other 6,159 5,661 Gross deferred income tax assets 155,720 112,177 270,064 141,878 Deferred income tax liabilities: Mortgage servicing rights 737,106 608,635 1,260,181 933,803 Other 15,935 14,617 14,620 19,879 Gross deferred income tax liabilities 753,041 623,252 1,274,801 953,682 Net deferred income tax liability $ 597,321 $ 511,075 $ 1,004,737 $ 811,804 The Company recorded a deferred tax asset of $161.7 million, of which $160.6 million related to net operating losses incurred in 2022 and $1.1 million related to At December 31, Commitments to Purchase and Fund Loans The Company’s commitments to purchase and fund loans totaled Legal Proceedings From time to time, the Company may be involved in various claims, investigations, lawsuits and other legal proceedings in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, income, or cash flows of the Company. Litigation On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Fourth Judicial Circuit Court in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by PLS. While no assurance can be provided as to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending. 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 (“CFPB”), HUD, and the FHA and is subject to the requirements of the Agencies to which it sells loans and for which it performs loan servicing activities. As a result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by such various federal, state and local regulatory bodies. On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated before the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter submitted on February 8, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, the Company does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial statements or operations. F-58 Cessation of the LIBOR Index The Company historically used a LIBOR index to establish the applicable interest rates in lending and financing transactions. One-week and two-month United States Dollar LIBOR rates were discontinued in 2022 and non-U.S. dollar LIBOR settings cease to be representative. The Company has serviced LIBOR-based adjustable rate mortgages and other financial arrangements that may incorporate fallback provisions or replacement provisions related to the LIBOR transition. The discontinuation of LIBOR could affect the Company’s interest expense and earnings, cost of capital, and the fair value of certain of the assets and the instruments PFSI uses to hedge their fair values. Furthermore, the transition away from widely used benchmark rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes. Note In The following table summarizes the Company’s stock repurchase activity: Year ended December 31, Cumulative Year ended December 31, Cumulative 2020 2019 2018 total (1) 2022 2021 2020 total (1) (in thousands) (in thousands) Shares of common stock repurchased 8,890 51 260 9,706 7,788 15,368 8,890 32,862 Cost of shares of common stock repurchased $ 337,479 $ 1,056 $ 5,293 $ 352,427 $ 406,086 $ 958,194 $ 337,479 $ 1,716,707 The shares of repurchased common stock were canceled upon settlement of the repurchase Year ended December 31, 2018 (in thousands) Net income attributable to PennyMac Financial Services, Inc. common stockholders $ 87,694 Increase in the Company's paid-in capital accounts for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc. $ 33,156 Shares of Class A common stock of PennyMac Financial Services, Inc. issued pursuant to exchange of Class A units of Private National Mortgage Acceptance Company, LLC by noncontrolling interest unitholders and issued as equity compensation 1,635 Increase in the Company's paid-in capital for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to common stock of PennyMac Financial Services, Inc. pursuant to the Reorganization $ 1,064,320 Shares of common stock of PennyMac Financial Services, Inc. issued for exchange of Class A units of Private National Mortgage Acceptance Company, LLC by noncontrolling interest unitholders pursuant to the Reorganization 52,263 Note 18—Net Gains on Loans Held for Sale Net gains on mortgage loans held for sale at fair value Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) From non-affiliates: Cash gain (loss): Cash (losses) gains: Loans $ 2,025,260 $ (190,853) $ (469,647) $ (2,128,195) $ 600,840 $ 2,025,260 Hedging activities (767,588) (175,305) 93,288 1,347,843 443,341 (767,588) 1,257,672 (366,158) (376,359) (780,352) 1,044,181 1,257,672 Non-cash gain: Non-cash gains: Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales 1,114,720 846,888 584,156 1,718,094 1,755,318 1,114,720 Provision for losses relating to representations and warranties: Provisions for losses relating to representations and warranties: Pursuant to loan sales (21,035) (8,377) (5,824) (9,617) (31,590) (21,035) Reduction in liability due to change in estimate 8,667 7,877 4,672 Change in fair value of loans and derivatives held at year end: Reductions in liability due to change in estimate 8,451 16,037 8,667 Changes in fair values of loans and derivatives held at year end: Interest rate lock commitments 540,376 87,312 (8,934) (296,349) (354,833) 540,376 Loans (326,986) (42,878) (1,506) 188,849 210,961 (326,986) Hedging derivatives 116,690 17,499 (11,766) (20,879) (124,200) 116,690 2,690,104 542,163 184,439 808,197 2,515,874 2,690,104 From PennyMac Mortgage Investment Trust (1) 50,681 183,365 64,583 (16,564) (51,473) 50,681 $ 2,740,785 $ 725,528 $ 249,022 $ 791,633 $ 2,464,401 $ 2,740,785 Year ended December 31, 2020 2019 2018 (in thousands) Interest income: From non-affiliates: Cash and short-term investments $ 6,154 $ 9,776 $ 2,038 Loans held for sale at fair value 184,789 138,124 128,732 Placement fees relating to custodial funds 52,758 134,498 78,184 243,701 282,398 208,954 From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell 3,325 6,302 7,462 247,026 288,700 216,416 Interest expense: To non-affiliates: Assets sold under agreements to repurchase (1) 112,778 74,215 22,463 Mortgage loan participation purchase and sale agreements 4,933 8,874 8,754 Obligations under capital lease 425 693 536 Notes payable secured by mortgage servicing assets 46,222 67,789 71,697 Unsecured senior notes 8,774 — — Corporate revolving line of credit 1,537 1,921 1,913 Interest shortfall on repayments of mortgage loans serviced for Agency securitizations 82,285 41,439 18,777 Interest on mortgage loan impound deposits 6,179 6,757 5,319 263,133 201,688 129,459 To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value 8,418 10,291 15,138 271,551 211,979 144,597 $ (24,525) $ 76,721 $ 71,819 Year ended December 31, 2020 2019 2018 (in thousands) Performance-based RSUs $ 20,610 $ 14,820 $ 12,425 Time-based RSUs 9,515 6,659 6,608 Stock options 14,980 3,292 6,218 $ 45,105 $ 24,771 $ 25,251 Note 19—Net Interest Expense Net interest expense is summarized below: Year ended December 31, 2022 2021 2020 (in thousands) Interest income: From non-affiliates: Cash and short-term investments $ 19,839 $ 3,280 $ 6,154 Loans held for sale at fair value 172,124 275,176 184,789 Placement fees relating to custodial funds 102,099 21,326 52,758 294,062 299,782 243,701 From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell — 387 3,325 294,062 300,169 247,026 Interest expense: To non-affiliates: Assets sold under agreements to repurchase 105,459 164,132 112,778 Mortgage loan participation purchase and sale agreements 7,314 4,153 4,933 Notes payable secured by mortgage servicing assets 79,813 39,782 46,222 Unsecured senior notes 95,014 70,208 8,774 Obligations under capital lease 20 169 425 Corporate revolving line of credit — — 1,537 Interest shortfall on repayments of mortgage loans serviced for Agency securitizations 40,741 105,430 82,285 Interest on mortgage loan impound deposits 7,066 5,545 6,179 335,427 389,419 263,133 To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value — 1,280 8,418 335,427 390,699 271,551 $ (41,365) $ (90,530) $ (24,525) Note 20—Stock-based Compensation The Company has adopted equity incentive plans that provide 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, 2022, the Company has 4.6 million units available for future awards. Following is a summary of the stock-based compensation expense by instrument awarded: Year ended December 31, 2022 2021 2020 (in thousands) Performance-based RSUs $ 18,096 $ 23,166 $ 20,610 Time-based RSUs 14,837 10,184 9,515 Stock options 9,619 4,444 14,980 $ 42,552 $ 37,794 $ 45,105 Performance-Based RSUs The F-61 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 The table below summarizes performance-based RSU activity: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands, except per unit amounts) (in thousands, except per unit amounts) Number of units: Outstanding at beginning of year 1,807 1,892 2,389 1,226 1,583 1,807 Granted 440 682 524 342 310 440 Vested (1) (645) (735) (730) (509) (634) (645) Forfeited or cancelled (19) (32) (291) (83) (33) (19) Outstanding at end of year 1,583 1,807 1,892 976 1,226 1,583 Weighted average grant date fair value per unit: Outstanding at beginning of year $ 21.67 $ 14.48 $ 15.57 $ 36.12 $ 27.02 $ 21.67 Granted $ 35.95 $ 23.11 $ 24.40 $ 57.10 $ 58.85 $ 35.95 Vested $ 18.16 $ 11.28 $ 12.86 $ 23.40 $ 24.47 $ 18.16 Forfeited $ 26.71 $ 21.72 $ 16.17 $ 49.14 $ 36.91 $ 26.71 Outstanding at end of year $ 27.02 $ 21.67 $ 14.48 $ 48.94 $ 36.12 $ 27.02 Following is a summary of performance-based RSUs as of December 31, Unamortized compensation cost (in thousands) $ 17,101 Number of shares expected to vest (in thousands) 1,411 Weighted average remaining vesting period (in months) 11 Unamortized compensation cost (in thousands) $ 12,021 Number of shares expected to vest (in thousands) 908 Weighted average remaining vesting period (in months) 11 Time-Based RSUs The RSU grant agreements provide for the award of time-based RSUs, entitling the award recipient to Compensation cost relating to time-based RSUs is based on the grant date fair value of the Company’s 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 The table below summarizes time-based RSU activity: Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands, except per unit amounts) (in thousands, except per unit amounts) Number of units: Outstanding at beginning of year 642 627 600 434 587 642 Granted 311 334 328 331 173 311 Vested (357) (300) (254) (246) (312) (357) Forfeited (9) (19) (47) (36) (14) (9) Outstanding at end of year 587 642 627 483 434 587 Weighted average grant date fair value per unit: Outstanding at beginning of year $ 22.40 $ 20.39 $ 16.37 $ 41.74 $ 29.37 $ 22.40 Granted $ 34.98 $ 22.88 $ 24.25 $ 57.10 $ 58.90 $ 34.98 Vested $ 21.75 $ 18.73 $ 16.08 $ 37.34 $ 28.08 $ 21.75 Forfeited $ 28.14 $ 22.29 $ 19.40 $ 51.97 $ 39.48 $ 28.14 Outstanding at end of year $ 29.37 $ 22.40 $ 20.39 $ 53.71 $ 41.74 $ 29.37 Following is a summary of RSUs as of December 31, Unamortized compensation cost (in thousands) $ 4,887 $ 7,214 Number of units expected to vest (in thousands) 520 460 Weighted average remaining vesting period (in months) 9 10 Stock Options The stock option award agreements provide for the award of stock options to purchase the optioned 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. During the year ended December 31, 2020, the Company awarded approximately 604,000 shares of stock options that vested on the grant date with a term of ten years from the date of grant, subject to certain transfer restrictions. 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, Year ended December 31, 2020 2019 2018 2022 2021 2020 Expected volatility (1) 34% 30% 30% 37% 38% 34% Expected dividends 1.4% 0% 0% 1.4% 1.4% 1.4% Risk-free interest rate 0.1% - 1.5% 2.5% - 2.7% 1.7% - 3.0% 1.1% - 2.1% 0.1% - 1.7% 0.1% - 1.5% Expected grantee forfeiture rate 0% - 6.7% 2.3% - 22.7% 0.0% - 23.2% 0% - 5.1% 0% - 6.7% 0% - 6.7% F-63 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, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands, except per option amounts) (in thousands, except per option amounts) Number of stock options: Outstanding at beginning of year 3,699 3,693 3,457 3,906 4,040 3,699 Granted 876 344 674 574 249 876 Exercised (530) (317) (322) (155) (377) (530) Forfeited (5) (21) (116) (8) (6) (5) Outstanding at end of year 4,040 3,699 3,693 4,317 3,906 4,040 Weighted average exercise price per option: Outstanding at beginning of year $ 18.40 $ 17.81 $ 16.40 $ 28.43 $ 28.01 $ 18.40 Granted $ 52.00 $ 22.92 $ 24.40 $ 57.10 $ 58.85 $ 52.00 Exercised $ 17.72 $ 16.26 $ 16.24 $ 21.09 $ 19.96 $ 17.72 Forfeited $ 20.61 $ 20.70 $ 18.46 $ 53.10 $ 39.52 $ 20.61 Outstanding at end of year $ 28.01 $ 18.40 $ 17.81 $ 32.46 $ 28.43 $ 28.01 Following is a summary of stock options as of December 31, Number of options exercisable at end of year (in thousands) 3,331 3,488 Weighted average exercise price per exercisable option $ 25.30 $ 27.09 Weighted average remaining contractual term (in years): Outstanding 6.3 5.2 Exercisable 5.9 4.4 Aggregate intrinsic value: Outstanding (in thousands) $ 160,974 $ 107,080 Exercisable (in thousands) $ 134,287 $ 105,114 Expected vesting amounts: Number of options expected to vest (in thousands) 688 825 Weighted average vesting period (in months) 9 11 Note 21—Earnings Per Share of Common Stock Basic earnings per share of common stock is determined The following table summarizes the basic and diluted earnings per share calculations: Year ended December 31, 2020 2019 2018 (in thousands, except per share data) Net income $ 1,646,884 $ 392,965 $ 87,694 Net income attributable to dilutive stock-based compensation units — — 3,868 Net income attributable to common stockholders for diluted earnings per share $ 1,646,884 $ 392,965 $ 91,562 Weighted average basic shares of common stock outstanding 75,161 78,206 33,524 Effect of dilutive shares: Common shares issuable under stock-based compensation plan 3,567 2,134 1,798 Weighted average shares of common stock applicable to diluted earnings per share 78,728 80,340 35,322 Basic earnings per share of common stock $ 21.91 $ 5.02 $ 2.62 Diluted earnings per share of common stock $ 20.92 $ 4.89 $ 2.59 Year ended December 31, 2022 2021 2020 (in thousands, except per share amounts) Net income $ 475,507 $ 1,003,490 $ 1,646,884 Weighted average shares of common stock outstanding 53,065 63,799 75,161 Effect of dilutive securities - shares issuable under stock-based compensation plan 2,885 3,672 3,567 Weighted average diluted shares of common stock outstanding 55,950 67,471 78,728 Basic earnings per share $ 8.96 $ 15.73 $ 21.91 Diluted earnings per share $ 8.50 $ 14.87 $ 20.92 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 weighted-average number of anti-dilutive outstanding performance-based RSUs, time-based RSUs and stock options Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands except for weighted-average exercise price) (in thousands except for weighted average exercise price) Performance-based RSUs (1) 322 1,032 1,084 281 223 322 Time-based RSUs — — 3 62 1 — Stock options (2) 83 572 740 1,339 211 83 Exchangeable PNMAC Class A units (3) — — 43,700 Total anti-dilutive shares and units 405 1,604 45,527 Total anti-dilutive units and options 1,682 435 405 Weighted average exercise price of anti-dilutive stock options (2) $ 43.89 $ 23.70 $ 17.81 $ 58.58 $ 58.85 $ 43.89 Year ended December 31, 2020 2019 2018 (in thousands) Cash paid for interest $ 272,970 $ 188,346 $ 161,001 Cash paid (refunds received) for income taxes, net $ 475,594 $ 32,457 $ (2,059) Non-cash investing activity: Mortgage servicing rights resulting from loan sales $ 1,138,045 $ 884,876 $ 591,757 Unsettled portion of MSR acquisitions $ — $ — $ 10,139 Operating right-of-use assets recognized $ 14,128 $ 83,248 $ — Non-cash financing activity: Mortgage servicing liabilities resulting from loan sales $ 23,325 $ 37,988 $ 7,601 Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement $ 2,093 $ 1,757 $ 2,688 Issuance of common stock in settlement of directors' fees $ 194 $ 233 $ 330 Note The Company, through PLS, PLS 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, 2020 December 31, 2019 Agency–company subject to requirement Actual (1) Requirement (1) Actual (1) Requirement (1) (dollars in thousands) Capital Fannie Mae & Freddie Mac – PLS $ 4,454,680 $ 633,331 $ 2,247,751 $ 585,674 Ginnie Mae – PLS $ 3,794,112 $ 1,058,641 $ 1,907,398 $ 910,456 HUD – PLS $ 3,794,112 $ 2,500 $ 1,907,398 $ 2,500 Liquidity Fannie Mae & Freddie Mac – PLS $ 506,096 $ 84,444 $ 257,794 $ 79,991 Ginnie Mae – PLS $ 506,096 $ 215,722 $ 257,794 $ 216,119 Adjusted net worth / Total assets ratio Ginnie Mae – PLS 12 % 6 % 19 % 6 % Tangible net worth / Total assets ratio Fannie Mae & Freddie Mac – PLS 14 % 6 % 22 % 6 % December 31, 2022 December 31, 2021 Requirement/Agency Actual (1) Requirement (1) Actual (1) Requirement (1) (dollars in thousands) Capital Fannie Mae & Freddie Mac $ 6,632,627 $ 797,748 $ 5,872,064 $ 722,040 Ginnie Mae $ 5,899,892 $ 923,202 $ 5,424,747 $ 976,303 HUD $ 5,899,892 $ 2,500 $ 5,424,747 $ 2,500 Liquidity Fannie Mae & Freddie Mac $ 1,265,569 $ 107,768 $ 316,659 $ 93,973 Ginnie Mae $ 1,265,569 $ 246,953 $ 316,659 $ 220,577 Adjusted net worth / Total assets ratio Ginnie Mae 35 % 6 % 29 % 6 % Tangible net worth / Total assets ratio Fannie Mae & Freddie Mac 39 % 6 % 32 % 6 % In August 2022, the Agencies issued revised capital and liquidity requirements. The requirements will be effective at various dates beginning September 30, 2023, for issuers of securities guaranteed by Ginnie Mae and seller/servicers of mortgage loans to Fannie Mae and Freddie Mac. The Company believes it is in compliance with Agencies’ revised requirements as of December 31, 2022. Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating Note The Company operates in 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 the acquired assets and correspondent production activities for PMT. Financial performance and results by segment are as follows: Year ended December 31, 2020 Year ended December 31, 2022 Mortgage Banking Investment Mortgage Banking Investment Production Servicing Total Management Total Production Servicing Total Management Total (in thousands) (in thousands) Revenue: (1) Revenues: (1) Net gains on loans held for sale at fair value $ 2,297,108 $ 443,677 $ 2,740,785 $ — $ 2,740,785 $ 599,896 $ 191,737 $ 791,633 $ — $ 791,633 Loan origination fees 285,551 — 285,551 — 285,551 169,859 — 169,859 — 169,859 Fulfillment fees from PennyMac Mortgage Investment Trust 222,200 — 222,200 — 222,200 67,991 — 67,991 — 67,991 Net loan servicing fees — 439,448 439,448 — 439,448 — 951,329 951,329 — 951,329 Net interest income (expense): Interest income 101,605 145,421 247,026 — 247,026 133,000 161,062 294,062 — 294,062 Interest expense 82,160 189,368 271,528 23 271,551 108,072 227,355 335,427 — 335,427 19,445 (43,947) (24,502) (23) (24,525) 24,928 (66,293) (41,365) — (41,365) Management fees — — — 34,538 34,538 — — — 31,065 31,065 Other 695 1,584 2,279 5,321 7,600 2,503 3,727 6,230 9,013 15,243 Total net revenue 2,824,999 840,762 3,665,761 39,836 3,705,597 865,177 1,080,500 1,945,677 40,078 1,985,755 Expenses 860,878 578,618 1,439,496 25,492 1,464,988 816,697 466,874 1,283,571 36,937 1,320,508 Income before provision for income taxes $ 1,964,121 $ 262,144 $ 2,226,265 $ 14,344 $ 2,240,609 $ 48,480 $ 613,626 $ 662,106 $ 3,141 $ 665,247 Segment assets at year end $ 7,870,398 $ 23,709,122 $ 31,579,520 $ 18,275 $ 31,597,795 $ 3,866,934 $ 12,929,233 $ 16,796,167 $ 26,417 $ 16,822,584 Year ended December 31, 2019 Year ended December 31, 2021 Mortgage Banking Investment Mortgage Banking Investment Production Servicing Total Management Total Production Servicing Total Management Total (in thousands) (in thousands) Revenue: (1) Revenues: (1) Net gains on loans held for sale at fair value $ 635,464 $ 90,064 $ 725,528 $ — $ 725,528 $ 1,746,650 $ 717,751 $ 2,464,401 $ — $ 2,464,401 Loan origination fees 174,156 — 174,156 — 174,156 384,154 — 384,154 — 384,154 Fulfillment fees from PennyMac Mortgage Investment Trust 160,610 — 160,610 — 160,610 178,927 — 178,927 — 178,927 Net loan servicing fees — 293,665 293,665 — 293,665 — 182,954 182,954 — 182,954 Net interest income (expense): Interest income 82,338 206,362 288,700 — 288,700 134,706 165,463 300,169 — 300,169 Interest expense 59,973 151,950 211,923 56 211,979 139,296 251,393 390,689 10 390,699 22,365 54,412 76,777 (56) 76,721 (4,590) (85,930) (90,520) (10) (90,530) Management fees — — — 36,492 36,492 — — — 37,801 37,801 Other 1,289 2,643 3,932 6,300 10,232 1,623 2,520 4,143 5,511 9,654 Total net revenue 993,884 440,784 1,434,668 42,736 1,477,404 2,306,764 817,295 3,124,059 43,302 3,167,361 Expenses 466,050 455,535 921,585 26,375 947,960 1,262,353 510,617 1,772,970 35,208 1,808,178 Income before provision for income taxes $ 527,834 $ (14,751) $ 513,083 $ 16,361 $ 529,444 $ 1,044,411 $ 306,678 $ 1,351,089 $ 8,094 $ 1,359,183 Segment assets at year end $ 4,836,472 $ 5,347,549 $ 10,184,021 $ 19,996 $ 10,204,017 $ 8,934,032 $ 9,821,436 $ 18,755,468 $ 21,144 $ 18,776,612 Year ended December 31, 2018 Year ended December 31, 2020 Mortgage Banking Investment Mortgage Banking Investment Production Servicing Total Management Total Production Servicing Total Management Total (in thousands) (in thousands) Revenues: (1) Net gains on loans held for sale at fair value $ 141,959 $ 107,063 $ 249,022 $ — $ 249,022 $ 2,297,108 $ 443,677 $ 2,740,785 $ — $ 2,740,785 Loan origination fees 101,641 — 101,641 — 101,641 285,551 — 285,551 — 285,551 Fulfillment fees from PennyMac Mortgage Investment Trust 81,350 — 81,350 — 81,350 222,200 — 222,200 — 222,200 Net loan servicing fees — 445,393 445,393 — 445,393 — 439,448 439,448 — 439,448 Net interest income (expense): Interest income 66,408 149,992 216,400 16 216,416 101,605 145,421 247,026 — 247,026 Interest expense 7,371 137,177 144,548 49 144,597 82,160 189,368 271,528 23 271,551 �� 59,037 12,815 71,852 (33) 71,819 19,445 (43,947) (24,502) (23) (24,525) Management fees — — — 24,469 24,469 — — — 34,538 34,538 Carried Interest from Investment Funds — — — (365) (365) Other 2,008 2,650 4,658 5,516 10,174 695 1,584 2,279 5,321 7,600 Total net revenue 385,995 567,921 953,916 29,587 983,503 2,824,999 840,762 3,665,761 39,836 3,705,597 Expenses 298,729 395,619 694,348 22,584 716,932 860,878 578,618 1,439,496 25,492 1,464,988 Income before provision for income taxes and non-segment activities 87,266 172,302 259,568 7,003 266,571 Non-segment activities (2) — — — — 1,126 Income before provision for income taxes $ 87,266 $ 172,302 $ 259,568 $ 7,003 $ 267,697 $ 1,964,121 $ 262,144 $ 2,226,265 $ 14,344 $ 2,240,609 Segment assets at year end (3) $ 2,434,897 $ 5,031,920 $ 7,466,817 $ 11,681 $ 7,478,498 Segment assets at year end $ 7,870,398 $ 23,709,122 $ 31,579,520 $ 18,275 $ 31,597,795 Note 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. The Company’s Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indentures under which the Unsecured Notes were issued). PENNYMAC FINANCIAL SERVICES, INC. CONDENSED BALANCE SHEETS December 31, December 31, 2020 2019 2022 2021 (in thousands) (in thousands) ASSETS Cash $ 19,013 $ 2,250 $ 45,496 $ 9,276 Investments in subsidiaries 3,918,583 2,443,407 4,421,906 4,217,461 Receivable from PennyMac Mortgage Investment Trust 27 27 Due from subsidiaries 580,069 100 1,509,103 1,477,332 Total assets $ 4,517,665 $ 2,445,757 $ 5,976,532 $ 5,704,096 LIABILITIES AND STOCKHOLDERS' EQUITY Unsecured senior notes $ 645,820 $ — $ 1,779,920 $ 1,776,219 Accounts payable and accrued expenses 14,590 — 26,356 28,135 Payable to subsidiaries 22,405 4,194 135 116 Income taxes payable 445,462 380,056 699,072 481,301 Total liabilities 1,128,277 384,250 2,505,483 2,285,771 Stockholders' equity 3,389,388 2,061,507 3,471,049 3,418,325 Total liabilities and stockholders' equity $ 4,517,665 $ 2,445,757 $ 5,976,532 $ 5,704,096 PENNYMAC FINANCIAL SERVICES, INC. CONDENSED STATEMENTS OF INCOME Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Revenues Dividends from subsidiaries $ 602,606 $ 36,376 $ 10,054 $ 417,391 $ 982,740 $ 602,606 Net interest income (expense): Net interest income: Interest income from subsidiary 15,830 — — 121,452 77,162 15,830 Interest expense: To non-affiliates 8,774 — — 95,014 70,208 8,774 To subsidiary 83 153 32 — — 83 8,857 153 32 95,014 70,208 8,857 Net interest income (expense) 6,973 (153) (32) Total revenue 609,579 36,223 10,022 Net interest income 26,438 6,954 6,973 Total net revenues 443,829 989,694 609,579 Expenses Charitable contributions 2,314 — — — 5,800 2,314 Professional services 42 — — — 2,236 42 Other 327 — — 267 449 327 Total expenses 2,683 — — 267 8,485 2,683 Income before provision for income taxes and equity in undistributed earnings in subsidiaries 606,896 36,223 10,022 Income before provision for income taxes and equity in undistributed earnings of subsidiaries 443,562 981,209 606,896 Provision for income taxes 395,340 91,291 20,897 129,948 238,803 395,340 Income (loss) before equity in undistributed earnings of subsidiaries 211,556 (55,068) (10,875) Income before equity in undistributed earnings of subsidiaries 313,614 742,406 211,556 Equity in undistributed earnings of subsidiaries 1,435,328 448,033 98,569 161,893 261,084 1,435,328 Net income $ 1,646,884 $ 392,965 $ 87,694 $ 475,507 $ 1,003,490 $ 1,646,884 PENNYMAC FINANCIAL SERVICES, INC. CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31, Year ended December 31, 2020 2019 2018 2022 2021 2020 (in thousands) (in thousands) Cash flows from operating activities Net income $ 1,646,884 $ 392,965 $ 87,694 $ 475,507 $ 1,003,490 $ 1,646,884 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed earnings of subsidiaries (1,435,328) (448,033) (98,569) (161,893) (261,084) (1,435,328) Amortization of net debt issuance cost 225 — — 3,701 2,321 225 Increase in receivable from PennyMac Mortgage Investment Trust — (27) — (Increase) decrease in intercompany receivable (574,518) 8,962 (3,737) (31,566) (897,063) (574,518) Increase in accounts payable and accrued expenses 14,590 — — (1,779) 13,545 14,590 Increase in payable to subsidiaries 18,211 — — (Decrease) increase in payable to subsidiaries 19 (22,289) 18,211 Increase in income taxes payable 65,406 58,609 22,889 217,771 35,839 65,406 Net cash (used in) provided by operating activities (264,530) 12,503 8,277 Cash flows from investing activities Increase in investments in subsidiaries — — (77) Net cash used by investing activities — — (77) Net cash provided by (used in) operating activities 501,760 (125,268) (264,530) Cash flows from financing activities Issuance of unsecured senior notes 650,000 — — — 1,150,000 650,000 Payment of debt issuance costs (4,405) — — — (21,922) (4,405) Payment of dividend to common stock and Class A common stockholders (30,947) (9,708) (10,054) Payment of dividend to holders of common stock (54,621) (52,896) (30,947) Issuance of common stock pursuant to exercise of stock options 9,389 5,145 803 2,947 7,536 9,389 Repurchase of common stock and Class A common stock (337,479) (1,056) (1,554) Payment of withholding taxes relating to stock-based compensation (5,265) (4,634) — (7,780) (8,993) (5,265) Net cash provided by (used in) financing activities 281,293 (10,253) (10,805) Repurchase of common stock (406,086) (958,194) (337,479) Net cash (used in) provided by financing activities (465,540) 115,531 281,293 Net increase (decrease) in cash (1) 16,763 2,250 (2,605) 36,220 (9,737) 16,763 Cash at beginning of year 2,250 — 2,605 9,276 19,013 2,250 Cash at end of year $ 19,013 $ 2,250 $ — $ 45,496 $ 9,276 $ 19,013 Suppemental cash flow information: Supplemental cash flow information: Non-cash financing activity: Issuance of common stock in settlement of directors' fees $ 194 $ 233 $ 330 $ 205 $ 200 $ 194 Note Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period: SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PENNYMAC FINANCIAL SERVICES, INC. (Registrant) By: /s/ David A. Spector David A. Spector Chairman and Chief Executive Officer (Principal Executive Officer) Unregistered Sales of Equity Securities● variations in our actual and Use of Proceeds● There were no sales of unregistered equitychanges in the manner that investors and securities duringanalysts who provide research to the year ended December 31, 2020.Repurchasemarketplace on us analyze the value of our Common StockThe following table summarized thecommon stock repurchase activity for the quarter ended December 31, 2020:
of shares
purchased
Average price
paid per share
shares purchased
as part of publicly
announced plans
or program (1)
value of shares that
may yet be
purchased under
the plans
or program (1)(1)In February 2021, our board of directors approved an increase to our common stock repurchase program from $500 million to $1 billion. The stock repurchase program does not require us to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected through negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant toand similar companies;● changes in recommendations or in estimated financial results published by securities analysts who provide research to the marketplace on us, our competitors or our industry; ● litigation and governmental investigations; ● increases in market interest rates that may lead purchasers of our shares to demand a higher yield; ● announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and ● general market, political and economic conditions, including any such conditions and local conditions in the markets in which our customers are located. Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.Item 6. Selected Financial Data● Our servicing segment is primarily located in California, Texas and Nevada. Not presented.● Our production segment is primarily located in California, Texas, Florida, Arizona, Missouri and North Carolina. In addition, we maintain loan production centers in California, Tennessee, Minnesota and Hawaii. ● Our investment management segment, as well as our information technology division, is primarily located in California.
of shares
purchased
Average price
paid per share
shares purchased
as part of publicly
announced plans
or program (1)
value of shares that
may yet be
purchased under
the plans
or program (1)(1) In August 2021, our board of directors approved an increase to our common stock repurchase program from $1 billion to $2 billion. The stock repurchase program does not require us to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected through negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.
assets (1)
assets(1) Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the specific asset or liability and whether we have elected to carry the asset or liability at its fair value.2020, $14.92022, $9.6 billion or 47%57% of our total assets were carried at fair value on a recurring basis and $12.2$11.5 million (real estate acquired in settlement of loans (“REO”)), were carried based on fair value on a non-recurring basis when fair value indicates evidence of impairment of individual properties.4850assetsassets) in the case of “Level 2” fair value assets.7.96.3 billion or 25%38% of our total assets are measured using “Level 3” fair value inputs – significant inputs where there is difficulty in observing the inputs used by market participants in establishingto establish fair value. Different approaches to valuing those assets or changes in inputs to measurement of these assets can have a significant effect on the amounts reported for these items including their reported balances and their effects on our income.2020,2022, we recognized significant changes in the fair value of our holdings of “Level 3” fair value assets and liabilities as shown below:(1) ExcludingExcludes changes in fair value attributable to realization of cash flows.(“IRLC”) “Level 3” fair value assets and liabilities to our Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring these items and maintenance of our valuation policies and procedures for non-IRLCnon-interest rate lock commitment (“IRLC”) assets and liabilities. The FAV group submits the results of its valuations to our senior management valuation committee, which oversees the valuations. Our senior management valuation committee includes the Company’s chief financial, investmentrisk, credit and riskdeputy chief investment officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.staff.IRLCsIRLC is developed by our Capital Markets Risk Management staff and is reviewed by our Capital Markets Operations group.49(1) The upward shift in input amount on a per-loan basis is limited to the amount of shift required to reach a 100% pull-through rate. ● We categorize loans that are saleable into active markets as “Level 2” fair value assets. We estimate the fair value of such loans using their quoted market price or market price equivalent. At December 31, 2020,2022, we held $6.9$3.2 billion of such loans.● We categorize loans that are not saleable into active markets as “Level 3” fair value assets. “Level 3” fair value loans arise primarily from twothe following sources:- We may purchase certain delinquent government guaranteed or insured loans from Ginnie Mae guaranteed securitizations included in our loan servicing portfolio. Our right to purchase such loans arises as the result of the loan being at least three months delinquent when we buy the loan. Our ability to purchase delinquent loans provides us with an alternative to our obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such repurchased loans (“are referred to as early buyout” or “EBO” loans)buyout (“EBO”) loans and may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed security. Such eligibility occurs when the repurchased loans either become current either through the borrower’s reperformance or through completion of a modification of thea loan’s terms or otherwise after sixthree months of timely payments followingand when the completionissuance date of certain types of payment deferral programs. We measure such loans using “Level 3” fair value inputs andthe new security is at least 120 days after the date the loan was last delinquent. At December 31, 2020,2022, we held $4.7 billion$257.2 million of such loans.- Certain of our loans may become non-saleable into active markets due to our identification of one or more defects. At December 31 2020,2022, we held $13.8$42.0 million of such loans.- There is no active market with observable inputs that are significant to the estimation of the fair value of home equity loans we produce. At December 31, 2022, we held $46.6 million of such loans. Interest Rate Lock CommitmentsOur net gains on loans held for sale include our estimates of the gains or losses we expect to realize upon the sale of loans we have contractually committed to fund or purchase but have not yet funded, purchased or sold. We recognize a substantial portion of our net gains on loans held for sale at fair value before we fund or purchase the loans as the result of these commitments. We call these commitments IRLCs. We recognize the fair value of IRLCs at the time we make the commitment to the correspondent seller, broker or loan applicant and adjust the fair value of such IRLCs as the loan approaches the point of funding or purchase or the prospective transaction is canceled.We carry IRLCs as either Derivative assets or Derivative liabilities on our consolidated balance sheet. The fair value of an IRLC is transferred to Loans held for sale at fair value when the loan is funded or purchased.An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using methods we believe that market participants use in pricing IRLCs. We estimate the fair value of an IRLC based on observable Agency MBS prices, our estimates of the fair value of the MSRs we expect to receive in the sale of the loans and the probability that we will fund or purchase the loan (the “pull-through rate”).50Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the marketplace. Our estimate of the probability that a loan will be funded and market interest rates are updated as the loans move through the funding or purchase process and as market interest rates change and may result in significant changes in our estimates of the fair value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Net gains on loans held for sale at fair value in the period of the change. The financial effects of changes in these inputs are generally inversely correlated. 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 loan principal and interest payment cash flow component, which decreases in fair value.A shift in our assessment of an input to the valuation of IRLCs can have a significant effect on the amount of Net gains on loans held for sale at fair value for the period. We believe that the most significant “Level 3” fair value input to the measurement of IRLCs is the pull-through rate. At December 31, 2020, we held $677.0 million of net IRLC assets at fair value. Following is a quantitative summary of the effect of changes in the pull-through rate input on the fair value of IRLCs at December 31, 2020:(1)The upward shift in input amount on a per-loan basis is limited to the amount of shift required to reach a 100% pull-through rate.The preceding analysis holds constant all of the other inputs to show an estimate of the effect on fair value of a change in the pull-through rate. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analysis is not a projection of the effects of a shock event or a change in our estimate of an input and should not be relied upon as an earnings projection.the changeother changes in fair value are affected by changes in fair value inputs. DuringIn the year ended December 31, 2020,2022, we recognized a $1.5 billion$354.2 million net reductionincrease in fair value of MSRs: $431.1 MSRs and MSLs: $877.7 million of the increase due to changes in fair value inputs, partially offset by $523.5 million of reduction was due to realization of cash flows underlying the fair value of MSR and $1.1 billion of the reduction was due to changes in fair value inputs.MSRs.classify MSRs as “Level 3”estimate fair value assetsof MSRs and determine their fair valueMSLs using a discounted cash flow approach. We believe the most significant “Level 3” fair value inputs to the valuation of MSRs and MSLs are the pricing spread (used to develop periodic discount rates), prepayment speed and annual per-loan cost of servicing.20202022 was $2.6$6.0 billion.512020:2022:Excess Servicing Spread FinancingWe finance a portion of the cost of Agency MSRs that we purchase from non-affiliate sellers through the sale to PMT of the servicing spread in excess of a specified level. We carry our ESS at fair value.Because the ESS is a claim to a portion of the cash flows from MSRs, the valuation of the ESS is similar to that of MSRs. We use the same discounted cash flow approach to measure the ESS and the related MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not included in the ESS valuation as these cash flows do not accrue to the holder of the ESS.A shift in the market for, or a change in our assessment of an input to, the valuation of ESS can have a significant effect on the fair value of ESS and in our income for the period. However, we believe that this change will be offset to a great extent by a change in the fair value of the MSRs that the ESS is financing. We record changes in the fair value of ESS in Net loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust. During the year ended December 31, 2020, we recorded $25.0 million of net gains due to changes in fair value of ESS.52We believe that the most significant “Level 3” fair value inputs to the valuation of ESS are the pricing spread (used to develop periodic discount rates) and prepayment speed. At December 31, 2020, we carried $131.8 million of ESS at fair value. Following is a summary of the effect on fair value of various changes to these inputs at December 31, 2020:The preceding analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the effect on fair value of a change in that specific input. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections.Accounting DevelopmentsRefer to Note 3 – Significant Accounting Policies ‒ Recently Issued Accounting Pronouncements to our consolidated financial statements for a discussion of recent accounting developments and the expected effect on the Company.5354Our resultsBusiness TrendsoperationsTreasury and mortgage-backed securities. Higher interest rates are summarized below:expected to contribute to reducing the size of the mortgage origination market from an estimated $2.2 trillion in 2022 to a projected range from $1.6 trillion to $1.9 trillion for 2023 according to leading economists.(1)Represents Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement.5455(2)(1)To provide investors with information we believe provides supplemental information that is useful to investors in addition to our results as determined by GAAP, we disclose Adjusted EBITDA as a non-GAAP measure whichmeasure. Adjusted EBITDA is a measure that is frequently used in our industry to measure performance.performance and we believe that this measure provides supplemental information that is useful to investors. Adjusted EBITDA is not a financial measure calculated in accordance with GAAP and should not be considered as a substitute for net income, or any other performance measure calculated in accordance with GAAP.attributable to our common stockholders before net income attributable to noncontrolling interest plus provision for income taxes, depreciation and amortization, excluding decrease (increase) in fair value of MSRs andnet of MSLs, due to changes in the valuation inputs usedwe use in themodel,models, increase (decrease) in fair value of ESSexcess servicing spread (“ESS”) payable to PMT, hedging losses (gains) associated with MSRs, stock-based compensation and interest expense on corporate debt or corporate revolving credit facilities and capital leases to the extent such items existed in the years presented.lease.U.S. GAAP. Some of these limitations are:● they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments; ● they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt; and ● they are not adjusted for all non-cash income or expense items that are reflected in our consolidated statements of cash flows. 55572020, 20192022, 2021 and 20182020ForIncome Before Provisions for Income Taxes2020,2022, we recorded income before provision for income taxes of $2.2 billion, an increase$665.2 million, a decrease of $1.7 billion$693.9 million or 323%51% from 2019.2021. The increasedecrease was primarily due to an increasea $2.0 billion decrease in production income (Net gains on loans held for sale at fair value, Loan origination fees and Fulfillment fees from PennyMac Mortgage Investment Trust) which reflects higherprimarily due to lower production volume and improvedgain on sale margins and anacross all channels, partially offset by a $768.4 million increase in Net loan servicing fees reflecting improved valuation results in our MSRs, net of hedging results, and a $487.7 million decrease in total expenses, primarily due to growth in our loan servicing portfolio and an increase in income from the re-performance of loans bought out of Ginnie Mae securities for potential resecuritization, partially offset by an increase in total expenses. The increase in total expense was mainly due to increasesreductions in compensation, servicing and loan origination expenses reflecting the continuing growth of our mortgage banking activities and the impact of the COVID-19 pandemic on our servicing portfolio and operations.expenses.DuringIn the year ended December 31, 2019,2021, we recorded net income of $393.0 million, an increase of $148.5 million, or 61%, from 2018. The increase is due to an increase of $492.8 million in total net revenue, partially offset by an increase of $231.0 million in total expenses and $113.2 million inbefore provision for income taxes.taxes of $1.4 billion, a decrease of $881.4 million or 39% from 2020. The increase in total expensesdecrease was primarily due to increasesa $221.1 million decrease in compensation and loan origination expenses, reflecting the continuing growth of our mortgage banking activities. The provision forproduction income taxes increased significantly as a result of the Reorganization which was completed in late 2018.The increase in total revenue was primarily due to an increase of $476.5 million in (Net gains on loans held for sale at fair value, $79.3 million inLoan origination fees and Fulfillment fees from PennyMac Mortgage InvestInvestment Trust,) primarily due to lower gain on sale margins across all production channels and $72.5reduced fulfillment fee rates during the year ended December 31, 2021 compared to 2020, a $256.5 million in Loan origination fees resulting from higher production volume and improved profit margins, which was partially offset by a decrease of $151.7 million in Net loan servicing fees primarily attributablereflecting elevated prepayment speeds and a $343.2 million increase in total expenses. The increase in total expenses was mainly due to increases in compensation and origination expenses reflecting the effect of lower interest rates on the fair valuegrowth of our MSRs that resulted in fair value losses net of hedging results compared to the year ended December 31, 2018.Before the onset of the COVID-19 pandemic, the mortgage origination market was experiencing healthy demand owing to historically low interest rates in the United States. The government’s response to the onset of the COVID-19 pandemic, including fiscal stimulus and infusions of additional liquidity by the Federal Reserve into financial markets, acted to further lower mortgage interest rates. These developments have acted to sustain heightened demand for new mortgage loans despite the slowdown in overall economic activity. The mortgage origination market for 2019 was $2.3 trillion; for 2020, the origination market is estimated to be $4.0 trillion and for 2021, is forecasted to be $3.3 trillion. This increase in demand for mortgage loans, combined with constraints on mortgage industry origination capacity that existed before the COVID-19 pandemic, has allowed us to realize higher gain-on sale margins in our production segment. We expect our gain on sale margins to decrease to historical levels as industry capacity adjusts to demand. Furthermore, Fannie Mae and Freddie Mac added a 50 basis point adverse market refinance fee applicable to most mortgage refinances that could have a negative impact on future refinances.During the year ended December 31, 2020, the United States was significantly impacted by the ongoing effects of the COVID-19 pandemic and the effects of market and government responses to the COVID-19 pandemic. These developments have resulted in an economic recession in the United States and increased unemployment that have created financial hardships for many existing borrowers.As part of its response to the COVID-19 pandemic, the federal government included requirements in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that we as a servicer of Agency loans provide borrowers with substantial payment forbearance. As a result of this requirement, we have seen a large increase in delinquencies in our servicing portfolio which has increased our cost to service those loans and may require us to finance substantial amounts of advances of principal and interest payments to the investors holding securities backed by these loans, as well as property taxes, insurance and other costs to protect investors’ interest in the properties collateralizing the loans. As of December 31, 2020, 7.2% of loans in UPB in our predominately government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent resulting in an increase in the level of servicing advances we have been required to make due to borrower delinquencies.This development may have a negative effect on the earnings of our servicing segment before taking into account the effect of future developments on the valuation of our MSRs by, among other things, reducing servicing fee income, reducing the amount of placement fees we earn on custodial deposits related to these loans, increasing our cost56to service due to higher delinquency and default rates, as well as increased financing costs due to the need to advance funds on behalf of delinquent borrowers. We expect these losses to be offset by growth in our loan servicing portfolio and gains on the resale of early buyout loans as those borrowers reperform.direct lending production.DuringIn our production segment, revenues reflect the effects of increasing interest rates on both demand for mortgage loans and gain on sale margins during the year ended December 31, 2020,2022, compared to the strong demand due to the historically low interest rate environment that prevailed during 2021 and 2020.compared to $725.5 millionin 2021 and $249.0 million during the years ended December 31, 2019 and 2018,2020, respectively. The increase in 2020 compared to 2019 and 2018decrease was primarily due to an increase inlower gains from production due to decreased production volumes and gain on sale margins and lower EBO loan production volumeredelivery gains due to reduced reperformance and improved profitmodifications and diminished redelivery margins in our mortgage production business, reflecting increased demand for mortgage loans during 2020 asthe year ended December 31, 2022 compared to 20192021 and 2018. The increase in demand for mortgage loans during 2020 as compared to 2019 and 2018 is attributable primarily to the decrease in market interest rates that prevailed during 2020. The increase in profit margins during 2020 reflects the effects of increased loan demand on an already capacity-constrained industry and the disruptive effect of the COVID-19 pandemic on certain industry participations’ ability to maintain their loan production levels.(1)Gain on sale of loans to PMT are primarily cash gains.57OurNon-cash elements of gain on sale of loansincludesinclude both cash and non-cash elements. We recognize a significant portion of our gaingains on loans held for sale of loans when we make a commitmentcommitments to purchase or fund or modify a mortgage loan.loans. We recognize this gain in the form of an interest rate lock commitment.IRLCs. We adjust our initial gain amountestimate as the loan purchase origination or modificationorigination process progresses until the loan is either funded or cancelled. We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilitiesMSLs (which represent the fair value of the costs we expect to incur in excess of the fees we receive for early buyout of delinquentto service the EBO loans (“EBO loans”) we have resold) and for the fair value of our estimate of the losses we expect to incur relating to the representationrepresentations and warranties we provide in our loan sale transactions.Non-cash elements of gain on sale of loansmortgage servicing liabilities (“MSLs”),MSLs, and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 40%217% of our gain on sale of loans at fair value for the year ended December 31, 2020,2022, as compared to 117%71% and 234% for the years ended December 31, 201940% in 2021 and 2018,2020, respectively. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. HowDuringIn the years ended December 31, 2020, 2019,2022, 2021, and 20182020 we recorded provisions for losses under representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $9.6 million, $31.6 million, and $21.0 million, $8.4 million,respectively. The decrease in provision relating to current loan sales reflects the decrease in our loan production in the year ended December 31, 2022 compared to 2021, and $5.8 million, respectively.the increase in 2021 compared to 2020 was due to a change in the mix of loan deliveries between the years. We also recorded reductions in the liability relating to previously sold loans of $8.7$8.5 million, $7.9$16.0 million, and $4.7$8.7 million, for the years ended December 31, 2020, 20192022, 2021 and 2018,2020, respectively. The reductions in the liability relating to previously sold loans resulted from those loans meeting performance criteria established by the Agencies which significantly limits the likelihood of certain repurchase or indemnification claims.5860DuringIn the year ended December 31, 2020,2022, we repurchased loans with unpaid principal balances totaling $58.4$93.0 million and charged $1.1$12.3 million in net incurred losses relating to repurchases against our liability for representations and warranties. Our losses arising from representations and warranties have historically been reduced by our ability to either recover most of the losses from our correspondent sellers or from our ability to profitably refinance and resell repurchased loans.increase significantly.increase. Furthermore, as expected economic conditions, such as interest rates, home values and borrower default rates change, our realized loss rates may increase. Such increases may require us to adjust our estimate of future losses relating to loans previously sold. Such increased loss estimates, if recognized, would be reflected in Net gains on loans held for sale at fair value in the period we recognize the change.increased $111.4decreased $214.3 million and $72.5 million duringin the year ended December 31, 2020 and 2019,2022 compared to 2021, primarily due to a decrease in loan production volumes. Loan origination fees increased $98.6 million in the yearsyear ended December 31, 2019, and 2018, respectively, and the increases were2021 compared to 2020, primarily due to an increase in the volume of loans we produced.loan production volumes.59fronfrom PennyMac Mortgage Investment TrustTheWe charged fulfillment fees were calculated as a percentage of the UPB of the loans we fulfilled for PMT through June 30, 2020. Effective July 1, 2020, we charge fulfillment fees are calculated based on the number of loans we lock and fulfill for PMT.increased $61.6decreased $110.9 million and $79.3 million during the years ended December 31, 2020 and 2019, compared to the years ended December 31, 2019 and 2018, respectively. The increases were primarily due to increased volume of loans we fulfilled for PMT, partially offset by a decrease in the fulfillment fee collected per loan during the year ended December 31, 20202022 compared to 2021, primarily due to a decrease in loan production volume. Fulfillment fees decreased $43.3 million in the yearsyear ended December 31, 20192021 compared to 2020. The decrease was primarily due to fulfillment fee structure changes, which generally reduced the fulfillment fees per loan fulfilled, and 2018, respectively.an increase in discretionary reductions in the fulfillment fee rate in the year ended December 31, 2021 compared to 2020.net loan servicing fees:6063mortgage servicing rightsMSR, MSL and excess servicing spread financing net ofESS and the related hedging results are summarized below:Following is a summaryChanges in realization of our loancash flows are influenced by changes in the level of servicing portfolio:Net loan servicing feesassets and liabilities and changes in estimates of the remaining cash flows to be realized. Realization of cash flows increased $145.8 million, duringin the year ended December 31, 20202022 compared to 2021 primarily due to the growth in our investment in MSRs. Realization of cash flows decreased in the year ended December 31, 2019. The increase was2021, compared to 2020, primarily due to an increase of $120.8 million in loan servicing fees resulting from an increase of 18% in our average servicing portfolio during 2020 comparedlower prepayment expectations through 2021 which slows the rate at which cash flows are expected to 2019.be realized.Net loan servicing fees decreased $151.7 million duringOther changes in fair value of MSRs increased in the year ended December 31, 20192022 compared to 2021 and 2020 primarily due to significant increases in interest rates and resulting decreases in expected future prepayment speeds in 2022.2018. The decrease was primarily due to an increase of $338.0 million in losses in fair value of MSR, MSLs and excess servicing spread financing, net of hedging results,2022 compared to the year ended December 31, 2018, resulting from the effect of decreasing interest rates on the fair value of our mortgage servicing assetslesser or opposite circumstances and liabilities. The increased losses were partially offset by an increase of $186.2 millioneffects in loan servicing fees, resulting from an increase of 24% in our average servicing portfolio for the year ended December 31, 2019 compared to the year ended December 31, 2018.2021 and 2020.6164DuringFollowing is a summary of our loan servicing portfolio:(1) Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.
maturity (months)(1) Loan-to-Value (2) MSRs and MSLs on government loans include loans securitized in Ginnie Mae pools as well as loans sold to private investors. (3) Represents MSRs on conventional loans sold to private investors. 2020, the prepayment expectations resulting from the decreasing interest rate environment, along with expectations of higher costs to service loans in the coming months and increased returns demanded by market participants in response to the uncertainties created by the COVID-19 pandemic, resulted in a 37% reduction in fair value (as measured by the December 31, 2019 fair value) of our investment in MSRs. This reduction in fair value was partially offset by our hedging results and change in fair value of ESS.Many of the risks of owning MSRs, such as changing costs to service loans and changing returns demanded by MSR market participants are difficult to hedge. There can be no assurance that future hedging results will effectively offset changes in fair value of MSRs. As discussed above, we expect the ongoing effects of the COVID-19 pandemic and the requirements of the CARES Act to reduce our servicing income and to increase our servicing expenses due to the increased number of delinquent loans, and significant number of forbearances that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the COVID-19 pandemic.Net Interest (Expense) IncomeNet interest income decreased $101.2 million during the year ended December 31, 20202022 compared to the year ended December 31, 2020.2021. The decrease was primarily due to:● a decreasean increase of $81.2$80.8 million in placement fees we receivedreceive relating to custodial funds that we manage due to decreasedincreased earning rates which reflect the lower interest rate environment; andrates;● an increasea decrease of $40.8$64.7 million in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increaseddecreased loan payoffs as a result of increaseddecreased borrower refinancing activity due to the lowerhigher interest rates in 2020 as compared to 2019.rates. When a borrower repays a loan, we are responsible in many cases for paying the full month’s interest to the holders of the Agency securities that are backed by the loan regardless of when in the month the borrower repays the loan. The increasedecrease in refinancing activity in our MSR portfolio caused the increasedecrease in the interest shortfall; and● an increase of $38.6$16.6 million in interest expense on repurchase agreements due to an increase in financing to fund the growth in our loan inventory and the expiration of a master repurchase agreement in August 2019. The master repurchase agreement provided us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics. We recorded $14.7 million of such incentives as reductions in Interest expense during the year ended in December 31, 2019;income from cash balances reflecting increasing interest rates; partially offset by● an increasea decrease of $46.7$103.1 million in interest income onfrom loans held for sale reflecting lower average levels of inventory; and● an increase of $9.2 million in interest expense on borrowings due to larger average inventory balances during the year ended December 31, 2020 as compared to 2019.higher interest rate environment.incomeexpense increased $4.9$66.0 million duringin the year ended December 31, 20192021 compared to the year ended December 31, 2018.2020. The increase was primarily due to:● an increasea decrease of $56.3$31.4 million in placement fees we receive relating to custodial funds that we manage reflecting the growth of our servicing portfoliodue to decreased earning rates; and net interest income relating to growth in our average inventory of loans held for sale, partially offset by● an increase of $23.1 million in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increased loan payoffs as a $33.4 million decreaseresult of increased borrower refinancing activity due to the lower interest rates; and● an increase in the financing incentives we received from onelevel of our lenders for financing mortgage loans approved for satisfying certain consumer relief characteristics; andunsecured borrowings due to issuance of unsecured senior notes, which generally bear higher rates of interest as compared to secured borrowings.●$22.7decrease in performance incentive fees.in interest shortfall on repaymentis primarily due to $3.0 million of loans serviced for Agency securitizations.6267Management fees and Carried InterestManagement fees and Carried Interest are summarized below:Management fees decreased $2.0 million during the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease was due to a decrease of $7.2 million in incentive fees due to losses PMT incurred during the quarter ended March 31, 2020, partially offset by an increase of $5.2 million in base management fees reflecting the increase in PMT’s average shareholders’ equity upon which our base management fees are based, during the year ended December 31, 2020 compared to the year ended December 31, 2019.Management fees from PMT increased by $12.0 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, reflecting the combined effect of the performance incentive fees arising from PMT’s increased profitability and the increase in PMT’s average shareholders’ equity upon which its management fees are based. The increase in average shareholders’ equity was primarily due to the issuance of new common shares by PMT during the year ended December 31, 2019.$869,000 during$571,000 in the year ended December 31, 2020,2022 compared to 2021 and increased $789,000 in the year ended December 31, 2019, and increased $84,000 during the year ended December 31, 2019,2021 compared to the year ended December 31, 2018,2020, primarily due to changes in the fair value of our investment in PMT. We held 75,000 common shares of PMT during each of the three years ended December 31, 2020.2022.63increased $235.1decreased $264.6 million duringin the year ended December 31, 2020,2022 compared to 2021 primarily due to work force reductions necessitated by reductions in loan production in 2022 and decreased incentive compensation accruals due to reduced staffing levels and lower achievement of profitability targets. Compensation expense increased $261.2 million in the year ended December 31, 2019.2021 compared to 2020. The increase was primarily due to growth in head countstaffing levels made to accommodate the growth in our loan production and servicing activities as well as to increases in incentive compensation resulting from performance-based incentives andprimarily due to higher than expected attainment of profitability targets.Compensation expense increased $100.2 million duringproduction volume. The decrease in stock based compensation in the year ended December 31, 2019,2021 compared to the year ended December 31, 2018. The increase in compensation2020 was primarily due to increases in incentive compensation resulting from performance-based incentives in our mortgage banking business and higher than expected attainment of profitability targets along with increases in base salaries, taxes and benefits due to increased average head count resulting from the growth in our mortgage banking activities during 2019.ServicingServicing expense increased $92.2 million and $27.6 million in the years ended December 31,a 2020 and 2019 compared to the years ended December 31, 2019 and 2018, respectively. The increase in 2020 compared to 2019 was primarily the result of the increase in delinquencies we experienced due to the effects of the COVID-19 pandemicstock option grant that vested on borrower delinquencies. The increase in 2019 compared to 2018, was due to growth in our government-insured or guaranteed mortgage servicing portfolio, which includes loans that are subject to nonreimbursable servicing advance losses, and to our EBO program to purchase defaulted loans from Ginnie Mae pools. During the years ended December 31, 2020, 2019, and 2018, we purchased $9.6 billion, $4.4 billion and $3.0 billion in UPB of EBO loans, respectively.The EBO program reduces the ongoing cost of servicing defaulted mortgage loans subject to Ginnie Mae MBS when we purchase and either sell the defaulted loans or finance them with debt at interest rates below the Ginnie Mae MBS pass-through rates. While the EBO program reduces the ultimate cost of servicing such mortgage loan pools, it accelerates loss recognition when the mortgage loans are purchased. We recognize expense because purchasing the mortgage loans from their Ginnie Mae pools causes us to write off accumulated non-reimbursable interest advances, net of interest receivable from the mortgage loans’ insurer or guarantor at the debenture rate of interest applicable to the respective mortgage loans to the extent the loan is immediately modified. The losses we recognize when we purchase EBO loans are anticipated and included in our valuation of the MSRs related to such loans before we repurchase the respective loans.its grant date.6468increased $44.6 million and $7.8decreased $1.5 million in the yearsyear ended December 31, 2020 and 20192022 compared to 2021 and increased $28.9 million in the yearsyear ended December 31, 20192021 compared to 2020. The increase between 2020 and 2018, respectively. The increases were2021 was primarily due to growth in our direct lending and loan servicing operations and continued investment in our loan production and servicing infrastructureinfrastructure. We recorded $728,000 and $13.1 million of impairment of capitalized software recorded during the year ended December 31, 2020.Occupancy and equipmentOccupancy and equipment expenses increased $4.4 million and $1.8 million during the years ended December 31, 2021 and 2020, and 2019, compared to the years ended December 31, 2019 and 2018, respectively. The increases are primarily attributable to expansion of our facilities to accommodate our growth.Income Taxesincome taxes2020, 20192022, 2021 and 2018,2020, our effective tax rates were 26.5%28.5%, 25.8%26.2%, and 8.7%26.5%, respectively. The difference in the effective income tax rate between the year ended December 31, 2020 and the year ended December 31, 2019 results from the lesser impact of favorable tax adjustments for total permanent differences in the year ended December 31, 2020. When compared to the same period in 2019, the tax adjustment for permanent differences was reduced by $3.7 million while pretax income increased by $1.7 billion, thereby diluting the impact of the tax adjustment on the effective income tax rate.The large difference between ourhigher effective tax rate and the statutory rate for the year ended December 31, 2018 was2022 is primarily due to the allocationeffect of earnings to the noncontrolling interest unitholders who were partners in PennyMac and therefore responsible forrepricing of the income taxes relatingnet deferred tax liability resulting from the income attributable to them. Pursuant tohigher booking tax rate partially offset by the Reorganization,effect of the noncontrolling interest unitholders converted their ownership units into our shares and as a result, we were allocated starting on that date and willreduction in the future be allocated 100%tax rate for some states. The higher effective tax rate additionally reflects the effect of PNMAC earnings that will be subject to corporate federal and state statutory tax rates, which hasan increase in turn increased our effective income tax rate.non-deductible compensation.CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable. In December 2020 the Taxpayer Certainty and Disaster Tax ReliefInflation Reduction Act was signed into law. No material changes in ourlaw on August 16, 2022 ("Act"), effective for tax years beginning after December 31, 2022. The Inflation Reduction Act imposes a 15% Alternative Minimum Tax ("AMT") on the adjusted financial statement income tax rates resulted from("AFSI") of applicable corporations. Applicable corporations generally include any corporation whose 3-year average AFSI exceeds $1 billion. Based on the either Act.current legislation and the definition of AFSI, we do not expect the Company will be subject to this corporate minimum tax.6569(1) Tangible stockholders’ equity represents total stockholder’s’ equity reduced by intangible assets, primarily capitalized software, for the dates presented. increased $21.4decreased $2.0 billion from $10.2$18.8 billion at December 31, 20192021 to $31.6$16.8 billion at December 31, 2020.2022. The increasedecrease was primarily due to an increase of $13.6a $6.2 billion in loans eligible for repurchase, $6.7 billiondecrease in loans held for sale at fair value, $551.6 million in derivative assets, $285.0 million in cash and short-term investments, $360.5 million in other assets and $248.4 million in servicing advances, partially offset by a decrease of $345.6 million$2.1 billion increase in MSRs. The increasesMSRs and a $1.7 billion increase in loans eligible for repurchase and servicing advances reflect an increase in delinquent loans as a result of the COVID-19 pandemic and the CARES Act forbearance requirements.repurchase. The decrease in MSRs reflects the $1.1 billion inloans held for sale at fair value losses discussed above, partially offset by additions resulting from ourwas primarily due to lower loan production activities. The increasevolume in derivative assets primarily reflects growth in the fair value of our IRLCs as the result of the growth in our commitments to fund and purchase loans as well as the increased margins inherent in such commitments at December 31, 2020 as compared to December 31, 2019. We increased our holding of cash and short-term investments during the year ended December 31, 2020 as a means of enhancing our liquidity during the COVID-19 pandemic.2022.increaseddecreased by $20.1$2.0 billion from $8.1$15.4 billion as of December 31, 20192021 to $28.2$13.4 billion as ofat December 31, 2020.2022. The increasedecrease was primarily attributabledue to ana $3.8 billion decrease in borrowings, partially offset by a $1.7 billion increase of $13.6 billion in liability for loans eligible for repurchase and $6.1 billion in borrowings required to finance a larger inventory of loans held for sale.repurchase.667020202022 are summarized below: provided by operating activities totaled $6.0 billion, $2.6 billion, and $(6.2) billion $(2.2) billion, and $572.4 million duringin the years ended December 31, 2020, 2019,2022, 2021, and 20182020, respectively. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of loans held for sale as shown below:The decreaseInvesting activitiescash flows from other operatinginvesting activities duringwas $721.6 million in the year ended December 31, 2020 compared2022, primarily comprised of $871.9 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and $71.9 million used in acquisition of capitalized software, partially offset by a $238.7 million decrease in margin deposits.yearsyear ended December 31, 2019 and 2018 was2021, primarily duecomprised of $434.4 million in net settlement of derivative financial instruments used to an increasehedge our investment in deposits securing certain of our borrowings and an increaseMSRs, partially offset by a $97.7 million decrease in servicing advances caused by pandemic-induced borrower delinquencies.Investing activitiesmargin deposits.duringin the year ended December 2020, primarily comprised of $913.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by $131.8 million increase in margin deposits.Net cash provided by investingFinancing activities was $148.8 million during the year ended December 2019, primarily comprised of $366.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by $227.4 million used in purchase of MSRs.investingfinancing activities was $322.6 million during$4.3 billion in the year ended December 31, 20182022, primarily compriseddue to a $4.5 billion decrease in short-term borrowings, which reflects decreased borrowing requirements relating to our reduced inventory of loans held for sale, and $406.1 million in repurchases of common stock, partially offset by issuance of a $650 million note payable secured by mortgage servicing rights.purchasefinancing activities was $2.5 billion in the year ended December 31, 2021, primarily due to a $2.4 billion decrease in short-term borrowings, which reflects decreased borrowing requirements relating to our inventory of MSRsloans held for sale, and net settlementsa $958.2 million repurchase of derivative financial instruments used to hedge our investment in MSRs.common stock, partially offset by issuance of $1.2 billion of unsecured senior notes.6771Financing activitiesduringin the year ended December 31, 2020, primarily due to an increase of $6.1 billion in borrowings to finance the growth in our inventory of loans held for sale, partially offset by a $337.5 million of repurchaserepurchases of common stock and $30.9 million of dividends paid to our common stock holders.Net cash provided by financing activities totaled $2.1 billion during the year ended December 31, 2019 which was primarily to finance the growth in our inventory of loans held for sale and our investments in MSRs.Net cash used in financing activities totaled $132.0 million during the year ended December 31, 2018 which was primarily due to net repurchases of assets sold under agreements to repurchase and mortgage loan participation purchase and sale agreements of $440.9 million, reflecting a reduction in our financing of loans held for sale, and repayments of excess servicing spread financing of $46.8 million, partially offset by net proceeds from issuance of notes payable secured by of $400 million.ESS and/or equity or debt offerings. In addition, we utilized existing borrowing facilities to increase our cash balances to $1.3 billion at December 31, 2022. We believe that our liquidity is sufficient to meet our current cash requirements.liquidity needs.The effect of the COVID-19 pandemic on our operations, liquidity and capital resources remains uncertain and difficult to predict. For further discussion of the potential impacts of the COVID-19 pandemic ic please also see “Risk Factors” in Part I, Item 1A.The CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the COVID-19 pandemic and may require us as the servicer to advance principal and interest, property taxes, insurance premiums and other expenses to the investors for up to four months on Fannie Mae and Freddie Mac loans and longer on Ginnie Mae and other government agency backed loans. In April 2020, the Company entered into a new Ginnie Mae servicing advance financing transaction allowing the Company to borrow $600 million against Ginnie Mae MSRs and servicing advances. The Ginnie Mae servicing advances eligible for financing include advances made to support regularly scheduled monthly principal and interest to mortgage-backed securities holders, taxes, homeowners insurance and escrowed items and other costs related to servicing delinquent loans. We are also in ongoing discussions with our lending partners to align our servicing advance assets and financing capacity, and to further diversify our financing alternatives.The COVID-19 pandemic has significantly increased the number of loans that are delinquent in our Ginnie Mae MSR portfolio. The Ginnie Mae guidelines provides us with the option to purchase loans that are at least three months delinquent out of the underlying Ginnie Mae securities as an alternative to continuing to advance principal and interest payments to the holders of the Ginnie Mae securities. We refer to such loans as “early buyout” or EBO loans.During the year ended December 31, 2020, we repurchased $9.6 billion in UPB of EBO loans from our Ginnie Mae MSR portfolio. Our objective is to work with the borrowers to cure the loan delinquency through either borrower reperformance or modification of the loans’ terms. When curing the delinquency is not feasible, we work to settle the loan and collect our claims from the applicable insurer or guarantor. When we are able to cure the delinquency, we are able to re-deliver the cured loan into another Ginnie Mae guaranteed security. Depending on the method used to cure a borrower delinquency, the Ginnie Mae program may require at least a six month period of timely borrower payments before we are able to re-deliver the loan into another Ginnie Mae guaranteed security. Therefore, regardless of whether we cure or settle the repurchased loan, our investment in the EBO loans may require a substantial holding period.68ESS financing, notes payable, a capital lease and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for advances with terms of approximately one year.ranging from 30 days to 270 days. Because a significant portion of our current debt facilities consistsconsist of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing. During SeptemberOctober 2020, wemature on May 25, 2027 unless extended to either May 25, 2028 or May 25, 2029.totalnote payable that is secured by Freddie Mac MSRs. Interest is charged at a rate based on SOFR plus a spread as defined in the agreement. The facility expires on November 13, 2024. The maximum amount that the Company may borrow under the note payable is $400 million, $350 million of $650 million long term unsecured senior notes that mature on October 15, 2025. We usedwhich is committed and which may be reduced by other debt outstanding with the proceeds from the unsecured senior notes to repay some of our existing short-term borrowings.counter party.balances for each of the three years ended December 31, 2020, 2019 and 2018:balances:monthyears of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations andsecuritizations.growthapplicable lender at its option, require us to transfer cash or, in our EBO inventory throughsome instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the year.market value (as determined by the applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we● positive net income during one of the two most recent calendar quarters;●a minimum in unrestricted cash and cash equivalents of $40$100 million;● a minimum tangible net worth of $1.25 billion; ● a maximum ratio of total liabilities to tangible net worth of 10:1; and ● at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements. In addition to the covenants noted above, the indenture governing ourOur unsecured senior notes containscontain covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ abilitytransactions, including, but not limited to, among other things:the following:● pay dividends or distributions, redeem or repurchase equity, prepay subordinated debt and make certain loans or investments; ● incur, assume or guarantee additional debt or issue preferred stock; ● incur liens on assets; ● merge or consolidate with another person or sell all or substantially all of our assets to another person; 69● transfer, sell or otherwise dispose of certain assets including capital stock of subsidiaries; ● enter into transactions with affiliates; and ● allow to exist certain restrictions on the ability of our non-guarantor restricted subsidiaries to pay dividends or make other payments to us. Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.● Effective June 30, 2020,The FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB (reduced by 70% of the UPB of nonperforming Agency loans that are in pandemic-related payment forbearance and were current when they entered such forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy the liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;● The FHFA net worth requirement is a minimum net worth of $2.5 million plus 0.25% (25 basis points) of UPB for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%; ● The Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or 0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and ● The Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s outstanding Ginnie Mae single-family obligations. On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced, and increase the liquidity requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 4% of total Agency servicing UPB. On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements.70have purchased portfoliosbelieve that we are also in compliance with Agencies’ revised requirements as currently interpreted as of MSRs and have financed them in part through the sale to PMT of the right to receive ESS. The recorded amount of the ESS is its current fair value.December 31, 2022.FebruaryAugust 4, 2021, our Board of Directors increased our common stock repurchase program from $500 million$1 billion to $1$2 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through December 31, 2020,2022, we have repurchased $352.4 millionapproximately $1.7 billion of common shares under our stock repurchase program.continued growth,business, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.Off-Balance Sheet ArrangementsAs of December 31, 2020, we have not entered into any off-balance sheet arrangements or guarantees.institution counterpartiesinstitutions in the form of sales of assets under agreements to repurchase and mortgage loan participation purchase and sale agreements,agreements. We access the capital market for long-term debt through the issuance of secured term notes payable, ESS and aunsecured senior notes and we have an outstanding long term capital lease. The borrowerissuer under each of theseour secured term note facilities is PLS or its subsidiary Issuer Trust with the exception of thea wholly-owned issuer trust guaranteed by PNMAC. In addition, we have issued unsecured senior notes and the capital lease, where the borrower is PFSI and PennyMac, respectively. All PLS obligations as previously noted are guaranteed by PennyMac.certain of our restricted wholly-owned subsidiaries.2020,2022, we believe we were in compliance in all material respects with these covenants.7175TheOur borrowings have maturities as follows:(3)(1) Outstanding indebtedness as of December 31, 2020.2022.(2) Total facility size, committed facility and maturity date include contractual changes through the date of this Report. (3) The $100 million is borrowed from CSFB and Citibank, N.A. under the sale of a VFN under an agreement to repurchase up to a maximum of $500 million secured by Ginnie Mae MSRs. No borrowing of $50 million with Credit Suisse First Boston Mortgage Capital LLC is in the form ofoutstanding from CSFB and Citibank, N.A. under a sale of a variable funding notethe GMSR Servicing Advance Notes under an agreement to repurchase up to a maximum of $600 million, less any amountmillion. Maximum amounts borrowed under both agreements to repurchase may be reduced by amounts utilized under other debt agreements with CSFB and Citibank N.A.(4) The maximum amount that the Credit Suisse AGCompany may borrow under this note payable an agreement to repurchase relating tois $400 million, $350 million of which is committed and may be reduced by other debt outstanding with the financing of Fannie Mae MSRs and an agreement to repurchase relating to the financing of GNMA servicing advances.counterparty.72762020:2022:(2)(1) The calculation of the amount at risk includes the VFNborrowing facility with Credit Suisse First Boston Mortgage Capital LLC and the 2018 Term Notes because beneficial interestsCitibank, N.A. is in the Ginnie Mae MSRsform of a sale of a variable funding note under an agreement to repurchase.(2) The borrowing facilities with Credit Suisse First Boston Mortgage Capital LLC and servicing advancesCitibank, N.A. are pledged toin the Issuer Trust and together serve as the collateral backing the VFN and 2018 Term Notes described in Notes payable secured by mortgage servicing assets below. The VFN financing is included in Assets soldform of asset sales under agreements to repurchase and the 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets.repurchase.20202022 and the date of this Annual Report have been renewed or extended and are described in Note 1312—Short-TermBorrowings to the accompanying consolidated financial statements.73 and ESS financing and positively affect the fair value of our MSRs. Changes in interest rates significantly influence the prepayment speeds of the loans underlying our investments in MSRs, and ESS, which can have a significant effect on their fair values. Changes in interest rate are most prominently reflected in the prepayment speeds of the loans underlying our investments in MSRs and ESS and the discount rate used in their valuation.MSLs and ESS.MSLs.and repurchase agreement derivatives (both of which arise from our operations) for purposes other than in support of our risk management activities.while definingand define target limits for market value and liquidity loss in those scenarios. With respect to our IRLCs and inventory of loans held for sale, we use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and further use MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. With respect to our MSRs, we seek to mitigate mortgage-based loss exposure utilizing MBS forward purchase and sale contracts, address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.2020,2022, given74Excess Servicing Spread FinancingThe following tables summarize the estimated change in fair value of our ESS accounted for using the fair valuemethod as of December 31, 2020, given several shifts in pricing spreads and prepayment speed (decrease in the liabilities’ fair values increases net income):2020.2022.7520202022 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.76802020,2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.2020,2022, of the Company and our report dated February 25, 2021,22, 2023, expressed an unqualified opinion on those financial statements. DELOITTEDeloitte & TOUCHETouche LLP25, 202122, 20237781Changes in Internal Control over Financial ReportingThere have been no changes in internal control over financial reporting during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.78Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspectionsby April 30, 2021, which is within 120 days after the end of fiscal year 2020.2022.by April 30, 2021, which is within 120 days after the end of fiscal year 2020.2022.We have adopted an equity incentive plan, the 2013Our 2022 Equity Incentive Plan which provides for the grant of incentive stock option and nonstatutory stock options, stock appreciation rights, restricted stock and stock unit awards, performance units, and stock grants and qualified performance-based awards, which we collectively refer to as “awards.” Directors, officers and other employees of our Company and our subsidiaries, as well as others performing consulting or advisory services for us, are eligible for grants under the 20132022 Equity Incentive Plan. The plan administrator of the equity incentive plan is the compensation committee of the board of directors. The board of directors itself may also exercise any of the powers and responsibilities under the 20132022 Equity Incentive Plan. Subject to the terms of the 20132022 Equity Incentive Plan, the plan administrator will select the recipients of awards and determine, among other things, the:the number of shares of common stock covered by the awards and the dates upon which such awards become exercisable or any restrictions lapse, as applicable; the type of award and the exercise or purchase price and method of payment for each such award; the performance measures, if applicable, required to be satisfied prior to vesting; the vesting period for awards, risks of forfeiture and any potential acceleration of vesting or lapses in risks of forfeiture; and the duration of awards.●number of shares of common stock covered by the awards and the dates upon which such awards become exercisable or any restrictions lapse, as applicable;●type of award and the exercise or purchase price and method of payment for each such award;●performance measures, if applicable, required to be satisfied prior to vesting;●vesting period for awards, risks of forfeiture and any potential acceleration of vesting or lapses in risks of forfeiture; and●duration of awards.79822020 concerning our shares2022, which consist of common stock authorized for issuance under our equity incentive plan.the 2013 Equity Incentive Plan and the 2022 Equity Incentive Plan (collectively the “Equity Incentive Plans”):(1) The weighted average exercise price set forth in this column relates only to 4,040,1204,316,846 shares of stock options outstanding under our 2013 Equity Incentive Plan.Plans. The remaining securities included in column (a) of this table are performance and time-based restricted stock units, for which no exercise price applies.(2) This number includes a general pool of 4,202,0054,600,000 shares of common stock authorized for future awards, (excluding securities reflected in column (a)). This general pool initially consisted of 3,906,433 shares of common stock authorized under the 20132022 Equity Incentive Plan, for future awards,plus, on or after January 1, 2023, and has been, and will continue to be, increased pursuant to the terms of the 2013 Equity Incentive Plan oneach January 1st of each calendar year1st thereafter through January 1, 2032, by an amount equal to the lesser of (i) 1.75% of our outstanding common stock on a fully diluted basis as of the end of our immediately preceding fiscal year, (ii) 1,322,024 shares, and (iii) any lower amount determined by our board of directors. The annual increase to this general pool on January 1, 2020 pursuant to the foregoing formula was 1,322,024.(3) Represents our 2013 Equity Incentive Plan.Plans.(4) We do not have any equity plans that have not been approved by our stockholders. by April 30, 2021, which is within 120 days after the end of fiscal year 2020.2022.by April 30, 2021, which is within 120 days after the end of fiscal year 2020.2022.AccountingAccountant Fees and ServicesApril 30, 2021, which is within 120 days after the end of fiscal year 2020.2022.8083
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)*10-KFebruary 25, 2021��
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)4.64.74.5)4.6).81Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)Exhibit No.Exhibit DescriptionFormFiling Date10.48-KFebruary 13, 202010.510.410.6†10.5†8-KDecember 31, 201810.7†31, 201816, 202210.8†10.6†31, 201816, 2022
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)10.9†10.7†AgreementAgreement.*10-KPennyMac Financial Services, Inc. Change of Control Severance Plan.8-K10.10†10.9†10.11†10.10†10.12†10.11†10.13†10.12†Plan.Plan.*10-KFebruary 25, 202182Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)Exhibit No.Exhibit DescriptionFormFiling Date10.14†10.13†10.15†10-QAugust 2, 201810.16†10-QAugust 2, 201810.17†10.14†10.18†10-KMarch 5, 201910.19†10.15†10.20†10-QMay 6, 201910.21†10.16†10.22†10.17†10.23†10.18†10.24†10.19†10.25†10-QNovember 4, 201910.26†10-QNovember 4, 20198386
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)10.27†10.20†10.28†10.21†10.29†10.22†10.30†10.23†10.31†10.24†10.32†10.25†10.33†10.26†10.34†*
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)10.3510.3210.3610.3310.3810.398488
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)10.3910.4210.4010.43*10.41March 5, 2019February 25, 202110.4210.4410.4310.4510.4410.4610.4510.4710-Q10.4610.50
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)10.4710.5110.4810.52˄85Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)Exhibit No.Exhibit DescriptionFormFiling Date10.4910.53˄
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)10.5010.5810.5110.5910.5210.6010.5310.6210.5410.6310.558-KDecember 21, 201610.568-KDecember 21, 201610.578-KDecember 21, 201610.588-KDecember 21, 20168691��
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)10.5910.66 ˄March 6, 2018August 5, 202110.6010.67May 7, 2020August 5, 202210.61 ˄10.6810-QMay 7, 202010.62 ˄10-QNovember 6, 202010.63April 7, 2020August 5, 202110.6410.69˄April 7, 2020August 5, 202110.65 ˄10.70May 7, 2020August 5, 202210.66 ˄10-QNovember 6, 202010.6710.7187Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)Exhibit No.Exhibit DescriptionFormFiling Date10.6810.72
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)10.6910.73
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)20202022 and December 31, 20192021 (ii) the Consolidated Statements of Income for the years ended December 31, 20202022 and December 31, 2019,2021, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 20202022 and December 31, 2019,2021, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 20202022 and December 31, 20192021 and (v) the Notes to the Consolidated Financial Statements.88Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)Exhibit No.Exhibit DescriptionFormFiling Date899520202022REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM20202022 and 2019,2021, the related consolidated statements of income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2020,2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20202022 in conformity with accounting principles generally accepted in the United States of America.2020,2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2021,22, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.-– Refer to Notes 3, 6 and 9 to the Financial StatementsF-2● We tested the design and operating effectiveness of internal controls over determining the fair value of MSRs, including those over the determination of the pricing spread and prepayment speed assumptions ● With the assistance of our fair value specialists, we evaluated the reasonableness of management’s prepayment speed assumptions by comparing thempreparing a value for comparison to independent market informationthe Company’s valuation● We evaluated the reasonableness of management’s prepayment speed assumptions of the underlying mortgage loans, by comparing historical prepayment speed assumptions to actual results ● We tested management’s process for determining the pricing spread assumptions by comparing them to the implied spreads within market transactions and other third-party information used by management /s/ DELOITTE & TOUCHE LLP25, 202122, 2023
to PennyMac Mortgage Investment Trust
PennyMac Mortgage Investment TrustF-7
Trust pursuant to a recapture agreement(formerly known as New PennyMac Financial Services, Inc.) (“PFSI”(together, with its consolidated subsidiaries, unless the context indicated otherwise, “PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”PNMAC”). The Company is the managing member of PennyMac,PNMAC, and it operates and controls all of the businesses and consolidates the financial results of PennyMacPNMAC and its subsidiaries.PennyMacPNMAC is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’sPNMAC’s mortgage banking activities consist of residential mortgage loan production and loan servicing. PennyMac’sPNMAC’s investment management activities and a portion of its loan production and loan servicingmortgage banking activities are conducted on behalf of entitiesPennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust that investinvests in residential mortgage loans and relatedmortgage-related assets. PennyMac’sPNMAC’s primary wholly owned subsidiaries are:● PennyMac Loan Services, LLC (“PLS”)—a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust,PMT, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT.U.S.United States Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S.United States Department of Agriculture (“USDA”) (each of the above an “Agency” and collectively the “Agencies”).● PNMAC Capital Management, LLC (“PCM”)—a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM enters intohas an investment management agreements with entities that invest in residential mortgage loans and related assets.Presently, PCM has a management agreement with PMT. Previously, PCM had management agreements with PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P., an affiliate of these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”). Together, PMT and the Investment Funds are referred to as the “Advised Entities”. The Investment Funds were dissolved during 2018.On November 1, 2018, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings” or “Old PFSI”) completed a corporate reorganization (the “Reorganization”) by which it changed its equity structure to create a single class of common stock held by all stockholders at a new top-level publicly traded parent holding corporation, as opposed to the 2 classes of common stock, Class A and Class B, that were in place at Old PFSI before the Reorganization. As part of the Reorganization, the Company replaced Old PFSI as the top-level parent holding corporation of the consolidated PennyMac business and changed its name from New PennyMac Financial Services, Inc. (“New PFSI”).As the result of the reorganization:●Each outstanding share of Class A common stock of Old PFSI was converted on a one-for-one basis into shares of New PFSI common stock.F-9●Each outstanding share of Class B common stock of Old PFSI was cancelled for 0 consideration.●Each Class A unit of PennyMac not held by Old PFSI was contributed to New PFSI and exchanged on a one-for-one basis for shares of New PFSI common stock.●New PFSI replaced Old PFSI as the publicly-held entity and, through its subsidiaries, conducts all of the operations previously conducted by Old PFSI.●Old PFSI changed its name to PNMAC Holdings, Inc. and New PFSI changed its name to PennyMac Financial Services, Inc.●New PFSI assumed Old PFSI’s existing equity incentive plan—including all performance share awards, restricted share awards, common stock options and other incentive awards covering shares of Old PFSI’s Class A common stock, whether vested or not vested, that were outstanding at the effective time of the Reorganization.New PFSI reserved the same number of shares of its common stock as was reserved by Old PFSI before the effective time of the Reorganization, and the terms and conditions that were in effect immediately before the Reorganization under each outstanding incentive award assumed by New PFSI continued in full force and effect after the Reorganization, except that the shares of Class A common stock reserved under Old PFSI’s plans and issuable under each such award will be replaced by shares of common stock of New PFSI.●The Reorganization was treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of the Internal Revenue Code.●After the completion of the Reorganization, PNMAC Holdings became a consolidated subsidiary of the Company and is considered the predecessor of the Company for accounting purposes. Accordingly, PNMAC Holdings’ historical consolidated financial statements are the Company’s historical financial statements.substantial portion of the Company’s activities relate to the Advised Entities.PMT. Revenues generated from these entitiesPMT and its subsidiaries (generally comprised of gains on mortgage loans held for sale, loan origination fees, fulfillment fees, loan servicing fees, management fees carried interest, lessand net interest paid to these entities)PMT) totaled 11%9%, 31%9%, and 21%11% of total net revenues for the years ended December 31, 2022, 2021 and 2020, 2019respectively. The Company also purchased 70%, 53% and 2018,64% of its newly originated loan production from PMT during the years ended December 31, 2022, 2021 and 2020, respectively. and Recently Issued Accounting Pronouncement (the “ASC” or the “Codification”).Certain asset amounts separately presented at December 31, 2019 have been reclassified to Other assets to conform to the current year presentation. Such amounts are detailed in Note 11—Other Assets.F-10F-9subsidiaries, including PennyMac.subsidiaries. Intercompany accounts and transactions have been eliminated.● Level 1—Quoted prices in active markets for identical assets or liabilities. ● Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. ● Level 3— Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances. InvestmentsInvestmentinvestments,investment, which represent investmentsrepresents an investment in accountsan account with a depository institutions, areinstitution, is carried at fair value. Changes in fair value are recognized in current period income. The Company classifies its short-term investmentsinvestment as a “Level 1” fair value assets.asset.F-11F-10● Interest rate lock commitments (“IRLCs”) that are created when the Company commits to purchase or originate a loan acquired for sale at specified interest rates.● Derivatives that were embedded in a master repurchase agreement with a non-affiliate that provided for the Company to receive incentives for financing loans that satisfied certain consumer relief characteristics as provided in the master repurchase agreement. The CompanyPFSI engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of the Company’s assets. The Company is exposed to price risk relative to:● Its loansLoans held for sale and IRLCs. The Company bears price risk from the time a commitment to fund a loan is made to a borrower or to purchase a loan from PMT or a non-affiliated entity, to the time either the prospective transaction is cancelled or the loan is sold. During this period, the Company is exposed to losses if market interest rates increase, because the fair value of the purchase commitment or prospective loan decreases.● The fair value of its mortgageMortgage servicing rights (“MSRs”) when interest rates decrease.. MSRs 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, thereby reducing their fair value. Reductions in the fair value of MSRs affect earnings primarily through recognition of the changes in fair value.F-12F-11relating to mortgage loans held for sale by entering into forward sale agreements to sell the expected mortgage loans or mortgage-backed securities (“MBS”) and by the purchase and sale of options on MBS. Such agreements are also accounted for as derivative financial instruments. These and other interest-rate derivatives are also used to manage the fair value risk created by changes in prepayment speeds on certain of the MSRs the Company holds. exchange-traded hedging derivative financial instruments that are actively traded on an exchange 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.Change in fair value of mortgageMortgage servicing rights and mortgage servicing liabilities,hedging results, as applicable, in the Company’s consolidated statements of income. Changes in fair value of derivative assets relating to athe master repurchase agreement that provided for the Company to receive incentives for loans that satisfied certain consumer relief characteristics are included in Interest expense.agreements and, when made, are deemed recoverable.agreements. A valuation allowance is provided for amounts expected to become uncollectable. Servicing advances are written off when they are deemed uncollectable.the acquisitionforeclosures and disposition of REO.property dispositions.F-13F-12net of related guarantee fees, based 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.Through December 31, 2017, the Company’s subsequent accounting for MSRs and MSLs was based on the class of MSR or MSL. Effective January 1, 2018, the Company elected to change the accounting for MSRs it had accounted for using the amortization method through December 31, 2017, to the fair value method as allowed in the Transfers and Servicing topic of the FASB’s ASC. The Company determined that a single accounting treatment across all currently existing classes of MSRs is consistent with lender valuation under its financing arrangements and simplifies that Company’s hedging activities. As a result of this change, the Company recorded an adjustment to increase its investment in MSRs by $848,000, increase its liability for income taxes payable by $72,000 and increase its stockholders’ equity by $776,000.F-14ESSexcess servicing spread (“ESS”) are based on the accrued cost of the agreements. The costs of creating the facilities underlying the agreements (debt issuance costs) are included in the carrying value of the agreements and are amortizedcharged 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; and ● Debt issuance cost relating to non-revolving debts, such as the Company’s Notes payable secured by mortgage servicing assets and Unsecured senior notes are amortized over the contractual term of the non-revolving debt using the interest method;●Debt issuance 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.method. the ESS. ESS is carried at its fair value. Changes in fair value of ESS are recognized in current period income in Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust.F-15committee comprisedcommittee. Both the initial recognition of, senior management.and adjustments to the level of, the liability for representations and warranties are recorded in Net gains on loans held for sale at fair value.origination feesOrigination Feesor originationat funding when paid by the borrower or upon sale of the loan when the origination fees are financed by the borrower.include loan administration, collection,are described in Mortgage Servicing Rights 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.schedulesrates established byat the applicable investor and depend on whether the Companytime a loan sale or securitization agreement is directly servicing loans, where it holds the MSRs, is subservicing loans or MSRs held by a non-affiliate or the Advised Entities.entered into.from the Advised Entities.for subserviced loans.F-16Owned loanLoan servicing fees are recorded net of Agency guarantee fees paid by the Company andrelating to owned MSRs are recognized when the loan payments are received from the borrowers.earned. Loan servicing fees relating to loans servicedsubserviced for the Advised EntitiesPMT are recognized in the month in which the loans are serviced.orand when it completes the sale or securitization of a loan it purchases.purchases to investors other than Fannie Mae or Freddie Mac. Fulfillment fee revenue is recognized in the month an interest rate lock commitment is issued, or the loan is purchased or sold by PMT. Fulfillment fees are not collected for any loans sold from PMT to the Company. Fulfillment fees are generally collected within 30 days of the applicable activity by PMT.activity.feesFeesthe Advised Entities.PMT. Management fees are based on PMT’s shareholders’ equity amounts and profitability in excess of specified thresholds. Management fees 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.compensationCompensation 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.is recognized in income in the period in which the change occurs. AThe Company establishes 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.F-17the PennyMaca recapitalization and reorganization of PNMAC in 2013, the Company expects to benefit from amortization and other tax deductions resulting from increases in the tax basis of PennyMac’sPNMAC’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.PennyMacPNMAC that provides for the additional payment by the Company to exchanging unitholders of PennyMacPNMAC 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. Although a reorganization of the Company’s ReorganizationCompany in 2018 eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement, the Company continues to be subject to the agreement and provide payment when applicable for units exchanged before the Reorganization.reorganization.Recently Issued Accounting PronouncementsEffective January 1, 2020, the Company adopted FASB Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): MeasurementF-16AffiliatesRelated Parties and MSR Recapture● 40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”; ● 35% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 15% and up to 30%; and ● 30% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 30%. unpaid principal balanceUPB of all recaptured loans, to (ii) the aggregate unpaid principal balanceUPB of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. The Company has further agreed to allocate sufficient resources to target a recapture rate of 15%.F-18Fulfillment Servicesa)●no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balanceUPB (the “Initial UPB”) of all mortgage loans purchased in such month, plusb)●in the case of all mortgage loans other than mortgage loansthose 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 was due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae MBS Guide.PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and, through June 30, 2020, a sourcing fee ranging from 2 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. While the Company purchases these mortgage loans “as is” and without recourse of any kind from PMT, where the Company has a claim for repurchase, indemnity or otherwise against a correspondent seller, it is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.and sourcing fees were revised as follows:● Fulfillment fees shall not exceed the following:(i)the number of loan commitments multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus (ii)●$315 multiplied by the number of purchased loans up to the and including 16,500 per quarter and $195 multiplied by the number of purchased loans in excess of 16,500 per quarter, plus(iii)●$750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided however, that 0no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans.loans, and as of October 1, 2022, certain Fannie Mae or Freddie Mac loans acquired by PLS.●Sourcing fees charged to PLS range from 1 to 2 basis points, generally based on the average number of calendar days the loans are held by PMT before purchase by PLS.F-19F-18Following is a summary of loan production activities, including MSR recapture, between the Company and PMT:(distressed loans)(special servicing). The Servicing Agreement provides for servicing fees of per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the REO. The Company is also remains entitled to customary ancillary income and market-based fees and charges relating to 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 fees for non-distressedprime servicing loans are calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.● To the extent that non-distressedprime servicing loans become delinquent, the Company receives an additional servicing fee per loan ranging from $10 to $55 per month based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO.● The Company is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification, origination fees and origination fees.a percentage of late charges.● Effective July 1, 2020, the Company receives certain fees for COVID-19 pandemic-related forbearance and modification activities provided for under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). (Distressed loans)● The base servicing fee rates for distressed loans range from $30 per month for current loans up to $85$95 per month for loans where the borrower has declared bankruptcy.in foreclosure proceedings. The base servicing fee rate for REO is $75 per month.F-20●Because PMT has a small number of employees and limited infrastructure, the 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 Companyalso receives a supplemental servicing fee of $25 per month for each distressed loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses it incurs in the performance of its servicing obligations.● The Company receives certain activity-based fees for distressedmodifications, foreclosures and liquidations that it facilitates with respect to special servicing loans, that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a full modification or liquidationas well as other market-based refinancing and $500 for a deed-in-lieu of foreclosure.loan disposition fees. The Company is not entitled tomay also receive more than 1 liquidation fee, reperformance fee or modification fee per loan in any 18-month period.●To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company receives an REO rental fee of $30 per month per REO, an REOfees, property lease renewal fee of $100 per lease renewal, and afees, 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 anyfees, 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 refinancingfees associated with its management of a loan on behalf of PMT and not through a third-party lender and the resulting loan is readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company receives from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis.REO.●The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan; provided, however, that with respect to any such incentive payments paid to the Company in connection with a 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.and property management fees earned from PMT:F-21F-19On June 30, 2020, the Servicing Agreement was amended and restated for a term of five years (the “2020 Servicing Agreement”). The terms of the 2020 Servicing Agreement are substantially similar to those in the prior servicing agreement except that they now include the fees described above relating to COVID-19 pandemic-related forbearance and modification activities provided for under the CARES Act.● 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.” equity“equity” plus the “high watermark,” up to (ii) a 12% return on PMT’s equity;“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“equity” plus the “high watermark,” up to (ii) a 16% return on PMT’s equity;“equity”; plus (c) 20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on equity“equity” plus the “high watermark.”lowerless than the Target Yield, the high watermark is increased by the difference. If the “net income” is highermore 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 0.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.F-22PMT 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 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.(1) Payments and settlements include payments for the operating, investing and financing activities summarized in this note and netting settlements made pursuant to master netting agreements between the Company and PMT. Conditional Reimbursement of Underwriting FeesIn connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the Management Agreement, and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursementF-23F-21agreement was extended to February 1, 2023. The Company received $211,000, $580,000 and $69,000 in reimbursement from PMT during the years ended December 31, 2020, 2019, and 2018, respectively.On December 19, 2016, theThe Company, through PLS, entered intohas a master repurchase agreement with 1one 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 under the Spread Acquisition Agreement. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac,PNMAC, 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”).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.Facility.F-24On December 19, 2016, theThe Company has an amended and restated a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”), pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.unpaid principal balanceUPB of the newly originated mortgage loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balanceUPB 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 balanceUPB of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, pay cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.F-25duereceivable from and payable to PMT are summarized below:TheOn May 8, 2013, as part of a reorganization of PNMAC, the Company hasentered into a tax receivable agreement with certain former owners of PennyMacPNMAC that provides for the payment from time to time by the Company to PennyMac’sPNMAC’s exchanged unitholders of 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’sPNMAC’s assets resulting from exchanges of ownership interests in PennyMacPNMAC 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 ReorganizationAlthough a reorganization in November 2018 eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement. However,agreement, the Company continues to be subject to the agreement and will be required to make payments, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable agreement to those certain prior owners of PennyMacPNMAC who effected exchanges of ownership interests in PennyMacPNMAC for the Company’s common stock before the closing of the Reorganization in November 2018.reorganization.yearyears ended December 31, 2021 and 2020, the Company contributed $5.8 million and $2.3 million, respectively, to a donor advised fund for the purpose of making charitable contributions. No such contributions were made during the year ended December 31, 2022.F-26F-24underfor representations and warranties it makes to purchasers and insurers of the loans.(1)Net of guarantee fees paid to the Agenciesunpaid principal balance (the “UPB”)the UPB of the loans sold by the Company in which it maintains continuing involvement:(1) At December 31, 2020, includesIncludes delinquent loans subject toin COVID-19 pandemic-related forbearance agreements underplans that were requested by borrowers seeking payment relief in accordance with the CARES Act with UPB totaling $2.6 billion in the 30-89 days delinquent category and $12.2 billion in the 90 or more days delinquent not in foreclosure category.Act.F-27F-25(1) Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. (2) Custodial funds are cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors. Placement fees are included in Interest income in the Company’s consolidated statements of income. F-28F-26(1) Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. (2) Custodial funds are cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors. Placement fees are included in Interest income in the Company’s consolidated statements of income. F-29F-28Fair Value Accounting ElectionsThe Company identified all of its MSRs, MSLs and all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trustunder agreements to resell pledged to creditors, 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. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.Assets and Liabilities Measured at Fair Value on a Recurring BasisFollowing is a summary of assets and liabilities that are measured at fair value on a recurring basis:F-30F-29F-312020:2022:(1) For the purpose of this table, the IRLC asset and liability positions are shown net. F-32F-30(1)For the purpose of this table, the IRLC asset and liability positions are shown net.F-33F-31(1) For the purpose of this table, the IRLC asset and liability positions are shown net. funding of the respective loans and from the return to salability in the active secondary market of certain loans held for sale.funding.F-34F-32arewere measured atbased on fair value on a nonrecurring basis:basis during the year:F-35F-33atbased on fair values on a nonrecurring basis:basis during the year:purchased from PennyMac Mortgage Investment Trust under agreements to resell, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements,, Obligations under capital lease, Notes payable secured by mortgage servicing assets, andUnsecured senior notes and Obligations under capital lease are carried at amortized cost.assets and liabilities other than the Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.the Term Notes payable secured by mortgage servicing assets and the Unsecured senior notes based on non-affiliate broker indications of fair value. The fair value and carrying value of these notes are summarized below: derivative liabilities and MSLs, are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets derivative liabilitiesand derivatives and all of its MSRs, ESS, and MSLs are “Level 3” fair value assets and liabilities which require 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.the responsibility for estimating the fair value of these itemsassets and liabilities 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.oversight:● The Company’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures. ● The Company’s Capital Markets Risk Management staff develops the fair value of the Company’s IRLCs which is reviewed by its Capital Markets Operations group. F-36F-34to the Company’s valuation committee. The Company’s valuation committee includes the Company’s chief financial, investment and risk officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.The FAV group is responsible for reporting to the Company’s valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs.inputs, to the Company’s senior management valuation committee. 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.models and for MSRs, comparisons of its estimates of fair value to those procured from non-affiliate brokers and comparisons of the key inputs used in the Company’s valuation model to published surveys.Company has assigned responsibility for developing the fair values of IRLCs to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed byCompany’s senior management valuation committee includes the Company’s Capital Markets Operations group.chief financial, risk, credit and deputy chief investment officers as well as other senior members of the Company’s finance, capital markets and risk management staff.● Government guaranteed or insured loans purchased by the Company from Ginnie Mae guaranteed pools in its loan servicing portfolio. The Company’s right to purchase government guaranteed or insured loans arises as the result of the loan being at least three months delinquent on the date of repurchasepurchase 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 loans may be resold to investors and thereafter may be repurchased to the extent they become eligible for resale into a new Ginnie Mae guaranteed security. Such eligibility occurs when the repurchased loans become current either through the borrower’s reperformance or through completion of a modification of the loan’s terms or after six months of timely payments following the completion of certain types of payment deferral programs.● Loans that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect. ● Home equity lines of credit held for sale to PMT.loans. At present, anthere is no active market with observable inputs that are significant to the estimation of fair value of the home equity lines of credit does not exist.loans the Company produces.prepayment/resale and total prepaymentprepayment/resale speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.F-37F-35(1) Weighted average inputs are based on fair value of the “Level 3” loans. (2) Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”). (3) Total prepayment speed is measured using Life Total CPR.CPR, which includes both voluntary and involuntary prepayment/resale rates.areas the result of changes in the loan’s instrument specific credit risk asare indicated by successful modifications of the loan’s terms or changes in the respective 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 loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.are categorized as a “Level 3” fair value assetassets or liability.liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loans will fund or be purchased (the “pull-through rate”).ChangesInitial recognition and changes in fair value of IRLCs are included in Net gains on loans acquired for sale at fair value in the consolidated statements of income.F-38F-36(1) For purposes of this table, the IRLC assets and liability positions are shown net. (2) Weighted average inputs are based on the committed amounts. Fair value of hedging derivative financial instrumentsHedging derivatives that are actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities. Fair value of hedging derivative financial instrumentsHedging derivatives whose fair values are based on observable MBS prices or interest rate volatilities in the MBS market are categorized as “Level 2” fair value assets and liabilities.HedgingMortgage servicing rights hedging results, as applicable, in the consolidated statements of income.Repurchase Agreement DerivativesThrough August 21, 2019, the Company had a master repurchase agreement that included incentives for financing loans approved for satisfying certain consumer relief characteristics. These incentives are classified for financial reporting purposes as embedded derivatives and are separated for reporting purposes from the master repurchase agreement. The Company classifies repurchase agreement derivatives as “Level 3” fair value assets. The significant unobservable inputs into the valuation of repurchase agreement derivative assets are the discount rate and the Company’s expected approval rate of the loans financed under the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate was 99.0% at December 31, 2019. prepayment speed of the underlying mortgage loans, and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly related. Recognized changesChanges in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.F-39F-37atreceived by the time of initial recognition, excluding MSR purchases:Company when it retains the obligation to service the mortgage loans it sells:
underlying mortgage loans amounts in thousands)
underlying mortgage loans amounts in thousands)(1) Weighted average inputs are based on UPB of the underlying mortgage loans.(2) Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information. (3) Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. TheEffective January 1, 2022, the Company applies a pricing spread to the United States Treasury (“Treasury”) Securities yield curve for purposes of discounting cash flows relating to MSRs. Through December 31, 2021, the Company applied its pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”)/swap curve. The change in reference interest rate from the LIBOR/swap curve for purposesto the Treasury yield curve did not have a significant effect on the Company’s fair value measurement of discounting cash flows relating to MSRs.(3)Annual total prepayment speed is measured using Life Total CPR. Equivalent average life is provided for informational purposes.F-40F-38(1) Weighted average inputs are based on UPB of the underlying mortgage loans.(2) The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs.(3)Annual total prepayment speed is measured using Life Total CPR.CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes.as supplementary information.(3) These sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made to account for changing circumstances. For these reasons, these estimates should not be viewed as earnings forecasts. (4) Effective January 1, 2022, the Company applies a pricing spread to the Treasury yield curve for purposes of discounting cash flows relating to MSRs. Through December 31, 2021, the Company applied its pricing spread to the United States Dollar LIBOR/swap curve. The change in reference interest rate from the LIBOR/swap curve to the Treasury yield curve did not have a significant effect on the Company’s fair value measurement of MSRs. F-41F-39The preceding sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding analysis should not be viewed as earnings forecasts.the ESS is a claim to a portion of the cash flows from MSRs, the Company’s approach to fair value measurement of the ESS is similar to that of MSRs. The Company uses the same discounted cash flow approach to measuring the ESS as it uses to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS.Following areDuring the key inputs used in determiningquarter ended March 31, 2021, the fair value ofCompany repaid its outstanding ESS financing:financing payable to PMT.(1)Weighted average inputs are based on UPB of the loans.(2)The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS.(3)Annual total prepayment speed is measured using Life Total CPR. Equivalent average life is provided for informational purposes.F-42This approach consists of projecting net servicing cash flows discounted at a rate that the Company believes market participants would use in their determinations of fair value. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread, (discount rate), theannual total prepayment rates of the underlying mortgage loans,speed, and the per-loan annual cost to serviceof servicing the respective mortgageunderlying loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.(1) The Company applies a pricing spread toWeighted average inputs are based on UPB of the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSLs.underlying mortgage loans.(2) Annual total prepayment speed is measured using Life Total CPR.CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes.as supplementary information.(3) Effective January 1, 2022, the Company applies a pricing spread to the Treasury yield curve for purposes of discounting cash flows relating to MSLs. Through December 31, 2021, the Company applied its pricing spread to the United States Dollar London LIBOR/swap curve. The change in reference interest rate from the LIBOR/swap curve to the Treasury yield curve did not have a significant effect on the Company’s fair value measurement of MSLs. include the following:are summarized below:F-43(1) Notional amounts provide an indication of the volume of the Company’s derivative activity. (2) All of the derivatives used for hedging purposes are interest rate derivatives and are used as economic hedges. F-44Derivative Balances and Netting of Financial InstrumentsThe 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 AssetsFollowing are summaries of derivative assets and related netting amounts.F-45F-41Offsetting of Derivative Liabilities and Financial LiabilitiesFollowing 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.F-46F-42(1) Amounts represent the UPB of Assets sold under agreements to repurchase. (1) Represents net increasechange in fair value of IRLCs from the beginning to the end of the reporting period.year. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loans are shown in the rollforward of IRLCs for the periodyear in Note 6 – Fair Value – Assets and Liabilities Measured at Fair Value on a Recurring Basis.F-47F-43LiabiltiesLiabilities(1) Principally reflects changes in discount rate andpricing spread, annual total prepayment speed, per loan annual cost of servicing and servicing costUPB of underlying loan inputs.(2) Represents changes due to realization of cash flows. (1) Principally reflectsDuring the year ended December 31, 2021, significant changes were made to valuation inputs used to estimate the fair value of MSLs in recognition of the observed increase in the proportion of performing government insured or guaranteed loans and reduced expected borrower performancecosts and servicer losses given default.from defaulted government insured or guaranteed loans underlying the Company’s MSLs.(2) Represents changes due to realization of cash flows. F-48ServicingContractual servicing fees relating to MSRs and MSLs are recorded in Net 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 loan servicing fees—Loan servicing fees—Other on the Company’s consolidated statements of income. Such amounts are summarized below:the termtheir terms for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.Lease expense during the year ended December 31, 2018 was $12.3 million.The Company’s leases are summarized below:F-49Note 11—Other AssetsOther assets are summarized below:Capitalized software is summarized below:Software amortization expense totaled $16.6 million, $6.0 million and $3.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company recorded $13.1 million of impairment of capitalized software during the year ended December 31, 2020, which is included in Technology expense. NaN such impairment was recorded during the years ended December 31, 2019 and 2018.F-50Furniture, fixtures, equipment and building improvements is summarized below:Depreciation and amortization expenses are summarized below:Note 12—BorrowingsThe borrowing facilities described throughout this Note 12 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, 2020.Assets Sold Under Agreements to RepurchaseThe Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by MSRs. Eligible loans and participation certificates backed by MSRs are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the lender’s overnight cost of funds rate or on LIBOR depending on the terms of the respective agreements. Loans and MSRs financed under these agreements may be re-pledged by the lenders.On April 1, 2020, the Company issued a series of variable funding notes, the Series 2020-SPIADVF1 Notes (“GMSR Servicing Advance Notes”), to be sold under agreement to repurchase pursuant to a Master Repurchase Agreement, dated as of April 1, 2020, with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”), acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as buyer (the “GMSR Servicing Advances Repurchase Agreement”).The GMSR Servicing Advance Notes leverage the Company’s GNMA MSR Facility to support a separately defined servicing advance facility within the existing structure and provide the Company enhanced ability to finance its servicing advance obligations to Ginnie Mae and its security holders as necessary. Specifically, the GMSR Servicing Advances Repurchase Agreement provides the Company with financing secured by its servicing advances to pay, in accordance with the Ginnie Mae requirements, in the event borrowers are delinquent: (i) regularly scheduled monthly principal and interest to mortgage-backed securities holders; (ii) taxes, homeowner’s insurance, and other escrowed items; and (iii) other expenses related to servicing delinquent loans as specified by (A) state and federal laws and (B) government agencies, including the FHA, the VA, and the USDA.The borrowing capacity under the GMSR Servicing Advances Repurchase Agreement, shared with VFN financing capacity, is $600 million, all of which is committed and may be used to finance the servicing advances related to delinquent FHA, VA, and USDA loans, including delinquencies caused by forbearance in accordance with the CARES Act.F-51F-46
Notes payable secured by mortgage servicing assets
Notes payable secured by mortgage servicing assets(2)(1) Excludes the effect of amortization of netdebt issuance costs totaling $15.3$12.9 million, for the year ended December 31, 2020 and the effect of amortization of net debt issuance premiums of $7.5$19.4 million and $40.5$15.3 million for the years ended December 31, 20192022, 2021 and 2018,2020, respectively.(2) In 2017, PFSI entered into a master repurchase agreement that provided the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $14.7 million and $48.1 million of such incentives as a reduction in Interest expense during the years ended December 31, 2019 and 2018, respectively. The master repurchase agreement expired on August 21, 2019.(3)The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed. Certain of the debt financing agreements contain a condition precedent to obtaining additional funding that requires PLS to maintain positive net income for at least one of the previous two consecutive quarters. (4)(3)Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes, and the 2018 Term Notes described in Note 13 – Long-Term Debt– Notes payable secured by mortgage servicing assets. The VFN financing and the GMSR Servicing Advance Notes financing are included in Assets sold under agreements to repurchase and the 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets.(5)(1)Margin depositsThe Company is subject to margin calls during the period the agreements are included in Other outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the assets on the Company’s consolidated balance sheets.securing those agreements decreases.F-52F-50Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:amountamounts at risk (the fair value of the assets pledged plus the related margin deposit,deposits, less the amountamounts advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase isare summarized by counterparty below as of December 31, 2020:2022:(1) The calculation of the amount at risk includes the VFN and the 2018 Term Notes because beneficial interests in the Ginnie Mae MSRs, Fannie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN and 2018the Term Notes described in Notes payable secured by mortgage servicing assets below. The VFN financing is included in Assets sold under agreements to repurchase and the 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets.The Company is subject to margin calls during the period the agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the assets securing those agreements decreases.withinto Fannie Mae, Freddie Mac or Ginnie Mae securities, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities which generally occurs within 30 days. 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.(1) Excludes the effect of amortization of debt issuance costs totaling $651,000, $688,000 and $662,000 for the years ended December 31, 2022, 2021 and 2020, respectively. (1) The Term Notes’ indentures provide the Company with the option to extend the maturity of the Term Notes by two years after the stated maturity. (2) In January 2023, the Company exercised its option to extend the maturity for two years. (1) Excludes the effect of amortization of debt issuance costs totaling $2.5 million, $2.2 million and $1.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. (1) Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral for the VFN, the GMSR Servicing Advance Notes and any outstanding Term Notes. The VFN financing and the GMSR Servicing Advance Notes financing are included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets. The mortgage loan participationFollowing is a summary of the Company’s issued and sale agreements are summarized below:outstanding Unsecured Notes:(1) Before the optional redemption date, the Company may redeem some or all of the Unsecured Notes for that issuance at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a make-whole premium or the Company may redeem up to 40% of the Unsecured Notes for that issuance with an amount equal to or less than the net proceeds from certain equity offerings at the redemption price set forth in the indenture, plus accrued and unpaid interest. On or after the optional redemption date, the Company may redeem some or all of the Unsecured Notes for that issuance at the redemption prices set forth in the indenture, plus accrued and unpaid interest. (1) Excludes the effect of amortization of debt issuance costs totaling $662,000, $514,000of $3.7 million, $2.3 million and $588,000$225,000 for the years ended December 31, 2020, 20192022, 2021 and 2018,2020, respectively.hashad a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease maturesmatured on June 13, 2022, and bearsbore interest at a spread over one-month LIBOR.Notes Payable Secured by Mortgage Servicing Assets2018 Term NotesMaturities of long-term debt obligations (based on final maturity dates) are as follows:The Company, through the Issuer Trust, issued the 2018-GTI Notes and 2018-GT2 Notes (the “2018 Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The 2018 Term Notes rank pari passu with each other and with the VFN issued by the Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility. The 2018 Term Notes are included in Notes payable secured by mortgage servicing assets.Following is a summary of the issued and outstanding 2018 Term Notes:(1) Spread over one-month LIBOR.(2)The 2018 Term NotesNotes’ indentures provide the Company with the option to extend the maturity of the 2018 Term Notes by Notestwo by two years after their stated maturities. In January 2023, the stated maturity.Company exercised its option to extend the maturity of $650 million Term Notes originally due on February 25, 2023 for two years.MSR Note PayableOn February 1, 2018, the Company issued a note payable that is secured by Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on April 23, 2021. The maximum amount that the Company may borrow under the note payable is $600 million, less any amount outstanding under the agreement to repurchase pursuant to which the Company finances the VFN. The Company did 0t borrow under this note payable during the periods presented.Notes payable are summarized below:(1)Excludes the effect of amortization of debt issuance costs totaling $1.8 million, $1.8 million and $9.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.F-55(1)Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes and the 2018 Term Notes. The VFN financing and the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and the 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheet.Unsecured Senior NotesOn September 29, 2020, the Company issued $500 million in principal amount of 5.375% senior notes (the “Unsecured Notes”). On October 19, 2020, the Company issued an additional $150 million in principal amount under a supplemental indenture governing the Unsecured Notes. Interest on the Unsecured Notes is payable semi-annually on April 15 and October 15, beginning on April 15, 2021. The Unsecured Notes mature on October 15, 2025.Before October 15, 2022, the Company may, at its option and on any one or more occasions redeem:●some or all of the Unsecured Notes at a price equal to 100% of the principal amount of the Unsecured Notes redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a make-whole premium; and●up to 40% of the aggregate principal amount of the Unsecured Notes with an amount equal to or less than the net proceeds from certain equity offerings at a redemption price of 105.375% plus accrued and unpaid interest to, but excluding, the redemption date.On or after October 15, 2022, the Company may, at its option and on any one or more occasions, redeem some or all of the Unsecured Notes at the applicable redemption prices set forth in the indenture under which the Unsecured Notes were issued, plus accrued and unpaid interest to, but excluding, the redemption date.If a “change of control” (as defined in the indenture under which the Unsecured Notes were issued) occurs, the holders of the Unsecured Notes may require the Company to purchase for cash all or a portion of their Unsecured Notes at a purchase price equal to 101% of the principal amount of the Unsecured Notes, plus accrued and unpaid interest to, but excluding, the repurchase date.The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinated indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinated to any future secured indebtedness of the Company to the extent of the value of collateral securing such indebtedness.F-56The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of PFSI’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries). The guarantees are senior unsecured obligations of the guarantors and will rank senior in right of payment to any future subordinated indebtedness of the guarantors, equally in right of payment with all existing and future senior indebtedness of the guarantors and effectively subordinated to any future secured indebtedness of the guarantors to the extent of the value of collateral securing such indebtedness. The Unsecured Notes and the guarantees are structurally subordinated to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes.The Unsecured Notes are summarized below:(1)Excludes the effect of amortization of debt issuance costs of $225,000.Corporate Revolving Line of CreditThe Company, through its subsidiary PennyMac, entered into an amended and restated credit agreement on November 18, 2016, as amended (the “Credit Agreement”) under which PennyMac established a revolving line of credit in an amount not to exceed $150 million. Certain cash accounts with balances totaling $52.6 million at December 31, 2019, were pledged to secure this revolving line of credit. PennyMac did 0t borrow under the revolving line of credit during the periods presented and terminated the Credit Agreement on September 29, 2020 concurrent with its issuance of the Unsecured Notes. Debt issuance costs and non-utilization fees totaled $1.5 million, $1.9 million and $1.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.13—14—Liability for Losses Under Representations and WarrantiesF-57Note 14—Income TaxesThe 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 2017 and forward and its state tax returns are generally subject to examination for 2016 and forward. PennyMac’s federal partnership returns are subject to examination for 2017 and forward, and its state tax returns are generally subject to examination for 2016 and forward. NaN returns are currently under examination.As a result of the Reorganization, the Company recorded through equity a net deferred tax liability attributable to its acquisition of the noncontrolling interest in the amount of $320.5 million. Beginning from November 1, 2018, the Company’s income subject to the corporate federal and state income taxes will include the portion of its income formerly attributed to the noncontrolling interest. As a result, the Company has recognized an increase in its effective income tax rate.The Reorganization was treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code (“IRC”) and/or a transfer described in Section 351(a) of the IRC.PFSI received a ruling from the California Franchise Tax Board in November 2018 which allows the Company to apply a reduced California statutory rate of 8.84% compared to the 10.84% rate previously applied by the Company. As a result, the Company recorded a tax benefit of $8.5 million due to remeasurement of deferred tax assets and tax liabilities.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 following table details the Company’s provision for income taxes:F-58F-55As the result of the Company’s reclassification of the noncontrolling interest to paid-in capital pursuant to the Reorganization on November 1, 2018, beginning in 2018, the provision for deferred taxes reflects each individual adjustment item in PFSI’s underlying investment in PennyMac.The components of Income taxes payable are as follows:F-59F-56California and other states’ net operating loss carryforwards, which were mostlylosses incurred in 2018 and expire in 2038.2018. The utilization of this remaining net operating loss has been suspended until 2023 under the California budget deal. All of the$126.1 million related to federal net operating loss carryforwardcarry forward has been fully utilizedno expiration date but is subject to an annual utilization limitation of up to 80% of taxable income. The remaining $35.6 million in 2019. The Company hasdeferred tax credits of $0.1 million, which generallyassets, relating to state net operating losses, either have no expiration date.date or expire by 2042. The Company expects to fully utilize these net operating losses before their expiration dates.20202022 and 2019,2021, the Company had 0no 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. NaNNo such accruals existed at December 31, 20202022 and 2019.Note 15—Commitments and ContingenciesLitigationFrom time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management currently believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company.2021.F-60F-57On December 20, 2018, a purported shareholder of the Company filed a complaint in a putative classNote 16—Commitments and derivative action in the Court of Chancery of the State of Delaware (the “Delaware Court”), captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action alleges, among other things, that certain current directors and officers of the Company breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to and entering into the Reorganization without ensuring that the Reorganization was entirely fair to the Company or public shareholders. The Reorganization was approved by 99.8% of voting shareholders on October 24, 2018. On December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. While the Company and its co-defendants believe the Garfield Action is without merit and expressly disclaim any wrongdoing, they have collectively agreed to settle the Garfield Action for an amount equal to $6.85 million in order to avoid the ongoing costs of litigation and further distractions to their respective businesses. A settlement agreement was filed with the Delaware Court on October 9, 2020, and was approved on February 11, 2021. The Company’s share of the settlement amount will be paid entirely by one of the Company’s insurers.ContingenciesOn November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Circuit Court for the Fourth Judicial Circuit in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by the Company. Consequently, on April 27, 2020, PennyMac dismissed its federal court action without prejudice to pursue those claims in arbitration as well. While no assurance can be provided at to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.Regulatory MattersThe 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.On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated prior to the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter submitted on February 08, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, the Company does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial statements or operations.F-61$20.6$7.0 billion as of December 31, 2020.2022.16—17—Stockholders’ EquityFebruaryAugust 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $500 million$1 billion to $1$2 billion. The Company entered into a privately negotiated transaction with The BlackRock Foundation under the revised stock repurchase program to repurchase 6,975,323 shares of the Company’s common stock at a price of $34 per share.(1) Amounts represent the total shares of common stock repurchased under the stock repurchase program through December 31, 2020.2022.transactions and returned to the authorized but unissued common stock pool.transactions.Note 17—Noncontrolling InterestAs a result of the Reorganization on November 1, 2018, noncontrolling interest unitholders exchanged their Class A units of PNMAC for shares of PFSI common stock without any cash consideration on a one-for-one basis and became stockholders of the Company. Consequently, the noncontrolling interest was reclassified to the Company’s paid-in capital accounts.Net income attributable to the Company’s common stockholders and the effects of changes in noncontrolling ownership interest in PennyMac for the year ended December 31, 2018 is summarized below:F-62F-59isare summarized below:(1) Gains on sales of loans to PMT are primarily cash gains.described in Note 4–Transactions with Affiliates.F-63Note 19—Net Interest Income (Expense)Net interest income (expense) is summarized below:(1)In 2017, the Company entered a master repurchase agreement that provided it with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the years ended December 31, 2019 and 2018, the Company included $14.7 million and $48.1 million, respectively of such incentives as a reduction in Interest expense. The master repurchase agreement expired on August 21, 2019.Note 20—Stock-based CompensationThe Company has adopted an equity incentive plan that 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, 2020, the Company has 4.2 million units available for future awards.Following is a summary of the stock-based compensation expense by instrument awarded:F-64F-60performance-basedperformance based RSUs provide for the issuance of shares of the Company’s common stock based on the attainmentachievement of earnings per share and/or return on equityperformance goals and are generally adjusted for grantee job performance ratings. The satisfaction of the performance goals and issuance ofApproximately 612,000 shares will be approved by a committee of the Company’s board of directors. Approximately 639,000 shares vested under the grants with a performance period endedperiods ending December 31, 20202022 are expected to vest and be issued to the grantees in March 2021.the first quarter of 2023.- 23.2%– 20.3% per year based on the grantees’ employee classification. The actual number of shares that vest could vary from 0,zero, if the performance goals are not met, to as much as 130%187.5% of the units granted, if the performance goals are meaningfully exceeded.(1) The actual number of performance-based RSUs vested during the yearyears ended December 31, 2022, 2021 and 2020 2019was 654,000, 781,000 and 2018 was 608,000 648,000 and 774,000 shares, respectively, which is approximately 94%128%, 88%123% and 106%94% of the 645,000, 735,000509,000, 634,000 and 730,000645,000 originally granted units, respectively, due to the performance varying from the established target for the respective grant.2020:2022:1one share of the Company’s common stock for each RSU. In general, and except as otherwise provided by the agreement, One-thirdone-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.0 - 23.5%0% – 20.3% per year based on the grantees’ employee classification.F-65F-622020:2022: In addition, during the year ended December 31, 2020, the Company awarded approximately 604,000 shares of stock options that vested on grant date with a term of ten years from the date of grant.(1) Based on historical volatilities of the Company’s common stock. F-662020:2022:usingby dividing 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 alland dilutive shares of common stock were issued.securities outstanding.PotentiallyThe Company’s potentially dilutive shares of common stock include non-vestedsecurities are stock-based compensation awards and PennyMac Class A units.awards. The Company applies the treasury stock method to determine the diluted weighted average number of shares of common stock attributable to outstanding non-vestedbased on the outstanding stock-based compensation awards. As a result of the Reorganization on November 1, 2018, all Class A units of PNMAC converted for shares of PFSI common stock on a one-for-one basis.F-67F-64 and Exchangeable PNMAC Class A units excluded from the calculation of diluted earnings per share:(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 duringprice for the year.(3)Exchangeable PNMAC units were anti-dilutive during 2018 due to the effect of the Reorganization.F-68Note 22—Supplemental Cash Flow Information23—22—Regulatory Capital and Liquidity Requirements and PennyMac, is required to maintain specified levels of capital and liquidity to remain a seller/servicer in good standing with the Agencies. Such capital and liquid asset requirements generally are tied to the size of the Company’s loan servicing portfolio, loan origination volume and delinquency rates.The CompanyPLS is subject to financial eligibility requirements established by the Federal Housing Finance Agency (“FHFA”) for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include:● tangible net worth of $2.5 million plus 25 basis points of the UPB of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others; ● before June 30, 2020, 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 (including nonperforming Agency loans that are in payment forbearance) in excess of 600 basis points; and●effective June 30, 2020, 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 less 70% of such nonperforming Agency servicing UPB in excess of 600 basis points where the underlying loans are in COVID-19 pandemic-related forbearance but were current at the time they entered forbearance.On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced, and increase the liquidity requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 400 basis points. On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements.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.F-69F-65(1) Calculated in compliance with the respective Agency’s requirements. PennyMac’sPLS’s ability to sell loans to and service loans on behalf of the respective Agency.24—23—Segments3three segments: production, servicing and investment management.NaNTwo of the segments are in the mortgage banking business: production and servicing. The production segment performs loan origination, acquisition and sale activities. The servicing segment performs servicing of newly originated loans on behalf of PMT and non-affiliate investors, execution and management of early buyout transactions and servicing of loans sourced and managed by the investment management segment for PMT, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.PMT.F-70F-66(1) All revenues are from external customers. (1) All revenues are from external customers. F-71F-67(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 working capital of $75,000.F-72F-6825—24—Parent Company InformationF-73F-69F-74F-70(1) The Company did 0tnot hold restricted cash during the years presented.F-75F-7126—25—Subsequent Events● On February 2, 2021,January 31, 2023, the Company’s board of directors declared a cash dividend of $0.20 per common share. The dividend will be paid on February 25, 202124, 2023 to common shareholdersstockholders of record as of February 12, 2021.14, 2023.● In January 2023, the Company exercised its option to extend the maturity of $650 million of Term Notes secured by Ginnie Mae MSRs originally due in February 2023 for two years. ● On February 2, 2021,7, 2023, the Company’s boardCompany, through the Issuer Trust, PLS and PNMAC entered into two new variable funding note repurchase agreements, as part of directors approved an increasethe structured finance transaction that PLS uses to its stock repurchase authorization from $500 million to $1.0 billion of outstanding common stock.finance Ginnie Mae mortgage servicing rights and related excess servicing spread and servicing advance receivables.● On February 11, 2021,All agreements to repurchase assets that matured before the Company issued $650 million in principal amountdate of 4.25% unsecured senior notes due 2029 (the “2029 Senior Notes”) that will be fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by its existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries). Interest on the 2029 Senior Notes is payable semi-annually on February 15 and August 15 of each year, commenting on August 15, 2021. The 2029 Senior Notes mature on February 15, 2029.this Report were extended or renewed.F-76F-72
Dated: February 25, 202122, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signatures |
| Title |
| Date |
| | | | |
/s/ David A. Spector | | Chairman and Chief Executive Officer | | February |
David A. Spector | | (Principal Executive Officer) | | |
| | | | |
/s/ Daniel S. Perotti | | Senior Managing Director and Chief Financial Officer | | February |
Daniel S. Perotti | | (Principal Financial Officer) | | |
| | | | |
/s/ Gregory L. Hendry | | Chief Accounting Officer | | February |
Gregory L. Hendry | | (Principal Accounting Officer) | | |
| | |||
/s/ James Hunt | | Director | | February |
James Hunt | | | | |
| | | | |
/s/ Jonathon S. Jacobson | | Director | | February |
Jonathon S. Jacobson | | | | |
| | | | |
/s/ Patrick Kinsella | | Director | | February |
Patrick Kinsella | | | | |
| | | | |
/s/ Anne D. McCallion | | Director | | February |
Anne D. McCallion | | | | |
| | | | |
/s/ Joseph Mazzella | | Director | | February |
Joseph Mazzella | | | | |
| | |||
/s/ Farhad Nanji | | Director | | February |
Farhad Nanji | | | | |
| | | | |
/s/ Jeffrey Perlowitz | | Director | | February |
Jeffrey Perlowitz | | | | |
| | | | |
/s/ Lisa Shalett | | Director | | February |
Lisa Shalett | | | | |
| | | | |
/s/ Theodore Tozer | | Director | | February |
Theodore Tozer | | | | |
| | | | |
/s/ Emily Youssouf | | Director | | February |
Emily Youssouf | | | | |
| | | | |
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