The Company’s mortgage servicing portfolio is summarized as follows:

	March 31, 2013						September 30, 2013
	Servicing rights owned		Subservicing		Total loans serviced		Servicing rights owned		Contract servicing and subservicing		Total loans serviced
	(in thousands)						(in thousands)
Affiliated entities	$	—	$	21,384,109	$	21,384,109	$	—	$	29,555,254	$	29,555,254
Agencies	13,328,541		—		13,328,541		21,725,393		—		21,725,393
Private investors	1,260,086		—		1,260,086		1,051,220		50,379		1,101,599
Mortgage loans held for sale	193,894		—		193,894		490,088		—		490,088
	$	14,782,521	$	21,384,109	$	36,166,630	$	23,266,701	$	29,605,633	$	52,872,334
Amount subserviced for the Company	$	43,546	$	285,243	$	328,789	$	42,201	$	554,070	$	596,271
Delinquent mortgage loans:
30 days	$	187,015	$	175,071	$	362,086	$	307,399	$	265,806	$	573,205
60 days	67,328		96,266		163,594		85,367		114,390		199,757
90 days or more	129,865		1,083,921		1,213,786		168,468		1,422,071		1,590,539
	384,208		1,355,258		1,739,466		561,234		1,802,267		2,363,501
Loans pending foreclosure	69,559		1,211,596		1,281,155		69,889		1,611,708		1,681,597
	$	453,767	$	2,566,854	$	3,020,621	$	631,123	$	3,413,975	$	4,045,098
Custodial funds managed by the Company(1)	$	200,611	$	224,176	$	424,787
Custodial funds managed by the Company (1)							$	389,267	$	266,285	$	655,552

	December 31, 2012
	Servicing rights owned		Contract servicing and subservicing		Total loans serviced
	(in thousands)
Affiliated entities	$	—	$	16,552,939	$	16,552,939
Agencies	9,860,284		—		9,860,284
Private investors	1,321,584		—		1,321,584
Mortgage loans held for sale	417,742		—		417,742
	$	11,599,610	$	16,552,939	$	28,152,549
Amount subserviced for the Company	$	45,562	$	375,818	$	421,380
Delinquent mortgage loans:
30 days	$	191,884	$	187,653	$	379,537
60 days	60,886		122,564		183,450
90 days or more	112,847		851,851		964,698
	365,617		1,162,068		1,527,685
Loans pending foreclosure	75,329		1,290,687		1,366,016
	$	440,946	$	2,452,755	$	2,893,701
Custodial funds managed by the Company (1)	$	263,562	$	150,080	$	413,642

~~Table of Contents~~

December 31, 2012

Servicing
rights owned

Subservicing

Total
loans serviced

(in thousands)

Affiliated entities

$
—

$
16,552,939

$
16,552,939

Agencies

9,860,284

—

9,860,284

Private investors

1,321,584

—

1,321,584

Mortgage loans held for sale

417,742

—

417,742

$
11,599,610

$
16,552,939

$
28,152,549

Amount subserviced for the Company

$
45,562

$
375,818

$
421,380

Delinquent mortgage loans:

30 days

$
191,884

$
187,653

$
379,537

60 days

60,886

122,564

183,450

90 days or more

112,847

851,851

964,698

365,617

1,162,068

1,527,685

Loans pending foreclosure

75,329

1,290,687

1,366,016

$
440,946

$
2,452,755

$
2,893,701

Custodial funds managed by the Company(1)

$
263,562

$
150,080

$
413,642

(1) Borrower and investor custodial cash accounts relate to loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns interest on custodial funds it manages on behalf of the loans’ investors, which is recorded as part of the interest income in the Company’s consolidated statements of income.

Table of Contents

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 the total unpaid principal balance:

State	March 31, 2013		December 31, 2012		September 30, 2013		December 31, 2012
	(in thousands)				(in thousands)
California	$	13,710,964	$	10,696,508	$	18,952,692	$	10,696,508
Virginia	1,698,397		*		2,984,671		*
Texas	1,677,184		1,223,382		2,962,697		1,223,382
Florida	1,668,887		1,385,286		2,395,337		1,385,286
Colorado	1,602,650		1,299,295		2,109,970		1,299,295
Washington	*		1,143,849		*		1,143,849
All other states	15,808,548		12,404,229		23,466,967		12,404,229
	$	36,166,630	$	28,152,549	$	52,872,334	$	28,152,549

*State did not represent a top five state as of the respective date.

Certain of the loans serviced by the Company are subserviced on the Company’s behalf by other mortgage loan servicers. Loans are subserviced for the Company when the loans are secured by property in the State of Massachusetts where the Company is not licensed and a license is required to perform such services, or on a transitional basis for loans where the Company has obtained the rights to service the loans but servicing of the loans has not yet transferred to the Company’s servicing system.

~~Table of Contents~~

Note 6—7—Netting of Financial Instruments

The Company uses derivative financial instruments to manage exposure to interest rate risk for the commitments it makes to purchase or originate mortgage loans at specified interest rates (interest rate lock commitments or “IRLCs”), its inventory of mortgage loans held for sale and MSRs. ~~All derivative financial instruments are recorded on the balance sheet at fair value with changes in fair value recognized in current period income.~~ The Company has elected to net derivative asset and liability positions, and cash collateral obtained from (or ~~posted) by (or for)~~posted to) its counterparties when subject to an enforceable master netting arrangement. In the event of default, all counterparties are subject to legally enforceable master netting agreements. The derivatives that are not subject to a master netting arrangement are IRLCs.

As of ~~March 31,~~September 30, 2013 and December 31, 2012, the Company was not party to reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following table.

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Offsetting of Derivative Assets

	March 31, 2013								December 31, 2012								September 30, 2013								December 31, 2012
	Gross amounts of recognized assets		Gross amounts offset in the balance sheet			Net amounts of assets presented in the balance sheet			Gross amounts of recognized assets		Gross amounts offset in the balance sheet			Net amounts of assets presented in the balance sheet			Gross amount of recognized assets		Gross amount offset in the balance sheet			Net amount of assets in the balance sheet			Gross amount of recognized assets		Gross amount offset in the balance sheet			Net amount of assets in the balance sheet
	(in thousands)																(in thousands)
Derivatives subject to master netting arrangements:
MBS put options	$	431	$	—		$	431		$	967	$	—		$	967		$	—	$	—		$	—		$	967	$	—		$	967
MBS call options	755		—			755			—		—			—
Forward purchase contracts	4,544		—			4,544			1,645		—			1,645			21,226		—			21,226			1,645		—			1,645
Forward sale contracts	553		—			553			1,818		—			1,818			505		—			505			1,818		—			1,818
Netting	—		(4,239		)	(4,239		)	—		(1,091		)	(1,091		)	—		(19,382		)	(19,382		)	—		(1,091		)	(1,091		)
	6,283		(4,239		)	2,044			4,430		(1,091		)	3,339			21,731		(19,382		)	2,349			4,430		(1,091		)	3,339
Derivatives not subject to master netting arrangements - IRLCs	25,437		—			25,437			23,951		—			23,951			21,717		—			21,717			23,951		—			23,951
Total	$	31,720	$	(4,239	)	$	27,481		$	28,381	$	(1,091	)	$	27,290
																	$	43,448	$	(19,382	)	$	24,066		$	28,381	$	(1,091	)	$	27,290

Derivative Assets, Financial Assets, and Collateral Held by Counterparty

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

																	September 30, 2013								December 31, 2012
	March 31, 2013								December 31, 2012										Gross amount not offfset in the								Gross amount not offset in the
	Net amount of assets		Gross amounts not offfset in the consolidated balance sheet						Net amount of assets		Gross amounts not offset in the consolidated balance sheet						Net amount		consolidated balance sheet						Net amount		consolidated balance sheet
	in the balance sheet		Financial instruments		Cash collateral received		Net amount		in the balance sheet		Financial instruments		Cash collateral received		Net amount		of assets in the balance sheet		Financial instruments		Cash collateral received		Net amount		of assets in the balance sheet		Financial instruments		Cash collateral received		Net amount
	(in thousands)																(in thousands)
Interest rate lock commitments	$	25,437	$	—	$	—	$	25,437	$	23,951	$	—	$	—	$	23,951	$	21,717	$	—	$	—	$	21,717	$	23,951	$	—	$	—	$	23,951
Barclays Capital	747		—		—		747		—		—		—		—
Nomura																	1,036		—		—		1,036		—		—		—		—
Goldman Sachs																	591		—		—		591		—		—		—		—
Bank of America, N.A.	297		—		—		297		1,782		—		—		1,782		—		—		—		—		1,782		—		—		1,782
Citibank	190		—		—		190		522		—		—		522
Citibank, N.A.																	—		—		—		—		522		—		—		522
Bank of NY Mellon	47		—		—		47		311		—		—		311		—		—		—		—		311		—		—		311
Wells Fargo																	—		—		—		—		18		—		—		18
Other	763		—		—		763		724		—		—		724		722		—		—		722		706		—		—		706
Total	$	27,481	$	—	$	—	$	27,481	$	27,290	$	—	$	—	$	27,290
																	$	24,066	$	—	$	—	$	24,066	$	27,290	$	—	$	—	$	27,290

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Offsetting of Derivative Liabilities and Financial Liabilities

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

	March 31, 2013								December 31, 2012								September 30, 2013								December 31, 2012
	Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet			Gross amount of recognized liabilities		Gross amount offset in the consolidated balance sheet			Net amount of liabilities in the consolidated balance sheet			Gross amount of recognized liabilities		Gross amount offset in the consolidated balance sheet			Net amount of liabilities in the consolidated balance sheet
	(in thousands)																(in thousands)
Derivatives:
Subject to a master netting arrangement:
Forward purchase contracts	$	59	$	—		$	59		$	389	$	—		$	389		$	215	$	—		$	215		$	389	$	—		$	389
Forward sale contracts	9,411		—			9,411			1,894		—			1,894			48,069		—			48,069			1,894		—			1,894
Netting	—		(7,111		)	(7,111		)	—		(1,785		)	(1,785		)	—		(42,667		)	(42,667		)	—		(1,785		)	(1,785		)
	9,470		(7,111		)	2,359			2,283		(1,785		)	498			48,284		(42,667		)	5,617			2,283		(1,785		)	498
Derivatives not subject to a master netting arrangement - IRLCs	—		—			—			11		—			11			159		—			159			11		—			11
Total derivatives	9,470		(7,111		)	2,359			2,294		(1,785		)	509			48,443		(42,667		)	5,776			2,294		(1,785		)	509

Mortgage loans sold under agreements to repurchase	180,049		—			180,049			393,534		—			393,534			387,883		—			387,883			393,534		—			393,534
Total	$	189,519	$	(7,111	)	$	182,408		$	395,828	$	(1,785	)	$	394,043
																	$	436,326	$	(42,667	)	$	393,659		$	395,828	$	(1,785	)	$	394,043

Derivative Liabilities, Financial Liabilities, and Collateral Held by Counterparty

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

	March 31, 2013									December 31, 2012									September 30, 2013									December 31, 2012
	Net amount of		Gross amounts not offset in the balance sheet							Net amount of		Gross amounts not offset in the balance sheet									Gross amount not offset in the consolidated									Gross amount not offset in the consolidated
	liabilities in the balance sheet		Financial instruments			Cash collateral pledged		Net amount		liabilities in the balance sheet		Financial instruments			Cash collateral pledged		Net amount		Net amount of		balance sheet							Net amount of		balance sheet
	(in thousands)																		liabilities in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount		liabilities in the consolidated balance sheet		Financial instruments			Cash collateral pledged		Net amount
Citibank, N.A.	$	61,419	$	(61,092	)	$	—	$	327	$	121,200	$	(121,200	)	$	—	$	—
																			(in thousands)
Interest rate lock commitments																			$	159	$	—		$	—	$	159	$	11	$	—		$	—	$	11
Bank of America, N.A.	92,910		(92,910		)	—		—		150,082		(150,082		)	—		—		200,074		(199,423		)	—		651		150,082		(150,082		)	—		—
Credit Suisse First Boston Mortgage Capital LLC	26,399		(26,047		)	—		352		122,443		(122,252		)	—		191		188,645		(188,460		)	—		185		122,443		(122,252		)	—		191
Daiwa Capital Markets																			1,589		—			—		1,589		20		—			—		20
Morgan Stanley Bank, N.A.	216		—			—		216		53		—			—		53		543		—			—		543		53		—			—		53
Goldman Sachs	668		—			—		668		—		—			—		—
Bank of NY Mellon																			524		—			—		524		—		—			—		—
Citibank, N.A.																			34		—			—		34		121,200		(121,200		)	—		—
Other	796		—			—		796		265		—			—		265		2,091		—			—		2,091		234		—			—		,234
Total	$	182,408	$	(180,049	)	$	—	$	2,359	$	394,043	$	(393,534	)	$	—	$	509
																			$	393,659	$	(387,883	)	$	—	$	5,776	$	394,043	$	(393,534	)	$	—	$	509

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Note 7—8—Fair Value

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

Fair Value Accounting Elections

Management identified all of its non-cash financial assets and its originated MSRs relating to loans with initial interest rates of more than 4.5% to be accounted for at estimated fair value so changes in fair value will be reflected in results of operations as they occur and more timely reflect the results of the Company’s performance. The Company’s financial assets subject to this election include the short-term investments and mortgage loans held for sale.

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

Management’s risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are aimed at mainly moderating the effects of changes in interest rates on the assets’ values. ~~During~~At times during the ~~period,~~nine months ended September 30, 2013, a portion of the IRLCs, the fair value of which typically increases when prepayment speeds increase, were used to ~~mitigate~~moderate the effect of changes in fair value of ~~the servicing assets,~~MSRs, which typically decreases as prepayment speeds increase.

Table of Contents

Financial Statement Items Measured at Fair Value on a Recurring Basis

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

	March 31, 2013									September 30, 2013
	Total			Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Total
	(in thousands)									(in thousands)
Assets:
Short-term investment	$	72,664		$	72,664	$	—	$	—	$	127,487	$	—	$	—	$	127,487
Mortgage loans held for sale at fair value	203,661			—		199,174		4,487		—		526,063		4,185		530,248
Investment in PMT	1,942			1,942		—		—		1,701		—		—		1,701
Mortgage servicing rights at fair value	18,622			—		—		18,622		—		—		26,768		26,768
Derivative assets:
Interest rate lock commitments	25,437			—		—		25,437		—		—		21,717		21,717
Forward purchase contracts	4,544			—		4,544		—		—		21,226		—		21,226
Forward sales contracts	553			—		553		—		—		505		—		505
MBS put options	431			—		431		—
MBS call options	755			—		755		—
Total derivative assets before netting	31,720			—		6,283		25,437		—		21,731		21,717		43,448
Netting (1)	(4,239		)	—		—		—		—		—		—		(19,382		)
Total derivative assets	27,481			—		6,283		25,437		—		21,731		21,717		24,066
	$	324,370		$	74,606	$	205,457	$	48,546	$	129,188	$	547,794	$	52,670	$	710,270
Liabilities:
Excess servicing spread financing at fair value										$	—	$	—	$	2,857	$	2,857
Derivative liabilities:
Interest rate lock commitments										—		—		159		159
Forward purchase contracts	$	59		$	—	$	59	$	—	—		215		—		215
Forward sales contracts	9,411			—		9,411		—		—		48,069		—		48,069
Total derivative liabilities before netting	9,470			—		9,470		—		—		48,284		159		48,443
Netting (1)	(7,111		)	—		—		—		—		—		—		(42,667		)
Total derivative liabilities	$	2,359		$	—	$	9,470	$	—	—		48,284		159		5,776
										$	—	$	48,284	$	3,016	$	8,633

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

Table of Contents

	December 31, 2012									December 31, 2012
	Total			Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Total
	(in thousands)											(in thousands)
Assets:
Short-term investment	$	53,164		$	53,164	$	—	$	—	$	53,164	$	—	$	—	$	53,164
Mortgage loans held for sale at fair value	448,384			—		448,384		—		—		448,384		—		448,384
Investment in PMT	1,897			1,897		—		—		1,897		—		—		1,897
Mortgage servicing rights at fair value	19,798			—		—		19,798		—		—		19,798		19,798
Derivative assets:
Interest rate lock commitments	23,951			—		—		23,951		—		—		23,951		23,951
Forward purchase contracts	1,645			—		1,645		—		—		1,645		—		1,645
Forward sales contracts	1,818			—		1,818		—		—		1,818		—		1,818
MBS put options	967			—		967		—		—		967		—		967
Total derivative assets before netting	28,381			—		4,430		23,951		—		4,430		23,951		28,381
Netting (1)	(1,091		)	—		—		—		—		—		—		(1,091		)
Total derivative assets	27,290			—		4,430		23,951		—		4,430		23,951		27,290
	$	550,533		$	55,061	$	452,814	$	43,749	$	55,061	$	452,814	$	43,749	$	550,533
Liabilities:
Derivative liabilities:
Interest rate lock commitments	$	11		$	—	$	—	$	11	$	—	$	—	$	11	$	11
Forward purchase contracts	389			—		389		—		—		389		—		389
Forward sales contracts	1,894			—		1,894		—		—		1,894		—		1,894
Total derivative liabilities before netting	2,294			—		2,283		11		—		2,283		11		2,294
Netting (1)	(1,785		)	—		—		—		—		—		—		(1,785		)
Net derivative liabilities	$	509		$	—	$	2,283	$	11	$	—	$	2,283	$	11	$	509

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

Table of Contents

As shown above, certain of the Company’s mortgage loans held for sale, MSRs at fair value, IRLCs, and ~~IRLCs,~~excess servicing spread financing at fair value are measured using Level 3 inputs. Following is a roll forward of these items for the quarters and nine month periods ended ~~March 31,~~September 30, 2013 and 2012 where Level 3 significant inputs were used on a recurring basis:

Quarter ended March 31, 2013

Mortgage
loans held
for sale

Mortgage
servicing
rights

Interest
rate lock
commitments

Total

(in thousands)

Balance, December 31, 2012

$
—

$
19,798

$
23,951

$
43,749

Repurchases

4,612

—

—

4,612

Repayments

(13
)
—

—

(13
)
Interest rate lock commitments issued, net

—

—

33,649

33,649

Servicing received as proceeds from sales of mortgage loans

—

3

—

3

Changes in fair value included in income

(112
)
(1,179
)
(107
)
(1,398
)
Transfers to mortgage loans held for sale

—

—

(32,056
)
(32,056
)
Balance, March 31, 2013

$
4,487

$
18,622

$
25,437

$
48,546

Changes in fair value recognized during the period relating to assets still held at March 31, 2013

$
(112
)
$
(1,179
)
$
25,437

Accumulated changes in fair value relating to assets still held at March 31, 2013

$
(112
)

$
25,437

	Quarter ended September 30, 2013
	Mortgage loans held for sale			Mortgage servicing rights			Net interest rate lock commitments (1)			Total
	(in thousands)
Assets:
Balance, June 30, 2013	$	4,525		$	23,070		$	(16,210	)	$	11,385
Repayments	(436		)	—			—			(436		)
Interest rate lock commitments issued, net	—			—			23,788			23,788
Purchases of MSR	—			1,116			—			1,116
Servicing received as proceeds from sales of mortgage loans	—			4,157			—			4,157
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—			—			—			—
Other factors	96			(1,575		)	10,585			9,106
	96			(1,575		)	10,585			9,106
Transfers of interest rate lock commitments (asset) liability to mortgage loans acquired for sale	—			—			3,395			3,395
Balance, September 30, 2013	$	4,185		$	26,768		$	21,558		$	52,511
Changes in fair value recognized during the period relating to assets still held at September 30, 2013	$	16		$	(1,575	)	$	21,558
Accumulated changes in fair value relating to assets still held at September 30, 2013	$	96					$	21,558

Quarter ended March 31, 2012

Mortgage
servicing
rights

Interest
rate lock
commitments

Total

(in thousands)

Balance, December 31, 2011

$
25,698

$
7,905

$
33,603

Interest rate lock commitments issued, net

—

14,444

14,444

Servicing received as proceeds from sales of mortgage loans

680

—

680

Changes in fair value included in income

(34
)
8

(26
)
Transfers to mortgage loans held for sale

—

(14,269
)
(14,269
)
Balance, March 31, 2012

$
26,344

$
8,088

$
34,432

Changes in fair value recognized during the period relating to assets still held at March 31, 2012

$
(34
)
$
8,088

Accumulated changes in fair value relating to assets still held at March 31, 2012

$
8,088

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

	Excess servicing spread financing
	(in thousands)
Liability:
Balance, June 30, 2013	$	—
Initial proceeds received from financing of excess servicing spread	2,828
Changes in fair value included in income	29
Repayments	—
Balance, September 30, 2013	$	2,857

Changes in fair value recognized during the period relating to liability still held at September 30, 2013	$	29
Accumulated changes in fair value relating to liability still held at September 30, 2013	$	29

Table of Contents

	Quarter ended September 30, 2012
	Mortgage servicing rights			Net interest rate lock commitments			Total
				(in thousands)
Balance, June 30, 2012	$	23,449		$	12,710		$	36,159
Interest rate lock commitments issued, net	—			48,044			48,044
Servicing received as proceeds from sales of mortgage loans	30			—			30
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—			—			—
Other factors	(2,239		)	128			(2,111		)
	(2,239		)	128			(2,111		)
Transfers of interest rate lock commitments (asset) liability to mortgage loans acquired for sale	—			(27,449		)	(27,449		)
Balance, September 30, 2012	$	21,240		$	33,433		$	54,673
Changes in fair value recognized during the period relating to assets still held at September 30, 2012	$	(2,239	)	$	33,433
Accumulated changes in fair value relating to assets still held at September 30, 2012				$	33,433

Table of Contents

	Nine months ended September 30, 2013
	Mortgage loans held for sale			Mortgage servicing rights			Net interest rate lock commitments (1)			Total
	(in thousands)
Assets:
Balance, December 31, 2012	$	—		$	19,798		$	23,940		$	43,738
Repurchases	5,529			—			—			5,529
Repayments	(1,059		)	—			—			(1,059		)
Interest rate lock commitments issued, net	—			—			78,722			78,722
Purchases of MSR	—			5,124			—			5,124
Sales of MSR	—			(550		)	—			(550		)
Servicing received as proceeds from sales of mortgage loans	—			4,177			—			4,177
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—			—			—			—
Other factors	(285		)	(1,781		)	(15,289		)	(17,355		)
	(285		)	(1,781		)	(15,289		)	(17,355		)
Transfers of interest rate lock commitments (asset) liability to mortgage loans acquired for sale	—			—			(65,815		)	(65,815		)
Balance, September 30, 2013	$	4,185		$	26,768		$	21,558		$	52,511
Changes in fair value recognized during the period relating to assets still held at September 30, 2013	$	(344	)	$	(1,781	)	$	21,558
Accumulated changes in fair value relating to assets still held at September 30, 2013	$	(285	)				$	21,558

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

	Excess servicing spread financing
	(in thousands)
Liability:
Balance, December 31, 2012	$	—
Initial proceeds received from financing of excess servicing spread	2,828
Changes in fair value included in income	29
Repayments	—
Balance, September 30, 2013	$	2,857

Changes in fair value recognized during the period relating to liability still held at September 30, 2013	$	29
Accumulated changes in fair value relating to liability still held at September 30, 2013	$	29

Table of Contents

	Nine months ended September 30, 2012
	Mortgage servicing rights			Net interest rate lock commitments			Total
	(in thousands)
Balance, December 31, 2011	$	25,698		$	7,905		$	33,603
Interest rate lock commitments issued, net	—			65,192			65,192
Servicing received as proceeds from sales of mortgage loans	772			—			772
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—			—			—
Other factors	(5,230		)	—			(5,230		)
	(5,230		)	—			(5,230		)
Transfers of interest rate lock commitments (asset) liability to mortgage loans acquired for sale	—			(39,664		)	(39,664		)
Balance, September 30, 2012	$	21,240		$	33,433		$	54,673
Changes in fair value recognized during the period relating to assets still held at September 30, 2012	$	(5,230	)	$	33,433
Accumulated changes in fair value relating to assets still held at September 30, 2012				$	33,433

The information used in the preceding roll forwards represents activity for any financial statement items identified as using Level 3 significant inputs at either the beginning or the end of the periods presented. The Company had no transfers in or out ~~between~~among the ~~levels.~~

~~Table~~levels other than transfers of ~~Contents~~IRLCs to mortgage loans held for sale at fair value upon funding of the respective mortgage loans.

Gains (losses) from changes in estimated fair values included in earnings for financial statement items carried at estimated fair value as a result of management’s election of the fair value option are summarized below:

	Quarter ended March 31, 2013								Quarter ended March 31, 2012								Quarter ended September 30, 2013									Quarter ended September 30, 2012
	Change in fair value of mortgage loans held for sale at fair value		Net servicing income			Total			Change in fair value of mortgage loans held for sale at fair value		Net servicing income			Total			Change in fair value of mortgage loans held for sale at fair value			Net servicing income			Total			Change in fair value of mortgage loans held for sale at fair value		Net servicing income			Total
	(in thousands)																(in thousands)
Short-term investments	$	—	$	—		$	—		$	—	$	—		$	—
Assets:
Mortgage loans held for sale at fair value	26,161		—			26,161			16,186		—			16,186			$	(6,060	)	$	—		$	(6,060	)	$	56,079	$	—		$	56,079
Mortgage servicing rights at fair value	—		(1,179		)	(1,179		)	—		(34		)	(34		)	—			(1,575		)	(1,575		)	—		(2,239		)	(2,239		)
	$	26,161	$	(1,179	)	$	24,982		$	16,186	$	(34	)	$	16,152		$	(6,060	)	$	(1,575	)	$	(7,635	)	$	56,079	$	(2,239	)	$	53,840
Liabilities:
Excess servicing spread financing at fair value																	$	—		$	(29	)	$	(29	)	$	—	$	—		$	—
																	$	—		$	(29	)	$	(29	)	$	—	$	—		$	—

Table of Contents

	Nine months ended September 30, 2013								Nine months ended September 30, 2012
	Change in fair value of mortgage loans held for sale at fair value		Net servicing income			Total			Change in fair value of mortgage loans held for sale at fair value		Net servicing income			Total
	(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	12,428	$	—		$	12,428		$	108,205	$	—		$	108,205
Mortgage servicing rights at fair value	—		(1,781		)	(1,781		)	—		(5,230		)	(5,230		)
	$	12,428	$	(1,781	)	$	10,647		$	108,205	$	(5,230	)	$	102,975
Liabilities:
Excess servicing spread financing at fair value	$	—	$	(29	)	$	(29	)	$	—	$	—		$	—
	$	—	$	(29	)	$	(29	)	$	—	$	—		$	—

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

	March 31, 2013							September 30, 2013
	Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference
	(in thousands)							(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	203,030	$	193,108	$	9,922		$	529,244	$	496,853	$	32,391
90 or more days delinquent	631		786		(155		)	1,004		1,297		(293		)
	$	203,661	$	193,894	$	9,767		$	530,248	$	498,150	$	32,098

	December 31, 2012							December 31, 2012
	Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference
	(in thousands)							(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	447,889	$	418,650	$	29,239		$	447,889	$	418,650	$	29,239
90 or more days delinquent	495		623		(128		)	495		623		(128		)
	$	448,384	$	419,273	$	29,111		$	448,384	$	419,273	$	29,111

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that are measured at estimated fair value on a nonrecurring basis as of the dates presented:

March 31, 2013

Total

Level 1

Level 2

Level 3

(in thousands)

Mortgage servicing rights at lower of amortized cost or fair value

$
56,090

$
—

$
—

$
56,090

$
56,090

$
—

$
—

$
56,090

	September 30, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	102,116	$	102,116
	$	—	$	—	$	102,116	$	102,116

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Table of Contents

December 31, 2012

Total

Level 1

Level 2

Level 3

(in thousands)

Mortgage servicing rights at lower of amortized cost or fair value

$
51,180

$
—

$
—

$
51,180

$
51,180

$
—

$
—

$
51,180

	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	51,180	$	51,180
	$	—	$	—	$	51,180	$	51,180

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

Quarter ended March 31,

2013

2012

(in thousands)

Mortgage servicing rights at lower of amortized cost or fair value

$
555

$
57

	Quarter ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	(1,164	)	$	(1,000	)	$	(521	)	$	(1,784	)
	$	(1,164	)	$	(1,000	)	$	(521	)	$	(1,784	)

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

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

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

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Cash as well as its Mortgage loans sold under agreements to repurchase, Note payable, Carried Interest due from Investment Funds, and amounts receivable from and payable to the Advised Entities are carried at amortized cost.

Cash is measured using “Level 1” significant inputs. The Company’s borrowings carried at amortized cost do not have active markets or observable inputs and the fair value is measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. The Company has classified these financial instruments as “Level 3” financial statement items as of ~~March 31,~~September 30, 2013 and December 31, 2012 due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate the fair value.

Management has concluded that the carrying value of the Carried Interest due from Investment Funds approximates its fair value as the balance represents the amount distributable to the Company at the balance sheet date assuming liquidation of the Investment Funds. Management has concluded that the estimated fair value of the Note payable approximates the agreements’ carrying value due to the agreements’ short ~~terms~~term and variable interest rates.

The Company also carries the receivable from and payable to the Advised Entities at cost. Management has concluded that the estimated fair value of such balances approximates the carrying value due to the short terms of such balances.

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Table of Contents

Valuation Techniques and Assumptions

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

The Company has assigned the responsibility for estimating the fair values of “Level 3” financial statement items to ~~a valuation group and has developed procedures and controls governing the valuation process relating to these assets. The estimation of fair values of the Company’s financial assets are assigned to~~ its Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring the Company’s investment portfolios and maintenance of its valuation policies and procedures.

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

The FAV group is responsible for reporting to the Company’s senior management valuation committee on a monthly basis on the changes in the valuation of the portfolio, including major factors affecting the valuation and any changes in model methods and assumptions. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of ~~each of the~~ changes to the significant inputs to the models.

~~The following describes~~Following is a description of the ~~methods~~techniques and assumptions used in estimating the fair values of “Level 2” and “Level 3” fair value financial statement items:

Mortgage Loans Held for Sale

Most of the Company’s mortgage loans held for sale at fair value are ~~saleable~~salable into active markets and are therefore categorized as “Level 2” fair value financial statement items and their fair values are estimated using their quoted market or contracted price or market price equivalent.

Certain of the Company’s mortgage loans may become ~~non-saleable~~non-salable into active markets due to identification of a defect by the Company or to the repurchase of a mortgage loan with an identified defect. ~~Such~~Because such loans are generally not ~~saleable~~salable into active mortgage markets, ~~and~~they are ~~therefore~~ classified as “Level 3” financial statement items. The significant unobservable inputs used in the fair value measurement of the Company’s ~~“non-saleable”~~“non-salable” mortgage loans held for sale at fair value are discount ~~rate,~~rates, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

The Company did not hold “Level 3” ~~Mortgage~~mortgage loans held for sale before ~~the quarter ended March 31,~~ 2013. Following is a quantitative summary of key inputs used in the valuation of “Level 3” mortgage loans held for sale at fair value:

		~~March 31,~~September 30, 2013
		Range (Weighted average)
Key Inputs
Discount rate		7.8% - 13.4%
		~~(8.6%~~(9.2%)
Twelve-month projected housing price index change		~~5.4%~~6.7% - ~~6.6%~~7.3%
		~~(5.6%~~(6.8%)
Prepayment ~~speed(1)~~speed (1)		~~1.2%~~2.1% - ~~9.0%~~5.6%
		~~(7.9%~~(4.8%)
Total prepayment ~~speed(2)~~speed (2)		~~3.3%~~3.4% - ~~9.0%~~5.7%
		~~(8.2%~~(5.1%)

(1) Prepayment speed is measured using ~~life voluntary~~Life Voluntary Conditional Prepayment Rate (“CPR”). ~~CPR represents the percentage of the remaining unpaid principal balance (“UPB”) that is expected to be prepaid in excess of the scheduled amortization of principal.~~

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

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

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Derivative Financial Instruments

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

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

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

	March 31, 2013	December 31, 2012	September 30, 2013	December 31, 2012
	Range (Weighted average)		Range (Weighted average)
Key Inputs
Pull-through rate	57.6% - 98.0%	61.6% – 98.1%	56.6% - 98.0%	61.6% – 98.1%
	(77.8%)	(79.1%)	(78.3%)	(79.1%)
MSR value expressed as:
Servicing fee multiple	1.7 - 5.2	3.2 – 4.2	2.1 - 5.0	3.2 – 4.2
	(4.5)	(4.0)	(4.0)	(4.0)
Percentage of unpaid principal balance	0.4% - 2.2%	0.6% – 2.2%	0.4% - 2.6%	0.6% – 2.2%
	(1.1%)	(0.9%)	(1.1%)	(0.9%)

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

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value financial statement items. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of value. The key assumptions used in the estimation of the fair value of MSRs include prepayment ~~and default~~ rates of the underlying loans, the applicable discount rate or pricing spread, and the cost to service loans.

The results of the estimates of fair value of MSRs are reported to the Company’s senior management valuation committee as part of their review and approval of monthly valuation results. Changes in the fair value of MSRs are included in the consolidated statements of income under the caption Net servicing income — Amortization, impairment and change in estimated fair value of mortgage servicing rights.

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Table of Contents

Key assumptions used in determining the fair value of MSRs at the time of initial recognition are as follows:

	Quarter ended March 31,				Quarter ended September 30,
	2013		2012		2013		2012
	Amortized cost	Fair value	Amortized cost	Fair value	Range (Weighted average)
					Fair value	Amortized cost	Fair value	Amortized cost
Unpaid principal balance of underlying loans					$315,869	$4,120,962	$4,217	$2,485,982
Weighted-average servicing fee rate (in basis points)					31	30	27	27
	Range (Weighted average)
Pricing spread (1)	5.4% - 12.5%	8.6% — 8.9%	7.5% - 10.5%	7.5% - 9.9%	7.4% - 13.1%	5.4% - 15.9%	7.5% - 9.9%	7.5% - 9.9%
	(8.5%)	(8.7%)	(9.8%)	(8.9%)	(9.9%)	(8.2%)	(7.8%)	(9.8%)
Annual total prepayment speed (2)	8.5% - 16.5%	11.3% — 12.7%	6.7% - 13.6%	7.8% - 12.9%	8.8% - 17.2%	8.5% - 14.7%	8.4% - 9.5%	8.4% - 9.5%
	(8.8%)	(12.4%)	(7.8%)	(8.5%)	(9.2%)	(8.8%)	(9.2%)	(8.4%)
Life (in years)	2.9 — 6.9	6.5 — 6.7	3.0 — 7.0	3.6 — 7.0	3.6 – 7.0	2.9 – 6.9	6.4 – 6.7	6.4 – 6.7
	(6.7)	(6.5)	(6.8)	(6.9)	(6.9)	(6.7)	(6.4)	(6.7)
Cost of servicing	$68 — $120	$68 — $68	$68 — $100	$68 — $100	$68 – $120	$68 – $120	$68 – $100	$68 – $100
	($100)	($68)	($99)	($85)	($101)	($104)	($71)	($99)

	Nine months ended September 30,
	2013		2012
	Range (Weighted average)
	Fair value	Amortized cost	Fair value	Amortized cost
Unpaid principal balance of underlying loans	$318,066	$12,350,104	$17,504	$4,811,328
Weighted-average servicing fee rate (in basis points)	31	29	28	27

Pricing spread (1)	7.4% - 13.1%	5.4% - 15.9%	7.5% - 9.9%	7.5% - 9.9%
	(9.9%)	(8.2%)	(8.4%)	(9.8%)
Annual total prepayment speed (2)	8.8% - 17.2%	8.5% - 18.5%	7.8% - 9.5%	7.8% - 9.5%
	(9.2%)	(8.8%)	(8.6%)	(8.3%)
Life (in years)	3.6 – 7.0	2.9 – 6.9	5.9 – 6.9	5.9 – 6.9
	(6.9)	(6.7)	(6.4)	(6.7)
Cost of servicing	$68 – $120	$68 – $120	$68 – $100	$68 – $100
	($101)	($102)	($77)	($99)

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

(2) ~~Annual total prepayment~~Prepayment speed is measured using ~~life total~~ CPR.

~~Table of Contents~~

Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs at period end and the effect on the estimated fair value from adverse changes in those assumptions (weighted averages are based upon unpaid principal balance):

~~Purchased MSRs backed by distressed mortgage loans~~

March 31, 2013

December 31, 2012

Fair
value

Amortized
cost

Fair
value

Amortized
cost

Range
(Weighted average)
(Unpaid principal balance of underlying loans and effect on value amounts in thousands)
Unpaid principal balance of underlying loans

$1,211,047

—

$1,271,478

—
Discount rate

15.3% — 15.3%

—

15.3% — 15.3%

—

(15.3%)

—

(15.3%)

—
Effect on value of 5% adverse change

($282)

—

($302)

—
Effect on value of 10% adverse change

($552)

—

($590)

—
Effect on value of 20% adverse change

($1,057)

—

($1,130)

—

Average life (in years)

4.9

—

5.0

—
Prepayment speed(1)

11.0% - 11.0%

—

10.7% — 10.7%

—

(11.0%)

—

(10.7%)

—
Effect on value of 5% adverse change

($265)

—

($273)

—
Effect on value of 10% adverse change

($519)

—

($529)

—
Effect on value of 20% adverse change

($994)

—

($1,040)

—

Per-loan cost of servicing

$271 — $271

—

$270 — $270

—

($271)

—

($270)

—
Effect on value of 5% adverse change

($274)

—

($290)

—
Effect on value of 10% adverse change

($549)

—

($580)

—
Effect on value of 20% adverse change

($1,098)

—

($1,159)

—

~~(1)Prepayment speed is measured using CPR.~~

2830

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Purchased MSRs backed by distressed mortgage loans

	September 30, 2013		December 31, 2012
	Range (Weighted average)
	Fair value	Amortized cost	Fair value	Amortized cost
	(Unpaid principal balance of underlying loans and effect on value amounts in thousands)
Carrying value	$10,125	—	$12,370	—
Unpaid principal balance of underlying loans	$1,051,220	—	$1,271,478	—
Weighted-average note rate	5.88%	—	6.01%	—
Weighted-average servicing fee rate (in basis points)	50	—	50	—

Discount rate	15.3% – 15.3%	—	15.3% – 15.3%	—
	(15.3%)	—	(15.3%)	—
Effect on value of 5% adverse change	($252)	—	($302)	—
Effect on value of 10% adverse change	($494)	—	($590)	—
Effect on value of 20% adverse change	($945)	—	($1,130)	—

Life (in years)	4.8 – 4.8	—	5.0 – 5.0	—
	(4.8)	—	(5.0)	—

Prepayment speed (1)	11.7% – 11.7%	—	10.7% – 10.7%	—
	(11.7%)	—	(10.7%)	—
Effect on value of 5% adverse change	($252)	—	($273)	—
Effect on value of 10% adverse change	($492)	—	($529)	—
Effect on value of 20% adverse change	($951)	—	($1,040)	—

Per-loan cost of servicing	$250 – $250	—	$270 – $270	—
	($250)	—	($270)	—
Effect on value of 5% adverse change	($223)	—	($290)	—
Effect on value of 10% adverse change	($447)	—	($580)	—
Effect on value of 20% adverse change	($893)	—	($1,159)	—

(1)Prepayment speed is measured using Life Voluntary CPR.

Table of Contents

All other MSRs

	March 31, 2013		December 31, 2012		September 30, 2013		December 31, 2012
	Fair value	Amortized cost	Fair value	Amortized cost	Range (Weighted average)
	Range (Weighted average) (Unpaid principal balance of underlying loans and effect on value amounts in thousands)				Fair value	Amortized cost	Fair value	Amortized cost
					(Unpaid principal balance of underlying loans and effect on value amounts in thousands)
Carrying value					$16,643	$226,090	$7,428	$89,177
Unpaid principal balance of underlying loans	$1,058,987	$12,316,588	$1,166,765	$8,730,686	$1,700,612	$20,024,781	$1,166,765	$8,730,686
Weighted-average note rate					4.68%	3.57%	5.22%	3.65%
Weighted-average servicing fee rate (in basis points)					27	28	26	28
Pricing spread (1)	8.6% - 18.5%	5.4% - 18.5%	7.5% — 19.5%	7.5% — 16.5%	6.4% – 17.5%	5.4% – 15.9%	7.5% – 19.5%	7.5% – 16.5%
	(10.6%)	(8.2%)	(10.6%)	(9.8%)	(8.9%)	(7.6%)	(10.6%)	(9.8%)
Effect on value of 5% adverse change	($112)	($2,690)	($113)	($1,814)	($303)	($4,833)	($113)	($1,814)
Effect on value of 10% adverse change	($220)	($5,284)	($222)	($3,562)	($596)	($9,488)	($222)	($3,562)
Effect on value of 20% adverse change	($426)	($10,203)	($430)	($6,870)	($1,153)	($18,303)	($430)	($6,870)

Average life (in years)	0.1 — 14.4	2.5 — 6.9	0.2 — 14.4	2.5 — 6.9	0.2 – 14.4	2.6 – 6.9	0.2 – 14.4	2.5 – 6.9
	(5.4)	(6.7)	(5.0)	(6.6)	(6.6)	(6.7)	(5.0)	(6.6)
Prepayment speed (2)	9.0% - 81.2%	8.5% - 26.9%	9.0% — 84.2%	8.7% — 28.3%	8.7% – 72.8%	8.5% – 16.0%	9.0% – 84.2%	8.7% – 28.3%
	(17.4%)	(9.0%)	(19.2%)	(9.2%)	(10.6%)	(9.0%)	(19.2%)	(9.2%)
Effect on value of 5% adverse change	($218)	($2,732)	($238)	($1,751)	($376)	($4,696)	($238)	($1,751)
Effect on value of 10% adverse change	($425)	($5,373)	($462)	($3,446)	($738)	($9,238)	($462)	($3,446)
Effect on value of 20% adverse change	($807)	($10,402)	($877)	($6,674)	($1,423)	($17,891)	($877)	($6,674)

Per-loan cost of servicing	$68 — $115	$68 — $120	$68 — $140	$68 — $140	$68 – $120	$68 – $120	$68 – $140	$68 – $140
	($75)	($100)	($76)	($99)	($77)	($102)	($76)	($99)
Effect on value of 5% adverse change	($74)	($1,459)	($77)	($963)	($150)	($2,383)	($77)	($963)
Effect on value of 10% adverse change	($147)	($2,919)	($153)	($1,926)	($300)	($4,766)	($153)	($1,926)
Effect on value of 20% adverse change	($295)	($5,837)	($307)	($3,852)	($601)	($9,531)	($307)	($3,852)

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

(2) Prepayment speed is measured using CPR.

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

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Excess Servicing Spread Financing at Fair Value

The Company categorizes excess servicing spread financing as a “Level 3” financial statement item. The Company uses a discounted cash flow approach to estimate the fair value of excess servicing spread financing. The key assumptions used in the fair value estimate of excess servicing spread financing include pricing spread, average life, and prepayment speed. Significant changes to any of those inputs in isolation could result in a significant change in the excess servicing spread financing fair value measurement. Changes in these key assumptions are not necessarily directly related.

Excess servicing spread is generally subject to loss in value when mortgage rates decrease. Decreasing mortgage rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the excess servicing spread, thereby reducing excess servicing spread financing’s value. Reductions in the value of excess servicing spread financing affect income primarily through change in fair value.

Interest expense for excess servicing spread financing is accrued using the interest method based upon the expected income from the excess servicing spread through the expected life of the underlying mortgages. Changes to expected cash flows result in a change in fair value which is recorded in Amortization, impairment and change in estimated fair value of mortgage servicing rights.

Following are the key inputs used in determining the fair value of excess servicing spread financing at the time of initial recognition:

	September 30, 2013		December 31, 2012
Key Inputs
Pricing spread	6.80	%	—
Average life	6.7		—
Prepayment speed	9.1	%	—

Note 8—9—Mortgage Loans Held for Sale at Fair Value

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

	March 31, 2013		December 31, 2012		September 30, 2013		December 31, 2012
	(in thousands)				(in thousands)
Conforming	$	60,038	$	50,003	$	57,651	$	50,003
Government-insured or guaranteed	139,136		398,381		468,412		398,381
Repurchased mortgage loans	4,487		—		4,185		—
	$	203,661	$	448,384	$	530,248	$	448,384

Fair value of mortgage loans pledged to secure mortgage loans sold under agreements to repurchase	$	197,693	$	438,850	$	522,031	$	438,850

Note 9—10—Derivative Instruments

The Company is exposed to price risk relative to its mortgage loans held for sale as well as to its IRLCs. The Company bears price risk from the time ~~a commitment to purchase or originate a loan~~an IRLC is made to PMT or a loan applicant to the time the mortgage loan is sold. The Company is exposed to loss in value of its ~~commitments to originate or purchase~~IRLCs and mortgage loans held for sale when mortgage rates increase. The Company is ~~exposed to risk relative to the fair value of its MSRs. The Company is~~also exposed to loss in value of its MSRs when interest rates decrease.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this price risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the value of the Company’s IRLCs, inventory of mortgage loans held for sale and MSRs. The Company does not use derivative financial instruments for purposes other than in support of its risk management activities.

Table of Contents

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

March 31, 2013

December 31, 2012

Fair Value

Fair Value

Instrument

Notional
amount

Derivative
assets

Derivative
liabilities

Notional
amount

Derivative
assets

Derivative
liabilities

(in thousands)

Derivatives not designated as hedging instruments

Free-standing derivatives:

Interest rate lock commitments

1,701,082

$
25,437

$
—

1,576,174

$
23,951

$
11

Forward purchase contracts

1,349,300

4,544

59

1,021,981

1,645

389

Forward sales contracts

3,022,710

553

9,411

2,621,948

1,818

1,894

MBS put options

325,000

431

—

500,000

967

—

MBS call options

300,000

755

—

—

—

—

Total derivatives before netting

31,720

9,470

28,381

2,294

Netting

(4,239
)
(7,111
)

(1,091
)
(1,785
)
Total

$
27,481

$
2,359

$
27,290

$
509

~~Table of Contents~~

	September 30, 2013							December 31, 2012
		Fair value							Fair value
Instrument	Notional amount	Derivative assets			Derivative liabilities			Notional amount	Derivative assets			Derivative liabilities
	(in thousands)
Derivatives not designated as hedging instruments
Free-standing derivatives:
Interest rate lock commitments	1,163,531	$	21,717		$	159		1,576,174	$	23,951		$	11
Forward purchase contracts	1,580,434	21,226			215			1,021,981	1,645			389
Forward sales contracts	3,086,889	505			48,069			2,621,948	1,818			1,894
MBS put options	—	—			—			500,000	967			—
Total derivatives before netting		43,448			48,443				28,381			2,294
Netting		(19,382		)	(42,667		)		(1,091		)	(1,785		)
		$	24,066		$	5,776			$	27,290		$	509

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

Period/Instrument						Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period	(in thousands)
	(in thousands)
Quarter ended March 31, 2013
Quarter ended September 30, 2013
Forward purchase contracts	1,021,981	10,195,550	(9,868,231	)	1,349,300	2,071,590	13,386,366	(13,877,522	)	1,580,434
Forward sales contracts	2,621,948	14,677,256	(14,276,494	)	3,022,710	4,226,940	18,727,428	(19,867,479	)	3,086,889
MBS call options	—	850,000	(550,000	)	300,000	625,000	300,000	(925,000	)	—
MBS put options	500,000	965,000	(1,140,000	)	325,000	260,000	50,000	(310,000	)	—

Period/Instrument						Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period	(in thousands)
	(in thousands)
Quarter ended March 31, 2012
Quarter ended September 30, 2012
Forward purchase contracts	130,900	1,447,545	(996,295	)	582,150	545,175	5,707,334	(5,351,309	)	901,200
Forward sales contracts	510,569	2,883,711	(2,115,999	)	1,278,281	1,522,674	8,324,782	(7,336,268	)	2,511,188
MBS call options	3,000	38,000	(11,000	)	30,000	5,000	5,000	(10,000	)	—
MBS put options	29,000	68,000	(47,000	)	50,000	210,000	512,000	(387,000	)	335,000

Period/Instrument	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	(in thousands)
Nine months ended September 30, 2013
Forward purchase contracts	1,021,981	35,012,198	(34,453,745	)	1,580,434
Forward sales contracts	2,621,948	51,199,986	(50,735,045	)	3,086,889
MBS call options	—	2,100,000	(2,100,000	)	—
MBS put options	500,000	2,210,000	(2,710,000	)	—

Table of Contents

Period/Instrument	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	(in thousands)
Nine months ended September 30, 2012
Forward purchase contracts	130,900	10,197,428	(9,427,128	)	901,200
Forward sales contracts	510,569	16,424,121	(14,423,502	)	2,511,188
MBS call options	3,000	168,000	(171,000	)	—
MBS put options	29,000	885,000	(579,000	)	335,000

The Company recorded net ~~gains (losses)~~losses on derivative financial instruments used to hedge the Company’s IRLCs and ~~inventory of~~ mortgage loans held for sale at fair value totaling ~~$11,025,000~~$4.6 million and ~~$(1,962,000)~~$39.0 million for the quarters ~~ending March 31,~~ended September 30, 2013 and ~~March 31,~~September 30, 2012, respectively. The Company recorded net gains on derivative financial instruments totaling $101.9 million for the nine months ended September 30, 2013 and net losses totaling $64.5 million for the nine months ended September 30, 2012. Derivative gains and losses are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income.

The Company did not record any net gains or losses on derivative financial instruments used as economic hedges of MSRs for the quarter ended September 30, 2013. The Company recorded a net ~~loss~~losses on derivative financial instruments used as economic hedges of MSRs totaling ~~$1,291,000~~$1.3 million for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2013. The ~~Company had no similar economic hedges in place for the quarter ended March 31, 2012. The~~ derivative ~~loss is~~losses are included in Amortization, impairment and ~~changes~~change in estimated fair value of mortgage servicing rights in the Company’s consolidated statements of income.

Note ~~10—~~11—Mortgage Servicing Rights

Carried at Fair Value:

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

	Quarter ended March 31,						Quarter ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012			2013			2012
	(in thousands)						(in thousands)
Balance at beginning of period	$	19,798		$	25,698		$	23,070		$	23,449		$	19,798		$	25,698
Additions - servicing resulting from loan sales	3			680
Additions:
Servicing resulting from MSR purchases							1,116			—			5,124			—
Servicing resulting from loan sales							4,157			30			4,177			772
Sales							—			—			(550		)	—
Change in fair value:
Due to changes in valuation inputs or assumptions used in valuation model	(90		)	1,315
Other changes in fair value(1)	(1,089		)	(1,349		)
Due to changes in valuation inputs or assumptions used in valuation model (1)							(635		)	(882		)	1,233			(1,218		)
Other changes in fair value (2)							(940		)	(1,357		)	(3,014		)	(4,012		)
Total change in fair value	(1,179		)	(34		)	(1,575		)	(2,239		)	(1,781		)	(5,230		)
Balance at end of period	$	18,622		$	26,344		$	26,768		$	21,240		$	26,768		$	21,240

(1)Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.

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

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Carried at Lower of Amortized ~~Cost:~~Cost or Fair Value:

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

	Quarter ended March 31,						Quarter ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012			2013			2012
	(in thousands)						(in thousands)
Amortized cost:
Balance at beginning of period	$	92,155		$	6,496		$	179,003		$	30,305		$	92,155		$	6,496
Additions	41,733			9,621
Additions:
Servicing resulting from loan sales							55,981			25,590			150,175			50,234
Amortization	(3,095		)	(264		)	(5,367		)	(1,127		)	(12,713		)	(1,962		)
Application of valuation allowance to write down MSRs with other-than temporary impairment	—			—
Application of valuation allowance to write down MSRs with other-than-temporary impairment							—			—			—			—
Balance at end of period	130,793			15,853			229,617			54,768			229,617			54,768

Valuation allowance for impairment of MSRs:
Balance at beginning of period	(2,978		)	(70		)	(2,335		)	(854		)	(2,978		)	(70		)
Reversal	555			57
Application of valuation allowance to write down MSRs with other-than temporary impairment	—			—
Additions							(1,192		)	(1,000		)	(549		)	(1,784		)
Application of valuation allowance to write down MSRs with other-than-temporary impairment							—			—			—			—
Balance at end of period	(2,423		)	(13		)	(3,527		)	(1,854		)	(3,527		)	(1,854		)
MSRs, net	$	128,370		$	15,840		$	226,090		$	52,914		$	226,090		$	52,914
Estimated fair value of MSRs at end of period	$	137,553		$	16,437		$	239,326		$	53,419		$	239,326		$	53,419

The following table summarizes the Company’s estimate of future amortization of its existing MSRs. This projection was developed using the assumptions made by management in its ~~March 31,~~September 30, 2013 valuation of MSRs. The assumptions underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time.

	Estimated		Estimated MSR
Twelve month period ending March 31,	amortization
12-month period ending September 30,			amortization
	(in thousands)		(in thousands)
2014	$	13,972	$	22,633
2015	13,050		21,637
2016	12,020		20,658
2017	11,146		19,910
2018	10,478		18,859
Thereafter	70,127		125,920
Total	$	130,793	$	229,617

Servicing fees relating to MSRs are recorded in Net servicing income—Loan servicing fees—From non-affiliates on the consolidated statements of income; late ~~fees,~~charges, ancillary and other fees are recorded in Net servicing income—Loan servicing fees—Ancillary and other fees on the consolidated statements of income and are summarized below:

	Quarter ended March 31,				Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012		2013		2012
	(in thousands)				(in thousands)
Contractual servicing fees	$	9,057	$	2,845	$	14,596	$	2,154	$	35,397	$	8,776
Late charges	413		267		527		209		1,336		682
Ancillary and other fees	102		58		140		72		374		194
	$	9,572	$	3,170	$	15,263	$	2,435	$	37,107	$	9,652

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Note ~~11—~~12—Carried Interest Due from Investment Funds

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

	Quarter ended March 31,				Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012		2013		2012
	(in thousands)				(in thousands)
Balance at beginning of period	$	47,723	$	37,250	$	55,322	$	41,149	$	47,723	$	37,250
Carried Interest recognized during the period	4,737		1,789		2,812		3,355		10,411		7,254
Proceeds received during the period	—		—		—		—		—		—
Balance at end of period	$	52,460	$	39,039	$	58,134	$	44,504	$	58,134	$	44,504

The amount of the Carried Interest received by the Company depends on the Investment Funds’ future performance. As a result, the amount of Carried Interest recorded by the Company at period end is subject to adjustment based on future results of the Investment Funds and may be reduced in future periods. However, the Company is not required to pay guaranteed returns to the Investment Funds and the amount of Carried Interest will only be reduced to the extent of amounts previously recognized.

Management expects the Carried Interest to be collected by the Company when the Investment Funds liquidate. The investment period for the Investment Funds ended on December 31, 2011. The Investment Funds will continue in existence through December 31, 2016, subject to three one-year extensions by PCM at its discretion as specified in the limited liability company and limited partnership agreements that govern the Investment Funds.

Note ~~12—~~13—Investment in PennyMac Mortgage Investment Trust at Fair Value

Following is a summary of Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust:

	Quarter ended March 31,				Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012		2013			2012
	(in thousands)				(in thousands)
Dividends	$	43	$	41	$	43	$	41	$	128		$	124
Change in fair value	45		154		122		273		(196		)	506
	$	88	$	195	$	165	$	314	$	(68	)	$	630

Fair value of PMT shares at period end					$	1,701	$	1,753	$	1,701		$	1,753

Note ~~13—~~14—Borrowings

~~The~~As of September 30, 2013, the Company ~~maintains~~maintained four borrowing facilities: three facilities that provide for sales of mortgage loans under agreements to repurchase; and one note payable secured by MSRs and servicing advances made onrelating to loans in the Company’s loan servicing portfolio.

Mortgage Loans Sold Under Agreement to Repurchase

The borrowing facilities secured by mortgage loans held for sale are in the form of loan sale and repurchase agreements. Eligible loans are sold under advance rates based on the loan type. Interest is charged at a rate based on the buyer’s overnight cost-of funds rate for one agreement and based on ~~the~~ LIBOR for the other two agreements. Loans sold under these agreements may be re-pledged by the lenders.

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Financial data pertaining to mortgage loans sold under agreements to repurchase are as follows:

	Quarter ended March 31,						Quarter ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012			2013			2012
	(dollar amounts in thousands)						(dollar amounts in thousands)
Period end:
Balance	$	180,049		$	159,547		$	387,883		$	361,478		$	387,883		$	361,478
Unused amount(1)	$	319,951		$	90,453
Unused amount (1)							$	612,117		$	88,522		$	612,117		$	88,522
Weighted-average interest rate	2.21		%	2.19		%	1.82		%	2.38		%	1.82		%	2.38		%
Fair value of mortgage loans securing agreements to repurchase	$	197,693		$	175,173
Fair value of loans securing agreements to repurchase							$	522,031		$	408,415		$	522,031		$	408,415
During the period:
Average balance of mortgage loans sold under agreements to repurchase	$	275,061		$	64,956
Weighted-average interest rate(2)	2.26		%	2.30		%
Average balance of loans sold under agreements to repurchase							$	373,386		$	219,047		$	354,125		$	146,425
Weighted-average interest rate (2)							1.89		%	2.23		%	2.02		%	2.18		%
Total interest expense	$	2,375		$	865		$	2,920		$	1,682		$	8,251		$	3,583
Maximum daily amount outstanding	$	479,860		$	159,547		$	588,494		$	361,588		$	623,523		$	361,588

(1) The amount the Company is able to borrow under loan repurchase agreements is tied to the fair value of unencumbered mortgage loans eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the mortgage loans sold.

(2) Excludes the effect of amortization of commitment fees totaling ~~$819,000~~$1.1 million and ~~$488,000~~$423,000 for the quarters ended ~~March 31,~~September 30, 2013 and September 30, 2012, respectively, and $2.8 million and $1.1 million for the nine months ended September 30, 2013 and September 30, 2012, respectively.

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

Remaining maturity at March 31, 2013	Balance
Remaining maturity at September 30, 2013			Balance
	(in thousands)		(in thousands)
Within 30 days	$	58,953	$	423
Over 30 to 90 days	119,109		387,460
Over 90 days to 180 days	1,987		—
Over 180 days to 1 year	—		—
	$	180,049	$	387,883
Weighted-average maturity (in months)	2.0		2.6

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 the Company’s mortgage loans held for sale sold under agreements to repurchase is summarized by counterparty below as of ~~March 31,~~September 30, 2013:

Counterparty

Amount at risk

Weighted-average
maturity of
advances under
repurchase
agreement

Amount at risk

Weighted-average
maturity of advances under
repurchase agreement

Facility maturity

(in thousands)

Bank of America, N.A.

9,151

June 20, 2013

45,516

December 16, 2013

January 2, 2014

Citibank, N.A.

6,415

April 24, 2013

Credit Suisse First Boston Mortgage Capital LLC

3,416

June 11, 2013

89,917

December 18, 2013

(1)

(1) The earlier to occur of October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination.

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The Company is subject to margin calls during the period the agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the value (as determined by the applicable lender) of the mortgage loans securing those agreements decreases. As of ~~March 31,~~September 30, 2013, the Company had ~~$1.6~~$1.5 million on deposit with its mortgage loan repurchase agreement counterparties.

~~Table of Contents~~ Such amounts are included in Other assets on the consolidated balance sheets.

Excess Servicing Spread Financing

In August 2013, the Company acquired MSRs on a pool of agency residential mortgage loans. In connection with such acquisition, the Company, in September 2013, sold to PMT the right to receive the excess cash flow generated from the related mortgage loans after receipt of a fixed base servicing fee per loan. The Company retained all ancillary income associated with servicing the loans and the fixed base servicing fee. The Company continues to be the servicer of the loan pool and provides all servicing and advancing functions. PMT has no prior or continuing involvement with the loans. The Company accounts for the transaction as a financing and the total proceeds received was $2.8 million.

The carrying amount of the financing was $2.9 million at September 30, 2013.

Note Payable

The note payable is summarized below:

	March 31, 2013		December 31, 2012		September 30, 2013		December 31, 2012
	(in thousands)				(in thousands)
Period end:
Note payable secured by:
Servicing advances	$	5,155	$	4,905	$	3,823	$	4,905
MSRs	58,282		48,108		52,952		48,108
	$	63,437	$	53,013	$	56,775	$	53,013
Servicing advances pledged to secure note payable	$	7,544	$	7,430
MSRs pledged to secure note payable	$	144,932	$	100,957
Assets pledged to secure note:
Servicing advances					$	6,865	$	7,430
MSRs					$	226,588	$	100,957

The note payable matures on the earlier to occur of October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination. Interest is charged at a rate based on the lender’s overnight cost of funds. The note payable is secured by servicing advances and MSRs relating to certain loans in the Company’s servicing portfolio, and provides for advance rates ranging from 50% to 85% of the amount of the servicing advances or the carrying value of the MSR pledged, up to a maximum of $17 million in the case of servicing advances and $100 million in the case of MSRs.

The borrowing facilities contain various covenants, including financial covenants governing the Company’s net worth, ~~debt-to equity~~debt-to-equity ratio, profitability and liquidity. Management believes the Company was in compliance with these requirements as of ~~March 31,~~September 30, 2013.

Note ~~14—~~15—Liability for Losses Under Representations and Warranties

The Company’s agreements with ~~the Agencies~~Fannie Mae and Freddie Mac include representations and warranties related to the loans the Company sells to those Agencies. The representations and warranties require adherence to Agency origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

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

The Company records a provision for losses relating to the representations and warranties it makes 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, ~~and~~ the potential severity of loss in the event of defaults and, for loans purchased from correspondent lenders, the probability of reimbursement by the correspondent ~~loan seller.~~

lenders. The Company establishes a liability at the time loans are sold and continually updates its liability estimate.

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

	Quarter ended March 31,				Quarter ended September 30,					Nine months ended September 30,
	2013		2012		2013			2012		2013			2012
	(in thousands)				(in thousands)
Balance at beginning of period	$	3,504	$	449	$	6,185		$	1,387	$	3,504		$	449
Provisions for losses on loans sold	1,244		311		1,069			918		3,766			1,856
Incurred losses	—		—		(39		)	—		(55		)	—
Balance at end of period	$	4,748	$	760	$	7,215		$	2,305	$	7,215		$	2,305
Unpaid principal balance of mortgage loans subject to representations and warranties	$	14,586,623	$	4,244,275	$	20,428,213		$	6,444,618	$	20,428,213		$	6,444,618

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

	Quarter ended March 31,				Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012		2013		2012
	(in thousands)				(in thousands)
During the period:
Unpaid balance of mortgage loans repurchased	$	—	$	—	$	1,973	$	—	$	6,840	$	—
Incurred losses on repurchased loans	$	—	$	—
Unpaid principal balance of mortgage loans put to correspondent lenders					$	357	$	—	$	1,410	$	—
At period end:
Unpaid balance of mortgage loans subject to pending claims for repurchase	$	1,038	$	5,492
Unpaid principal balance of mortgage loans subject to pending claims for repurchase					$	1,249	$	3,459	$	1,249	$	3,459

The level of the liability for representations and warranties requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors (including unemployment levels and trends, and housing price levels and trends), investor reviews of recently sold mortgage loans and repurchase demand strategies relating to defaulted mortgage loans, and other external conditions that will change over the lives of the underlying loans. The Company’s representations and warranties are generally not subject to stated limits of exposure. However, management believes that the current unpaid principal balance of loans sold by the Company to date represents the maximum exposure to repurchases related to representations and warranties. ~~Management~~

The level of the liability for representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that will change over the lives of the underlying loans. However, management believes the amount and range of reasonably possible losses in relation to the recorded liability is not material to the Company’s financial condition or results of operations.

Note ~~15—Members’~~16—Income Taxes

The Company files U.S. federal and state corporate income tax returns for PFSI and partnership return for PennyMac. Before the IPO, the Company did not have a provision for income taxes as PennyMac is a pass-through taxable entity. PFSI’s tax returns are subject to examination for 2012 and forward. In March 2013, the IRS concluded its audit of the partnership return of PennyMac and its subsidiaries for the tax year ended December 31, 2010 and proposed no changes to the return as originally filed. No returns are currently under examination. PennyMac’s federal partnership returns are subject to examination for 2011 and forward. PennyMac’s primary state tax return is generally subject to examination for 2009 and forward.

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The following table details the Company’s income tax expense (benefit).

	Quarter ended September 30, 2013		Nine months ended September 30, 2013
	(in thousands)
Current expense:
Federal	$	—	$	—
State	—		—
Total current expense	—		—
Deferred expense:
Federal	2,823		4,339
State	670		1,192
Total deferred expense	3,493		5,531
Total provision for income taxes	$	3,493	$	5,531

The provision for deferred income taxes for the quarter and nine months ended September 30, 2013 primarily relates to its investment in PennyMac partially offset by a net operating loss carryforward. The portion attributable to its investment in PennyMac primarily relates to MSRs that PennyMac received pursuant to sales of mortgage loans held for sale at fair value and Carried Interest from the Investment Funds.

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

	Quarter ended September 30, 2013		Nine months ended September 30, 2013
Federal income tax statutory rate	35.0	%	35.0	%
Less: Rate attributable to non-controlling members	(26.3	)%	(31.6	)%
State income taxes, net of federal benefit	1.2	%	0.6	%
Other	0.0	%	0.0	%
Valuation allowance	0.0	%	0.0	%
Effective tax rate	9.9	%	4.0	%

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

	Quarter ended September 30, 2013			Nine months ended September 30, 2013
	(in thousands)
Investment in PennyMac	$	5,491		$	7,762
Net operating loss carryforward	(1,998		)	(2,231		)
Other	—			—
Valuation allowance	—			—
Total provision for deferred income taxes	$	3,493		$	5,531

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The components of Deferred tax asset are as follows:

	September 30, 2013
	(in thousands)
Taxes currently receivable	$	7
Deferred income tax asset, net	54,523
Deferred tax asset	$	54,530

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

	September 30, 2013
	(in thousands)
Deferred income tax assets:
Investment in PennyMac	$	52,292
Net operating loss carryforward	$	2,231
Other	—
Gross deferred tax assets	54,523
Deferred income tax liabilities:
Other	—
Gross deferred tax liabilities	—
Net deferred income tax asset	$	54,523

The Company’s deferred income tax is recorded in Deferred tax asset in the consolidated balance sheets as of September 30, 2013. There was no income tax asset or liability as of December 31, 2012 since PennyMac is a pass-through taxable entity and PFSI had no activity in 2012. Increases in deferred tax assets are primarily due to the increase in the Company’s ownership of PennyMac as a result of a member exchanging its PennyMac Class A units for PFSI stock. As existing members exchange their units, the Company records a deferred tax asset related to PennyMac’s election pursuant to Section 754 of the Internal Revenue Code. The investment in PennyMac deferred tax asset is reflected net of the investment in PennyMac deferred tax liabilities primarily related to deferred income from MSRs and accrued Carried Interest from the Investment Funds.

The Company’s net operating loss carryforward of $2.2 million generally expires in 2033.

At September 30, 2013 and December 31, 2012, the Company had no unrecognized tax benefits and does not anticipate any increase in unrecognized tax benefits. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in the Company’s income tax accounts. No such accruals existed at September 30, 2013 and December 31, 2012.

Note 17—Stockholders’ Equity

~~Subscriptions receivable are amounts due from certain members who are holders of preferred units, and earn interest at rates of either 4% or 8% annually.~~

~~The Company made tax distributions of $9,476,000 to its unitholders relating to the Company’s taxable income allocated to the respective unitholders for~~During the quarter ended ~~March 31, 2013.~~September 30, 2013, a PennyMac unitholder exchanged 6,110,000 Class A Units for PFSI Class A common stock. The impact of the exchange reduced the percentage of the Noncontrolling interest in Private National Mortgage Acceptance Company, LLC from 83.16% to 75.11%.

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Note ~~16—~~18—Net Gain on Mortgage Loans Held for Sale

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

Quarter ended March 31,

2013

2012

(in thousands)

Cash gain (loss) on sale:

Loan proceeds

$
(11,823
)
$
5,700

Hedging activities

17,621

(6,032
)

5,798

(332
)
Non-cash gain on sale:

Change in fair value of IRLCs

1,497

183

MSRs received as proceeds on sale

41,736

10,301

MSR recapture payable to affiliate

(133
)
—

Provision for representations and warranties on loans sold

(1,244
)
(311
)
Change in fair value relating to loans and hedging instruments held for sale at period end:

Loans

(2,392
)
26

Hedging instruments

(5,305
)
4,070

Total non-cash (loss) gain relating to loans and hedging instruments held at period end

(7,697
)
4,096

Total non-cash gain on sale

34,159

14,269

$
39,957

$
13,937

	Quarter ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
	(in thousands)
Cash (loss) gain:
Sales proceeds	$	(93,725	)	$	26,676		$	(148,866	)	$	49,695
Hedging activities	88,789			(19,574		)	128,670			(40,276		)
	(4,936		)	7,102			(20,196		)	9,419
Non-cash gain:
Receipt of MSRs in loan sale transactions	60,137			25,620			154,352			51,006
MSR recapture payable to affiliate	(86		)	—			(586		)	—
Provision for losses relating to representations and warranties provided in loan sales	(1,069		)	(918		)	(3,766		)	(1,856		)
Change in fair value relating to loans and hedging derivatives held at period end:
IRLCs	37,768			20,723			(2,382		)	25,528
Mortgage loans	27,510			6,693			7,876			8,636
Hedging derivatives	(93,375		)	(19,460		)	(26,738		)	(24,246		)
	$	25,949		$	39,760		$	108,560		$	68,487

Note ~~17—~~19—Net Interest Income (Expense)

Net interest income (expense) is summarized for the periods presented below:

	Quarter ended September 30,					Nine months ended September 30,
	2013		2012			2013			2012
	(in thousands)
Interest income:
Short-term investments	$	432	$	11		$	635		$	54
Mortgage loans at fair value	4,661		1,903			10,675			4,437
	5,093		1,914			11,310			4,491
Interest expense:
Assets sold under agreements to repurchase	2,920		1,682			8,251			3,583
Note payable	681		281			2,326			645
Other	555		79			1,109			(2		)
	4,156		2,042			11,686			4,226
Net interest income (expense)	$	937	$	(128	)	$	(376	)	$	265

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Note 20—Stock-Based Compensation

The Company’s 2013 Equity Incentive Plan provides for grants of stock options, time-based and performance-based restricted stock units (“RSUs”), stock appreciation rights, performance units and stock grants. As of September 30, 2013, the Company has 120.2 million units available for future awards. The Company ~~has three equity based compensation plans:~~

·~~A common equity compensation plan by which it may award up to 15% of its total equity in~~estimates the ~~form of common units to key members~~cost of the ~~Company’s management. Common~~stock options, time-based restricted stock units ~~are subordinate~~and performance-based restricted stock units awarded with reference to the ~~Company’s preferred units. The~~fair value of PFSI’s underlying common units vest over a three-or four-year period. Vesting of four-year awards starts on the grantees’ date of hire and awards are 25% vested on the second anniversary, 50% on the third anniversary, and 100% on the fourth anniversary. Vesting of three-year awards begins on the award date. The common units have a strike price equal to zerostock on the date of ~~grant. Several key management members~~the award. The Company amortizes the cost of previously granted stock-based awards to compensation expense over the vesting period using the graded vesting method. Compensation costs are fixed, except for the performance-based restricted stock units, at the grant’s estimated fair value on the grant date as all grantees are employees and directors of the ~~Company have received common units. Unvested common units under this plan have~~Company. Expense relating to awards is included in Compensation in the ~~rights to participate in distributed and undistributed earnings. However, undistributed earnings allocable to these unvested common units are forfeitable;~~consolidated statements of income.

·~~A Class C common equity plan by which it may award up to 3% of its total equity to key members~~Following is a summary of the ~~management~~stock-based compensation expense by instrument awarded for the periods presented:

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)
Stock options	$	593	$	—	$	791	$	—
Performance-based RSUs	464		—		746		—
Time-based RSUs	330		—		395		—

	$	1,387	$	—	$	1,932	$	—

Stock Options

The Stock Option award agreements provide for the award of ~~its correspondent lending group. Class C~~Stock Options to purchase the optioned common ~~units~~stock. In general, and except as otherwise provided by the agreement, one-third of the optioned common stock will vest ~~over 4 years and upon the satisfaction of certain performance thresholds. Vesting occurs 12.5%, 12.5%, 25% and 50%~~in a lump sum on each ~~successive year anniversary~~ of the ~~award date. The Class C common units~~first, second, and third anniversaries of the grant date, subject to the recipient’s continued service through each anniversary. Each Stock Option will have a ~~strike price equal~~term of ten years from the date of grant but will expire (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 ~~zero~~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. Unvested~~grant using a variant of the Black Scholes model based on the assumptions noted in the following table:

	Quarter ended September 30, 2013	Nine months ended September 30, 2013
Expected volatility (1)	—	45%
Expected dividends	—	0%
Risk-free rate	—	0.03% - 2.30%
Annualized grantee forfeiture rate	—	6.2% - 19.2%

(1) Based on historical volatilities of comparable companies’ common ~~units under this plan~~stock.

The Company uses its historical data to estimate employee departure behavior used in the option-pricing model; groups of employees (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes. The expected term of common stock options granted is derived from the ~~rights~~option pricing model and represents the period of time that common stock options granted are expected to ~~participate~~be outstanding. The risk-free rate for periods within the contractual term of the common stock option is based on the U.S. Treasury yield curve in ~~distributed and undistributed earnings. However, undistributed earnings allocable to these unvested common units are forfeitable; and~~effect at the time of grant.

·The 2011 Equity Incentive Plan by which it will grant common units to key employees that vest immediately. The first units earned under the 2011 Equity Incentive Plan will be issued in 2013. Common units granted under the 2011 Equity Incentive Plan participate in the Company’s profits and losses after the grant date. The equity incentive plan common units have a strike price equal to zero on the date of grant. Common units under this plan have the rights to participate in distributed and undistributed earnings.

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The table below summarizes ~~common unit~~stock option award activity ~~under the common equity compensation plan~~ and compensation ~~expense:~~expense for the periods presented:

	Quarter ended March 31,						Quarter ended September 30, 2013		Nine months ended September 30, 2013
	2013			2012
	(in thousands except unit data)
Number of units
Number of Stock Options
Outstanding at beginning of period	3,533			12,174			423,407		—
Granted	—			324			—		423,407
Vested	(2,338		)	(2,228		)
Exercised							—		—
Expired or canceled	(23		)	—			253		253
Outstanding at end of period	1,172			10,270			423,154		423,154

Weighted average grant date fair value:
Weighted-average exercise price:
Outstanding at beginning of period	$	397		$	398		$	21.03	$	—
Granted	$	—		$	433		—		21.03
Vested	$	378		$	378
Exercised							—		—
Expired or canceled	$	516		$	—		21.03		21.03
Outstanding at end of period	$	460		$	403		$	21.03	$	21.03

Units available for future awards at end of period	—			—
Compensation expense recorded during the period	$	176		$	163
Unamortized costs at end of period	$	94		$	448
Exercisable at end of period							—		—
Available for future grant							—		—
Weighted-average remaining contractual term (in years):
Outstanding at end of period							9.7		—
Exercisable at end of period							—		—
Aggregate intrinsic value:
Outstanding at end of period							$	—	$	—
Exercisable at end of period							$	—	$	—

~~As of March 31, 2013, the weighted-average remaining vesting term of unvested units was approximately four months.~~

~~Class C Awards~~Time-Based RSUs

The ~~Company issued Class C units initially during November 2011 and periodically during 2012 as awards~~RSU grant agreements provide for the award of time-based RSUs, for each RSU, entitling the award recipient to ~~employees~~one share of the Company’s ~~correspondent lending group. The~~ Class ~~C units are~~A common stock. One-third of all time-based RSUs vest in a lump sum on each of the first, second, and third anniversaries of the vesting commencement date, subject to the ~~participation preferences~~recipient’s continued service through each anniversary.

Compensation cost relating to time-based RSUs is based on the fair value of PFSI’s common stock and ~~other rights~~the number of shares expected to vest. For purposes of estimating the cost of the ~~preferred units~~time-based RSUs granted, management assumes turnover rates of 6.2% - 19.2% per year based on the grantees’ employee classification. Compensation cost relating to time-based RSUs is amortized to expense using the graded vesting method and ~~common units as described above. Class C units have partially vested and there were no cancelled or forfeited units as~~is included in the Compensation expense on the accompanying consolidated statements of ~~March 31, 2013.~~income.

Following is a summary of time-based RSU activity for the periods presented:

	Quarter ended September 30, 2013		Nine months ended September 30, 2013
Number of units
Outstanding at beginning of period	70,826		—
Granted	27,407		98,233
Vested	—		—
Expired or canceled	126		126
Outstanding at end of period	98,107		98,107
Weighted-average grant date fair value:
Outstanding at beginning of period	$	17.51	$	—
Granted	$	19.37	$	18.03
Vested	$	—	$	—
Expired or canceled	$	17.51	$	17.51
Outstanding at end of period	$	18.03	$	18.03
Compensation expense recorded during the period (in thousands)	$	330	$	395
Period end:
Unamortized compensation cost (in thousands)	$	979

Performance-Based RSUs

The ~~following is the activity~~performance-based RSUs provide for the issuance of shares of PFSI Class ~~C Units:~~A common stock based equally on the attainment of earnings per share and total shareholder return goals and are adjusted for grantee performance ratings. The performance period for these grants is from June 13, 2013 through December 31, 2015. The grantees’ satisfaction of the performance goals will be established by review of a committee of PFSI’s board of directors. Shares vested under these grants will be issued to the grantees no later than March 15, 2016.

Quarter ended March 31,

2013

2012

(in thousands except unit data)

Number of units

Outstanding at beginning of period

2,653

2,932

Granted

498

352

Vested

(73
)
—

Outstanding at end of period

3,078

3,284

Weighted average grant date fair value:

Outstanding at beginning of period

$
439

$
196

Granted

$
402

$
211

Vested

$
1,470

$
—

Outstanding at end of period

$
408

$
197

Units available for future awards at end of period

—

—

Compensation expense recorded during the period

$
124

$
—

Unamortized costs at end of period

$
959

$
550

The performance-based RSUs contain both performance goals (attainment of earnings per share) and market goals (total shareholder return). The Company separately accounts for the performance and market goals when recognizing compensation expense relating to performance-based RSUs.

The fair value of the market goal component of the performance-based RSUs is measured using a variant of the Black-Scholes model. Key inputs are the expected volatility of the Company’s Class A common stock, the risk-free interest rate and expected grantee forfeiture rates.

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~~2011 Incentive Plan~~

~~The terms and conditions of~~Following are the 2011 Equity Incentive Plan (“2011 unit awards”) were communicated to employees and key members of management of the Company during 2012. The 2011 unit awards are subject to the participation preferences and other rights of the Preferred Units and Common Units as described in Note 4 along with performance metrics establishedinputs for grants made for the 2012 vesting period in accordance with the 2011 Equity Incentive Plan agreement. The service period for these awards precedes the Grant date which is expected to be prior to the completion of PFSI’s IPO. At each reporting period during the service period, the Partnership assessed the probability that the performance metrics would be achieved and the 2011 unit awards would become eligible to vest. These performance metrics became probable of being achieved during 2012 and the Company recorded expense relating to the estimated fair values of the unit awards over the service period.

~~The following is the activity for the 2011 unit awards:~~

Quarter ended March 31,

2013

2012

(in thousands except unit data)

Outstanding at beginning of period

3,545

—

Granted

—

3,545

Vested

—

—

Expired or canceled

—

—

Outstanding at end of period

3,545

3,545

Weighted average service period fair value:

Outstanding at beginning of period

$
18,129

$
—

Granted

—

7,680

Vested

—

—

Expired or canceled

—

—

Outstanding at end of period

$
18,129

$
7,680

Units available for future awards at end of period

—

—

Compensation expense recorded during the period

$
—

$
2,573

Unamortized costs at end of period

$
—

$
7,718

The Class C Unit and Common Unit awards contain certain repurchase provisions which could result in an award being settled in cash at the option of the Company alone, in the event of certain types of termination scenarios. The Company established a policy that settlement will not occur until the point in time where the unitholder has borne sufficient risks and rewards of equity ownership, assumed as six months and one day post vesting.

~~Valuation of Stock Based Compensation Awards~~

The valuation of stock based compensation awards was estimated using the income approach, specifically a discounted cash flow analysis, and the market approach to determine the value of the Company. The discounted cash flow analysis was developed based on the Company’s forecasts. The market approach was developed by applying market multiples of comparable peer companies in the Company’s industry or similar lines of business. The values determined by the income and the market approach were combined by weighting the income and market approaches equally. The primary assumptions used in the determination of the fair value of the Company using the discounted cash flow method were the discount rate, terminal capitalization rate, and growth rate assumptions.

~~Table of Contents~~

~~The aggregate value was then allocated to each class of units utilizing the options pricing model using the following assumptions:~~periods presented:

~~Assumption~~Input	~~January 1,~~Quarter ended ~~2012~~September 30, 2013		Nine months ended September 30, 2013
~~Time to liquidity event~~Expected volatility	~~1.00 years~~—		45%
Expected dividends	—		0%
Risk-free interest rate	~~0.15~~	%
~~Dividend yield~~—	~~0.00~~	%
~~Volatility~~	~~40.00~~	%

~~The value derived from the options pricing model was reduced by the following in the determination of fair values of the awards at each of the following dates:~~

~~Assumption~~	~~January 1,~~ ~~2012~~
~~Lack of marketability discount~~	~~20% to 25%~~0.3%-2.3%
~~Lack of control discount~~Annualized grantee forfeiture rate	~~17%~~—	6.2%-19.2%

The fair value of the performance goal component of the performance-based RSUs is measured based on the fair value of the Company’s common shares at the grant date, management’s estimate of to what extent the performance goal will be met and the number of shares to be forfeited during the vesting period. The cost of the performance-based RSUs is amortized to Compensationexpense using the straight line method over the performance period.

Following is a summary of performance-based RSU activity for the periods presented:

	Quarter ended September 30, 2013		Nine months ended September 30, 2013
Number of units
Outstanding at beginning of period	499,364		—
Granted	—		499,364
Vested	—		—
Expired or canceled	253		253
Outstanding at end of period	499,111		499,111
Weighted-average grant date fair value:
Outstanding at beginning of period	$	11.58	$	—
Granted	$	—	$	11.58
Vested	$	—	$	—
Expired or canceled	$	11.58	$	11.58
Outstanding at end of period	$	11.58	$	11.58
Compensation expense recorded during the period (in thousands)	$	464	$	746
Period end:
Unamortized compensation cost (in thousands)	$	3,816

Note ~~18—~~21—Supplemental Cash Flow Information

	Quarter ended March 31,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Cash paid for interest	$	3,693	$	786	$	11,110	$	3,506
Cash paid for income taxes					$	7	$	—
Non-cash investing activity:
Receipt of MSRs created in loan sales activities	$	41,736	$	10,301	$	154,352	$	51,006
Non-cash financing activity:
Settlement of stock subscription through partnership distribution	$	4,113	$	—

Note ~~19—~~22—Regulatory Net Worth and Agency Capital Requirements

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

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

Requirement - company subject to	March 31, 2013				December 31, 2012
requirement	Net worth(1)		Required		Net worth(1)		Required
									September 30, 2013				December 31, 2012
Requirement - company subject to requirement									Net worth (1)		Required		Net worth (1)		Required
	(in thousands)								(in thousands)
Fannie Mae - PLS	$	213,543	$	43,812	$	172,843	$	35,947	$	273,445	$	54,546	$	172,843	$	35,947
Freddie Mac - PLS	$	214,069	$	38,967	$	173,273	$	27,119	$	273,798	$	53,751	$	173,273	$	27,119
Ginnie Mae:
Issuer — PLS	$	201,965	$	36,556	$	152,782	$	23,886	$	260,032	$	45,625	$	152,782	$	23,886
Issuer’s parent — PennyMac	$	278,941	$	40,212	$	227,560	$	26,275	$	554,841	$	50,188	$	227,560	$	26,275
HUD - PLS	$	201,965	$	1,000	$	152,782	$	1,000	$	260,032	$	195,891	$	152,782	$	1,000

(1) Calculated in compliance with the respective Agency’s requirements.

~~The Company is required to maintain specified levels~~46

Table of members’ equity to remain a seller/servicer in good standing with the Agencies. Such equity requirements generally are tied to the size of the Company’s servicing portfolio or loan origination volume. Contents

Noncompliance with the respective agencies’ capital requirements can result in the respective Agency taking various remedial actions up to and including removing ~~the Company’s~~PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency. Management believes that ~~the Company~~PennyMac and PLS had Agency capital in excess of the respective Agencies’ requirements at ~~March 31,~~September 30, 2013.

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Note ~~20—~~23—Commitments and Contingencies

Litigation

The business of the Company involves the collection of numerous accounts, as well as the validity of liens and compliance with various state and federal lending and servicing laws. Accordingly, the Company may be involved in proceedings, claims, and legal actions arising in the ordinary course of business. As of September 30, 2013, the Company was not involved in any legal proceedings, claims, or actions in management’s view would be reasonably likely to have a material adverse effect on the Company.

Commitments to Fund and Sell Mortgage Loans

March 31, 2013

(in thousands)

Commitments to purchase mortgage loans from PMT

$
1,420,790

Commitments to fund mortgage loans

280,292

$
1,701,082

Commitments to sell mortgage loans

$
3,022,710

~~Examination of Federal Income Tax Filings~~

As of December 31, 2012, the Internal Revenue Service was conducting an examination of the Company’s federal income tax filings for the tax year ended December 31, 2010. In March 2013, the IRS examination team concluded their audit of the Company’s federal income tax return for the tax year ended December 31, 2010 and proposed no changes to the return as originally filed. No other federal or state examination was in progress as of March 31, 2013.

~~Litigation~~

The business of the Company involves the collection of numerous accounts as well as the validity of liens and compliance with various state and federal lending and servicing laws; as such the Company is subject to various legal proceedings in the normal course of business. As of March 31, 2013, there were no material current or pending claims against the Company.

	September 30, 2013
	(in thousands)
Commitments to purchase mortgage loans from PMT	$	1,022,670
Commitments to fund mortgage loans	140,861
	$	1,163,531
Commitments to sell mortgage loans	$	3,086,889

Note ~~21—~~24—Segments and Related Information

The Company has two ~~business~~operating segments: mortgage banking and investment management.

The mortgage banking segment represents the Company’s operations aimed at originating, purchasing, selling and servicing newly originated mortgage loans and servicing mortgage loans sourced and managed by the investment management segment, including executing the loan resolution strategy identified by the investment management segment ~~and originating, purchasing, selling and servicing newly originated~~relating to distressed mortgage loans.

The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and completion of asset acquisitions and managing the acquired assets for the Advised Entities.

The investment management segment presently focuses on managing investments in distressed mortgage assets, which include mortgage loans that are either in default or are perceived to be at higher risk of default. The investment management segment then seeks to maximize the value of the mortgage loans on behalf of investors through the direction of effective “high touch” servicing by the mortgage banking segment. “High touch” servicing is based on significant levels of borrower outreach and contact, and the ability to implement long-term, sustainable loan modification and restructuring programs that address borrowers’ ability and willingness to pay their mortgage loans. Where this is not possible, the investment management segment seeks to effect property resolution in a timely, orderly and economically efficient manner for the investor.

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Financial highlights by operating segment are as follows:

Quarter ended March 31, 2013	Mortgage banking		Investment management		Total
							Quarter ended September 30, 2013
							Mortgage banking			Investment management		Total
	(in thousands)						(in thousands)
Revenues:
External:
Net gains on mortgage loans held for sale at fair value	$	39,957	$	—	$	39,957	$	25,949		$	—	$	25,949
Loan origination fees	5,668		—		5,668		6,280			—		6,280
Fulfillment fees from PMT	28,244		—		28,244		18,327			—		18,327
Net servicing income	16,042		—		16,042		21,399			—		21,399
Management fees	—		8,406		8,406		—			10,540		10,540
Carried Interest from Investment Funds	—		4,737		4,737		—			2,812		2,812
Interest	1,737		5		1,742
Net interest income:
Interest income							5,089			4		5,093
Interest expense							(4,156		)	—		(4,156		)
							933			4		937
Other	88		814		902		(22		)	972		950
Intersegment	—		—		—
	91,736		13,962		105,698		72,866			14,328		87,194
Expenses:
Compensation	33,322		2,359		35,681		33,969			1,861		35,830
Interest	3,330		—		3,330
Other	11,254		140		11,394		16,240			207		16,447
	47,906		2,499		50,405		50,209			2,068		52,277
Net income	$	43,830	$	11,463	$	55,293
Income before provision for income taxes							$	22,657		$	12,260	$	34,917
Segment assets at period end	$	642,191	$	50,786	$	692,977	$	1,208,156		$	46,228	$	1,254,384

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Quarter ended March 31, 2012	Mortgage banking		Investment management		Total
							Quarter ended September 30, 2012
							Mortgage banking			Investment management		Total
	(in thousands)						(in thousands)
Revenues:
External:
Net gains on mortgage loans held for sale at fair value	$	13,937	$	—	$	13,937	$	39,760		$	—	$	39,760
Loan origination fees	235		—		235		2,752			—		2,752
Fulfillment fees from PMT	6,124		—		6,124		17,258			—		17,258
Net servicing income	11,576		—		11,576		6,112			—		6,112
Management fees	—		4,193		4,193		—			6,114		6,114
Carried Interest from Investment Funds	—		1,789		1,789		—			3,355		3,355
Interest	430		1		431
Net interest income (expense):
Interest income							1,913			1		1,914
Interest expense							(2,042		)	—		(2,042		)
							(129		)	1		(128		)
Other	195		470		665		1			1,008		1,009
Intersegment	—		—		—
	32,497		6,453		38,950		65,754			10,478		76,232
Expenses:
Compensation	17,180		1,559		18,739		29,089			2,767		31,856
Interest	1,062		—		1,062
Other	3,802		116		3,918		6,375			138		6,513
	22,044		1,675		23,719		35,464			2,905		38,369
Net income	$	10,453	$	4,778	$	15,231
Income before provision for income taxes							$	30,290		$	7,573	$	37,863
Segment assets at period end	$	405,074	$	13,565	$	418,639	$	709,733		$	17,529	$	727,262

	Nine months ended September 30, 2013
	Mortgage banking			Investment management		Total
	(in thousands)
Revenues:
Net gains on mortgage loans held for sale at fair value	$	108,560		$	—	$	108,560
Loan origination fees	18,260			—		18,260
Fulfillment fees from PMT	68,625			—		68,625
Net servicing income	59,510			—		59,510
Management fees	—			29,375		29,375
Carried Interest from Investment Funds	—			10,411		10,411
Net interest income (expense):
Interest income	11,296			14		11,310
Interest expense	(11,686		)	—		(11,686		)
	(390		)	14		(376		)
Other	(22		)	1,796		1,774
	254,543			41,596		296,139
Expenses:
Compensation	106,584			7,266		113,850
Other	41,354			496		41,850
	147,938			7,762		155,700
Income before provision for income taxes	$	106,605		$	33,834	$	140,439
Segment assets at period end	$	1,208,156		$	46,228	$	1,254,384

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	Nine months ended September 30, 2012
	Mortgage banking			Investment management		Total
	(in thousands)
Revenues:
Net gains on mortgage loans held for sale at fair value	$	68,487		$	—	$	68,487
Loan origination fees	5,439			—		5,439
Fulfillment fees from PMT	31,097			—		31,097
Net servicing income	25,346			—		25,346
Management fees	—			15,163		15,163
Carried Interest from Investment Funds	—			7,255		7,255
Net interest income:
Interest income	4,488			3		4,491
Interest expense	(4,226		)	—		(4,226		)
	262			3		265
Other	1			2,514		2,515
	130,632			24,935		155,567
Expenses:
Compensation	71,541			6,214		77,755
Other	14,443			466		14,909
	85,984			6,680		92,664
Income before provision for income taxes	$	44,648		$	18,255	$	62,903
Segment assets at period end	$	709,733		$	17,529	$	727,262

Note ~~22—~~25—Subsequent Events

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

· On ~~May 3,~~November 1, 2013, the Company, ~~amended and restated its master repurchase agreement, by and among Credit Suisse First Boston Mortgage Capital, LLC,~~through PLS, ~~and the Company. Pursuant to the terms~~acquired $10.3 billion in UPB of ~~the amended and restated master repurchase agreement, the parties increased the maximum committed purchase price~~Fannie Mae MSRs from $150 million to $300 million and extended the maturity date to the earlier to occur of October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination. The master repurchase agreement, as amended and restated, remains the same in all other material respects.

·In connection with the IPO by PSFI of its Class A Common Stock, par value $0.0001 per share, covered by the final prospectus, dated May 8, 2013 and included as part of the Registration Statement, PFSI and the Company consummated a recapitalization (“Recapitalization”). Under the terms of the Recapitalization, PFSI, the Company and the existing unitholders of the Company entered into that certain Fourth Amended and Restated Limited Liability Company Agreement of the Company, dated May 8, 2013 (the “LLC Agreement”), pursuant to which, among other things, PFSI became the sole managing member of the Company and the capital structure of the Company was modified by converting all existing classes of units into new Class A units. The allocation of Class A units among the Company’s existing owners was determined pursuant to the distribution provisions of its former limited liability company agreement based upon the liquidation value of the Company, assuming it was liquidated at the time of the IPO of Class A Common Stockthird party, with a ~~value implied~~$62 million co-investment by ~~the IPO of the shares of Class A Common Stock sold~~PMT in the ~~IPO.~~

~~Also in connection~~excess servicing spread associated with the Recapitalization, on May 8, 2013, PSFI entered into: (i) an exchange agreement with the Company and the then-existing unitholders of the Company; (ii) a tax receivable agreement with the Company and the then-existing unitholders of the Company; (iii) a registration rights agreement with the then-existing unitholders of the Company and (iv) separate stockholder agreements with each of BlackRock Mortgage Ventures, LLC and HC Partners LLP, formerly known as Highfields Capital Investments LLC.

·On May 8, 2013, PFSI’s Amended and Restated Certificate of Incorporation and PFSI’s Amended and Restated Bylaws became effective. PFSI is authorized to issue 210.0 million shares consisting of 10.0 million shares of Preferred Stock, par value $0.0001 per share, 200.0 million shares of Class A Common Stock, and 1,000 shares of Class B Common Stock.this MSR portfolio.

· On ~~May 14,~~November 11, 2013, ~~PFSI~~the Company, through PLS, entered into a purchase agreement with a third party to purchase $10.8 billion in UPB of Ginnie Mae MSRs. The Company expects to enter into an agreement with PMT providing for approximately $86 million of co-investment in the excess servicing spread associated with this MSR portfolio. The MSR acquisition by PLS and PMT’s co-investment in the excess servicing spread are subject to the negotiation and execution of definitive documentation, continuing due diligence and customary closing conditions and approvals. There can be no assurance that the committed amounts will ultimately be acquired or that the transactions will be completed ~~its IPO~~at all.

·On October 1, 2013, the Company filed with the SEC a registration statement on Form S-1, which registers the resale from time to time by ~~issuing approximately 12.8 million~~certain stockholders of up to 43,973,679 shares of the Company’s Class A common stock, of which 37,863,679 shares are issuable upon the exchange of Class A ~~Common Stock for cash consideration of $16.875 per share (net of underwriting discounts) to a syndicate of underwriters led~~Units, and 6,110,000 shares are currently held by Citigroup Global Markets, Inc., BofA Merrill Lynch, Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co., as joint book-running managers for the offering. Barclays Capital Inc., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, and Wells Fargo Securities, LLC acted as co-managers. PFSI’s net proceeds from the offering were approximately $215.6 million, after deducting underwriting discounts and commissions. As contemplated in the Registration Statement, PSFI used the net proceeds from the offering to purchase approximately 12.8 million newly issued Class A unitsone of the ~~Company at a price per Class A unit of $16.875.~~stockholders. The registration statement was declared effective by the SEC on October 28, 2013.

43·All agreements to repurchase assets that matured between September 30, 2013 and the date of this Report were extended or renewed.

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

Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes of ~~Private National Mortgage Acceptance Company, LLC~~PennyMac Financial Services, Inc. included within this Quarterly Report on Form 10-Q and the final prospectus of PennyMac Financial Services, Inc. dated May 8, 2013 included as part of its Registration Statement on Form S-1, as amended (SEC File No. 333-186495) (the “Registration Statement”).10-Q.

Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of a number of factors, including those described in “Factors that May Affect Our Future Results” and the risks discussed under the heading “Risk Factors” in the Company’s final prospectus included as part of its Registration Statement on Form S-1, as amended (SEC File No. 333-186495) (the “Registration Statement”), and in Part II, Item 1A., Risk Factors, of this Quarterly Report on Form 10-Q, as well as its consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and its other filings with the United States Securities and Exchange ~~Commission.~~Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and the Company assumes no obligation to update or supplement any forward-looking statements.

Overview

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to ~~Private National Mortgage Acceptance Company, LLC~~PennyMac Financial Services, Inc. (“~~PennyMac”~~PFSI”).

Initial Public Offering and Recapitalization

~~PennyMac Financial Services, Inc. (“PFSI”) has not engaged in any business or other activities except in connection with its formation and~~On May 14, 2013, we completed an initial public offering (“IPO”) ~~of shares. On May 14, 2013, PFSI completed an IPO~~ in which itwe sold approximately 12.8 million shares of Class A Common Stock par value $0.0001 per share (“Class A Common Stock”)~~, which includes approximately 1.7 million shares sold pursuant to the exercise by the underwriters of an over-allotment option,~~ for cash consideration of $16.875 per share (net of underwriting discounts) ~~to a syndicate~~. With the net proceeds from the IPO, we bought Class A Units of ~~underwriters.~~Private National Mortgage Acceptance Company, LLC (“PennyMac”) and became its sole managing member. We operate and control all of the business and affairs and consolidate the financial results of PennyMac.

~~Prior to~~Before the completion of the IPO, the limited liability company agreement of PennyMac was amended and restated to, among other things, ~~modify~~change its capital structure by converting the different classes of interests held by its existing unitholders into ~~New Holdings~~Class A Units. PennyMac and its existing unitholders also entered into an exchange agreement under which (subject to the terms of the exchange agreement) they ~~will~~ have the right to exchange their ~~New Holdings~~Class A Units for shares of our Class A Common Stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and certain other transactions that would cause the number of outstanding shares of Class A Common Stock to be different than the number of ~~New Holdings~~Class A Units that PFSI owns.

~~With~~Before 2013, PennyMac made an election pursuant to Section 754 of the ~~net proceeds from~~Internal Revenue Code which remains in effect. An exchange results in a special adjustment for PFSI that may increase PFSI’s tax basis in the ~~IPO, PFSI purchased the New Holdings Units~~assets of PennyMac that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that PFSI would otherwise be required to pay in the future and ~~became its sole managing member. PFSI operates and controls all~~result in increases in investment in PennyMac deferred tax assets net of ~~the business and affairs and consolidates the financial results of PennyMac.~~investment in PennyMac deferred tax liabilities.

As part of the IPO, ~~PFSI~~we entered into a tax receivable agreement with the then-existing unitholders of PennyMac that provides for ~~its~~ payment to such owners of 85% of the tax benefits, if any, that ~~PFSI is~~we are deemed to realize under certain circumstances as a result of (i) increases in tax basis resulting from exchanges of ~~New Holdings~~Class A Units and (ii) certain other tax benefits related to ~~its entering into the~~our tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

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Our Company

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

~~Table of Contents~~

~~We were~~PennyMac was founded in 2008 by members of ~~our~~its executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC, together with its affiliates, ~~“BlackRock,”~~ and HC Partners LLC, formerly known as Highfields Capital Investments LLC, together with its ~~affiliates, “Highfields.”~~affiliates.

We conduct our business in two segments: mortgage banking and investment management. Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC, ~~or PLS,~~(“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. Our principal investment management subsidiary, PNMAC Capital Management, LLC, ~~or PCM,~~(“PCM”), is an SEC registered investment adviser. ItPCM manages PennyMac Mortgage Investment Trust ~~or PMT,~~(“PMT”), a mortgage real estate investment trust, ~~or REIT,~~ listed on the New York Stock Exchange. PCM also manages PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, LP, both registered under the Investment Company Act of 1940, as amended, and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our “Investment Funds” and, together with PMT, as our “Advised Entities.”

Mortgage Banking

Our mortgage banking segment is comprised of three primary businesses: correspondent lending, retail lending, and loan servicing.

· Correspondent Lending. Our correspondent lending business manages, on behalf of PMT and for our own account, the acquisition of newly originated, prime credit quality, first-lien residential mortgage loans that have been underwritten to investor guidelines. PMT acquires, from approved correspondent sellers, newly originated loans, primarily “conventional” residential mortgage loans guaranteed by the ~~GSEs and “government-insured” residential mortgage loans insured or guaranteed by the FHA or the VA and eligible to back securities guaranteed by Ginnie Mae.~~Agencies. For conventional loans, we perform fulfillment activities for PMT and earn a fulfillment fee for each loan purchased by PMT. In the case of government-insured loans, we purchase them from PMT at PMT’s cost plus a sourcing fee and fulfill them for our own account.

· Retail Lending. Our retail lending business originates new prime credit quality, first-lien residential conventional and government-insured mortgage loans on a national basis to allow customers to purchase or refinance their homes. We conduct this business through a consumer direct model, which 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 and have been developing our consumer direct operations with call centers strategically positioned across the United States.

· Loan Servicing. Our loan servicing business performs loan administration, collection and default activities, including the collection and remittance of loan payments; response to customer inquiries; accounting for principal and interest; holding custodial (impound) funds for the payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions. We service a diverse portfolio of loans both as the owner of MSRs and on behalf of other MSR or mortgage owners. We provide prime servicing for conventional and government-insured loans, as well as special servicing for distressed ~~whole~~ loans that have been acquired as investments by our Advised Entities, and loans in “private-label” MBS securities, which are securities issued by institutions that are not affiliated with any Agency.

During the quarter and nine months ended ~~March 31,~~September 30, 2013, we managed PMT’s acquisition of approximately ~~$5.5~~$8.0 billion and $25.2 billion, respectively, in unpaid principal balance of newly originated, prime credit quality, first-lien residential mortgage loans. We purchased, for our own account, approximately ~~$3.4~~$4.0 billion and $12.0 billion in unpaid principal balance of government-insured loans ~~of the $3.7 billion~~from PMT ~~acquired~~ during the quarter and nine month period ended ~~March 31,~~September 30, 2013. We also originated ~~$268.1~~$282.5 million and $892.3 million in unpaid principal balance of residential mortgage loans through our retail channel during the quarter and nine month period ended ~~March 31,~~September 30, 2013. During the quarter and nine months ended ~~March 31,~~September 30, 2013, we increased our portfolio of loans that we serviced or subserviced from approximately $28.2 billion at December 31, 2012 to approximately ~~$36.2~~$52.9 billion at ~~March 31,~~September 30, 2013.

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During the quarter and nine months ended ~~March 31,~~September 30, 2012, we managed PMT’s acquisition of approximately ~~$1.2~~$6.3 billion and $11.5 billion, respectively, in unpaid principal balance of newly originated, prime credit quality, first-lien residential mortgage ~~loans, of which we~~loans. We purchased ~~$799.0 million~~for our account approximately $2.6 billion and $5.0 billion, respectively, in unpaid principal balance of government-insured loans from ~~PMT for our own account.~~PMT. We also originated ~~$61.9~~$147.5 million and $302.6 million, respectively, in unpaid principal balance of residential mortgage loans through our retail channel during the quarter and nine months ended ~~March 31,~~September 30, 2012, and increased our portfolio of loans that we serviced or subserviced from approximately $7.7 billion at December 31, 2011 to approximately ~~$9.2~~$18.6 billion at ~~March 31,~~September 30, 2012.

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Investment Management

We are an investment manager through our indirect wholly-owned subsidiary, PCM. PCM currently manages PMT and the Investment Funds, which had combined net assets of approximately ~~$1.8~~$2.1 billion as of ~~March 31,~~September 30, 2013. For these activities, we earn management fees as a percentage of net assets and incentive compensation based on investment performance.

Observations on Current Market Opportunities

Our business is affected by macroeconomic conditions in the United States, including economic growth, unemployment rates, the residential housing market and interest rate levels and expectations. The U.S. economy continues its pattern of modest growth as reflected in recent economic data. During the ~~first~~third quarter of 2013, real U.S. gross domestic product expanded at an annual rate of ~~2.5%~~2.8% compared to a revised ~~2.0%~~2.5% and ~~0.4%~~2.8% annual rates for ~~both~~ the ~~first~~second quarter of 2013 and ~~fourth quarters~~third quarter of 2012, respectively. Modest economic growth ~~and pressure on state and federal government spending~~ continued to affect unemployment rates during the ~~first~~second quarter of 2013. The national unemployment rate was ~~7.6%~~7.2% at ~~March 31,~~September 30, 2013 and ~~compared~~compares to a revised seasonally adjusted rate of ~~8.2%~~7.8% at ~~March 31,~~September 30, 2012 and ~~7.8%~~7.6% at ~~December 31, 2012. Declining unemployment is partially reflective of a declining workforce labor participation rate.~~June 30, 2013. Delinquency rates on ~~single family~~ residential ~~mortgage~~real estate loans ~~linger at historically high~~remain elevated compared to historical rates. As reported by the Federal Reserve, during the ~~fourth~~second quarter of ~~2012, charge-off and~~2013, the delinquency ~~rates~~rate on residential real estate loans ~~and leases at~~held by commercial banks ~~were 10.07%~~was 9.4%, ~~an improvement~~a reduction from ~~10.30%~~10.6% during the ~~first~~second quarter of 2012.

Residential real estate activity appears to be ~~modestly~~ improving. The seasonally adjusted annual rate of existing home sales for ~~March~~September 2013 was ~~10.3%~~10.7% higher than for ~~March~~September 2012 and the national median existing home price for all housing types was ~~$184,300,~~$199,200, an ~~11.8%~~11.7% increase from ~~March~~September 2012. On a national level, foreclosure filings during the ~~first~~third quarter of 2013 decreased ~~12%~~by 27% as compared to the ~~fourth~~third quarter of ~~2012 and 23% as compared~~2012. Foreclosure activity across the country is expected to the first quarter of 2012, representing the ninth consecutive quarter with an annual decrease in foreclosure activity. A previously expected increase in foreclosure activity at the national level as lenders resolve their operational issues relating to the foreclosure of delinquent loans has not yet materialized, however it is anticipated that foreclosure activity within select markets may increase duringremain above historical average levels through the remainder of 2013 and beyond.

Thirty-year fixed rate mortgage interest rates ranged from a high of ~~3.57%~~4.49% to a low of ~~3.41%~~4.37% during the ~~first~~third quarter of 2013 (Source: the Federal Home Loan Mortgage Corporation’s Weekly Primary Mortgage Market Survey). During the first nine months of 2013, mortgage interest rates have ranged from a high of 4.58% to a low of 3.34%. During the third quarter of 2012, interest rates for the thirty-year fixed rate mortgage ranged from a high of ~~3.95%~~3.66% to a low of ~~3.89%~~3.40%.

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

Mortgage lenders originated an estimated $460 billion of home loans during the ~~first~~third quarter of 2013, ~~were approximately $500 billion, an increase~~down 18.6 percent from the second quarter of ~~19.0% compared~~the year. That brought year-to-date volume for the origination market to ~~originations of $420 billion~~slightly less than $1.6 trillion, up 3.9 percent from the pace set during the first ~~quarter of 2012, and a decrease of 4.8% compared to originations of $525 billion during the fourth quarter~~nine months of 2012 (Source: Inside Mortgage Finance). However, mortgage originations are forecast to decline, with current industry estimates for the fourth quarter of 2013 totaling $280 billion (Source: average of Fannie Mae, Freddie Mac and Mortgage Bankers Association forecasts).

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In our capacity as an investment manager, we continue to see substantial volumes of distressed residential mortgage loan sales (sales of loan pools that consist of either nonperforming loans, troubled but performing loans or a combination thereof) offered for sale by a limited number of sellers. During the ~~first~~third quarter of 2013, we reviewed ~~27 mortgage loan pools with unpaid principal balances totaling approximately $5.7 billion. This compares to our review of~~ 25 mortgage loan pools with unpaid principal balances totaling approximately ~~$4.9~~$7.3 billion. This compares to our review of 23 mortgage loan pools with unpaid principal balances totaling approximately $3.8 billion during the ~~first~~third quarter of 2012. We managed the acquisition, on behalf of PMT, of distressed mortgage loans with fair values totaling ~~$200.3~~$822 million during the third quarter ~~ended March 31,~~of 2013 ~~and none~~compared to $151 million during the third quarter ~~ended March 31,~~of 2012.

In recent periods, we have seen increased competition from new and existing market participants in both our correspondent lending and retail ~~origination~~lending businesses, as well as reductions in the overall level of refinancing activity. We believe that this change in supply and demand within the marketplace has been driving lower production margins in recent periods, which ~~will be~~is reflected in our results of operations in our gains on mortgage loans held for sale. Although margins on gains from mortgage loans held for sale benefitted from wider secondary spreads (the difference between interest rates charged to borrowers and yields on mortgage-backed securities in the secondary market) ~~early~~ in ~~the fourth quarter of~~ 2012, margins narrowed ~~as the quarter progressed~~in subsequent quarters and ~~into the first quarter of 2013. While production margins remained elevated from a historical perspective during the first quarter of 2013,~~ we expect them to continue to normalize toward their long-term averages in ~~2013.~~2013 and 2014.

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Results of Operations

~~Set forth below is a summary of our~~Our results of operations are summarized below for the periods ~~indicated.~~presented:

	Quarter ended March 31,				Quarter ended September 30,					Nine months ended September 30,
	2013		2012		2013		2012			2013			2012
	(in thousands)				(in thousands)
Revenue
Net gains on mortgage loans held for sale at fair value	$	39,957	$	13,937	$	25,949	$	39,760		$	108,560		$	68,487
Loan origination fees	5,668		235		6,280		2,752			18,260			5,439
Fulfillment fees from PennyMac Mortgage Investment Trust	28,244		6,124		18,327		17,258			68,625			31,097
Net servicing income	16,042		11,576		21,399		6,112			59,510			25,346
Management fees	8,406		4,193		10,540		6,114			29,375			15,163
Carried Interest from Investment Funds	4,737		1,789		2,812		3,355			10,411			7,254
Interest	1,742		431
Net interest income					937		(128		)	(376		)	265
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust	88		195		165		314			(68		)	630
Other	814		470		785		695			1,842			1,886
Total revenue	105,698		38,950		87,194		76,232			296,139			155,567
Expenses
Compensation	35,681		18,739
Interest	3,330		1,062
Other	11,394		3,918
Total expenses	50,405		23,719		52,277		38,369			155,700			92,664
Provision for income taxes					3,493		—			5,531			—
Net income	$	55,293	$	15,231	$	31,424	$	37,863		$	134,908		$	62,903

Income by segment:
Pre-tax income by segment:
Mortgage Banking	$	43,830	$	10,453	$	22,657	$	30,290		$	106,605		$	44,648
Investment Management	11,463		4,778		12,260		7,573			33,834			18,255
	$	55,293	$	15,231	$	34,917	$	37,863		$	140,439		$	62,903
During the period:
Mortgage loans purchased and originated for sale:
Government-insured or guaranteed loans acquired from PMT at fair value	$	3,548,397	$	838,120	$	4,147,535	$	2,650,097		$	12,429,698		$	5,111,185
Retail production at fair value	268,125		61,891		282,440		149,006			895,405			304,402
	$	3,816,522	$	900,011	$	4,429,975	$	2,799,103		$	13,325,103		$	5,415,587
Unpaid principal balance of mortgage loans fulfilled for PMT	$	5,538,564	$	1,224,737	$	3,681,771	$	2,488,443		$	12,792,482		$	4,828,117
At period end:
Unpaid balance of mortgage loan servicing portfolio at period-end	$	36,166,630	$	9,228,422
Net assets of Advised Entities under management	$	1,774,949	$	1,222,042
Unpaid principal balance of mortgage loan servicing portfolio
Mortgage loans held for sale					$	490,088	$	376,717		$	490,088		$	376,717
MSRs owned					22,776,613		8,286,075			22,776,613			8,286,075
Subserviced					29,605,633		10,313,879			29,605,633			10,313,879
					$	52,872,334	$	18,976,671		$	52,872,334		$	18,976,671
Net assets of Advised Entities
PennyMac Mortgage Investment Trust					$	1,494,765	$	1,184,203		$	1,494,765		$	1,184,203
Investment Funds					556,013		575,850			556,013			575,850
					$	2,050,778	$	1,760,053		$	2,050,778		$	1,760,053

Comparison of the quarters and nine months ended September 30, 2013 and 2012

Net income decreased by approximately $6.4 million or 17% and increased $72.0 million or 114% for the quarter and nine months ended September 30, 2013, respectively, when compared to the same periods in 2012.

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~~Comparison of the quarters ended March 31, 2013 and 2012~~

~~Net~~The decrease in net income ~~increased by approximately $40.1 million or 263% for~~from the quarter ended ~~March 31,~~September 30, 2012 to the quarter ended September 30, 2013 is due to the contraction in the mortgage origination market and the resulting increased price competition, which had a negative effect on our margins during the quarter ended September 30, 2013. While our mortgage loan origination volume increased $1.6 billion or 58%, increased price competition in the mortgage market during the quarter ended September 30, 2013 caused a reduction in our net gain on mortgage loans held for sale at fair value of $13.8 million or 35%.

The increase in net income for the nine months ended September 30, 2013 as compared to the ~~quarter~~nine months ended ~~March 31, 2012. The increase in net income~~September 30, 2012, primarily reflects growth in the Company’s mortgage banking operations. Loan purchase and origination volume increased by approximately ~~$2.9~~$7.9 billion or ~~324%~~146% in the ~~quarter~~nine months ended ~~March 31,~~September 30, 2013 as compared to the ~~quarter~~nine months ended ~~March 31,~~September 30, 2012 and the Company’s loan servicing portfolio ~~grew by~~was approximately ~~$26.9~~$52.9 billion at September 30, 2013, an increase of $33.9 billion or ~~292%~~179% from ~~March 31, 2012 to March 31, 2013.~~September 30, 2012. This growth was supplemented by growth in the Company’s investment management segment due to an increase of ~~$2.9~~$14.2 million or ~~165% in Carried Interest income and $4.2 million or 100%~~94% in management fees ~~reflecting an increase of approximately $552.9 million or 45% in net assets under management and~~for the ~~recognition of incentive fees relating~~nine months ended September 30, 2013, compared to the ~~Company’s management of PMT.~~nine months ended September 30, 2012. These revenue increases were partly offset by increases in expenses of approximately ~~$26.7~~$63.0 million or ~~113%~~68%, during the nine month periods ended September 30, 2013 as compared to the comparable periods in 2012. We incurred these increases in expenses to accommodate ~~our~~the Company’s growth.

Net gains on mortgage loans held for sale at fair value ~~increased $26.0~~

During the quarter and nine months ended September 30, 2013, we recognized net gains on mortgage loans held for sale at fair value totaling $25.9 million ~~from $13.9~~and $108.6 million, respectively. This compares to net gains on mortgage loans held for sale at fair value totaling $39.8 million and $68.5 million, respectively, during the quarter and nine months ended September 30, 2012.

The decrease in net gains on mortgage loans held for sale at fair value from the quarter ended ~~March 31,~~September 30, 2012 to ~~$40.0 million for~~ the quarter ended ~~March 31,~~September 30, 2013 is due to the effect of increasing price competition in the mortgage market, which had a negative effect on our margins during the quarter ended September 30, 2013. The net gain for the quarters ended September 30, 2013 and 2012 included $60.1 million and $25.6 million, respectively, in fair value of MSRs received as part of proceeds on sales.

The increase in net gains on mortgage loans held for sale at fair value for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012, was due to growth in the volume of mortgage loans that we purchased and originated and subsequently sold during 2013 as compared to 2012. The net ~~gain~~gains for the ~~quarter~~nine months ended ~~March 31, 2012~~September 30, 2013 included ~~$10.3~~$154.4 million in fair value of MSRs received as part of proceeds on sales. The net ~~gain~~gains for the ~~quarter~~nine months ended ~~March 31, 2013~~September 30, 2012 included ~~$41.7~~$51.0 million in fair value of MSRs received as part of proceeds on sales.

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We recognized gains on mortgage loans held for sale as summarized below:

Quarter ended March 31,

2013

2012

(in thousands)

Cash gain (loss) on sale:

Proceeds from sales

$
(11,823
)
$
5,700

Hedging activities

17,621

(6,032
)

5,798

(332
)
Non-cash changes in fair value:

Change in fair value of IRLCs

1,497

183

MSRs received as proceeds on sale

41,736

10,301

MSR recapture payable to affiliate

(133
)
—

Provision for representations and warranties on mortgage loans sold

(1,244
)
(311
)
Change in fair value relating to mortgage loans and hedging instruments held for sale at year-end:

Mortgage loans

(2,392
)
26

Hedging instruments

(5,305
)
4,070

Total non-cash changes in fair value relating to mortgage loans and hedging instruments held at year-end

(7,697
)
4,096

Total non-cash changes in fair value

34,159

14,269

$
39,957

$
13,937

Unpaid principal balance of mortgage loans sold during the period

$
3,857,150

$
777,604

Interest rate lock commitments issued during the period

$
33,649

$
14,444

At period end:

Fair value of mortgage loans held for sale

$
203,661

$
176,282

Commitments to fund and purchase mortgage loans

$
1,701,082

$
594,783

Increase (decrease) in net gains on mortgage loans held for sale at fair value due to:

Net change in fair value of IRLCs

$
1,314

$
148

Volume of mortgage loans sold

32,956

12,999

Gain margin

(8,250
)
(10
)
Total change

$
26,020

$
13,137

	Quarter ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
	(in thousands)
Cash (loss) gain:
Sales proceeds	$	(93,725	)	$	26,676		$	(148,866	)	$	49,695
Hedging activities	88,789			(19,574		)	128,670			(40,276		)
	(4,936		)	7,102			(20,196		)	9,419
Non-cash gain:
Receipt of MSRs in loan sale transactions	60,137			25,620			154,352			51,006
MSR recapture payable to affiliate	(86		)	—			(586		)	—
Provision for losses relating to representations and warranties provided in loan sales	(1,069		)	(918		)	(3,766		)	(1,856		)
Change in fair value relating to mortgage loans and hedging derivatives held for sale at period end:
IRLCs	37,768			20,723			(2,382		)	25,528
Mortgage loans	27,510			6,693			7,876			8,636
Hedging derivatives	(93,375		)	(19,460		)	(26,738		)	(24,246		)
	$	25,949		$	39,760		$	108,560		$	68,487
During the period:
Unpaid principal balance of loans sold	$	4,442,944		$	2,490,174		$	12,679,436		$	4,834,492
Interest rate lock commitments issued, net of cancellations	$	3,699,970		$	2,274,847		$	12,280,205		$	3,539,763
At period end:
Fair value of mortgage loans held for sale	$	530,248		$	410,071		$	530,248		$	410,071
Commitments to fund and purchase mortgage loans	$	1,163,531		$	1,470,590		$	1,163,531		$	1,470,590

Increase (decrease) in gains on mortgage loans held for sale at fair value due to:
Change in IRLCs fair value	$	17,045		$	19,324		$	27,910		$	24,428
Volume of loans sold	7,532			17,981			68,494			41,143
Gain margin	(38,388		)	112			(512		)	(979		)
Total change	$	(13,811	)	$	37,417		$	95,892		$	64,592

We recognize a substantial portion of our gain on mortgage loans held for sale at fair value before we fund or purchase the loan. In the course of our correspondent and retail lending activities, we make contractual commitments to PMT and to mortgage loan applicants to purchase or fund mortgage loans at specified terms. We call these commitments interest rate lock commitments (“IRLCs”). We recognize the value of IRLCs at the time we make a commitment to PMT or the borrower.

We estimate the fair value of an IRLC based on quoted Agency MBS prices, our estimate of the fair value of the MSRs we expect to receive in the sale of the loans and the probability that the mortgage loan will fund or be purchased as a percentage of the commitment we have made (the “pull-through rate”). We update our estimates of the value of the IRLCs as the mortgage loans move through the purchase or loan process for changes in our estimate of the probability the loan will fund and for changes in interest rates.

An active, observable market for IRLCs does not exist. Therefore, we estimate the fair value of IRLCs using methods and assumptions we believe that market participants use in pricing 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 value of the mortgage loans we have committed to purchase. Significant changes in the pull-through rate and the MSR component of the IRLCs, in isolation, could result in a significant change in fair value measurement. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but rising interest rates increase the pull-through rate for loans that have decreased in fair value in comparison to the agreed-upon purchase price.

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Following is a quantitative summary of key unobservable inputs we used in the valuation of IRLCs as of the dates presented:

	September 30, 2013	December 31, 2012
	Range (Weighted average)
Key Inputs
Pull-through rate	56.6% - 98.0%	61.6% — 98.1%
	(78.3%)	(79.1%)
MSR value expressed as:
Servicing fee multiple	2.1 - 5.0	3.2 — 4.2
	(4.0)	(4.0)
Percentage of unpaid principal balance	0.4% - 2.6%	0.6% — 2.2%
	(1.1%)	(0.9%)

MSRs represent the value of a contract that obligates us to service mortgage loans on behalf of the purchaser of the loan in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We recognize MSRs at our estimate of the fair value of the contract to service the loans. As discussed in Net loan servicing income, below, how much of the MSR we realize in cash depends on how our initial estimates of the future cash flows accruing to the MSRs are realized.

As economic fundamentals influence the loans we sell with servicing rights retained, our estimate of the fair value of MSRs will also change. As a result, we will record changes in fair value as a component of Net loan servicing income for the MSRs we carry at fair value and we may recognize changes in fair value relating to our MSRs carried at the lower of amortized cost or fair value depending on the relationship of the asset’s fair value to its carrying value at the measurement date.

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

	Quarter ended September 30,
	2013		2012
	Range (Weighted average)
	Amortized cost	Fair value	Amortized cost	Fair value
Unpaid principal balance of underlying loans	$4,120,962	$315,869	$2,485,982	$4,217
Weighted-average servicing fee rate (in basis points)	30	31	27	27

Pricing spread (1)	5.4% - 15.9%	7.4% - 13.1%	7.5% - 9.9%	7.5% - 9.9%
	(8.2%)	(9.9%)	(9.8%)	(7.8%)
Annual total prepayment speed (2)	8.5% - 14.7%	8.8% - 17.2%	8.4% - 9.5%	8.4% - 9.5%
	(8.8%)	(9.2%)	(8.4%)	(9.2%)
Life (in years)	2.9 — 6.9	3.6 — 7.0	6.4 — 6.7	6.4 — 6.7
	(6.7)	(6.9)	(6.7)	(6.4)
Cost of servicing	$68 — $120	$68 — $120	$68 — $100	$68 — $100
	$(104)	$(101)	$(99)	$(71)

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	Nine months ended September 30,
	2013		2012
	Range (Weighted average)
	Amortized cost	Fair value	Amortized cost	Fair value
Unpaid principal balance of underlying loans	$12,350,104	$318,066	$4,811,328	$17,504
Weighted-average servicing fee rate (in basis points)	29	31	27	28

Pricing spread (1)	5.4% - 15.9%	7.4% - 13.1%	7.5% - 9.9%	7.5% - 9.9%
	(8.2%)	(9.9%)	(9.8%)	(8.4%)
Annual total prepayment speed (2)	8.5% - 18.5%	8.8% - 17.2%	7.8% - 9.5%	7.8% - 9.5%
	(8.8%)	(9.2%)	(8.3%)	(8.6%)
Life (in years)	2.9 – 6.9	3.6 – 7.0	5.9 – 6.9	5.9 – 6.9
	(6.7)	(6.9)	(6.7)	(6.4)
Cost of servicing	$68 – $120	$68 – $120	$68 – $100	$68 – $100
	$(102)	$(101)	$(99)	$(77)

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

(2)Annual total prepayment speed is measured using CPR.

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

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

We evaluate the adequacy of the balance of our recorded liability for losses under representations and warranties based on our loss experience and our assessment of future losses to be incurred relating to loans we have previously sold and which remain outstanding at the balance sheet date. 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 and the potential severity of loss in the event of defaults and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and periodically update our liability estimate.

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

	Quarter ended September 30,					Nine months ended September 30,
	2013			2012		2013			2012
	(in thousands)
Balance at beginning of period	$	6,185		$	1,387	$	3,504		$	449
Provisions for losses on loans sold	1,069			918		3,766			1,856
Incurred losses	(39		)	—		(55		)	—
Balance at end of period	$	7,215		$	2,305	$	7,215		$	2,305
Unpaid principal balance of mortgage loans subject to representations and warranties	$	20,428,213		$	6,444,618	$	20,428,213		$	6,444,618

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

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)
During the period:
Unpaid balance of mortgage loans repurchased	$	1,973	$	—	$	6,840	$	—
Unpaid principal balance of mortgage loans put to correspondent lenders	$	357	$	—	$	1,410	$	—
At period end:
Unpaid principal balance of mortgage loans subject to pending claims for repurchase	$	1,249	$	3,459	$	1,249	$	3,459

During the quarter and nine months ended September 30, 2013, we repurchased mortgage loans with unpaid balances totaling $2.0 million and $6.8 million, respectively, and charged $39,000 and $55,000, respectively, in incurred losses relating to these repurchases against our liability for representations and warranties. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases and the loans sold season, we expect the level of repurchase activity to increase. As economic fundamentals change and as investor and Agency evaluation of their loss mitigation strategies, including claims under representations and warranties, change, the level of repurchase activity and ensuing losses will change, which may be material to us.

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

Our hedging activities relating to correspondent and retail lending primarily involve forward sales of our inventory and IRLCs as well as purchases of options to sell and options to purchase MBS.

Other loan production-related revenues

Loan origination fees increased ~~$5.5~~$3.5 million ~~from $0.2~~and $12.8 million, ~~for~~respectively, in the quarter and nine months ended ~~March 31, 2012~~September 30, 2013 compared to ~~$5.7 million for~~ the ~~quarter ended March 31, 2013.~~same periods in 2012. The increase was due to growth in the volume of loans produced.

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Loan fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with its acquisition, packaging and sale of mortgage loans. The ~~fee is~~loan fulfillment fees are calculated as a percentage of the unpaid principal balance of the mortgage loans ~~purchased.~~ we fulfill for PMT. Summarized below are our fulfillment fees for the periods presented:

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)
Fulfillment fee revenue	$	18,327	$	17,258	$	68,625	$	31,097
Unpaid principal balance of loans fulfilled	$	3,681,771	$	2,488,443	$	12,792,482	$	4,828,117

The increase of ~~$22.1~~$1.1 million and $37.5 million, respectively, in ~~the~~fulfillment fees during the quarter and nine months ended ~~March 31,~~September 30, 2013 compared to the same ~~period~~periods in 2012 is due to the ~~substantial~~continuing growth in the volume of Agency-eligible and jumbo mortgage loans PMT purchased in its correspondent lending activities.

Net servicing income

Our net servicing income is summarized before for the periods presented

	Quarter ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
	(in thousands, except share data)
Net servicing income:
Loan servicing fees
From non-affiliates	$	14,596		$	2,154		$	35,397		$	8,776
From PennyMac Mortgage Investment Trust	10,738			4,600			27,251			13,163
From Investment Funds	1,813			2,484			6,060			9,130
Mortgage servicing rebate from (to) Investment Funds	(362		)	135			(535		)	(360		)
Ancillary and other fees	2,777			1,153			7,700			3,661
	29,562			10,526			75,873			34,370
Amortization, impairment and change in estimated fair value of mortgage servicing rights	(8,163		)	(4,414		)	(16,363		)	(9,024		)
Net servicing income	$	21,399		$	6,112		$	59,510		$	25,346

Following is a summary of our loan servicing portfolio as of the dates presented:

	September 30, 2013		December 31, 2012
	(in thousands)
Loans serviced at period end:
Prime servicing:
Subserviced for our Advised Entities	$	24,540,141	$	12,920,209
Owned MSRs—Originated	20,024,781		8,992,602
Owned MSRs—Acquisitions	1,700,612		990,461
Mortgage loans held for sale	490,088		417,742
Total prime servicing	46,755,622		23,321,014
Special servicing:
Subserviced for our Advised Entities	5,015,113		3,559,893
Subserviced for non-affiliates	50,379		—
Owned MSRs—Acquisitions	1,051,220		1,271,642
Total special servicing	6,116,712		4,831,535
Total loans serviced	$	52,872,334	$	28,152,549

Total loan servicing fees increased ~~$9.2~~$19.0 million ~~from $11.8~~and $41.5 million, ~~for~~respectively, in the quarter and nine months ended ~~March 31, 2012~~September 30, 2013 compared to ~~$21.1 million for~~the same periods in 2012. The increase in the quarter and nine months ended ~~March 31, 2013. The increase~~September 30, 2013 was due to an increase of ~~$3.5~~$12.4 million ~~in loan servicing fees from PMT due to growth in the volume of loans we subservice for PMT, an increase of $6.2~~and $26.6 million, respectively, in loan servicing fees from non-affiliates due to growth in our portfolio of loans serviced as a result of our ~~increasing~~ongoing sales of mortgage loans with servicing rights ~~retained~~retained; an increase of $6.1 million and $14.1 million, respectively, in loan servicing fees from PMT due to growth in the volume of loans we service and subservice for PMT; and an increase of ~~$875,000~~$1.6 million and $4.0 million, respectively, in ancillary fees due to growth in the portfolios of mortgage loans serviced, partially offset by a decrease in loan servicing fees net of mortgage servicing rebate from the Investment Funds of ~~$1.5 million.~~$398,000 and $3.2 million, respectively. This decrease was due to the decrease in the principal balance in the Investment Funds’ mortgage loan portfolios as these portfolios liquidate following the end of the related commitment periods on December 31, 2011.

~~Set forth~~Amortization, impairment and change in estimated fair value of mortgage servicing rights are summarized below ~~is information about our loan servicing portfolio as of:~~for the periods presented:

March 31,

December 31,

2013

2012

(in thousands)

Loans serviced at period end (unpaid principal balance):

Prime servicing:

Subserviced for our Advised Entities

$
17,685,194

$
12,920,209

Owned MSRs: Originated

12,487,986

8,992,602

Owned MSRs: Acquisitions

887,589

990,461

Mortgage loans held for sale

193,894

417,742

Total prime servicing

31,254,663

23,321,014

Special servicing:

Subserviced for our Advised Entities

3,700,919

3,559,893

Owned MSRs—Acquisitions

1,211,048

1,271,642

Total special servicing

4,911,967

4,831,535

Total loans serviced

$
36,166,630

$
28,152,549

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)
MSRs carried at lower of amortized cost or fair value:
Amortization	$	5,367	$	1,127	$	12,713	$	1,962
Recognition of impairment	1,192		1,000		549		1,784
Hedging losses	—		48		1,291		48
	6,559		2,175		14,553		3,794
MSRs carried at fair value:
Change in fair value	1,575		2,239		1,781		5,230
Change in fair value of excess spread financing	29		—		29		—
	1,604		2,239		1,810		5,230
Total amortization, impairment and change in fair value	$	8,163	$	4,414	$	16,363	$	9,024

Amortization, impairment and change in estimated fair value of mortgage servicing rights increased ~~$4.8~~$3.8 million from ~~$0.2~~$4.4 million ~~for~~to $8.2 million from the quarter ended ~~March 31,~~September 30, 2012 to ~~$5.0 million for~~ the quarter ended ~~March 31,~~September 30, 2013 and increased $7.4 million from $9.0 million to $16.4 million from the nine months ended September 30, 2012 to the nine months ended September 30, 2013. The increase in amortization, impairment and change in estimated fair value during the quarter and nine months ended September 30, 2013 as compared to the quarter and nine months ended September 30, 2012 was due primarily to growth in our investment in MSRs between 2012 and 2013, which ~~increases~~caused an increase in amortization of the ~~level~~asset.

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

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

The key assumptions used in the valuation of MSRs include mortgage prepayment and default rates of the underlying loans, the applicable discount rate, and cost to service loans. These variables can, and generally do, change from period to period as market conditions change. Therefore our estimate of the fair value of MSRs changes from period to period. Our valuation committee reviews and approves the fair value estimates of our MSRs.

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

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

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

Our MSRs are summarized by the basis on which we account for the assets below as of the dates presented:

Basis of Accounting	September 30, 2013			December 31, 2012
	(in thousands)
Fair value	$	26,768		$	19,798
Lower of amortized cost or fair value:
Amortized cost	$	229,617		$	92,155
Valuation allowance	(3,527		)	(2,978		)
Carrying value	$	226,090		$	89,177
Fair value	$	239,326		$	91,028

Total MSR:
Carrying value	$	252,858		$	108,975
Fair value	$	266,094		$	110,826
Unpaid balance of mortgage loans underlying MSRs	$	22,776,613		$	11,254,705
Average servicing fee rate (in basis points)
Amortized cost	28			28
Fair value	27			26
Fair value special servicing	50			50

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Key assumptions used in determining the fair value of MSRs as of the dates presented are as follows:

Purchased MSRs backed by distressed mortgage loans

	September 30, 2013		December 31, 2012
	Range (Weighted average)
	Fair value	Amortized cost	Fair value	Amortized cost
	(Unpaid principal balance of underlying loans and effect on value amounts in thousands)
Carrying value	$10,125	—	$12,370	—
Unpaid principal balance of underlying loans	$1,051,220	—	$1,271,478	—
Weighted-average note rate	5.88%	—	6.01%	—
Weighted-average servicing fee rate (in basis points)	50	—	50	—

Discount rate	15.3% – 15.3%	—	15.3% – 15.3%	—
	(15.3%)	—	(15.3%)	—

Average life (in years)	4.8	—	5.0	—
Prepayment speed (1)	11.7% – 11.7%	—	10.7% – 10.7%	—
	(11.7%)	—	(10.7%)	—

Per-loan cost of servicing	$250 – $250	—	$270 – $270	—
	$(250)	—	$(270)	—

(1)Prepayment speed is measured using CPR.

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All other MSRs

	September 30, 2013		December 31, 2012
	Range (Weighted average)
	Fair value	Amortized cost	Fair value	Amortized cost
	(Unpaid principal balance of underlying loans and effect on value amounts in thousands)
Carrying value	$16,643	$226,090	$7,428	$89,177
Unpaid principal balance of underlying loans	$1,700,612	$20,024,781	$1,166,765	$8,730,686
Weighted-average note rate	4.68%	3.57%	5.22%	3.65%
Weighted-average servicing fee rate (in basis points)	27	28	26	28
Pricing spread (1)	6.4% – 17.5%	5.4% – 15.9%	7.5% – 19.5%	7.5% – 16.5%
	(8.9%)	(7.6%)	(10.6%)	(9.8%)

Average life (in years)	0.2 – 14.4	2.6 – 6.9	0.2 – 14.4	2.5 – 6.9
	(6.6)	(6.7)	(5.0)	(6.6)
Prepayment speed (2)	8.7% – 72.8%	8.5% – 16.0%	9.0% – 84.2%	8.7% – 28.3%
	(10.6%)	(9.0%)	(19.2%)	(9.2%)

Per-loan cost of servicing	$68 – $120	$68 – $120	$68 – $140	$68 – $140
	$(77)	$(102)	$(76)	$(99)

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

(2)Prepayment speed is measured using CPR.

Significant changes to any of the key assumptions shown above in isolation could result in a significant change in the MSR fair value measurement. Changes in these key assumptions are not necessarily directly related. The sensitivity analyses, under Quantitative and Qualitative Disclosures about Market Risk in this document, are limited in that they were performed as of a particular point in time, only contemplate the movements in the indicated variables, do not incorporate changes in the variables in relation to other variables, are subject to ~~amortization, along with reduced valuation gains during~~ the ~~quarter ended March 31, 2013 compared~~accuracy of various models and inputs used, and do not take into account other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by the Manager to account for changing circumstances. For these reasons, the ~~quarter ended March 31, 2012~~sensitivity tables in the following pages should not be viewed as earnings forecasts.

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Management fees and ~~recognition of approximately $1.3 million in hedging losses during~~Carried Interest

Management fees and Carried Interest are summarized below for the ~~quarter ended March 31, 2013. No hedging activities were undertaken during the quarter ended March 31, 2012.~~periods presented:

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)
Management Fees:
PennyMac Mortgage Investment Trust:
Base management fee	$	5,104	$	3,672	$	14,043	$	7,964
Performance incentive fee	3,435		—		9,443		—
	8,539		3,672		23,486		7,964
Investment Funds	2,001		2,442		5,889		7,199
	$	10,540	$	6,114	$	29,375	$	15,163

Carried Interest	$	2,812	$	3,355	$	10,411	$	7,254
Total management fees and carried interest	$	13,352	$	9,469	$	39,786	$	22,417

Net assets of Advised Entities:
PennyMac Mortgage Investment Trust	$	1,494,765	$	1,184,203	$	1,494,765	$	1,184,203
Investment Funds	556,013		575,850		556,013		575,850
	$	2,050,778	$	1,760,053	$	2,050,778	$	1,760,053

Management fees from PMT increased ~~$4.7~~$4.9 million ~~from $1.8~~and $15.5 million, ~~for~~respectively, in the quarter and nine months ended ~~March 31, 2012~~September 30, 2013 compared to ~~$6.5 million for~~ the ~~quarter ended March 31, 2013.~~same periods in 2012. The increase was due primarily to:

·Base management fees increased due to ~~increases~~an increase in PMT’s shareholders’ equity upon which its management fee is based ~~along with~~by $310.6 million or 26% from September 30, 2012 through September 30, 2013.

·We recognized incentive fees of ~~$2.1~~$3.4 million and $9.4 million for the quarter and nine months ended September 30, 2013, respectively. These fees were not recognized during 2012. We recognized performance incentive fees during 2013 as a result of anthe amendment to our management agreement with PMT effective February 1, 2013, which changed the basis on which profitability is measured for incentive fee purposes. ~~Management~~Under the amended agreement, profitability is primarily based on net income determined in compliance with U.S. GAAP. Previously, the agreement based profitability on U.S. GAAP net income generally excluding non-cash gains and losses.

Partially offsetting the increases in management fees from PMT, management fees from the Investment Funds decreased ~~$475,000 from $2.4~~$441,000 and $1.3 million, ~~for~~respectively, in the quarter and nine months ended ~~March 31, 2012~~September 30, 2013 compared to ~~$1.9 million for~~ the ~~quarter ended March 31, 2013.~~same periods in 2012. The decrease was due to decreases in the Investment Funds’ net asset values as a result of continued distributions to the ~~funds’~~Funds’ investors following the end of the Investment Funds’ commitment periods at December 31, 2011, which reduced the investment base on which the management fees are computed.

Carried Interest from Investment Funds ~~increased $2.9 million~~decreased $543,000 from ~~$1.8~~$3.4 million for the quarter ended ~~March 31,~~September 30, 2012 to ~~$4.7~~$2.8 million for the quarter ended ~~March~~September 30, 2013. The decrease was due to decreases in the Investment Funds’ net asset values as a result of continued distributions to the Funds’ investors following the end of the Investment Funds’ commitment periods at December 31, 2011, which reduced the investment base on which the Carried Interest returns is computed. Carried Interest from Investment Funds increased $3.2 million from $7.3 million for the nine months ended September 30, 2012 to $10.4 million for the nine months ended September 30, 2013. The increase was primarily due to valuation gains in the Investment Funds’ loan portfolios as a result of increases in demand for distressed mortgage loans, ~~change~~improvements in the value of the loans as they proceed through the resolution process and continuing increases in collateral valuations for the properties underlying the Funds’ loans.

~~Interest~~Other revenues

Net interest income increased ~~$1.3~~$1.1 million from ~~$431,000~~($128,000) for the quarter ended ~~March 31,~~September 30, 2012, to ~~$1.7 million~~$937,000 for the quarter ended ~~March 31, 2013. The increase was~~September 30, 2013 due to the increase in our average inventory of mortgage loans held for sale as a result of the growth in our loan production activities, and primarily relates to the interest that we earned on mortgage loans net of interest paid on our financing facilities during the period for which we held the loans pending sale. Net interest income decreased $641,000 from $265,000 for the nine months ended September 30, 2012 to ($376,000) for the nine months ended September 30, 2013 due to interest expense financing our non-interest earning assets exceeding net interest income on our interest earning assets.

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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:

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013			2012
	(in thousands)
Dividends	$	43	$	41	$	128		$	124
Change in fair value	122		273		(196		)	506
	$	165	$	314	$	(68	)	$	630

Fair value of PMT shares at period end	$	1,701	$	1,753	$	1,701		$	1,753

Change in fair value of investment in and dividends received from PMT decreased ~~$107,000 from $195,000 for~~$149,000 and $698,000, respectively, in the quarter and nine months ended ~~March 31, 2012~~September 30, 2013 compared to ~~$88,000 for~~ the ~~quarter ended March 31, 2013.~~same periods in 2012. The ~~decrease was~~decreases were primarily due to ~~a $109,000 decrease~~decreases in the fair value of our investment in common shares of PMT as of September 30, 2013 as compared to the appreciation in value of our investment in common shares of ~~PMT.~~PMT during 2012. During the ~~quarters~~periods ended ~~March 31,~~September 30, 2013 and 2012, we held 75,000 common shares of PMT.

49Expenses

~~Table of Contents~~

Our compensation expense is summarized below for the periods presented:

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)
Salaries and wages	$	26,722	$	16,320	$	74,970	$	41,269
Incentive compensation	2,945		7,645		22,649		14,690
Taxes and benefits	3,825		2,298		11,937		5,964
Stock and unit-based compensation	2,338		5,593		4,294		15,833
	$	35,830	$	31,856	$	113,850	$	77,756

Average headcount	1,402		800		1,324		649
Period-end headcount	1,329		850		1,329		850

Compensation expense increased ~~$16.9~~$4.0 million from ~~$18.7~~$31.9 million for the quarter ended ~~March 31,~~September 30, 2012 to ~~$35.7~~$35.8 million for the quarter ended ~~March 31,~~September 30, 2013 and increased $36.1 million from $77.8 million for the nine months ended September 30, 2012 to $113.9 million for the nine months ended September 30, 2013. The increase in compensation expense was due to the development of and growth in our mortgage banking segment as well as growth in the level of assets managed and serviced for ~~PMT. Below is a summary of our average and period end headcount (including temporary and contract personnel):~~

Quarter ended
March 31,

2013

2012

Average headcount

1,145

501

Period-end headcount

1,205

549

~~Interest~~PMT, partially offset by decreases in unit-based compensation relating to PennyMac Class A units awards. The increase in compensation expense ~~increased $2.3 million from $1.1 million for~~in the quarter ended ~~March 31, 2012~~September 30, 2013 was further offset by reduced accruals for cash-based incentive compensation. We expect stock-based compensation to ~~$3.3 million for the quarter ended March 31, 2013. The~~ increase in ~~interest~~future quarters as a result of equity-based grants made on June 13, 2013. However, based on current outstanding equity award grants we do not expect to incur stock-based compensation expense ~~reflects increases in borrowings incurred to finance~~at the ~~growth of our loan production activities and, to a lesser extent, to finance our servicing advances and a portion of our MSRs.~~level recorded during 2012.

Professional services expense increased ~~$1.1~~$1.5 million ~~from $1.2~~and $4.4 million, ~~for~~respectively, in the quarter and nine months ended ~~March 31, 2012~~September 30, 2013 compared to ~~$2.3 million for~~ the ~~quarter ended March 31, 2013.~~same periods in 2012. The increase was due to growth in the size of our operations.

~~Technology~~Loan origination expense increased ~~$604,000~~$1.0 million from ~~$1.0~~$1.8 million for the quarter ended ~~March 31,~~September 30, 2012 to ~~$1.6~~$2.8 million for the quarter ended ~~March 31, 2013. The increase was due to growth in the size of our operations.~~

~~Servicing expense~~September 30, 2013 and increased ~~$553,000~~$6.0 million from ~~$1.0~~$1.8 million for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2012 to ~~$1.5~~$7.8 million for the ~~quarter~~nine months ended ~~March 31, 2013. The increase was due to growth in our mortgage servicing portfolio.~~

~~Loan origination expense increased $2.3 million from $171,000 for the quarter ended March 31, 2012 to $2.5 million for the quarter ended March 31,~~September 30, 2013. The increase was due to growth in our loan origination volume and to changes in our fee structure which resulted in many of our fees being charged to correspondent lenders on an other-than pass-through basis. As a result of this change in structure, we recognized both the fee income and expense during 2013 as compared to “passing through” these items on a net basis during 2012.

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Technology expense increased $1.5 million and $3.0 million, respectively, in the quarter and nine months ended September 30, 2013 compared to the same periods in 2012. The increase was due to growth in the size of our operations.

Servicing expense increased $932,000 and $2.6 million, respectively, in the quarter and nine months ended September 30, 2013 compared to the same periods in 2012. The increase was due to growth in our mortgage servicing portfolio.

Occupancy expense increased ~~$108,000 from $383,000 for~~$402,000 and $805,000, respectively, in the quarter and nine months ended ~~March 31, 2012~~September 30, 2013 compared to ~~$491,000 for~~ the ~~quarter ended March 31, 2013.~~same periods in 2012. The increase was primarily due to growth in the size of our operations.

Other expense increased ~~$2.8~~$4.5 million ~~from $160,000 for~~and $10.1 million, respectively, in the quarter and nine months ended ~~March 31, 2012~~September 30, 2013 compared to ~~$3.0 million for~~ the ~~quarter ended March 31, 2013.~~same periods in 2012. The increase was due to growth in the size of our operations.

Expenses Allocated to PMT

PMT reimburses us for other expenses, including common overhead expenses incurred on its behalf by us, in accordance with the terms of our management agreement. The expense amounts presented in our income statement are net of these allocations. Expense amounts allocated to PMT during the ~~quarter~~periods ended ~~March 31,~~September 30, 2013 and 2012 are summarized below:

	Quarter ended March 31,				Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012		2013		2012
	(in thousands)				(in thousands)
Technology	$	772	$	63	$	891	$	310	$	2,814	$	568
Occupancy	467		159		558		414		1,658		897
Depreciation and amortization	286		62		349		178		986		365
Other	766		73		729		342		2,335		645
Total expenses	$	2,291	$	357	$	2,527	$	1,244	$	7,793	$	2,475

The amount of total expenses that we allocated to PMT increased ~~$1.9~~$1.3 million from ~~$357,000~~$1.2 million in the quarter ended ~~March 31,~~September 30, 2012 to ~~$2.3~~$2.5 million for the quarter ended ~~March 31,~~September 30, 2013 and increased $5.3 million from $2.5 million for the nine months ended September 30, 2012 to $7.8 million for the nine months ended September 30, 2013. The increase was due to growth in our overhead expenses, ~~along with an increase of PMT’s assets in relation to the total assets that we manage,~~ resulting in a larger portion of our overhead expenses being allocated to PMT.

50Provision for Income Taxes

For the quarter and nine months ended September 30, 2013, our effective tax rates were 9.9% and 4.0%, respectively. The difference between our effective tax rate and the statutory rate is primarily due to the allocation of earnings to the noncontrolling interest unitholders. As the noncontrolling unitholders convert their ownership units into our shares, we expect an increase in allocated earnings that will be subject to corporate federal and state statutory tax rates.

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Balance Sheet Analysis

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

March 31, 2013

December 31, 2012

(in thousands)

ASSETS

Cash and short-term investments

$
128,799

$
65,487

Mortgage loans held for sale at fair value

203,661

448,384

Servicing advances

96,587

93,152

Receivable from affiliates

17,917

20,363

Carried Interest due from Investment Funds

52,460

47,723

Mortgage servicing rights

146,992

108,975

Other assets

46,561

48,079

Total assets

$
692,977

$
832,163

LIABILITIES

Borrowings

$
243,486

$
446,547

Payable to affiliates

91,675

83,574

Other liabilities

50,073

40,292

Total liabilities

385,234

570,413

MEMBERS’ EQUITY

307,743

261,750

Total liabilities and members’ equity

$
692,977

$
832,163

~~Comparison of balance sheet data as of March 31, 2013 and December 31, 2012~~

	September 30, 2013		December 31, 2012
	(in thousands)
ASSETS
Cash and short-term investments	$	183,885	$	65,487
Mortgage loans held for sale at fair value	530,248		448,384
Servicing advances	105,344		93,152
Receivable from affiliates	22,571		20,363
Carried Interest due from Investment Funds	58,134		47,723
Mortgage servicing rights	252,858		108,975
Other assets	101,344		48,079
Total assets	$	1,254,384	$	832,163

LIABILITIES
Borrowings	$	444,658	$	446,547
Payable to affiliates	94,804		83,574
Other liabilities	124,961		40,292
Total liabilities	664,423		570,413
EQUITY	589,961		261,750
Total liabilities and equity	$	1,254,384	$	832,163

Total assets ~~decreased $139.2~~increased $422.2 million from $832.2 million at December 31, 2012 to ~~$693.0 million~~$1.3 billion at ~~March 31,~~September 30, 2013. The ~~decrease~~increase was primarily due to ~~a decrease~~an increase of ~~$244.7~~$143.9 million in MSRs and an increase of $81.9 million in mortgage loans held for sale at fair value, due to sales of loans to investors in excess of the volume of mortgage loans that we originated or purchased, resulting in a decreased inventory of mortgage loans at period end, partially offset by an increase of $38.0 million in mortgage servicing rightsboth due to growth in our correspondent lending operations. Our cash and short-term investment balances increased by $118.4 million reflecting the ~~volume~~proceeds from our IPO partially offset by our use of ~~mortgage loans that we sold with servicing rights retained, resulting in an increase in~~the IPO proceeds to pay down our ~~investment in MSRs. The volume of mortgage loans that we purchase from PMT is dependent on~~repurchase agreement borrowings which reduced the ~~volume of loans that PMT purchases from correspondent lenders and the timing~~percentage of our ~~purchases of such loans from PMT.~~assets being financed.

Total liabilities ~~decreased~~increased by ~~$185.2~~$94.0 million from $570.4 million as of December 31, 2012 to ~~$385.2~~$664.4 million as of ~~March 31,~~September 30, 2013. The ~~decrease~~increase was primarily attributable to an increase in liabilities relating to a ~~reduction in borrowings~~tax receivable agreement with PennyMac’s partners of ~~$203.1~~$58.6 million, ~~resulting~~which resulted from ~~a decline in mortgage loans held for sale.~~one exchange of PennyMac Class A units to shares of PFSI stock.

Cash Flows

Comparison of ~~Quarter~~Quarters ended ~~March 31,~~September 30, 2013 and 2012

Our cash flows resulted in a net increase in cash of ~~$43.8~~$44.1 million during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2013 as compared to the ~~quarter~~nine months ended ~~March 31,~~September 30, 2012. The positive cash flows arose primarily due to ~~growth~~our initial public offering during the period. Cash used in ~~our operations. Cash provided by~~ operating activities totaled ~~$272.2~~$68.2 million during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2013. The cash ~~flows~~used in operating activities were primarily due to ~~the reductions in~~growth of our mortgage ~~loan inventory~~loans held for sale portfolio as ~~cash proceeds from loan sales exceeded originations~~origination and purchases of loans ~~by $244.6 million.~~exceeded loan sales.

Net cash used in investing activities was ~~$(15.9)~~$78.5 million ~~for~~during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2013. This use of cash reflects an increase in short-term investments ~~offset~~due to the liquidity provided by the ~~cash inflow from margin deposits and a decrease in restricted cash.~~IPO.

Net cash ~~used in~~provided by financing activities was ~~$212.5~~$190.8 million ~~for~~during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2013. Cash ~~used in~~provided by financing activities was primarily due to the ~~repurchases~~IPO which raised $212.3 million net of ~~loans sold under agreements to repurchase exceeding sale of loans under agreements to repurchase by $213.5 million~~underwriting and ~~reflects reduced financing requirements as the result of our reduced level of inventory of mortgage loans held for sale at March 31, 2013 as compared to December 31, 2012.~~

~~Table of Contents~~offering costs.

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), 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, earnings on our investments and proceeds from borrowings and/or additional equity offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

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Our current leverage strategy is to finance our assets where we believe such borrowing is prudent and appropriate. Our borrowing activities are in the form of sales of mortgage loans under agreements to repurchase, and a note payable secured by mortgage servicing rights and servicing advances.

Our repurchase agreements represent the sales of mortgage loans together with agreements for us to buy back the mortgage loans at a later date. During the ~~quarter~~nine months ended ~~March 31,~~September 30, 2013, the average balance outstanding under agreements to repurchase mortgage loans totaled ~~$275.1~~$354.1 million, and the maximum daily amount outstanding under such agreements totaled ~~$479.9~~$623.5 million. During the ~~quarter~~nine months ended ~~March 31,~~September 30, 2012, the average balance outstanding under agreements to repurchase mortgage loans totaled ~~$65.0~~$146.4 million, and the maximum daily amount outstanding under such agreements totaled ~~$159.5~~$361.6 million.

The difference between the maximum and average daily amounts outstanding was due to increases in the sizes and utilization of our existing facilities, ~~and our entry into a new credit facility during the quarter ended June 30, 2012,~~ all in support of the growth in our mortgage loan production, investments and correspondent lending activities.

All of our borrowings discussed above have short-term maturities. The transactions relating to mortgage loans under agreements to repurchase mature between ~~June 25, 2013~~January 2, 2014 and the earlier to occur of October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination and provide for the repurchase from major financial institution counterparties based on the estimated fair value of the mortgage loans sold. Our note payable secured by mortgage servicing rights and loan servicing advances at fair value has a maturity date that is the earlier to occur of October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination.

PLS’s debt financing agreements require it to comply with various financial covenants. The most significant financial covenants currently include the following:

· positive net income during each calendar quarter;

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

· a minimum tangible net worth of $90 million;

· a maximum ratio of total liabilities to tangible net worth of ~~less than~~ 10:1; and

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

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.

With respect to servicing that we perform for the Advised Entities, we are also subject to certain covenants under their respective debt agreements. These covenants are similar to those above, with the additional covenant that we must maintain a minimum servicing portfolio of $5 billion in UPB.

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.

~~Table of Contents~~

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

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of ~~March 31,~~September 30, 2013, we have not entered into any off-balance sheet arrangements or guarantees.

Contractual Obligations

As of ~~March 31,~~September 30, 2013, we had on-balance sheet contractual obligations of ~~$180.0~~$387.9 million to finance assets under agreements to repurchase with maturities between ~~June~~July 25, 2013 and ~~January 2, 2014. On May 3, 2013, we amended and restated one of our master repurchase agreements and extended the maturity date to~~ the earlier to occur of October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination. We also had a contractual obligation of ~~$63.4~~$56.8 million relating to a note payable secured by mortgage servicing rights and loan servicing advances at fair value and with a maturity date that is the earlier to occur of October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination. We also lease our primary office facilities under an agreement that expires on February 28, 2017 and we license certain software to support our loan servicing operations.

Payment obligations under these agreements are summarized below:

	Payments due by period										Payments due by period
Contractual/Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Contractual Obligations											Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
	(in thousands)										(in thousands)
Commitments to purchase mortgage loans from PMT											$	1,022,670	$	1,022,670	$	—	$	—	$	—
Commitments to fund mortgage loans											140,861		140,861		—		—		—
Commitments to sell mortgage loans											3,086,889		3,086,889		—		—		—
Loans sold under agreements to repurchase											387,883		387,883		—		—		—
Note payable											56,775		56,775		—		—		—
Payable to Private National Mortgage Acceptance Company, LLC partner under tax receivable agreement											58,615		—		11,916		9,959		36,740
Software licenses (1)	$	7,263	$	2,905	$	4,358	$	—	$	—	7,710		3,855		3,855		—		—
Office leases	14,001		3,123		7,596		3,282		—		13,132		3,584		7,829		1,719		—
Loans sold under agreements to repurchase	180,049		180,049		—		—		—
Note payable	63,437		63,437		—		—		—
Total	$	264,750	$	249,514	$	11,954	$	3,282	$	—	$	4,774,535	$	4,702,517	$	23,600	$	11,678	$	36,740

(1) Software licenses include both volume and activity-based fees that are dependent on the number of loans serviced during each period and include a base fee of approximately $452,000 per year. Estimated payments for software licenses above are based on the number of loans currently serviced by us, which totaled approximately ~~157,000~~226,000 at ~~March 31,~~September 30, 2013. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. For the quarter ended ~~March 31,~~September 30, 2013, software license fees totaled $2.8 million. All figures contained in this footnote are in actual amounts and not in thousands (in contrast to the table above).

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The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of ~~March 31,~~September 30, 2013:

Counterparty

Amount at risk

Weighted-average
repurchase agreement
maturity

Amount at risk

Weighted-average
maturity of advances under
repurchase agreement

Facility Maturity

(in thousands)

(in thousands)

Bank of America, N.A.

9,151

January 2, 2014

45,516

December 16, 2013

January 2, 2014

Citibank, N.A.

6,415

June 25, 2013

Credit Suisse First Boston Mortgage Capital LLC

3,416

September 23, 2013

89,917

December 18, 2013

(1)

~~Table~~(1)The earlier to occur of ~~Contents~~October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination.

Debt Obligations

As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through borrowings with major financial institution counterparties in the form of sales of mortgage loans under agreements to repurchase, and a note payable secured by mortgage servicing rights and loan servicing ~~advances at fair value.~~advances. The borrower under each of these facilities is PLS, and all obligations thereunder are guaranteed by Private National Mortgage Acceptance Company, LLC.

Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of ~~March 31,~~September 30, 2013, we were in compliance in all material respects with these covenants.

The agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

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

All of PLS’s borrowings discussed above have short-term maturities that expire as follows:

Counterparty (1)	Outstanding Indebtedness (2)		Committed Amount		Maturity Date	Outstanding Indebtedness (2)		Committed Amount		Maturity Date
	(in thousands)					(in thousands)
Bank of America, N.A.	$	92,910	$	300,000	January 2, 2014	$	199,423	$	300,000	January 2, 2014
Citibank, N.A.	$	61,092	$	150,000	June 25, 2013	$	—	$	150,000	July 24, 2014
Credit Suisse First Boston Mortgage Capital LLC	$	63,437	$	117,000	(3)	$	188,460	$	300,000	(3)
Credit Suisse First Boston Mortgage Capital LLC	$	26,047	$	300,000	(3)	$	56,775	$	117,000	(3)

(1) The borrowings with Bank of America, N.A., Citibank, N.A. and Credit Suisse First Boston Mortgage Capital LLC (with a committed amount of $300 million) are in the form of sales of mortgage loans under agreements to repurchase. The borrowing with Credit Suisse First Boston Mortgage Capital LLC (with a committed amount of $117 million) is in the form of a note payable secured by mortgage servicing rights and servicing advances.

(2) Represents outstanding indebtedness reduced by cash collateral as of ~~March 31,~~September 30, 2013.

(3) The earlier to occur of October 31, 2014 or the rolling maturity date that is 364 days from any particular date of determination.

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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 ~~to which~~that we are exposed to are ~~credit risk,~~ interest rate risk, credit risk, prepayment risk, inflation risk and market value risk.

Credit Risk

We are subject to credit risk in connection with our loan sales activities. Our loan sales are generally made with contractual representations and warranties, which, if breached, can require us to repurchase the mortgage loan or reimburse the investor for any losses incurred because of that breach. These breaches are generally evidenced when the borrower defaults on a loan. The amount of our liability for losses due to representations and warranties to the loans’ investors is not limited. However, we believe that the current unpaid principal balance of loans sold by us to date represents the maximum exposure to repurchases related to representations and warranties. We include a provision for potential losses due to recourse as part of our recognition of loan sales, based initially on our estimate of the fair value of such obligation. We review our loss experience relating to representations and warranties and adjust our liability estimate when necessary. We believe that residual loan credit quality is primarily determined by the borrowers’ credit profiles and loan characteristics.

~~Table of Contents~~

In the event of developments affecting the credit performance of loans we have sold subject to representations and warranties, such as a significant increase in unemployment or a significant deterioration in real estate values in markets where properties securing mortgage loans we purchase are located, defaults could increase and result in credit losses arising from claims under our representations and warranties, which could materially and adversely affect our business, financial condition and results of operations.

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. This effect is most pronounced with fixed-rate mortgage assets. In general, rising interest rates negatively affect the fair value of our interest rate lock agreements 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 our 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.

We engage in interest rate risk management activities in an effort to reduce the variability of income caused by changes in interest rates. To manage this price risk resulting from interest rate 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 value of our interest rate lock commitments and inventory of mortgage loans held for sale. We do not use derivative financial instruments for purposes other than in support of our risk management activities.

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 the MSRs and when we measured fair value as of the end of each reporting period, the carrying value of our investment in MSRs will be affected. In general, a decline in the principal balances of the loans underlying our MSRs or an increase in prepayment expectations will accelerate the amortization and may result in impairments of our MSRs accounted for using the amortization method and decrease our estimates of the fair value of both the MSRs accounted for using the amortization method and those accounted for using the fair value method, thereby reducing net servicing income.

Inflation Risk

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors will influence our performance more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Furthermore, our consolidated financial statements are prepared in accordance with GAAP and any distributions that ~~Private National Mortgage Acceptance Company, LLC~~PennyMac may make to its members will be determined by us as the managing member of ~~Private National Mortgage Acceptance Company, LLC~~PennyMac based primarily on our taxable income and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair value without considering inflation.

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Market Value Risk

Our mortgage loans held for sale are reported at their estimated fair values. The fair value of these assets fluctuates primarily due to changes in interest rates.

The following sensitivity analyses are limited in that they were (i) performed at a particular point in time, (ii) only contemplate certain movements in interest rates, (iii) do not incorporate changes in interest rate volatility or changes in the relationship of one interest rate index to another, (iv) are subject to the accuracy of various models and assumptions used, including prepayment forecasts and discount rates, and (v) 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 an earnings forecast.

~~Table of Contents~~

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of ~~March 31,~~September 30, 2013, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:

Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	149,384		$	143,244		$	140,345		$	134,863		$	132,269		$	127,351		$	260,632		$	249,562		$	244,345		$	234,493		$	229,837		$	221,023
Change in fair value:
$	$	11,831		$	5,690		$	2,792		$	(2,690	)	$	(5,284	)	$	(10,203	)	$	21,306		$	10,236		$	5,020		$	(4,833	)	$	(9,488	)	$	(18,303	)
%	8.60		%	4.14		%	2.03		%	-1.96		%	-3.84		%	-7.42		%	8.90		%	4.28		%	2.10		%	-2.02		%	-3.96		%	-7.65		%

Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	149,477		$	143,306		$	140,380		$	134,822		$	132,180		$	127,151		$	259,797		$	249,207		$	244,182		$	234,630		$	230,088		$	221,435
Change in fair value:
$	$	11,923		$	5,753		$	2,827		$	(2,732	)	$	(5,373	)	$	(10,402	)	$	20,472		$	9,881		$	4,856		$	(4,696	)	$	(9,238	)	$	(17,891	)
%	8.67		%	4.18		%	2.05		%	-1.99		%	-3.91		%	-7.56		%	8.55		%	4.13		%	2.03		%	-1.96		%	-3.86		%	-7.48		%

Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	143,391		$	140,472		$	139,013		$	136,094		$	134,635		$	131,716		$	248,857		$	244,091		$	241,709		$	236,943		$	234,560		$	229,794
Change in fair value:
$	$	5,837		$	2,919		$	1,459		$	(1,459	)	$	(2,919	)	$	(5,837	)	$	9,531		$	4,766		$	2,383		$	(2,383	)	$	(4,766	)	$	(9,531	)
%	4.24		%	2.12		%	1.06		%	-1.06		%	-2.12		%	-4.24		%	3.98		%	1.99		%	1.00		%	-1.00		%	-1.99		%	-3.98		%

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The following tables summarize the estimated change in fair value of MSRs accounted for using the fair value method as of ~~March 31,~~September 30, 2013, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:

Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	7,600		$	7,348		$	7,228		$	7,001		$	6,892		$	6,686		$	17,971		$	17,283		$	16,957		$	16,339		$	16,046		$	15,490
Change in fair value:
$	$	488		$	235		$	116		$	(112	)	$	(220	)	$	(426	)	$	1,329		$	640		$	314		$	(303	)	$	(596	)	$	(1,153	)
%	6.85		%	3.31		%	1.63		%	-1.57		%	-3.09		%	-5.99		%	7.99		%	3.85		%	1.89		%	-1.82		%	-3.58		%	-6.93		%

Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	8,113		$	7,585		$	7,342		$	6,895		$	6,688		$	6,305		$	18,303		$	17,440		$	17,033		$	16,266		$	15,904		$	15,219
Change in fair value:
$	$	1,000		$	472		$	230		$	(218	)	$	(425	)	$	(808	)	$	1,660		$	797		$	391		$	(376	)	$	(738	)	$	(1,423	)
%	14.06		%	6.64		%	3.23		%	-3.06		%	-5.97		%	-11.35		%	9.98		%	4.79		%	2.35		%	-2.26		%	-4.44		%	-8.55		%

Per-loan servicing cost shift in %

-20%

-10%

-5%

+5%

+10%

+20%

(dollar amounts in thousands)

Fair value

$
7,407

$
7,260

$
7,186

$
7,039

$
6,965

$
6,818

Change in fair value:

$

$
295

$
147

$
74

$
(74
)
$
(147
)
$
(295
)
%

4.14
%
2.07
%
1.04
%
-1.04
%
-2.07
%
-4.14
%

~~Table of Contents~~

Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)
Fair value	$	17,244		$	16,943		$	16,793		$	16,492		$	16,342		$	16,042
Change in fair value:
$	$	601		$	300		$	150		$	(150	)	$	(300	)	$	(601	)
%	3.61		%	1.81		%	0.90		%	-0.90		%	-1.81		%	-3.61		%

The following tables summarize the estimated change in fair value of purchased MSRs backed by distressed mortgage loans accounted for using the fair value method as of ~~March 31,~~September 30, 2013, given several shifts in pricing spreads, prepayment speed and annual per-loan cost of servicing:

Pricing spread shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	12,781		$	12,114		$	11,805		$	11,227		$	10,957		$	10,452		$	11,266		$	10,667		$	10,390		$	9,873		$	9,631		$	9,180
Change in fair value:
$	$	1,272		$	605		$	296		$	(282	)	$	(552	)	$	(1,057	)	$	1,141		$	542		$	265		$	(252	)	$	(494	)	$	(945	)
%	11.05		%	5.26		%	2.57		%	-2.45		%	-4.79		%	-9.18		%	11.27		%	5.36		%	2.61		%	-2.49		%	-4.88		%	-9.33		%

Prepayment speed shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	12,639		$	12,058		$	11,780		$	11,244		$	10,990		$	10,515		$	11,188		$	10,640		$	10,377		$	9,873		$	9,633		$	9,174
Change in fair value:
$	$	1,130		$	549		$	271		$	(265	)	$	(519	)	$	(994	)	$	1,063		$	515		$	252		$	(252	)	$	(492	)	$	(951	)
%	9.82		%	4.77		%	2.36		%	-2.30		%	-4.51		%	-8.64		%	10.50		%	5.08		%	2.49		%	-2.48		%	-4.86		%	-9.40		%

Per-loan servicing cost shift in %	-20%			-10%			-5%			+5%			+10%			+20%			-20%			-10%			-5%			+5%			+10%			+20%
	(dollar amounts in thousands)																		(dollar amounts in thousands)
Fair value	$	12,607		$	12,058		$	11,784		$	11,235		$	10,960		$	10,411		$	11,018		$	10,572		$	10,348		$	9,902		$	9,678		$	9,232
Change in fair value:
$	$	1,098		$	549		$	274		$	(274	)	$	(549	)	$	(1,098	)	$	893		$	447		$	223		$	(223	)	$	(447	)	$	(893	)
%	9.54		%	4.77		%	2.38		%	-2.38		%	-4.77		%	-9.54		%	8.82		%	4.41		%	2.21		%	-2.21		%	-4.41		%	-8.82		%

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Factors That May Affect Our Future Results

This Report contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:

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

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

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· 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. of Part II hereof and the section entitled “Risk Factors” in our final prospectus filed pursuant to Rule 424(b)(4) on May 8, 2013 with the SEC in connection with our initial public offering.

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 creation of the Consumer Financial Protection Bureau, or CFPB, its recently issued and future rules and the enforcement thereof by the CFPB;

· Changes in existing U.S. government-sponsored entities, their current roles or their guarantees or guidelines;

· Changes to government mortgage modification programs;

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

· Foreclosure delays and changes in foreclosure practices;

· Certain banking regulations that may limit our business activities;

· Changes in macroeconomic and U.S. residential real estate market conditions;

· Difficulties inherent in growing loan production volume;

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

·Changes in prevailing interest rates;

· Increases in loan delinquencies and defaults;

· Our reliance on PMT as a significant source of financing for, and revenue related to, our correspondent lending business;

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

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

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· Our obligation to indemnify PMT and the Investment Funds if our services fail to meet certain criteria or characteristics or under other circumstances;

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

· The extensive amount of regulation applicable to our investment management segment;

· Conflicts of interest in allocating our services and investment opportunities among ourselves and our Advised Entities;

· The potential damage to our reputation and adverse impact to our business resulting from the ongoing negative publicity focused on Countrywide Financial Corporation, given the former association of certain of our officers with that entity; and

· Our recent rapid growth.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In response to this Item, the information set forth on pages 5472 to 5774 of this Report is incorporated herein by reference.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of management, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of ~~March 31,~~September 30, 2013. Based upon our evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of ~~March 31,~~September 30, 2013, to provide reasonable assurance that information required to be disclosed by us in 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. 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 control issues and instances of fraud, if any, within the Company to disclose material information otherwise required to be set forth in our periodic reports.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various legal proceedings, claims and actions arising in the ordinary course of business. As of ~~March 31,~~September 30, 2013, we were not involved in any such legal proceedings, claims or actions that management believes would be reasonably likely to have a material adverse effect on us.

Item 1A. Risk Factors

There are no material changes from the risk factors set forth in ~~the~~our final prospectus ~~of PennyMac Financial Services, Inc.~~ dated ~~May 8,~~October 28, 2013 included as part of itour Registration Statement on Form S-1, as ~~amended.~~amended (SEC File No. 333-191522).

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

~~On May 8,~~Effective July 15, 2013, the ~~SEC declared effective PFSI’s Registration Statement on Form S-1, as amended (File No. 333-186495) (the “Registration Statement”), relating~~Company received a Notice of Election of Exchange from a unitholder related to the exchange of 6,110,000 Class A units for an equivalent number of shares of the Company’s Class A Common Stock. In connection with delivering the Notice of Election of Exchange, the unitholder surrendered its ~~underwritten initial public offering of up~~Class A units to ~~12,777,777~~the Company for cancellation and was issued 6,110,000 unregistered shares of Class A Common Stock ~~par value $0.0001 per share, including up to 1,666,666 shares issuable pursuant to an overallotment option granted to the underwriters.~~

~~In connection with the initial public offering, PFSI and PennyMac consummated a recapitalization (“Recapitalization”), pursuant to which PennyMac and its existing unitholders entered into~~ that ~~certain Fourth Amended and Restated Limited Liability Company Agreement, dated May 8, 2013. As a result~~qualified for exemption under Section 4(2) of the Recapitalization, PFSI became the sole managing member of PennyMac and the capital structure of PennyMac was modified by converting all existing classes of units into new Class A units. The allocation of Class A units among PennyMac’s existing owners was determined pursuant to the distribution provisions of its former limited liability company agreement based upon the liquidation value of PennyMac, assuming it was liquidated at the time of the initial public offering of Class A Common Stock with a value implied by the initial public offering price of the shares of Class A Common Stock sold in PFSI’s initial public offering.

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The initial public offering of PFSI Class A Common Stock commenced as of May 8, 2013 after the Registration statement was declared effective, and did not terminate before all of the securities registered pursuant to the Registration Statement were sold. On May 14, 2013, PFSI completed the initial public offering of all such shares at a price to the public of $18.00 per share, resulting in net proceeds to PFSI of approximately $215.6 million after deducting underwriting discounts and commissions to be approximately $14.4 million. The syndicate of underwriters was led by Citigroup Global Markets, Inc., BofA Merrill Lynch, Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co., acting as joint book-running managers for the offering. Barclays Capital Inc., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, and Wells Fargo Securities, LLC acted as co-managers. No payments were made by PFSI to directors, officers, general partners of PFSI or their associates, to persons owning ten percent or more of its Class A Common Stock, or to affiliates of PFSI.

Upon the completion of the initial public offering and as contemplated in the Registration Statement, PSFI used the net proceeds from the offering to purchase 12,777,777 million newly issued Class A units of PennyMac at a price per Class A unit of $16.875. There has been no material change in the planned use by PennyMac of these proceeds as described in PFSI’s final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit
Number		Exhibit Description
3.1			Amended and Restated Certificate of Incorporation of PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
3.2			Amended and Restated Bylaws of PennyMac Financial Services, Inc. (incorporated by reference to Exhibit ~~3.2~~3.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on ~~May 14,~~August 19, 2013).
4.1			Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s
		Amendment No. 4 to Form S-1 Registration Statement as filed with the SEC on April 29, 2013).
10.1			Fourth Amended and Restated Limited Liability Company Agreement of Private National Mortgage Acceptance Company, LLC, dated as of May 8, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.2			Exchange Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and Private National Mortgage Acceptance Company, LLC and the Company Unitholders (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.3			Tax Receivable Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. Private National Mortgage Acceptance Company, LLC and each of the Members (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.4			Registration Rights Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and the Holders (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.5			Stockholder Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and BlackRock Mortgage Ventures, LLC (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.6			Stockholder Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and HC Partners LLC (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.7	†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).
10.8	†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 16, 2013).
10.9	†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).
10.10	†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Other Eligible Participants (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).
10.11	†		PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).
10.12	†		Form of PennyMac Financial Services, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.8 of the Registrant’s Amendment No. 2 to Form S-1 Registration Statement as filed with the SEC on April 5, 2013).
10.13	†		Employment Agreement, dated as of April 20, 2013, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and Stanford L. Kurland (incorporated by reference to Exhibit 10.34 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
10.14	†		Employment Agreement, dated as of April 20, 2013, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and David A. Spector (incorporated by reference to Exhibit 10.35 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
10.15			Mortgage Banking and Warehouse Services Agreement, effective as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.9 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
10.16			Amendment No. 1 to Mortgage Banking and Warehouse Services Agreement, dated as of March 1, 2013, by and between PennyMac Loan Services LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.31 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

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Exhibit Number		Exhibit Description
10.17		Amendment No. 2 to Mortgage Banking and Warehouse Services Agreement, dated as of August 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 19, 2013).
10.18		Amended and Restated Flow Servicing Agreement, dated as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.10 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.18~~	10.19		Second Amended and Restated Flow Servicing Agreement, dated as of March 1, 2013, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.30 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

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~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
~~10.19~~	10.20		MSR Recapture Agreement, effective as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.11 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.20~~10.21		Amendment No. 1 to MSR Recapture Agreement, dated as of August 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.21 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).
10.22		Amended and Restated Management Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.12 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.21~~	10.23		Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.13 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.22~~	10.24		Master Spread Acquisition and MSR Servicing Agreement, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P., dated as of February 1, 2013 (incorporated by reference to Exhibit 10.26 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.23~~10.25		Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P., dated as of September 30, 2013 (incorporated by reference to Exhibit 10.25 of the Registrant’s Form S-1/A Registration Statement as filed with the SEC on October 22, 2013).
10.26		Confidentiality Agreement, by and between PennyMac Mortgage Investment Trust and PNMAC Capital Management, LLC, dated as of February 6, 2013 (incorporated by reference to Exhibit 10.28 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.24~~	10.27		Amended and Restated Confidentiality Agreement, dated as of March 1, 2013, by and between PennyMac Mortgage Investment Trust and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.29 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).
~~10.25~~	10.28		Amended and Restated Flow Servicing Agreement, by and between PNMAC Mortgage Co., LLC and PennyMac Loan Services, LLC, dated August 1, 2010 (incorporated by reference to Exhibit 10.14 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).
~~10.26~~	10.29		Second Amended and Restated Flow Servicing Agreement, dated as of August 1, 2008, as amended effective as of January 1, 2012, by and between PNMAC Mortgage Opportunity Fund Investors, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.15 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.27~~	10.30		Amended and Restated Flow Servicing Agreement, dated as of August 1, 2010, by and between PNMAC Mortgage Opportunity Fund, LP and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.27 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

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~~10.28~~Exhibit
Number		Exhibit Description
10.31		Investment Management Agreement, as amended and restated May 26, 2011, by and between PNMAC Mortgage Opportunity Fund, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.16 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.29~~	10.32		Investment Management Agreement, dated as of August 1, 2008, between PNMAC Mortgage Opportunity Fund Investors, LLC and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.17 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.30~~	10.33		Master Repurchase Agreement, dated as of March 17, 2011, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.18 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.31~~	10.34		Amendment No. 1 to Master Repurchase Agreement, dated as of July 21, 2011, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
~~10.32~~	10.35		Amendment No. 2 to Master Repurchase Agreement, dated as of March 23, 2012, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
~~10.33~~	10.36		Amendment No. 3 to Master Repurchase Agreement, dated as of August 28, 2012, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

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~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
~~10.34~~	10.37		Amendment No. 4 to Master Repurchase Agreement, dated as of January 3, 2013, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
~~10.35~~	10.38		Amendment No. 5 to Master Repurchase Agreement, dated as of March 28, 2013, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
~~10.36~~	10.39		Master Repurchase Agreement, dated as of June 26, 2012, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.20 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.37~~	10.40		Amendment Number One to the Master Repurchase Agreement, dated as of December 31, 2012, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.21 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.38~~10.41		Amendment Number Two to the Master Repurchase Agreement, dated April 17, 2013, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.40 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).
10.42		Amendment Number Three to the Master Repurchase Agreement, dated June 25, 2013, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.41 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).
10.43		Amendment Number Four to the Master Repurchase Agreement, dated July 25, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.42 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).
10.44		Second Amended and Restated Loan and Security Agreement, dated as of March 27, 2012, between Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.22 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).
~~10.39~~	10.45		Amendment No. 1 to Second Amended and Restated Loan and Security Agreement, dated as of December 12, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.23 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).
~~10.40~~	10.46		Amendment No. 2 to Second Amended and Restated Loan and Security Agreement, dated as of March 22, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.23 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

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~~10.41~~Exhibit
Number		Exhibit Description
10.47		Amended and Restated Master Repurchase Agreement, dated as of May 3, 2013, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.36 of the Registrant’s Amendment No. 5 to Form S-1 Registration Statement as filed with the SEC on May 7, 2013).
~~31.1~~10.48		Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of September 5, 2013, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.47 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).
10.49		Master Repurchase Agreement, dated as of July 2, 2013, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 8, 2013).
10.50		Amendment Number One to the Master Repurchase Agreement, dated as of August 26, 2013, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.49 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).
10.51		Guaranty Agreement, dated as of July 2, 2013, by Private National Mortgage Acceptance Company, LLC in favor of Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 1.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 8, 2013).
31.1		Certification of Stanford L. Kurland pursuant to Rule ~~13a — 14(a)~~13a-14(a)/~~15d — 14(a)~~15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Anne D. McCallion pursuant to Rule ~~13a — 14(a)~~13a-14(a)/~~15d — 14(a)~~15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	*		Certification of Stanford L. Kurland pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	*		Certification of Anne D. McCallion pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		**	Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of ~~March 31,~~September 30, 2013 and December 31, 2012, (ii) the Consolidated Statements of Income for the quarters ended ~~March 31,~~September 30, 2013 and 2012, (iii) the Consolidated Statements of Changes in Members’ Equity for the quarters ended ~~March 31,~~September 30, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the quarters ended ~~March 31,~~September 30, 2013 and 2012 and (v) the Notes to the Consolidated Financial Statements.

*	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.
**	Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not otherwise subject to liability under those sections.
†	Indicates management contract or compensatory plan or arrangement.

*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.

**Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not otherwise subject to liability under those sections.

†~~Indicates management contract or compensatory plan or arrangement.~~

6381

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PENNYMAC FINANCIAL SERVICES, INC.
	(Registrant)

Dated: ~~June 21,~~November 14, 2013	By:	/S/ STANFORD L. KURLAND
		Stanford L. Kurland
		Chairman of the Board and Chief Executive Officer

Dated: ~~June 21,~~November 14, 2013	By:	/S/ ANNE D. MCCALLION
		Anne D. McCallion
		Chief Financial Officer

6482

Delaware		80-0882793
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

Class		Outstanding at ~~June 17,~~November 12, 2013
Class A Common Stock, $0.0001 par value		~~12,777,777~~18,887,777
Class B Common Stock, $0.0001 par value		6061

	Nine months ended September 30,
	2013			2012
	(in thousands)
Cash flow from operating activities:
Net income	$	134,908		$	62,903
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net gain on mortgage loans held for sale at fair value	(108,560		)	(68,487		)
Accrual of servicing rebate to Investment Funds	535			360
Amortization, impairment and change in fair value of mortgage servicing rights	16,363			9,024
Carried Interest from Investment Funds	(10,411		)	(7,255		)
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust	196			(506		)
Change in fair value of real estate acquired in settlement of loans	22			—
Stock and unit-based compensation expense	2,394			13,880
Amortization of debt issuance costs and commitment fees relating to financing facilities	3,714			1,261
Depreciation and amortization	594			389
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust	(12,429,698		)	(5,111,185		)
Originations of mortgage loans held for sale	(895,405		)	(304,402		)
Sale and principal payments of mortgage loans held for sale	13,210,810			5,112,530
Increase in servicing advances	(12,192		)	(12,989		)
Increase in prepaid expenses	(9,094		)	(3,457		)
Repurchase of real estate acquired in settlement of loans subject to representations and warranties	(309		)	—
Sale of real estate acquired in settlement of loans subject to representations and warranties	287			—
Decrease in receivable from Investment Funds	596			3,674
(Increase) decrease in receivable from PennyMac Mortgage Investment Trust	(1,790		)	2,528
Decrease (increase) in other assets	4,087			(2,962		)
Increase in accounts payable and accrued expenses	17,060			15,695
(Decrease) increase in payable to Investment Funds	(371		)	4,821
Increase in payable to PennyMac Mortgage Investment Trust	8,158			10,325
Net cash used in operating activities	(68,106		)	(273,853		)

Cash flow from investing activities:
Net (increase) decrease in short-term investment	(74,323		)	12,625
Purchase of mortgage servicing rights	(5,124		)	—
Sale of mortgage servicing rights	550			—
Purchase of furniture, fixtures, equipment and building improvements	(4,719		)	(2,495		)
Acquisition of capitalized software	(242		)	(379		)
Increase in margin deposits and restricted cash	5,349			(27,524		)
Net cash used in investing activities	(78,509		)	(17,773		)

Cash flow from financing activities:
Sale of loans under agreements to repurchase	12,225,201			4,924,895
Repurchase of loans sold under agreements to repurchase	(12,230,851		)	(4,641,117		)
Increase in note payable	3,762			15,433
Issuance of excess servicing spread financing	2,828			—
Issuance of common stock	230,000			—
Payment of common stock underwriting and offering costs	(13,486		)	—
Payment by noncontrolling interest of common stock issuance costs	(3,745		)	—
Noncontrolling interest repayments of partners’ capital contributions	—			15,058
Noncontrolling interest collection of subscriptions receivable	—			(6		)
Noncontrolling interest distributions	(23,019		)	(11,368		)
Net cash provided by financing activities	190,690			302,895
Net increase in cash	44,075			11,269
Cash at beginning of period	12,323			16,465
Cash at end of period	$	56,398		$	27,734

	Quarter ended March 31,
	2013			2012
	(in thousands)
Cash flow from operating activities:
Net income	$	55,293		$	15,231
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net gain on mortgage loans held for sale at fair value	(39,957		)	(13,937		)
Accrual of servicing rebate to Investment Funds	139			246
Amortization, impairment and change in fair value of mortgage servicing rights	5,010			242
Carried Interest from Investment Funds	(4,737		)	(1,789		)
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust	(45		)	(154		)
Unit-based compensation expense	176			2,736
Amortization of debt issuance costs and commitment fees relating to financing facilities	1,145			549
Depreciation and amortization	137			132
Purchase from affiliate of mortgage loans held for sale	(3,548,397		)	(838,120		)
Originations of mortgage loans held for sale	(268,125		)	(61,891		)
Sale and principal payments of mortgage loans held for sale	4,061,097			813,128
Increase in servicing advances	(3,435		)	(9,567		)
Decrease in receivable from Investment Funds	364			3,660
Decrease (increase) in receivable from PennyMac Mortgage Investment Trust	2,427			(5,129		)
Increase in other assets	(3,507		)	(1,946		)
Increase in accounts payable and accrued expenses	6,685			4,645
Increase in payable to Investment Funds	971			2,226
Increase in payable to PennyMac Mortgage Investment Trust	6,997			8,340
Net cash provided (used in) by operating activities	272,238			(81,398		)

Cash flow from investing activities:
Net increase in short-term investment	(19,500		)	(18,209		)
Purchase of furniture, fixtures, equipment and building improvements	(1,531		)	(721		)
Acquisition of capitalized software	(151		)	(14		)
Decrease in margin deposits and restricted cash	5,293			769
Net cash used in investing activities	(15,889		)	(18,175		)

Cash flow from financing activities:
Sale of loans under agreements to repurchase	3,485,093			824,458
Repurchase of loans sold under agreements to repurchase	(3,698,578		)	(742,611		)
Increase (decrease) in notes payable	10,424			(1,018		)
Collection of subscriptions receivable	—			15,058
Distributions	(9,476		)	(18		)
Net cash (used in) provided by financing activities	(212,537		)	95,869
Net increase (decrease) in cash	43,812			(3,704		)
Cash at beginning of period	12,323			16,465
Cash at end of period	$	56,135		$	12,761

			Page
PART I. FINANCIAL INFORMATION		12

Item 1.	Financial Statements (Unaudited):	1
~~PennyMac Financial Services, Inc.~~		12
	~~Balance Sheets as of March 31, 2013 and December 31, 2012~~	1
	~~Notes to~~Consolidated Balance Sheets	2

~~Private National Mortgage Acceptance Company, LLC~~		3
	~~Financial Statements (Unaudited):~~
	Consolidated ~~Balance Sheets as~~Statements of ~~March 31, 2013 and December 31, 2012~~Income	3
	Consolidated Statements of ~~Income as of March 31, 2013 and December 31, 2012~~Changes in Stockholders’ Equity	4
	Consolidated Statements of ~~Changes in Members’ Equity~~Cash Flows	5
	~~Consolidated Statements of Cash Flows as of March 31, 2013 and December 31, 2012~~	6
	Notes to Consolidated Financial Statements	76
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4451
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5976
Item 4.	Controls and Procedures	5976

PART II. OTHER INFORMATION		5977

Item 1.	Legal Proceedings	5977
Item 1A.	Risk Factors	5977
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5977
Item 3.	Defaults Upon Senior Securities	6077
Item 4.	Mine Safety Disclosures	6077
Item 5.	Other Information	6077
Item 6.	Exhibits	6178

	September 30,		December 31,
	2013		2012
	(in thousands, except share data)
ASSETS
Cash	$	56,398	$	12,323
Short-term investments at fair value	127,487		53,164
Mortgage loans held for sale at fair value (includes $522,031 and $438,850 pledged to secure mortgage loans sold under agreements to repurchase)	530,248		448,384
Servicing advances (includes $6,865 and $7,430 pledged to secure note payable)	105,344		93,152
Derivative assets	24,066		27,290
Carried Interest due from Investment Funds	58,134		47,723
Investment in PennyMac Mortgage Investment Trust at fair value	1,701		1,897
Mortgage servicing rights at lower of amortized cost or fair value (includes $216,463 and $88,587 pledged to secure note payable)	226,090		89,177
Mortgage servicing rights at fair value (includes $10,125 and $12,370 pledged to secure note payable)	26,768		19,798
Receivable from Investment Funds	2,541		3,672
Receivable from PennyMac Mortgage Investment Trust	20,030		16,691
Furniture, fixtures, equipment and building improvements, net	8,498		5,065
Capitalized software, net	743		795
Deferred tax asset	54,530		—
Other	11,806		13,032
Total assets	$	1,254,384	$	832,163
LIABILITIES
Mortgage loans sold under agreements to repurchase	$	387,883	$	393,534
Note payable	56,775		53,013
Excess servicing spread financing at fair value	2,857		—
Derivative liabilities	5,776		509
Accounts payable and accrued expenses	53,355		36,279
Payable to Investment Funds	36,424		36,795
Payable to PennyMac Mortgage Investment Trust	55,523		46,779
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement	58,615		—
Liability for losses under representations and warranties	7,215		3,504
Total liabilities	664,423		570,413

Commitments and contingencies

STOCKHOLDERS’ EQUITY
Class A Common Stock, par value $0.0001 per share, 200,000,000 shares authorized, 18,887,777 issued and outstanding at September 30, 2013	$	2	$	—
Class B Common Stock, par value $0.0001 per share, 1,000 shares authorized, 61 issued and outstanding at September 30, 2013	—		—
Additional paid-in capital	136,484		—
Retained earnings	7,990		—
Total PennyMac Financial Services, Inc. stockholders’ equity	144,476		—
Members’ equity related to Private National Mortgage Acceptance Company, LLC	—		261,750
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC	445,485		—
Total equity	589,961		261,750
Total liabilities and stockholders’ equity	$	1,254,384	$	832,163

	March 31,		December 31,
	2013		2012
	(in thousands except share data)
ASSETS
Cash	$	50	$	—
Total assets	$	50	$	—

LIABILITIES
Payable to Private National Mortgage Acceptance Company, LLC	$	50	$	—
Total liabilities		50		—

Commitments and contingencies

STOCKHOLDERS’ EQUITY
Class A Common Stock, par value $0.0001 per share, 9,000 shares authorized, none issued and outstanding	$	—	$	—
Class B Common Stock, par value $0.0001 per share, 1,000 shares authorized, none issued and outstanding	—		—
Total stockholders’ equity		—		—
Total liabilities and stockholders’ equity	$	50	$	—

	PennyMac Financial Services, Inc. Stockholders														Noncontrolling interest in Private
	Number of Shares		Common stock				Additional			Retained		Members’			National Mortgage Acceptance
	Class A	Class B	Class A		Class B		paid-in capital			earnings		equity			Company, LLC			Total equity
	(in thousands)
Balance at December 31, 2011	—	—	$	—	$	—	$	—		$	—	$	123,915		$	—		$	123,915
Capital:
Contributions	—	—	—		—		—			—		15,058			—			15,058
Redemptions	—	—	—		—		—			—		(6		)	—			(6		)
Distributions	—	—	—		—		—			—		(11,369		)	—			(11,369		)
Unit-based compensation expense	—	—	—		—		—			—		13,880			—			13,880
Net income	—	—	—		—		—			—		62,903			—			62,903
Balance at September 30, 2012	—	—	$	—	$	—	$	—		$	—	$	204,381		$	—		$	204,381

Balance at December 31, 2012	—	—	$	—	$	—	$	—		$	—	$	261,750		$	—		$	261,750
Capital:
Distributions	—	—	—		—		—			—		(19,623		)	—			(19,623		)
Unit-based compensation expense	—	—	—		—		—			—		238			—			238
Partner capital issuance costs	—	—	—		—		—			—		(3,745		)	—			(3,745		)
Net income	—	—	—		—		—			—		76,834			—			76,834
Exchange of existing member units to Class A units of Private National Mortgage Acceptance Company, LLC	—	—	—		—		—			—		(315,454		)	315,454			—
Balance post-reorganization	—	—	—		—		—			—		—			315,454			315,454
Issuance of common shares in initial public offering, net of issuance costs	12,778	—	1		—		229,999			—		—			—			230,000
Underwriting and offering costs	—	—	—		—		(13,290		)	—		—			(196		)	(13,486		)
Dilution assumed with IPO	—	—	—		—		(127,160		)	—		—			127,160			—
Stock-based compensation expense	—	—	—		—		891			—		—			1,265			2,156
Distributions	—	—	—		—		—			—		—			(3,395		)	(3,395		)
Net income	—	—	—		—		—			7,990		—			50,084			58,074
Tax related impact to exchange of Class A Units of Private National Mortgage Acceptance Company, LLC to Class A stock of PennyMac Financial Services, Inc.	—	—	—		—		1,158			—		—			—			1,158
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A stock of PennyMac Financial Services, Inc.	6,110	—	1		—		44,886			—		—			(44,887		)	—
Balance at September 30, 2013	18,888	—	$	2	$	—	$	136,484		$	7,990	$	—		$	445,485		$	589,961

							Class C
	Preferred units			Common units			common units			Subscriptions			Retained
	Units	Amounts		Units	Amounts		Units	Amounts		receivable			earnings			Total
	(in thousands except unit data)

Balance at December 31, 2011	96,682	$	96,374	4,564	$	2,737	—	$	—	$	(19,918	)	$	44,722		$	123,915
Capital:
Contributions	—	—		—	—		—	—		15,058			—			15,058
Distributions	—	—		—	—		—	—		—			(18		)	(18		)
Unit-based compensation expense	—	—		2,228	2,736		—	—		—			—			2,736
Net income	—	—		—	—		—	—		—			15,231			15,231
Balance at March 31, 2012	96,682	$	96,374	6,792	$	5,473	—	$	—	$	(4,860	)	$	59,935		$	156,922
Balance at December 31, 2012	96,682	97,148		13,552	21,895		367	375		(4,842		)	147,174			261,750
Capital:																—
Distributions	—	—		—	—		—	—		4,113			(13,589		)	(9,476		)
Unit-based compensation expense	—	—		2,338	52		73	124		—			—			176
Net income	—	—		—	—		—	—		—			55,293			55,293
Balance at March 31, 2013	96,682	$	97,148	15,890	$	21,947	440	$	499	$	(729	)	$	188,878		$	307,743

	Quarter ended September 30, 2013		Nine months ended September 30, 2013
	(in thousands, except per share amounts)

Basic earnings per share of common stock:
Net income attributable to common stockholders	$	5,197	$	7,990
Weighted-average shares outstanding	17,958		16,042
Basic earnings per share	$	0.29	$	0.50

Diluted earnings per share of common stock:
Net income	$	5,197	$	7,990
Effect of net income attributable to noncontrolling interest, net of tax	15,685		29,595
Diluted net income attributable to common stockholders	$	20,882	$	37,585
Weighted-average common stock outstanding	17,958		16,042
Dilutive potential exchangeable PennyMac Class A common units to common stock	57,888		59,804
Dilutive potential common stock—issuable under stock-based compensation plans	30		21
Diluted weighted-average common stock outstanding	75,876		75,867
Diluted earnings per share of common stock	$	0.28	$	0.50

	Quarter ended March 31, 2013
	Mortgage loans held for sale			Mortgage servicing rights			Interest rate lock commitments			Total
	(in thousands)
Balance, December 31, 2012	$	—		$	19,798		$	23,951		$	43,749
Repurchases	4,612			—			—			4,612
Repayments	(13		)	—			—			(13		)
Interest rate lock commitments issued, net	—			—			33,649			33,649
Servicing received as proceeds from sales of mortgage loans	—			3			—			3
Changes in fair value included in income	(112		)	(1,179		)	(107		)	(1,398		)
Transfers to mortgage loans held for sale	—			—			(32,056		)	(32,056		)
Balance, March 31, 2013	$	4,487		$	18,622		$	25,437		$	48,546
Changes in fair value recognized during the period relating to assets still held at March 31, 2013	$	(112	)	$	(1,179	)	$	25,437
Accumulated changes in fair value relating to assets still held at March 31, 2013	$	(112	)				$	25,437

	Quarter ended March 31,
	2013	2012
Average headcount	1,145	501
Period-end headcount	1,205	549