2022 Annual Report

PennyMac Mortgage Investment Trust (NYSE: PMT) is a specialty finance company that invests

primarily in residential mortgage loans and mortgage-related assets. As a real estate

investment trust (REIT), our objective is to provide attractive risk-adjusted returns to our

shareholders over the long-term, primarily through dividends and secondarily through capital

appreciation.

Our investment focus is on mortgage-related assets that we create through our industry-leading

correspondent production activities, including mortgage servicing rights (MSRs). In

correspondent production, we acquire, pool and securitize or sell newly originated prime credit

quality loans. Our interest rate sensitive investments include the MSRs, mortgage-backed

securities and related hedge instruments. Our credit sensitive investments primarily consist of

credit risk transfer investments related to loans sourced through our correspondent production

that were delivered to Fannie Mae.

PMT is managed by PNMAC Capital Management, LLC, a wholly-owned subsidiary of PennyMac

Financial Services, Inc. (NYSE: PFSI), and an investment adviser registered with the Securities

and Exchange Commission that specializes in mortgage assets. Our correspondent production

operations are conducted on a fee-for-service basis by another PennyMac Financial subsidiary,

PennyMac Loan Services, LLC, which also services most of the loans in our investment portfolio

and the loans for which we retain the obligation to service.

Dear Fellow Shareholders,

2022 proved to be a challenging year for the mortgage industry and mortgage REITs overall,

including PMT. The Federal Reserve’s tightening of monetary policy in response to high inflation

drove a rapid and significant increase in mortgage rates, which ended 2022 at the highest levels

observed in the last 15 years. While these higher interest rates drove strong financial

performance for PMT’s interest rate sensitive strategies, the results were more than offset by

related tax provisions attributable to fair value changes on investments held in its taxable REIT

subsidiary as well as fair value declines in its credit sensitive strategies as market credit

spreads widened due to the uncertain impact higher rates may have on the broader economy.

Additionally, the steep decline in the size of the origination market from $4.4 trillion in unpaid

principal balance (UPB) in 2021 to an estimated $2.3 trillion in 2022, according to Inside

Mortgage Finance, led to lower volumes and income in PMT’s correspondent production

segment. For the full year, PMT reported pre-tax income of $63 million. However, net of tax

provisions, PMT reported a net loss of $73 million; and after distributions to preferred holders,

the net loss to common shareholders was $115 million or $1.26 per common share. PMT

declared and paid dividends of $1.81 per common share, which combined with the net loss

resulted in a reduction in book value per common share to $15.78 at year-end from $19.05

year-end 2021. While overall performance last year did not meet our expectations, the

underperformance was largely driven by fair value changes of our investments and hedges.

However, the fundamentals underlying PMT’s diversified investment portfolio remain strong and

we are confident in the earnings potential of the platform over the longer term.

In 2022, PMT created nearly $700 million of new mortgage servicing rights (MSR) and credit

sensitive investments sourced primarily from $37 billion in UPB of conventional correspondent

production designated for its own account. Though the mortgage origination market is

expected to remain constrained in 2023 due to higher prevailing mortgage rates, we believe

PMT is well-positioned given its historical orientation towards purchase money loans, which are

expected to comprise the majority of originations over the next several years. Additionally, the

exit of Wells Fargo, a long-term and well-respected competitor in this channel, provides

opportunities for smaller community banks, credit unions and independent mortgage

companies across the country to benefit by partnering with PMT, who can provide the products,

As described in Note 3 of PMT’s Annual Report on Form 10-K for the year ended December 31, 2021, an accounting change

required that beginning in 2022, the portion of PMT’s senior notes that were exchangeable for PMT common shares of beneficial

interest originally allocated to additional paid-in capital were reclassified to the carrying value of exchangeable senior notes. Giving

effect to this change on a pro forma basis, PMT’s book value as of December 31, 2021 would have been $18.60.

stability and support they need to successfully navigate the current mortgage market. The

investments we have made in our correspondent lending platform in recent years have made

the business extremely scalable, and we stand ready and able to absorb the volumes left behind

by Wells Fargo and others who have decided to exit or reduce their participation in the channel

without a meaningful increase in associated expenses.

This management team has a long and successful track record of investing in and managing

credit sensitive investments. Although PMT’s financial performance in 2022 was negatively

impacted by fair value declines in its credit sensitive strategies due to wider market credit

spreads, the same market dynamics generated opportunities to deploy capital into additional

credit assets at attractive risk-adjusted returns. In fact, during 2022 we created or invested in

more than $200 million of new credit investments, and looking ahead to 2023 we expect

additional investment opportunities to arise. Further, our front-end lender risk share

investments, which comprise a large portion of our credit sensitive strategies, consist of loans

originated by PMT from 2015 to 2020. Since borrowers with loans underlying these investments

have built up a significant equity position in their homes as a result of seasoning and strong

home price appreciation in recent years, we ultimately expect realized losses to be limited.

Additionally, the vast majority of financing arrangements we maintain against those assets are

term notes that do not contain margin call provisions, which has served us extraordinarily well in

recent history, providing stable financing for these investments as their fair values fluctuated.

While our discussions around the resumption of front-end lender risk share transactions with

Fannie Mae and Freddie Mac continue, the GSEs’ priorities have shifted towards the expansion

of affordable home ownership, and therefore we do not expect to aggregate loans for delivery

into a new front-end lender risk share transaction with the GSEs for some time.

PMT’s interest rate sensitive strategies, primarily consisting of MSRs paired with Agency

mortgage-backed securities, performed well in 2022 as interest rates increased meaningfully

throughout the year. We expect performance in 2023 to remain strong, as the sensitivity to

changes in interest rates of MSR fair values has declined meaningfully given the significant

reduction in prepayment speeds from prior years and earnings from placement fees on

custodial balances have increased along with short term interest rate levels.

While PMT’s equity allocation to credit sensitive strategies has declined due to runoff and

decreases in fair value, the allocation to interest rate sensitive strategies increased

meaningfully given net new investments and fair value gains related to higher interest rates. In

order to more proactively allocate equity among credit sensitive and interest rate sensitive

segments, and to maintain capital for new opportunistic investments, in the fourth quarter of

2022 PMT began selling certain of its conventional correspondent loans to its manager and

services provider, PennyMac Financial Services, Inc. (NYSE: PFSI), a mutually beneficial

transaction for both companies that highlights the benefits of their synergistic relationship.

While 2022 was a year of transition for PMT, I am optimistic for improved financial performance

in 2023 due to the material improvement in the credit markets year-to-date, which supports both

the valuation of our credit sensitive investments and the broader structured product markets in

general. I also believe PMT’s strength in correspondent lending, decreased volatility of MSR fair

values, and our management team’s long, successful track record of disciplined risk

management positions PMT well to deliver strong risk adjusted returns to its shareholders as

we move forward. Thank you for your continued trust and confidence in PMT.

Sincerely,

David A. Spector

Chairman and Chief Executive Officer

April 21, 2023

SHARE PERFORMANCE GRAPH

The following graph and table describe certain information comparing the cumulative total

return on our common shares of beneficial interest to the cumulative total return of the Russell

2000 Index and the Bloomberg REIT Mortgage Index. The comparison period is from December

31, 2017, to December 31, 2022, and the calculation assumes reinvestment of any dividends.

The graph and table illustrate the value of a hypothetical investment in our common shares of

beneficial interest and the two other indices on December 31, 2017.

Source: PMT & Russell 2000 from S&P Global Market Intelligence. Bloomberg REIT Mortgage Index from Bloomberg Professional

Services.

The information in the performance graph and table has been obtained from sources believed

to be reliable, but neither its accuracy nor its completeness can be guaranteed. The historical

information set forth above is not necessarily indicative of future performance. Accordingly, we

do not make or endorse any predictions as to future share performance. The share performance

graph and table shall not be deemed, under the Securities Act of 1933, as amended, or the

Securities Exchange Act of 1934, as amended, to be (i) “soliciting material” or “filed” or (ii)

incorporated by reference by any general statement into any filing made by us with the

Securities and Exchange Commission, except to the extent that we specifically incorporate such

share performance graph and table by reference.

100

120

140

160

180

200

Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22

PMT Russell 2000 Bloomberg REIT Mortgage Index

CORPORATE INFORMATION

Corporate Offices

3043 Townsgate Road

Westlake Village, CA 91361

818.224.7028

pmt.pennymac.com

2023 Annual Meeting

The 2023 Annual Meeting of Shareholders

will be held at 11:00 a.m. Pacific Time on June

8, 2023, via a live webcast at

www.virtualshareholdermeeting.com/PMT2023

Independent Registered Public

Accounting Firm

Deloitte & Touche LLP

Los Angeles, CA

PennyMac Mortgage Investment Trust

Securities

Traded: New York Stock Exchange

Common Share Symbol: PMT

Preferred Share Symbols: PMT PrA, PMT PrB, &

PMT PrC

Transfer Agent

Computershare

150 Royall Street, Suite 101

Canton, MA 02021

Toll-Free 800.522.6645

Shareholder inquiries

The Annual Report on Form 10-K of PennyMac

Mortgage Investment Trust filed with the SEC

and other reports can be accessed via our

website at pmt.pennymac.com or by emailing a

request to investorrelations@pennymac.com.

As of March 31, 2023, we had approximately

139 common shareholders of record. This

figure does not represent the actual number of

beneficial owners of common shares because

shares are frequently held in “street name” by

securities dealers and others for the benefit of

individual owners who may vote the shares.

Pursuant to Rule 303A.12 of the New York Stock Exchange Listed Companies Manual, each

listed company CEO must certify to the NYSE each year that he or she is not aware of any

violation by the company of NYSE corporate governance listing standards. David A. Spector’s

annual CEO certification regarding the NYSE’s corporate governance listing standards was

submitted to the NYSE on June 14, 2022.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

(Mark One)

☒

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

For the fiscal year ended December 31, 2022

☐

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

For the transition period from to

Commission file number: 001-34416

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)

Maryland

27-0186273

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

3043 Townsgate Road, Westlake Village, California

91361

(Address of principal executive offices)

(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

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

Title of Each Class

Trading Symbol (s)

Name of Each Exchange on Which Registered

8.125% Series A Cumulative Redeemable Preferred

Shares of Beneficial Interest, $0.01 Par Value

PMT/PA

New York Stock Exchange

8.00% Series B Cumulative Redeemable Preferred

Shares of Beneficial Interest, $0.01 Par Value

6.75% Series C Cumulative Redeemable Preferred

Shares of Beneficial Interest, $0.01 Par Value

Common Shares of Beneficial Interest, $0.01 Par Value

PMT/PB

PMT/PC

PMT

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the

preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past

90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-

T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging

growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the

Exchange Act:

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised

financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over

financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect

the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of

the registrant’s executive oﬃcers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

As of June 30, 2022, the aggregate market value of the registrant’s common shares of beneficial interest, $0.01 par value (“common shares”), held by nonaffiliates

was $1,249,688,052 based on the closing price as reported on the New York Stock Exchange on that date.

As of February 22, 2023, there were 88,892,107 common shares of the registrant outstanding.

Documents Incorporated By Reference

Document

Parts Into Which Incorporated

Definitive Proxy Statement for 2023 Annual Meeting of Shareholders

Part III

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-K

December 31, 2022

TABLE OF CONTENTS

Page

Special Note Regarding Forward-Looking Statements ...................................................................................................................

PART I

Item 1

Business ....................................................................................................................................................................

Item 1A

Risk Factors...............................................................................................................................................................

Item 1B

Unresolved Staff Comments.....................................................................................................................................

Item 2

Properties ..................................................................................................................................................................

Item 3

Legal Proceedings.....................................................................................................................................................

Item 4

Mine Safety Disclosures ...........................................................................................................................................

PART II

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

Securities...............................................................................................................................................................

Item 6

Reserved....................................................................................................................................................................

Item 7

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

Item 7A

Quantitative and Qualitative Disclosures About Market Risk..................................................................................

Item 8

Financial Statements and Supplementary Data.........................................................................................................

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................................

Item 9A

Controls and Procedures ...........................................................................................................................................

Item 9B

Other Information .....................................................................................................................................................

Item 9C

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections......................................................................

PART III

Item 10

Directors, Executive Officers and Corporate Governance........................................................................................

Item 11

Executive Compensation...........................................................................................................................................

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................

Item 13

Certain Relationships and Related Transactions, and Director Independence .........................................................

Item 14

Principal Accounting Fees and Services...................................................................................................................

PART IV

Item 15

Exhibits and Financial Statement Schedules ............................................................................................................

Item 16

Form 10-K Summary ................................................................................................................................................

Signatures..................................................................................................................................................................

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Report”) contains certain forward-looking statements that are subject to various risks and

uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,”

“should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,”

“continue,” “plan” or other similar words or expressions.

Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies,

contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements

include the following:

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

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

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

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

any revenues.

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we

believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and

performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of

which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these

factors are discussed below

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and

risks, as well as the risks and uncertainties discussed elsewhere in this Report and any subsequent Quarterly Reports on Form 10-Q.

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

to:

• changes in interest rates and other macroeconomic conditions;

• our ability to comply with various federal, state and local laws and regulations that govern our business;

• the impact to our CRT arrangements and agreements of increased borrower requests for forbearance under the

Coronavirus Aid, Relief and Economic Security Act;

• changes in our investment objectives or investment or operational strategies, including any new lines of business or new

products and services that may subject us to additional risks;

• the degree and nature of our competition;

• volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets

specifically, whether the result of market events or otherwise;

• events or circumstances which undermine confidence in the financial and housing markets or otherwise have a broad

impact on financial and housing markets, such as the sudden instability or collapse of large depository institutions or other

significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

• changes in general business, economic, market, employment and domestic and international political conditions, or in

consumer confidence and spending habits from those expected;

• declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market;

• the availability of, and level of competition for, attractive risk-adjusted investment opportunities in loans and mortgage-

related assets that satisfy our investment objectives;

• the inherent difficulty in winning bids to acquire loans, and our success in doing so;

• the concentration of credit risks to which we are exposed;

• our dependence on our Manager and servicer, potential conflicts of interest with such entities and their affiliates, and the

performance of such entities;

• changes in personnel and lack of availability of qualified personnel at our Manager, servicer or their affiliates;

• the availability, terms and deployment of short-term and long-term capital;

• the adequacy of our cash reserves and working capital;

• our substantial amount of debt;

• our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets;

• the timing and amount of cash flows, if any, from our investments;

• our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man-made or natural

disasters, climate change and pandemics such as the COVID-19 pandemic;

• unanticipated increases or volatility in financing and other costs, including a rise in interest rates;

• the performance, financial condition and liquidity of borrowers;

• the ability of our servicer, which also provides us with fulfillment services, to approve and monitor correspondent sellers

and underwrite loans to investor standards;

• incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the

financial condition of our customers and counterparties;

• our indemnification and repurchase obligations in connection with loans we purchase and later sell or securitize;

• the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which

we invest;

• increased rates of delinquency, default and/or decreased recovery rates on our investments;

• the performance of loans underlying mortgage-backed securities in which we retain credit risk;

• our ability to foreclose on our investments in a timely manner or at all;

• the degree to which our hedging strategies may or may not protect us from interest rate volatility;

• the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability

valuations when measuring and reporting upon our financial condition and results of operations;

• our ability to maintain appropriate internal control over financial reporting;

• technology failures, cybersecurity risks and incidents, and our ability to mitigate cybersecurity risks and cyber intrusions;

• our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our

business;

• our ability to detect misconduct and fraud;

• developments in the secondary markets for our loan products;

• legislative and regulatory changes that impact the loan industry or housing market;

• changes in regulations that impact the business, operations or governance of mortgage lenders and/or publicly-traded

companies or such changes that increase the cost of doing business with such entities;

• the Consumer Financial Protection Bureau and its issued and future rules and the enforcement thereof;

• changes in government support of homeownership;

• our ability to effectively identify, manage and hedge our credit, interest rate, prepayment, liquidity, and climate risks;

• changes in government or government-sponsored home affordability programs;

• limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a real estate investment

trust (“REIT”) for U.S. federal income tax purposes and qualify for an exclusion from the Investment Company Act of

1940 and the ability of certain of our subsidiaries to qualify as REITs or as taxable REIT subsidiaries for U.S. federal

income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the

limitations imposed by these rules;

• changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws

governing the taxation of REITs, or the exclusions from registration as an investment company);

• our ability to make distributions to our shareholders in the future;

• our failure to deal appropriately with issues that may give rise to reputational risk; and

• our organizational structure and certain requirements in our charter documents.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other

document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of

operations and/or financial condition.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-

looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

PART I

Item 1. Business

The following description of our business should be read in conjunction with the information included elsewhere in this Report.

This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from

the projections and results discussed in the forward-looking statements due to the factors described under the caption “Risk Factors”

and elsewhere in this Report. References in this Report to “we,” “our,” “us,” “PMT,” or the “Company” refer to PennyMac

Mortgage Investment Trust and its consolidated subsidiaries, unless otherwise indicated.

Our Company

We are a specialty finance company that invests primarily in mortgage-related assets. We conduct substantially all of our

operations, and make substantially all of our investments, through PennyMac Operating Partnership, L.P. (our “Operating

Partnership”) and its subsidiaries. A wholly-owned subsidiary of ours is the sole general partner, and we are the sole limited partner,

of our Operating Partnership. Certain of the activities conducted or investments made by us that are described below are conducted or

made through a wholly-owned subsidiary that is a taxable REIT subsidiary (“TRS”) of our Operating Partnership.

The management of our business and execution of our operations is performed on our behalf by subsidiaries of PennyMac

Financial Services, Inc. (“PFSI”). PFSI is a specialty financial services firm focused on the production and servicing of loans and the

management of investments related to the U.S. mortgage market. Specifically:

• We are managed by PNMAC Capital Management, LLC (“PCM” or our “Manager”), a wholly-owned subsidiary of PFSI

and an investment adviser registered with the United States Securities and Exchange Commission (“SEC”) that specializes

in, and focuses on, U.S. mortgage assets.

• Our loan production and servicing activities (as described below) are performed on our behalf by another wholly-owned

PFSI subsidiary, PennyMac Loan Services, LLC (“PLS” or our “Servicer”).

Our investment focus is on residential mortgage-backed securities (“MBS”) and mortgage-related assets that we create through

our correspondent production activities. Correspondent production activities include purchasing, pooling and selling newly originated

prime credit quality residential loans (“correspondent production”). Through our correspondent production activities, we create and

hold mortgage servicing rights (“MSRs”), non-Agency MBS, credit risk transfer (“CRT”) agreements (“CRT Agreements”), and other

CRT securities (together, “CRT arrangements”).

Our business includes four segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and

corporate.

• The credit sensitive strategies segment represents our investments in CRT arrangements, subordinate MBS, distressed

loans and real estate.

• The interest rate sensitive strategies segment represents our investments in MSRs, excess servicing spread (“ESS”)

purchased from PFSI, Agency and senior non-Agency MBS and the related interest rate hedging activities.

• The correspondent production segment represents our operations aimed at serving as an intermediary between lenders and

the capital markets by purchasing, pooling and reselling newly originated prime credit quality loans either directly or in

the form of MBS, using the services of PCM and PLS.

We primarily sell the loans we acquire through our correspondent production activities to government-sponsored entities

(“GSEs”) such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage

Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by the Government National Mortgage

Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and,

collectively, as the “Agencies.”

• Our corporate segment includes management fee and corporate expense amounts and certain interest income.

Following is a summary of our segment results for the years presented:

Year ended December 31,

2022

2021

2020

(in thousands)

Net investment income:

Credit sensitive strategies

(106,772

)

323,121

(305,340

)

Interest rate sensitive strategies

297,726

(204,665

)

174,558

Correspondent production

111,078

298,925

597,222

Corporate

1,739

2,916

2,911

303,771

420,297

469,351

Pretax income:

Credit sensitive strategies

(112,566

)

306,643

(317,143

)

Interest rate sensitive strategies

207,802

(290,065

)

105,697

Correspondent production

27,557

86,936

344,639

Corporate

(59,706

)

(58,853

)

(53,463

)

63,087

44,661

79,730

Total assets at year end:

Credit sensitive strategies

1,614,977

1,848,294

2,920,558

Interest rate sensitive strategies

9,991,621

7,363,878

4,593,127

Correspondent production

1,936,797

4,325,750

3,781,010

Corporate

378,169

234,786

197,316

13,921,564

13,772,708

11,492,011

In our correspondent production segment, we purchase Agency-eligible and jumbo loans. A jumbo loan is a loan in an amount

that exceeds the maximum loan amount for loans that are eligible for sale to the Agencies under their guidelines. We then either:

• sell Agency-eligible loans meeting the guidelines of the government-sponsored entities eligibility of loans for sale to Fannie

Mae or Freddie Mac (“GSEs-Eligible Loans”) on a servicing-retained basis whereby we retain the related MSRs;

• sell government loans (insured by the Federal Housing Administration or guaranteed by the U.S. Department of Veterans

Affairs or U.S. Department of Agriculture) and certain GSEs-Eligible Loans on a servicing-released basis to PLS, a Ginnie

Mae approved issuer and servicer, for which we earn sourcing fees as described in Note 4 – Transactions with Related

Parties to the consolidated financial statements included in this Report;

• create and issue structured MBS, retain a portion of the subordinate securities and sell the remaining senior MBS to

nonaffiliates; or

• sell loans with certain specified characteristics to banks or other investors, generally on a servicing retained basis.

Our correspondent production segment involves purchases of loans from approved mortgage originators that meet specific

criteria related to management experience, financial strength, risk management controls and loan quality. During 2022, we were the

largest correspondent aggregator in the United States as ranked by Inside Mortgage Finance. As of December 31, 2022, we had 722

approved sellers with delegated underwriting authority, primarily independent mortgage originators and small banks located across the

United States. PLS also serves as a source of correspondent production to us.

Following is a summary of our correspondent production activities:

Year ended December 31,

2022

2021

2020

(in thousands)

Correspondent loan purchases at fair value:

GSEs-Eligible Loans (1)

41,575,252

113,667,618

106,472,654

Held for sale to PLS ‒ Government insured or guaranteed (2)

46,562,853

67,702,945

63,574,547

Jumbo

5,029

—

Home equity lines of credit

132

—

2,569

88,143,266

181,370,563

170,049,770

Interest rate lock commitments issued

91,031,903

172,953,139

185,414,040

Fair value of loans at year end pending sale to:

Nonaffiliates

1,662,262

3,856,030

3,085,910

PLS

159,671

314,995

460,414

1,821,933

4,171,025

3,546,324

Number of approved sellers at year-end (2)

722

768

714

(1) The Company sells or finances a portion of its GSEs-Eligible Loans production to or with other investors, including PLS.

(2) Includes only sellers with delegated underwriting authority.

The sale of loans to nonaffiliates from our correspondent production activities serves as the source of our investments in MSRs,

CRT arrangements and subordinate non-Agency MBS which are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Sales of loans acquired for sale:

To nonaffiliates

39,077,156

110,919,477

106,306,805

To PennyMac Financial Services, Inc.

50,575,617

67,851,630

63,618,185

89,652,773

178,771,107

169,924,990

Net gains on loans acquired for sale

25,692

87,273

379,922

Investment activities resulting from correspondent production:

Receipt of MSRs as proceeds from sales of loans

670,343

1,484,629

1,158,475

Retention of interests in securitizations of loans secured

by investment properties, net of associated asset-backed financings

23,485

42,256

—

Purchase of subordinate bonds backed by previously-sold loans

secured by investment properties held in consolidated

variable interest entities

—

28,815

—

Investments in CRT arrangements:

Deposits securing CRT arrangements

—

1,700,000

Recognition of firm commitment to purchase CRT securities (1)

—

(38,161

)

Change in face amount of firm commitment to

purchase CRT securities and commitment

to fund Deposits securing CRT arrangements

—

(1,502,203

)

Total investments in CRT arrangements

—

159,636

Total investments resulting from correspondent activities

693,828

1,555,700

1,318,111

(1) Initial recognition of firm commitment upon sale of loans.

We also invest in MBS and have historically invested in ESS on MSRs acquired by PLS and distressed mortgage assets (loans

and real estate acquired in settlement of loans (“REO”)). We have liquidated our investment in ESS and substantially liquidated our

investment in distressed mortgage assets.

Following is a summary of our acquisitions of other mortgage-related investments:

Year ended December 31,

2022

2021

2020

(in thousands)

MBS, net of sales

2,638,267

932,270

352,307

ESS, net of sale

—

(129,304

)

2,093

2,638,267

802,966

354,400

Our portfolio of mortgage investments was comprised of the following:

December 31,

2022

2021

2020

(in thousands)

Credit sensitive assets:

CRT arrangements, net (1)

1,144,078

1,686,445

2,617,509

Subordinate credit-linked mortgage-backed securities

177,898

—

Subordinate interests in loans held in VIEs, net of associated

asset-backed financings

84,044

85,266

8,981

Distressed loans at fair value

3,457

4,161

8,027

Real estate acquired in settlement of loans

7,734

14,382

28,709

Other (2)

2,424

4,229

6,576

1,419,635

1,794,483

2,669,802

Interest rate sensitive assets:

Mortgage-backed securities

4,284,703

2,666,768

2,213,922

Mortgage servicing rights at fair value

4,012,737

2,892,855

1,755,236

Excess servicing spread

—

131,750

Net interest rate lock commitments

(478

)

2,451

72,386

Net interest rate hedges (3)

77,483

(2,546

)

(123,490

)

8,374,445

5,559,528

4,049,804

9,794,080

7,354,011

6,719,606

(1) Investments in CRT arrangements include deposits securing CRT arrangements, CRT strips, CRT derivatives and an interest-

only security payable.

(2) Comprised of home equity lines of credit and a small balance commercial loan.

(3) Derivative assets, net of derivative liabilities, excluding interest rate lock commitments (“IRLCs”) and CRT derivatives.

Over time, our targeted asset classes may change as a result of changes in the opportunities that are available in the market,

among other factors. We may not continue to invest in certain of the investments described above if we believe those types of

investments will not provide us with suitable returns or if we believe other types of our targeted assets provide us with better returns.

Investment Policies

Our board of trustees has adopted the policies set forth below for our investments and borrowings. PCM reviews its compliance

with our investment policies regularly and reports periodically to our board of trustees regarding such compliance.

• No investment shall be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes;

• No investment shall be made that would cause us to be regulated as an investment company under the Investment

Company Act of 1940 (the “Investment Company Act”); and

• With the exception of real estate and housing, no single industry shall represent more than 20% of the investments or total

risk exposure in our portfolio.

These investment policies may be changed by a majority of our board of trustees without the approval of, or prior notice to, our

shareholders.

We have not adopted a policy that expressly prohibits our trustees, officers, shareholders or affiliates from having a direct or

indirect financial interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have

an interest. We do not have a policy that expressly prohibits any such persons from engaging for their own account in business

activities of the types conducted by us. However, our code of business conduct and ethics contains a conflicts of interest policy that

prohibits our trustees and officers, as well as employees of PFSI and its subsidiaries who provide services to us, from engaging in any

transaction that involves an actual or apparent conflict of interest with us without the appropriate approval. We also have written

policies and procedures for the review and approval of related party transactions, including oversight by designated committees of our

board of trustees and PFSI’s board of directors.

Competition

In our correspondent production activities, we compete with large financial institutions, the government-sponsored enterprise

cash windows and other independent residential loan producers and servicers such as Mr. Cooper, Rithm Capital Corp., Truist

Financial, Western Alliance Bank and Ocwen Financial. We compete on the basis of product offerings, technical knowledge, loan

quality, speed of execution, rate and fees.

In the acquisition of mortgage assets, we compete with specialty finance companies, private funds, other mortgage REITs,

thrifts, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, governmental

bodies and other entities such as Chimera Investment Corporation, Invesco Mortgage Capital Inc., Rithm Capital Corp., MFA

Financial, Inc., New York Mortgage Trust, Redwood Trust Inc. and Two Harbors Investment Corp., which may also be focused on

acquiring mortgage-related assets, and therefore may increase competition for the available supply of mortgage assets suitable for

purchase.

Many of our competitors are significantly larger than we are and have stronger financial positions and greater access to capital

and other resources than we have and may have other advantages over us. Such advantages include the ability to obtain lower-cost

financing, such as deposits, and operational efficiencies arising from their larger size.

Some of our competitors may have higher risk tolerances or different risk assessments and may not be subject to the operating

constraints associated with REIT tax compliance or maintenance of an exclusion from the Investment Company Act, any of which

could allow them to consider a wider variety of investments and funding strategies and to establish more relationships with sellers of

mortgage assets than we can.

Because the availability of mortgage assets may fluctuate, the competition for assets and sources of financing may increase.

Increased competition for assets may result in our accepting lower returns for acquisitions of assets or adversely influence our ability

to bid for such assets at levels that allow us to acquire the assets.

To address this competition, we have access to PCM’s professionals and their industry expertise, which we believe provides us

with a competitive advantage and helps us assess investment risks and determine appropriate pricing for certain potential investments.

We expect this relationship to enable us to compete more effectively for attractive investment opportunities. Furthermore, we believe

that our access to PLS servicing expertise provides us with a competitive advantage over other companies with a similar focus.

However, we can provide no assurance that we will be able to achieve our business goals or expectations due to the competition and

other risks that we face.

Cyclicality and Seasonality

The demand for loan originations is affected by consumer demand for home loans. Demand for home loans generally comes

from the demand for loans made to finance the purchase of homes and the demand for loans made to refinance existing loans.

The demand for loans made to finance the purchase of homes is most significantly influenced by the overall strength of the

economy, housing prices and availability and societal factors such as household formation and government support for home

ownership.

The demand for loans made to refinance existing loans is most significantly influenced by movements in interest rates and to a

lesser extent, to changes in property values and employment.

Our Financing Activities

Following is a summary of our financing, including borrowings and the assets pledged to secure those borrowings as of

December 31, 2022:

Assets financed

Financing

MBS

Loans

acquired

for sale

Loans at

fair value

CRT assets

MSRs (1)

REO

Total

(in thousands)

Borrowings

Short term

Assets sold under agreements to

repurchase

4,250,638

1,678,554

64,501

237,835

385,000

—

6,616,528

Mortgage loan participation purchase

and sale agreements

—

Long term

Notes payable secured by CRT

arrangements and MSRs

—

591,027

2,213,001

—

2,804,028

Asset-backed financings at fair value

—

1,414,955

—

1,414,955

Interest-only security payable

—

21,925

—

21,925

Total secured borrowings

4,250,638

1,678,554

1,479,456

850,787

2,598,001

—

10,857,436

Exchangeable senior notes

546,254

Total borrowings

4,250,638

1,678,554

1,479,456

850,787

2,598,001

—

11,403,690

Shareholders' equity

1,962,815

Total financing

13,366,505

Assets pledged to secure borrowings

4,462,601

1,801,368

1,510,148

1,326,556

4,063,708

3,297

13,167,678

Debt-to-equity ratio:

Excluding non-recourse debt

5.1:1

Total

5.8:1

(1) Amounts pledged to secure borrowings include pledged servicing advances.

Debt

Our current debt financing strategy is to finance our assets in such a way as to match the term of the liabilities used to finance

them to the expected life of the underlying assets where we believe such borrowing is prudent, appropriate and available. Our

borrowings are primarily collateralized borrowings in the form of sales of assets under agreements to repurchase, loan and security

agreements, and loan participation purchase and sale agreements. We supplement these borrowings with long-term securitized notes,

including secured term financing for our MSRs and our CRT arrangements.

Terms of our borrowings are summarized in Notes 14 and 15 to our consolidated financial statements included in this Report. A

significant portion of our balance sheet is comprised of longer-lived assets - such as MSRs, servicing advances, CRT arrangements

and distressed loans - that have historically been less liquid, and more difficult to finance than our newly originated mortgage loans

and MBS. As a result, we have historically relied on shorter-term financing arrangements, primarily sales of the assets under

agreements to repurchase, to finance our longer-lived assets. As we have grown, our ability to finance more of our assets under longer

term arrangements that more closely align the term of the borrowings with the expected life of the corresponding assets, on terms that

are economically viable for us, has increased.

Following is a summary of the types of debt we use to finance our investing and operating activities:

Short-term debt

Sales of assets under agreements to repurchase

Our largest source of debt financing is the sale of assets under agreements to repurchase. Under these agreements, we sell assets

or participation certificates to a lender under a commitment to repurchase the asset or participation certificate within a specified

period - generally ranging from 30 to 90 days for MBS and CRT assets, 60 to 120 days for mortgage loans and two to five years for

participation certificates secured by MSRs.

During the period the agreement to repurchase is outstanding, our lender is generally contractually authorized to repledge the

assets underlying the repurchase agreement. The repurchase agreements generally contain margin provisions that require us to

maintain our borrowings at a specified percentage of the fair value of the assets pledged to secure the borrowings. As a result, we are

subject to margin calls during the period the repurchase agreements are outstanding and, therefore, may be required to repay a portion

of the borrowings before the respective repurchase agreements mature if the fair value (as determined by the applicable lender) of the

assets securing those repurchase agreements decreases.

We are exposed to loss in the event a lender makes a margin call to us and we are unable to fund the margin call. In such a

circumstance, the lender is contractually allowed to liquidate the assets securing the repurchase agreement and pursue repayment from

us for any balance not satisfied through the sale of the collateral. To the extent we finance long-lived assets with repurchase

agreements, we are also exposed to the risk of our being unable to refinance these assets under terms that are reasonable to us when

the repurchase agreements mature.

Our repurchase agreement facilities include a mix of committed and uncommitted facilities. Committed facilities contractually

bind the lender to purchase assets meeting the criteria of the credit facility up to a committed amount, whereas the lender is not

required to fund repurchase agreements on uncommitted amounts. We pay a facility commitment fee to maintain committed amounts

and endeavor to minimize our borrowing costs while maintaining adequate committed amounts to fund our expected loan inventory

levels during the facility commitment period.

Mortgage loan participation purchase and sale agreements

We finance a portion of our inventory of loans acquired for sale using mortgage loan participation purchase and sale

agreements. Under mortgage loan participation purchase and sale agreements, we sell participation certificates to a lender,

representing undivided beneficial ownership interests in pools of loans deemed eligible to back pass-through MBS issued and

guaranteed by Fannie Mae or Freddie Mac, while the pools are pending securitization and the sale of the resulting securities. As part

of the sale of the participation certificates, we arrange to deliver the resulting securities to the lender, and assign the commitments

between us and nonaffiliates to sell the securities.

Mortgage loan participation purchase and sale certificates generally have a term of up to 45 days based on the anticipated

delivery date of the related MBS and are repaid when the nonaffiliated investors purchase the securities.

Our mortgage loan participation purchase and sale agreement facilities are both committed and uncommitted facilities.

Mortgage loan participation certificates do not contain margin call provisions. However, in the event the purchasers of the securities

fail to settle the purchase, we are obligated to purchase the securities from the lender.

Loan and security agreements

We finance our MSRs related to mortgage loans pooled into Freddie Mac securities using a loan and security agreement or

similar credit agreements with terms to maturity of two years from their original effective dates. Under the agreements, we borrow

amounts collateralized by the MSRs, the fair value of which is determined by the lender or a third-party agent, on a monthly basis, or

at the discretion of the lender. The lender makes available both committed and uncommitted amounts, with the maximum maturity of

borrowed balances not to exceed the maturity of the agreements.

The agreements include provisions that require us to maintain our borrowings at a level not to exceed a specified percentage of

the fair value of the MSRs pledged to secure the borrowings. As a result, we are subject to margin calls during the period if any

amount is outstanding under the agreements. We are exposed to loss in the event the lender makes a margin call to us and we are

unable to fund the margin call. In such a circumstance, the lender is contractually allowed to liquidate any portion of the MSRs

securing the agreements and pursue repayment from us for any balance not satisfied through their subsequent sale of the MSRs.

Long-term debt

Notes payable secured by CRT arrangements and MSRs

Our notes payable secured by CRT arrangements and MSRs represent long-term financing of our CRT and MSR assets and

include:

• $1.1 billion in secured term notes issued to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as

amended (the “Securities Act”). The term notes are secured by MSRs on Fannie Mae loans that are pledged to a subsidiary

trust that has also issued variable funding notes (“VFNs”) that may be financed with certain lenders in the form of sales of

assets under agreements to repurchase. VFNs are typically used to finance a portion of the fair value of MSRs held by the

subsidiary trust in excess of the fair value required to collateralize the secured term notes. The term notes include margin call

provisions that require us to maintain a certain advance rate based on the fair value of the underlying MSRs. As the fair value

of MSRs is subject to periodic fluctuation, we are required to either pledge additional MSRs or cash to the subsidiary trust

when the fair value of the MSRs decreases even though the borrowings have a long-term maturity.

• $1.1 billion in various credit agreements secured by Freddie Mac MSRs

• $593 million of term notes secured by our investment in CRT assets issued to qualified institutional buyers under Rule 144A

of the Securities Act. These term notes do not include margin call provisions. However, these term notes must be repaid

based on the amortization of the CRT assets that collateralize them. These term notes have maturities ranging from

March 2023 through October 2024. A portion of these term notes have terms that provide for optional extensions of two

years under conditions provided in the respective agreements.

Asset-backed financings

We have participated in various transactions whereby we invest in subordinate securities issued in loan securitizations. These

transactions are sponsored by us or a nonaffiliate. We acquire the loans underlying these loan securitizations through our

correspondent lending activities. We then either sell the loans to a nonaffiliate which pools the loans into securities, or we pool the

loans into securities issued by one of our subsidiary trusts. We purchase subordinate securities from nonaffiliate sponsored

transactions and retain subordinate securities in the transactions we sponsored. Any mortgage servicing rights for the loans underlying

these securities are owned by us, and sub-serviced by PLS for the subsidiary trusts issuing the securities.

Because we hold substantially all of the subordinate securities created in these transactions and we or PLS service the

underlying loans, we include the assets of the issuing trust on our consolidated balance sheet, primarily in Loans at fair value. We also

include the securities issued to nonaffiliates by the issuing trusts as Asset-backed financings at Fair Value on our consolidated balance

sheet.

This debt is repaid by the issuing trust from the cash flows received on the loans underlying these subordinated securities. Cash

flows from those loans represent the sole source of repayment of this debt and the holders of this debt have no recourse to other assets

on our consolidated balance sheet. The maturities of these financings are based on the loan(s) with the latest maturity of the loans in

the issuing subsidiary trusts.

Interest-only security payable

One of the classes of the securities issued by the trusts relating to our investments in CRT arrangements is an interest-only

security that was offered to a nonaffiliate. As discussed in Note 6 – Variable Interest Entities to the consolidated financial statements

included in this Report, we consolidate the trusts that issue the securities underlying our investments in the CRT arrangements. As part

of the consolidation of the CRT arrangements, we recognize this interest-only security.

This debt is repaid by the issuing trust from the cash flows based on the reference loans underlying these securities. Cash flows

from those loans represent the sole source of repayment of this security and its holder has no recourse to other assets on our

consolidated balance sheet.

Exchangeable senior notes

We have $210 million in outstanding exchangeable senior notes due to mature on November 1, 2024, and $345 million in

outstanding exchangeable senior notes due on mature on March 15, 2026. The exchangeable senior notes are unsecured obligations.

The exchangeable senior notes are exchangeable into 40.101 PMT common shares per $1,000 principal amount for the notes maturing

on November 1, 2024 and 46.1063 PMT common shares per $1,000 principal amount for the notes maturing on March 15, 2026,

subject to adjustment upon the occurrence of certain events. The exchangeable senior notes bear interest at 5.50%.

Equity

Our shareholders’ equity includes both common and cumulative preferred shares, partially offset by our accumulated deficit as

summarized below:

December 31,

2022

2021

2020

(in thousands)

Paid-in capital

Preferred shares

541,482

299,707

Common shares

1,948,155

2,082,706

2,097,886

2,489,637

2,624,188

2,397,593

Accumulated deficit

(526,822

)

(256,670

)

(100,734

)

1,962,815

2,367,518

2,296,859

We actively manage our equity financing and endeavor to obtain an equity structure that optimizes the returns to our common

shareholders. This approach to managing our equity includes supplementing our common shares with issuances of preferred shares

and common share repurchase activities. At December 31, 2022, we had $200 million of common shares available for issuance under

our at-the-market equity offering program and $101.3 million authorized for share repurchases.

Following is a summary of our offerings and repurchases of common shares:

Year ended December 31,

Share offerings

Share repurchases

(in thousands)

2022

—

87,992

2021

—

56,855

2020

5,597

37,267

Our preferred shares are comprised of three series of $25 par value cumulative preferred shares that have dividend rates ranging

from 6.75% to 8.125% of their par values and liquidation preferences totaling $560 million. Our preferred shares have no stated

maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless we redeem or

repurchase the shares or the shares are converted into common shares in connection with a change of control by the holders of the

preferred shares, as provided in the respective articles supplementary establishing the terms of each series of preferred shares. The

preferred shares become redeemable between March 15, 2024 and August 24, 2026.

As a REIT, we face limits on our ability to finance our operations and investments with retained earnings, as we are generally

required to distribute to our shareholders at least 90% of our taxable income each year for us to qualify as a REIT under the Internal

Revenue Code of 1986 (the “Internal Revenue Code”). To the extent we satisfy the 90% distribution requirement but distribute less

than 100% of our taxable income, we are subject to U.S. federal corporate income tax on our undistributed taxable income. We

establish the level of our periodic common share distributions based on this requirement as well as our earnings, our financial

condition and such other factors as our board of trustees may deem relevant from time to time.

Operating and Regulatory Structure

Taxation – REIT Qualification

We have elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code beginning with our

taxable year ended December 31, 2009. Our qualification as a REIT depends upon our ability to meet on a continuing basis, through

actual investment and operating results, various complex requirements under the Internal Revenue Code relating to, among other

things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership

of our common shares. We believe that we are organized in conformity with the requirements for qualification and taxation as a REIT

under the Internal Revenue Code, and that our manner of operation enables us to meet the requirements for qualification and taxation

as a REIT.

As a REIT, we generally are not subject to U.S. federal income tax on the REIT taxable income we distribute to our

shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be

subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four

taxable years following the year during which we lost our REIT qualification. Accordingly, our failure to qualify as a REIT could

have a material adverse impact on our results of operations and amounts available for distribution to our shareholders.

Even though we have elected to be taxed as a REIT, we are subject to some U.S. federal, state and local taxes on our income or

property. A portion of our business is conducted through, and a portion of our income is earned in, our TRS that is subject to corporate

income taxation. In general, a TRS of ours may hold assets and engage in activities that we cannot hold or engage in directly and may

engage in any real estate or non-real estate related business. A TRS is subject to U.S. federal, state and local corporate income taxes.

To maintain our REIT election, at the end of each quarter no more than 20% of the value of a REIT’s assets may consist of stock or

securities of one or more TRSs.

If our TRS generates net income, our TRS can declare dividends to us, which will be included in our taxable income and

necessitate a distribution to our shareholders. Conversely, if we retain earnings at the TRS level, no distribution is required and we can

increase shareholders’ equity of the consolidated entity. As discussed in Section 1A. of this Report entitled Risk Factors, the

combination of the requirement to maintain no more than 20% of our assets in the TRS coupled with the effect of TRS dividends on

our income tests creates compliance complexities for us in the maintenance of our qualified REIT status.

The dividends paid deduction of a REIT for qualifying dividends to its shareholders is computed using our taxable income as

opposed to net income reported on our financial statements. Taxable income generally differs from net income reported on our

financial statements because the determination of taxable income is based on tax laws and regulations and not financial accounting

principles.

Compliance and Regulation

Our business is subject to extensive federal, state and local regulation. The Consumer Financial Protection Bureau (“CFPB”)

was established on July 21, 2010 under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB is

responsible for ensuring consumers are provided with timely and understandable information to make responsible decisions about

financial transactions, federal consumer financial laws are enforced and consumers are protected from unfair, deceptive, or abusive

acts and practices and from discrimination. Although the CFPB’s actions may improve consumer protection, such actions also have

resulted in a meaningful increase in costs to consumers and financial services companies including mortgage originators and servicers.

Our and our Manager’s loan production and loan servicing operations are regulated at the state level by state licensing

authorities and administrative agencies. Our Manager’s employees who engage in regulated activities must apply for licensing as a

mortgage banker or lender, loan servicer and debt collector pursuant to applicable state law. These state licensing requirements

typically require an application process, the payment of fees, background checks and administrative review. Our Manager’s servicing

operations are licensed (or exempt or otherwise not required to be licensed) to service mortgage loans in all 50 states, the District of

Columbia, Guam and the U.S. Virgin Islands. From time to time, we or our Manager receive requests from states and Agencies and

various investors for records, documents and information regarding our policies, procedures and practices regarding our loan

production and loan servicing business activities, and undergo periodic examinations by federal and state regulatory agencies.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”) requires all states to enact laws that

require all individuals acting in the United States as mortgage loan originators to be individually licensed or registered if they intend to

offer mortgage loan products. These licensing requirements include enrollment in the Nationwide Mortgage Licensing System,

application to state regulators for individual licenses and the completion of pre-licensing education, annual education and the

successful completion of both national and state exams.

We must comply with a number of federal consumer protection laws, including, among others:

• the Real Estate Settlement Procedures Act (“RESPA”), and Regulation X thereunder, which require certain disclosures to

mortgagors regarding the costs of mortgage loans, the administration of tax and insurance escrows, the transferring of

servicing of mortgage loans, the response to consumer complaints, and payments between lenders and vendors of certain

settlement services;

• the Truth in Lending Act (“TILA”), and Regulation Z thereunder, which require certain disclosures to mortgagors regarding

the terms of their mortgage loans, notices of sale, assignments or transfers of ownership of mortgage loans, new servicing

rules involving payment processing, and adjustable rate mortgage change notices and periodic statements;

• the Equal Credit Opportunity Act and Regulation B thereunder, which prohibit discrimination on the basis of age, race and

certain other characteristics, in the extension of credit;

• the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other

characteristics;

• the Home Mortgage Disclosure Act and Regulation C thereunder, which require financial institutions to report certain public

loan data;

• the Homeowners Protection Act, which requires the cancellation of private mortgage insurance once certain equity levels are

reached, sets disclosure and notification requirements, and requires the return of unearned premiums;

• the Servicemembers Civil Relief Act, which provides, among other things, interest and foreclosure protections for service

members on active duty;

• the Gramm-Leach-Bliley Act and Regulation P thereunder, which require us to maintain privacy with respect to certain

consumer data in our possession and to periodically communicate with consumers on privacy matters;

• the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications;

• the Fair Credit Reporting Act and Regulation V thereunder, which regulate the use and reporting of information related to the

credit history of consumers;

• the National Flood Insurance Reform Act of 1994, which provides for lenders to require borrowers/owners of properties in

special flood hazard areas to purchase flood insurance for such properties, or for lenders to purchase flood insurance on

behalf of such borrowers/owners; and

• the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response

to the increased borrower hardships resulting from the ongoing COVID-19 pandemic.

Many of these laws are further impacted by the SAFE Act and implementation of new rules by the CFPB.

Our Manager and Our Servicer

We are externally managed and advised by PCM pursuant to a management agreement. PCM specializes in and focuses on

investments in U.S. mortgage assets.

PCM is responsible for administering our business activities and day-to-day operations, including developing our investment

strategies, and sourcing and acquiring mortgage-related assets for our investment portfolio. Pursuant to the terms of the management

agreement, PCM provides us with our senior management team, including our officers and support personnel. PCM is subject to the

supervision and oversight of our board of trustees and has the functions and authority specified in the management agreement.

We also have a loan servicing agreement with PLS, pursuant to which PLS provides primary and special servicing for our

portfolio of residential loans and MSRs. PLS’ loan servicing activities include collecting principal, interest and escrow account

payments, accounting for and remitting collections to investors in the loans, responding to customer inquiries, and default

management activities, including managing loss mitigation, which may include, among other things, collection activities, loan

workouts, modifications and refinancings, foreclosures, short sales and sales of REO. Servicing fee rates are based on the delinquency

status, activities performed, and other characteristics of the loans serviced and total servicing compensation is established at levels that

we believe are competitive with those charged by other primary servicers and specialty servicers. PLS acted as the servicer for loans

with an unpaid principal balance totaling approximately $551.7 billion, of which $233.6 billion was subserviced for us as of

December 31, 2022.

Human Capital Resources

All of our senior officers are employees of PFSI or its affiliates and we have no employees. Our long-term growth and success is

highly dependent upon PFSI’s employees and PFSI’s ability to maintain a diverse, equitable and inclusive workplace representing a

broad spectrum of backgrounds, ideas and perspectives. As part of these efforts, PFSI strives to offer competitive compensation and

benefits, foster a community where everyone feels a greater sense of belonging and purpose, and provide employees with the

opportunity to give back and make an impact in the communities where we live and serve.

PFSI had approximately 4,000 domestic employees as of the end of fiscal year 2022. In addition, as of the end of fiscal year

2022, PFSI’s workforce was 49.9% female and 50.1% male, and the ethnicity of PFSI’s workforce was 44.4% White, 22.6% Hispanic

or Latino, 14.3% Black or African American, 14.2% Asian and 4.5% other (which includes American Indian or Alaska Native, Native

Hawaiian or Other Pacific Islander, Two or More Races, and Not Specified as defined in its EE0-1 Report filed with the Department

of Labor).

Employee Retention and Development

We and PFSI believe in attracting, developing and engaging the best talent, while providing a supportive work environment that

prioritizes the health and safety of all. Talent development is a critical component of our and PFSI’s experience and ensures that

employees have career growth opportunities, including establishing development networks and relationships and fostering continued

growth and learning. Employees receive regular business and compliance training to help further enhance their career development

objectives. PFSI also actively manages enterprise-wide and divisional mentoring programs and has partnered with an external vendor

to establish a comprehensive, fully integrated wellness program designed to enhance employee productivity.

Compensation and Succession Planning

Our and PFSI’s compensation programs are designed to motivate and reward employees who possess the necessary skills to

support our business strategy and create long-term value for our shareholders. PFSI compensation may include base salary, annual

cash incentives, and long-term equity incentives, as well as life insurance and 401(k) plan matching contributions. PFSI also offers a

comprehensive selection of health and welfare benefits to its employees including emotional well-being support and paid parental

leave programs. Succession planning is also critical to our operations and we have established ongoing evaluations of our leadership

depth and succession capabilities.

Diversity, Equity and Inclusion

We and PFSI believe that building a diverse, equitable and inclusive, high-performing workforce where PFSI’s employees bring

varied perspectives and experiences to work every day creates a positive influence in PFSI’s workplace, community and business

operations. Our Board of Trustees, our Nominating and Corporate Governance Committee, our Compensation Committee, and our

Risk Committee provide regular oversight of our and PFSI’s corporate sustainability program, including our diversity, equity and

inclusion programs and initiatives. We and PFSI are also taking proactive measures to strategically and sustainably advance equity in

the workplace through Business Resource Groups (“BRGs”), a diversity hiring initiative, mentorship programs, and external

partnerships with organizations such as the Mortgage Bankers Association and the National Association of Minority Mortgage

Bankers of America. We and PFSI also established leadership goals and created customized initiatives that focus on PFSI’s continued

effort to increase the number of women and underrepresented minorities in management positions throughout the company and its

business divisions. As it relates to PFSI’s inclusive culture, PFSI established the following BRGs to emphasize career growth,

networking, and learning opportunities for employees and allies with shared backgrounds and experiences: the BOLD BRG (for Black

and African American employees and allies), the HOLA BRG (for Hispanic, Latino and Latinx employees and allies), the

InspirASIAN BRG (for Asian American and Pacific Islander employees and allies), the Pennymac PRIDE BRG (for LGBTQIA

employees and allies), the SERVE BRG (for veteran and military family employees and allies), and the wEMRG BRG (for women

employees and allies). We and PFSI also foster a more inclusive culture through a variety of initiatives, including corporate training,

special events, community outreach and corporate philanthropy.

Community Involvement

PFSI has a corporate philanthropy program that is governed by a philosophy of giving that prioritizes the support of causes and

issues that are important in our local communities, and drives a culture of employee engagement and collaboration throughout our and

PFSI’s organization. We and PFSI are committed to empowering our employees to be a positive influence in the communities where

we live and serve, and believe that this commitment supports our efforts to attract and engage employees and improve retention.

PFSI’s philanthropy program consists of three key components: an employee matching gift program, a charitable grants program and a

corporate sponsorship program. PFSI’s five philanthropic focus areas are: community development and equitable housing, financial

literacy and economic inclusion, human and social services, health and medical research, and environmental sustainability. PFSI has

established a separate donor advised fund to facilitate donations to various local and national charitable organizations and has

provided funding to several charitable organizations located near our office sites and national organizations that support missions such

as sustainable homeownership, mortgage and rental assistance, food insecurity, disaster recovery, family and child advocacy, and

community empowerment. We and PFSI also manage our environmental impact by focusing on improving our waste reduction,

energy efficiency and water conservation.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and

amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of

1934, as amended, are available free of charge at www.pennymacmortgageinvestmenttrust.com through the investor relations section

of our website as soon as reasonably practicable after electronically filing such material with the SEC. The SEC maintains an Internet

site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. The above

references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on those

websites and should not be considered part of this document.

Item 1A. Risk Factors

Summary Risk Factors

We are subject to a number of risks that, if realized, could have a material adverse effect on our business, financial condition,

liquidity, results of operations and our ability to make distributions to our shareholders. Some of our more significant challenges and

risks include, but are not limited to, the following, which are described in greater detail below:

• Interest rate fluctuations could significantly decrease our results of operations and cash flows and the fair value of our

investments.

• Difficult conditions in the mortgage, real estate and financial markets and the economy generally may adversely affect the

performance and fair value of our investments.

• A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and results

of operations.

• We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could

materially and adversely affect our business, financial condition, liquidity and results of operations.

• New CFPB and state rules and regulations or more stringent enforcement of existing rules and regulations by the CFPB or

state regulators could result in enforcement actions, fines, penalties and the inherent reputational harm that results from such

actions.

• We are highly dependent on U.S. government-sponsored entities and government agencies, and any organizational or pricing

changes at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition

and results of operations.

• We and/or PLS are required to have various Agency approvals and state licenses in order to conduct our business and there is

no assurance we and/or PLS will be able to obtain or maintain those Agency approvals or state licenses.

• Our or PLS’ inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material

adverse effect on our business, financial condition, liquidity and results of operation

• We have a substantial amount of indebtedness, which may limit our financial and operating activities, expose us to

substantial increases in costs due to interest rate fluctuations, expose us to the risk of default under our debt obligations and

adversely affect our ability to incur additional debt to fund future needs.

• We finance our investments with borrowings, which may materially and adversely affect our return on our investments and

may reduce cash available for distribution to our shareholders.

• We may not be able to raise the debt or equity capital required to finance our assets or grow our business.

• Our business, financial condition, liquidity and results of operations may be adversely affected by the long term impact of the

COVID-19 pandemic.

• Our correspondent production activities could subject us to increased risk of loss.

• The success and growth of our correspondent production activities will depend, in part, upon PLS’ ability to adapt to and

implement technological changes and to successfully develop, implement and protect its proprietary technology.

• Hedging against interest rate exposure may materially and adversely affect our results of operations and cash flows.

• We are not an approved Ginnie Mae issuer and an increase in the percentage of government loans we acquire could be

detrimental to our results of operations.

• Our retention of credit risk underlying loans we sell to the GSEs is inherently uncertain and exposes us to significant risk of

loss.

• Government-sponsored entities have wound down lender risk share transactions such as CRT investments since the end of

2020. If we are unable to find a suitable alternative investment to investing in CRTs with similar returns, our business,

liquidity, financial condition and results of operations could be materially and adversely affected.

• A portion of our investments is in the form of loans, and the loans in which we invest subject us to costs and losses arising

from delinquency and foreclosure, as well as the risks associated with residential real estate and residential real estate-related

investments, any of which could result in losses to us.

• Our acquisition of mortgage servicing rights exposes us to significant risks.

• Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks, and other long term

physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans

we own or service, as well as geographic areas where we conduct business.

• We may be materially and adversely affected by risks affecting borrowers or the asset or property types in which our

investments may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.

• Many of our investments are illiquid and we may not be able to adjust our portfolio in response to changes in economic and

other conditions.

• Fair values of many of our investments are estimates and the realization of reduced values from our recorded estimates may

materially and adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash

available for distribution to our shareholders.

• We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain

circumstances, which could adversely affect our business, financial condition, liquidity, results of operations and ability to

make distributions to our shareholders.

• We are dependent upon PCM and PLS and their resources and may not find suitable replacements if any of our service

agreements with PCM or PLS are terminated.

• The management fee structure could cause disincentive and/or create greater investment risk.

• Termination of our management agreement is difficult and costly.

• Certain provisions of Maryland law, our staggered board of trustees and certain provisions in our declaration of trust could

each inhibit a change in our control.

• Failure to maintain exemptions or exclusions from registration under the Investment Company Act could materially and

adversely affect us.

• Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our shareholders.

• Even if we qualify as a REIT, we face tax liabilities that reduce our cash flow, and a significant portion of our income may be

earned through TRSs that are subject to U.S. federal income taxation.

• The percentage of our assets represented by a TRS and the amount of our income that we can receive in the form of TRS

dividends are subject to statutory limitations that could jeopardize our REIT status.

• Our and our Manager’s risk management efforts may not be effective.

• Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our

operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of

which could negatively impact our financial results.

The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the information in

this Report, including the matters set forth below in this Item 1A.

Risk Factors

In addition to the other information set forth in this Report, you should carefully consider the following factors, which could

materially adversely affect our business, financial condition, liquidity and results of operations in future periods. The risks described

below are not the only risks that we face. Additional risks not presently known to us or that we currently deem immaterial may also

materially adversely affect our business, financial condition, liquidity and results of operations in future periods.

Risks Related to Our Business

Interest rate fluctuations could significantly decrease our results of operations and cash flows and the fair value of our

investments.

Interest rates are highly sensitive to many factors, including United States monetary policies, domestic and international

economic and political considerations and other macroeconomic conditions such as inflation fluctuations, consumer confidence and

demand. Interest rate fluctuations present a variety of risks to our operations. Our primary interest rate exposures relate to the yield on

our investments, their fair values and the financing cost of our debt, as well as any derivative financial instruments that we utilize for

hedging purposes. In addition, interest rates and the liquidity of the MBS market may be impacted by the Federal Reserve increasing

the federal funds rate, tapering MBS purchases or selling MBS. Changes in interest rates affect our net interest income, which is the

difference between the interest income we earn on our interest earning investments and the interest expense we incur in financing

these investments. Interest rate fluctuations resulting in our interest expense exceeding interest income may result in operating losses

for us. An increase in interest rates in 2022 negatively impacted our loan production volumes, and further increases in interest rates

could further materially and adversely affect our correspondent production activities.

Changes in the level of interest rates also may affect our ability to make investments, the fair value of our investments

(including our pipeline of loan commitments) and any related hedging instruments, the value of newly originated loans acquired

through our correspondent production segment, and our ability to realize gains from the disposition of assets. Changes in interest rates

may result in a margin call and require us to post additional collateral, affect borrower default rates and impact our ability to refinance

or modify loans and/or to sell REO. Decreasing interest rates may cause a large number of borrowers to refinance, which may result in

the loss of mortgage servicing business and write-downs of the associated MSRs. Any such scenario could materially and adversely

affect us.

A prolonged economic slowdown, recession or declining real estate values could materially and adversely affect us.

The risks associated with our investments are more acute during periods of economic slowdown or recession, especially if these

periods are accompanied by high unemployment and declining real estate values. The long term impact of the COVID-19 pandemic, a

weakening economy, high unemployment and declining real estate values significantly increase the likelihood that borrowers will

default on their debt service obligations and that we will incur losses on our investments in the event of a default on a particular

investment because the fair value of any collateral we foreclose upon may be insufficient to cover the full amount of such investment

or may require a significant amount of time to realize. These factors may also increase the likelihood of re-default rates even after we

have completed loan modifications. Any period of increased payment delinquencies, foreclosures or losses could adversely affect the

net interest income generated from our portfolio and our ability to make and finance future investments, which would materially and

adversely affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our

shareholders.

Difficult conditions in the mortgage, real estate and financial markets and the economy generally may adversely affect the

performance and fair value of our investments.

The success of our business strategies and our results of operations are materially affected by current conditions in the mortgage,

real estate and financial markets and the economy generally. Continuing concerns over factors including the long term impact of the

COVID-19 pandemic, inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, domestic

political issues, climate change, the availability and cost of credit and the mortgage and real estate markets have contributed to

increased volatility and unclear expectations for the economy and markets going forward. Mortgage markets may be affected by

changes in the lending landscape, defaults, credit losses and liquidity concerns. A destabilization of the real estate and mortgage

markets or deterioration in these markets may adversely affect the performance and fair value of our investments, reduce our loan

production volume, lower our margins, reduce the profitability of servicing mortgages or adversely affect our ability to sell loans that

we acquire, either at a profit or at all. Any of the foregoing could materially and adversely affect our business, financial condition,

liquidity, results of operations and ability to make distributions to our shareholders.

A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and results of

operations.

In our correspondent production activities, we deliver newly originated Agency-eligible loans that we acquire to Fannie Mae or

Freddie Mac to be pooled into Agency MBS securities or transfer government loans that we acquire to PLS, which pools them into

Ginnie Mae MBS securities. In addition, interest rates and the liquidity of the MBS market may be impacted by the Federal Reserve

increasing the federal funds rate, tapering MBS purchases or selling MBS. Any significant disruption or period of illiquidity in the

general MBS market would directly affect our liquidity because no existing alternative secondary market would likely be able to

accommodate on a timely basis the volume of loans that we typically acquire and sell in any given period. Furthermore, we would

remain contractually obligated to fund loans under our outstanding interest rate lock commitments (“IRLCs”) without being able to

sell our existing inventory of mortgage loans. Accordingly, if the MBS market experiences a period of illiquidity, we might be

prevented from selling the loans that we produce into the secondary market in a timely manner or at favorable prices and we could be

required to hold a larger inventory of loans than we have committed facilities to fund, or we may be required to repay a portion of the

debt secured by these assets, which could materially and adversely affect our business, financial condition, results of operations and

our ability to make distributions to our shareholders.

We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations could

materially and adversely affect our business, financial condition, liquidity and results of operations.

We are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things,

the manner in which we conduct our loan production and servicing businesses. These regulations directly impact our business and

require constant compliance, monitoring and internal and external audits. PLS and the service providers it uses, including outside

counsel retained to process foreclosures and bankruptcies, must also comply with some of these legal requirements. Our failure or the

failure of PLS to operate effectively and in compliance with these laws, regulations and rules could subject us to lawsuits or

governmental actions and damage our reputation, which could materially and adversely affect our business, financial condition,

liquidity and results of operations. In addition, our failure or the failure of PLS to comply with these laws, regulations and rules may

result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of loans, permanent

forgiveness of debt, delays in the foreclosure process, increased servicing advances, litigation, reputational damage, enforcement

actions, and repurchase and indemnification obligations.

We and PLS must also comply with a number of federal, state and local consumer protection and state foreclosure laws. These

statutes apply to loan origination, servicing, debt collection, marketing, use of credit reports, safeguarding of non-public, personally

identifiable information about our clients, foreclosure and claims handling, investment of and interest payments on escrow balances

and escrow payment features, and mandate certain disclosures and notices to customers.

Because neither we nor PLS is a federally chartered depository institution, we generally do not benefit from federal pre-emption

of state mortgage loan banking, loan servicing or debt collection licensing and regulatory requirements and must comply with multiple

state licensing and compliance requirements. These state rules and regulations generally provide for, but are not limited to: originator,

servicer and debt collector licensing requirements, requirements as to the form and content of contracts and other documentation,

employee licensing and background check requirements, fee requirements, interest rate limits, and disclosure and record-keeping

requirements.

The failure of our correspondent sellers to comply with any applicable laws, regulations and rules may also result in these

adverse consequences. PLS has in place a due diligence program designed to assess areas of risk with respect to loans we acquire from

such correspondent sellers. However, we may not detect every violation of law and, to the extent any correspondent sellers with which

we do business fail to comply with applicable laws or regulations and any of their loans or MSRs become part of our assets, it could

subject us, as an assignee or purchaser of the related loans or MSRs, to monetary penalties or other losses. While we may have

contractual rights to seek indemnity or repurchase from certain lenders, if they are unable to fulfill their indemnity or repurchase

obligations to us to a material extent, our business, liquidity, financial condition and results of operations could be materially and

adversely affected. Our service providers and other vendors are also required to operate in compliance with applicable laws,

regulations and rules. Our failure to adequately manage service providers and other vendors to mitigate risks of noncompliance with

applicable laws may also have these negative results.

Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting fair lending, fair housing and

other claims that the practices of lenders and loan servicers result in a disparate impact on protected classes. Anti-discrimination

statutes, such as the Fair Housing Act and the Equal Credit Opportunity Act, prohibit creditors from discriminating against loan

applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory

agencies and departments take the position that these laws apply not only to intentional discrimination, but also to neutral practices

that have a “disparate impact” on a group that shares a characteristic that a creditor may not consider in making credit decisions (i.e.,

creditor or servicing practices that have a disproportionately negative affect on a protected class of individuals).

Federal and state administrations could enact significant policy changes increasing regulatory scrutiny and enforcement actions

in our industry. While it is not possible to predict when and whether significant policy or regulatory changes would occur, any such

changes on the federal, state or local level could significantly impact, among other things, our operating expenses and the availability

of mortgage financing. To the extent that the current government administration takes action by proposing and/or passing regulatory

policies that could have a negative impact on our industry, such actions may have a material adverse effect on our business, financial

condition, results of operations and our ability to make distributions to our shareholders. To the extent any such state regulators

impose new minimum net worth, capital ratio and liquidity standards that are overly burdensome, such actions may have a material

adverse effect on our business, financial condition, liquidity and results of operations.

The Financial Stability Oversight Council (“FSOC”) and Conference of State Bank Supervisors (“CSBS”) have been reviewing

whether state chartered nonbank mortgage servicers should be subject to “safety and soundness” standards similar to those imposed by

federal law on insured depository institutions, even though nonbank mortgage servicers do not have any federally insured deposit

accounts. For example, on July 26, 2021, the CSBS released model state regulatory prudential standards for state oversight of nonbank

mortgage servicers. The model CSBS prudential standards include revised minimum net worth, capital ratio and liquidity standards

similar to current Federal Housing Finance Agency (“FHFA”) requirements and require servicers to maintain sufficient allowable

assets to cover normal operating expenses in addition to the amounts required for servicing expenses. In addition, on August 17,

2022, the FHFA and Ginnie Mae announced enhanced minimum net capital and liquidity eligibility requirements for sellers, servicers

and issuers that will go into effect in 2023 and 2024. To the extent any new minimum net worth, capital ratio and liquidity standards

and requirements are overly burdensome, complying with such standards and requirements may have a material adverse effect on our

business, financial condition, liquidity and results of operations.

New CFPB and state rules and regulations or more stringent enforcement of existing rules and regulations by the CFPB or state

regulators could result in enforcement actions, fines, penalties and the inherent reputational harm that results from such actions.

The CFPB has regulatory authority over certain aspects of our business as a result of our residential mortgage banking activities,

including, without limitation, the authority to conduct investigations, bring enforcement actions, impose monetary penalties, require

remediation of practices, pursue administrative proceedings or litigation, and obtain cease and desist orders for violations of applicable

federal consumer financial laws. The current CFPB administration has stated its intention to aggressively supervise, investigate and,

where it deems appropriate, bring enforcement actions against lenders and servicers the CFPB believes are engaged in activities that

violate federal laws and regulations. In addition, examinations by state regulators and enforcement actions in the residential mortgage

origination and servicing sectors by state attorneys general have increased and may continue to increase. Failure to comply with the

CFPB and state laws, rules or regulations to which we are subject, whether actual or alleged, could have a material adverse effect on

our business, liquidity, financial condition and results of operations.

Our or PLS’ failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, would

expose us or PLS to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could

have a material adverse effect on our or PLS’ business, liquidity, financial condition and results of operations and our ability to make

distributions to our shareholders.

We are highly dependent on U.S. government-sponsored entities and government agencies, and any organizational or pricing

changes at such entities or their regulators could materially and adversely affect our business, liquidity, financial condition and

results of operations.

Our ability to generate revenues through loan sales depends on programs administered by the Agencies and others that facilitate

the issuance of MBS in the secondary market. We acquire loans from mortgage lenders through our correspondent production

activities that qualify under existing standards for inclusion in mortgage securities backed by the Agencies. We also derive other

material financial benefits from these relationships, including the ability to avoid certain loan inventory finance costs through

streamlined loan funding and sale procedures.

A number of legislative proposals have been introduced in recent years that would wind down or phase out the GSEs in their

current form, including a proposal by the prior federal administration to end the conservatorship and privatize Fannie Mae and Freddie

Mac. It is not possible to predict the scope and nature of the actions that the U.S. government, including the current federal

administration, will ultimately take with respect to the GSEs. Any changes in laws and regulations affecting the relationship between

Fannie Mae and Freddie Mac and their regulators or the U.S. federal government, and any changes in leadership at any of these

entities could adversely affect our business and prospects. Any discontinuation of, or significant reduction in, the operation of Fannie

Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or

secondary mortgage markets or underwriting criteria could materially and adversely affect our business, liquidity, financial condition,

results of operations and our ability to make distributions to our shareholders.

Our ability to generate revenues from newly originated loans that we acquire through our correspondent production activities is

also highly dependent on the fact that the Agencies have not historically acquired such loans directly from mortgage lenders, but have

instead relied on banks and non-bank aggregators such as us to acquire, aggregate and securitize or otherwise sell such loans to

investors in the secondary market. Certain of the Agencies have approved new and smaller lenders that traditionally may not have

qualified for such approvals. To the extent that mortgage lenders choose to sell directly to the Agencies rather than through loan

aggregators like us, this reduces the number of loans available for purchase, and it could materially and adversely affect our business,

financial condition, liquidity, results of operations and ability to make distributions to our shareholders. In addition, under certain

Agency capital rules, loans sourced from loan aggregators, such as ourselves, have higher capital requirements and we may incur

higher Agency fees for third party originated loans that we aggregate and deliver to the Agencies as compared to individual loans

delivered by third party mortgage lenders directly to the Agencies’ cash windows without the assistance of a loan aggregator. To the

extent the Agencies increase the number of purchases and sales for their own accounts, our business and results of operations could be

materially and adversely affected.

We and/or PLS are required to have various Agency approvals and state licenses in order to conduct our business and there is no

assurance we and/or PLS will be able to obtain or maintain those Agency approvals or state licenses.

Because we and PLS are not federally chartered depository institutions, neither we nor PLS benefit from exemptions to state

mortgage lending, loan servicing or debt collection licensing and regulatory requirements. Accordingly, PLS is licensed in all state

jurisdictions, and for those activities, where it is required to be licensed and believes it is cost effective and appropriate to become

licensed.

Our failure or the failure by PLS to maintain any necessary licenses, comply with applicable licensing laws or satisfy the various

requirements to maintain them over time could restrict our direct business activities, result in litigation or civil and other monetary

penalties, or cause us to default under certain of our lending arrangements, any of which could materially and adversely impact our

business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

We and PLS are also required to hold the Agency approvals in order to sell loans to the Agencies and service such loans on their

behalf. Our failure, or the failure of PLS, to satisfy the various requirements necessary to maintain such Agency approvals over time

would also restrict our direct business activities and could adversely impact our business.

We and PLS are subject to periodic examinations by federal, state and Agency auditors and regulators, which can result in

increases in our administrative costs, and we or PLS may be required to pay substantial penalties imposed by these regulators due to

compliance errors, or we or PLS may lose our licenses. Negative publicity or fines and penalties incurred in one jurisdiction may

cause investigations or other actions by regulators in other jurisdictions and could adversely impact our business.

Our or PLS’ inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material adverse

effect on our business, financial condition, liquidity and results of operation.

We and our servicer are subject to minimum financial eligibility requirements established by the Agencies, as applicable. For

example, on August 2022, the FHFA and Ginnie Mae announced enhanced minimum net capital and liquidity eligibility requirements

for sellers, servicers and issuers that will go into effect in 2023 and 2024. These eligibility requirements align the minimum financial

requirements for mortgage sellers/servicers and MBS issuers to do business with the Agencies. These minimum financial requirements

include net worth, capital ratio and/or liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential

losses and a minimum amount of liquidity needed to service Agency loans and MBS and cover the associated financial obligations and

risks.

In order to meet these minimum financial requirements, we and PLS are required to maintain rather than spend or invest, cash

and cash equivalents in amounts that may adversely affect our or its business, financial condition, liquidity, results of operations and

ability to make distributions to our shareholders, and this could significantly impede us and PLS, as non-bank mortgage lenders, from

growing our respective businesses and place us at a competitive disadvantage in relation to federally chartered banks and certain other

financial institutions. To the extent that such minimum financial requirements are not met, the Agencies may suspend or terminate

Agency approval or certain agreements with us or PLS, which could cause us or PLS to cross default under financing arrangements

and/or have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make

distributions to our shareholders.

We have a substantial amount of indebtedness, which may limit our financial and operating activities, expose us to substantial

increases in costs due to interest rate fluctuations, expose us to the risk of default under our debt obligations and adversely affect

our ability to incur additional debt to fund future needs.

As of December 31, 2022, we had $11.4 billion of total indebtedness outstanding (approximately $10.9 billion of which was

secured) and up to $5.0 billion of additional capacity under our secured borrowings and other secured debt financing arrangements.

This substantial indebtedness and any future indebtedness we incur could have adverse consequences and, for example, could:

• require us to dedicate a substantial portion of cash flow from operations and investments to the payment of principal and

interest on indebtedness, including indebtedness we may incur in the future, thereby reducing the funds available for

operations, investments and other general corporate purposes;

• make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the

obligations of any of our debt instruments, including any restrictive covenants, could result in an event of default under the

agreements governing our other indebtedness which, if not cured or waived, could result in accelerated repayment of our

indebtedness;

• subject us to increased sensitivity to interest rate increases;

• make us more vulnerable to economic downturns, adverse industry conditions or catastrophic events, including the

COVID-19 pandemic and climate change;

• reduce our flexibility in planning for or responding to changing business, industry and economic conditions or restrict our

ability to carry on business activity; and/or

• place us at a competitive disadvantage to competitors that have relatively less debt than we have.

In addition, our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms, or at

all, for working capital and general corporate purposes. Our liquidity needs vary significantly from time to time and may be affected

by general economic conditions, industry trends, performance and many other factors outside our control.

We finance our investments with borrowings, which may materially and adversely affect our return on our investments and may

reduce cash available for distribution to our shareholders.

We currently leverage and, to the extent available, intend to continue to leverage our investments through borrowings, the level

of which may vary based on our investment portfolio characteristics and market conditions. We generally finance our investments

with relatively short-term facilities until longer-term financing becomes available. As a result, we are subject to the risks that we

would not be able to obtain suitable non-recourse long-term financing or otherwise acquire, during the period that any short-term

facilities are available, sufficient eligible assets or securities to maximize the efficiency of a securitization. We also bear the risk that

we would not be able to obtain new short-term facilities or to renew any short-term facilities after they expire should we need more

time to obtain long-term financing or seek and acquire sufficient eligible assets or securities for a securitization. If we are unable to

obtain and renew short-term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be

required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or unfavorable price.

Specifically, we have financed certain of our investments through repurchase agreements, pursuant to which we may sell

securities or loans to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. CRT investments have

been financed through term notes and repurchase agreements. Unlike MBS and other investments, we finance under repurchase

agreements, our CRT investments are generally more illiquid and subject to greater fluctuations in fair value and the term notes we

issue to finance these assets may not be callable and may otherwise prohibit the disposition of the assets securing the financing.

We also currently finance certain of our MSRs under secured financing arrangements. Our Freddie Mac MSRs are pledged to

secure borrowings under loan and security agreements, while our Fannie Mae MSRs are pledged to a special purpose entity, which

issues variable funding notes and term notes that are secured by such Fannie Mae MSRs and repaid through the cash flows received by

the special purpose entity as the lender under a repurchase agreement with PennyMac Corp. (“PMC”). A decrease in the fair value of

the pledged collateral can result in a margin call. Any such margin call may require that we liquidate assets at a disadvantageous time

or provide that the secured parties may sell the collateral, either of which could result in significant losses to us. Each of the secured

financing arrangements pursuant to which we finance MSRs is further subject to the terms of an acknowledgement agreement with

Fannie Mae, Freddie Mac or Ginnie Mae, as applicable, pursuant to which our and the secured parties’ rights are subordinate in all

respects to the rights of the applicable Agency. Any extinguishment of our and the secured parties’ rights in the related collateral could

result in significant losses to us.

We may in the future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing

arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our available

capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of, among

other things, the stability of our investment portfolio’s cash flow.

Our return on our investments and cash available for distribution to our shareholders may be reduced to the extent that changes

in market conditions increase the cost of our financing relative to the income that can be derived from the investments acquired. Our

debt service payments also reduce cash flow available for distribution to shareholders. In the event we are unable to meet our debt

service obligations, we risk the loss of some or all of our assets to foreclosure or sale to satisfy the obligations.

Our financing agreements contain financial and restrictive covenants that could adversely affect our financial condition and our

ability to operate our businesses.

The lenders under our repurchase agreements require us and/or our subsidiaries to comply with various financial covenants,

including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Our lenders also

require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. If we are

unable to maintain these liquidity levels, we could be forced to sell additional investments at a loss and our financial condition could

deteriorate rapidly.

Our existing financing agreements also contain certain events of default and other financial and non‑financial covenants and

restrictions that impact our flexibility to determine our operating policies and investment strategies. If we default on our obligations

under a credit or financing agreement, fail to comply with certain covenants and restrictions or breach our representations and are

unable to cure, the lender may be able to terminate the transaction or its commitments, accelerate any amounts outstanding, require us

to post additional collateral or repurchase the assets, and/or cease entering into any other credit transactions with us.

Because our financing agreements typically contain cross‑default provisions, a default that occurs under any one agreement

could allow the lenders under our other agreements to also declare a default, thereby exposing us to a variety of lender remedies, such

as those described above, and potential losses arising therefrom. Any losses that we incur on our credit and financing agreements

could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to make distributions

to our shareholders.

As the servicer of the assets subject to our repurchase agreements, PLS is also subject to various financial covenants, including

those relating to tangible net worth, liquidity, profitability and its ratio of total liabilities to tangible net worth. PLS’ failure to comply

with any of these covenants would generally result in a servicer termination event or event of default under one or more of our

repurchase agreements. Thus, in addition to relying upon PCM to manage our financial covenants, we rely upon PLS to manage its

own financial covenants in order to ensure our compliance with our repurchase agreements and our continued access to liquidity and

capital. A servicer termination event or event of default resulting from PLS’ breach of its financial or other covenants could materially

and adversely impact our business, financial condition, liquidity, results of operations and our ability to make distributions to

shareholders.

We may not be able to raise the debt or equity capital required to finance our assets or grow our business.

We require continued access to debt and equity capital that may or may not be available on favorable terms or at the desired

times, or at all. In addition, we invest in certain assets, including MSRs, for which financing has historically been difficult to obtain.

Our inability to continue to maintain debt financing for MSRs could require us to seek equity capital that may be more costly or

unavailable to us.

We are also dependent on a limited number of banking institutions that extend us credit on terms that we have determined to be

commercially reasonable. These banking institutions are subject to their own regulatory supervision, liquidity and capital

requirements, risk management frameworks and risk thresholds and tolerances, any of which may change materially and negatively

impact their willingness to extend credit to us specifically or mortgage lenders and servicers generally. Such actions may increase our

cost of capital and limit or otherwise eliminate our access to capital, in which case our business, financial condition, liquidity, results

of operations and ability to make distributions to our shareholders would be materially and adversely affected.

We can provide no assurance that we will have access to any debt or equity capital on favorable terms or at the desired times, or

at all. Our inability to raise such capital or obtain financing on favorable terms could materially and adversely impact our business,

financial condition, liquidity, results of operations and our ability to make distributions to shareholders.

Our business, financial condition, liquidity and results of operations may be adversely affected by the long term impact of the

COVID-19 pandemic.

The COVID-19 pandemic, inclusive of any variants, has created unprecedented economic, financial and public health

disruptions that may continue to adversely affect our business, financial condition, liquidity and results of operations. The extent to

which COVID-19 continues to affect our business, financial condition, liquidity and results of operations will depend on future

developments, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other

third parties in response to the COVID-19 pandemic.

The federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which allows

borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships

resulting from the long term impact of the COVID-19 pandemic. As a result of the CARES Act and other forbearance requirements,

we may experience delinquencies in our servicing portfolio that require us to finance advances of principal and interest payments to

the investors holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’

interests in the properties securing the loans. The CARES Act and other forbearance requirements have reduced our servicing fee

income and increased our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we

have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the long term

impact of the COVID-19 pandemic. Future servicing advances will be driven by a number of factors, including: the number of

borrower delinquencies, including those resulting from payment forbearance; the length of time borrowers remain delinquent; and the

level of successful resolution of delinquent payments, all of which will be impacted by the pace at which the economy recovers from

the long term impact of the COVID-19 pandemic. As of December 31, 2022, 0.3% of loans in our MSR portfolio were in forbearance

plans and delinquent, resulting in an increase in the level of servicing advances we have been required to make due to borrower

delinquencies. Servicing advances resulting from the COVID-19 pandemic could have a significant adverse impact on our cash flows

and could also have a detrimental effect on our business and financial condition.

The CARES Act and other forbearance requirements have negatively impacted the fair value of our servicing assets and

further market volatility or economic weakness may result in additional reductions in the value of our servicing assets and make it

increasingly difficult to optimize our hedging activities. Our liquidity and/or regulatory capital could also be adversely impacted by

volatility and disruptions in the capital and credit markets. If we fail to meet or satisfy any of the covenants in our financing

arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result

in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts

due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of

additional collateral and enforce their respective interests against existing collateral.

We may have difficulty accessing debt and equity capital on attractive terms, or at all, as a result of the impact of the

COVID-19 pandemic, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities

on a timely basis. This includes renewals of our existing credit facilities with our lenders who may be adversely impacted by the

volatility and dislocations in the financial markets and may not be willing or able to continue to extend us credit on the same terms, or

on favorable terms, or at all.

Our business could be disrupted if we or our Manager are unable to operate due to changing governmental restrictions such

as travel bans and quarantines placed or reinstituted on our employees or operations, including successfully operating our business

from remote locations, ensuring the protection of our employees’ health and maintaining our information technology infrastructure.

Further, increased operational expenses to address these restrictions and widespread employee illnesses could negatively affect

staffing within our various businesses and geographies.

Federal, state, and local executive, legislative and regulatory responses to the long term impact of the COVID-19 pandemic may

be inconsistent and conflict in scope or application, and may be subject to change without advance notice. These regulatory responses

may impose additional compliance obligations, and may extend existing CARES Act and other forbearance requirements. In addition,

the CARES Act and other federal, state and local regulations are subject to interpretation given the existing ambiguities in the rules

and regulations, which may result in future class action and other litigation risk.

The outcome of the COVID-19 related governmental measures are unknown and they may not be sufficient to address future

market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with

our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic. The

final scope and duration of the COVID-19 pandemic and the efficacy of the extraordinary government measures put in place to

address it are currently unknown. Even after the COVID-19 pandemic subsides, the economy may not fully recover for some time and

we may be materially and adversely affected by a prolonged recession or economic downturn.

The COVID-19 pandemic and the CARES Act have significantly increased the number of borrowers who were in forbearance

whose loans are in our CRT arrangements which may result in future losses.

The CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance if they attest that they

are directly or indirectly experiencing any financial hardship resulting from the COVID-19 pandemic. The CARES Act also precludes

servicers from reporting borrowers subject to forbearance plans as delinquent to the credit reporting agencies even though the

federally-backed loans may still be characterized as delinquent for the purposes of our CRT arrangements with Fannie Mae. Our CRT

arrangements are structured such that we retain a portion of the credit risk and an interest-only ownership interest in the reference

loans and, under certain of our CRT Agreements, may be required to realize losses in the event of a loan delinquency of 180 days or

more even where there is ultimately no loss realized with respect to such loan (e.g., as a result of a borrower’s re-performance).

CARES Act forbearance requests under our CRT arrangements may thus result in credit and fair value losses that require us to write

down the value of the assets significantly. Further, in the event of a foreclosure, the proceeds upon the sale of such underlying real

estate may not be sufficient to repay the borrower’s mortgage loan obligation, which could result in losses to our CRT arrangements

and to us.

We are subject to risks associated with the discontinuation of LIBOR.

One-week and two-month U.S. dollar LIBOR (and certain non-U.S. dollar LIBOR settings) were discontinued as of December

31, 2021, while the remaining non-U.S. dollar LIBOR settings ceased to be representative and thereafter began to be published only

on a “synthetic basis”. In addition, the UK Financial Conduct Authority (the “FCA”), which is the regulator of the LIBOR

administrator, has announced that the principal U.S. dollar LIBOR tenors (overnight and one, three, six and 12 months) will cease to

be published by any administrator or will no longer be representative as of June 30, 2023. In addition, despite the expected

publication of the principal U.S. dollar LIBOR settings through June 30, 2023, the FCA has prohibited the firms it regulates from

using such settings in new contracts.

Accordingly, many LIBOR obligations have transitioned to another benchmark or will do so. Different types of financial

products have transitioned, or are expected to transition, to different benchmarks; and there is no assurance that any alternative

benchmark will be the economic equivalent of any LIBOR setting. For some existing LIBOR-based obligations, the contractual

consequences of the discontinuation of LIBOR may not be clear. Although the foregoing reflects the timing (or expected timing) of

LIBOR discontinuation and certain consequences, there is no assurance that LIBOR, of any particular currency or tenor, will continue

to be published until any particular date or in any particular form, and there is no assurance regarding the consequences of LIBOR

discontinuation. Uncertainty as to the foregoing and the nature of alternative reference rates may adversely impact the availability and

costs of borrowings.

The discontinuation of LIBOR could have a significant impact on the financial markets and our business activities. The cost of

borrowing under certain of our financing arrangements is based on LIBOR. We also may hold assets and instruments used to hedge

the value of certain assets with values or cash flows determined by reference to LIBOR. We expect to face challenges during the

transition away from LIBOR for all of our LIBOR based financing arrangements regardless of whether their maturity dates (as

applicable) fall before or after the discontinuation date after June 30, 2023. These challenges include, but are not limited to, amending

agreements or instruments underlying our existing and/or new LIBOR-based assets, financing arrangements, securities and liabilities

with appropriate fallback language in such a way as to ensure economic equivalence with our LIBOR-based assets, financing

arrangements and securities prior to the discontinuation of LIBOR, and the possibility that LIBOR may deteriorate as a viable

benchmark to ensure a fair cost of funds for our LIBOR-linked liabilities, interest income for our LIBOR-linked assets, and/or the

determination of fair value for certain of our assets and hedges using LIBOR as a benchmark rate or used to develop a market discount

rate. In addition, the transition to using any new benchmark rate or other financial metric may require changes to existing transaction

data, products, systems, models, operations and pricing processes.

We also anticipate additional risks to our current business activities as they relate to the discontinuation of LIBOR. We may

service LIBOR-based adjustable rate mortgages for which the underlying mortgage notes incorporate fallback provisions, but we

cannot anticipate the response of our borrowers or note holders to such risks. We may also incorporate LIBOR base rates for financial

planning and reporting in our financial models.

In the United States, there have been efforts to identify alternative reference interest rates to replace United States Dollar

LIBOR. The Alternative Reference Rates Committee has recommended that U.S. dollar LIBOR be replaced by rates based on the

Secured Overnight Financing Rate (“SOFR”) plus, in the case of existing LIBOR contracts and obligations, a spread adjustment. The

derivatives markets are also expected to use SOFR-based rates to replace U.S. dollar LIBOR. SOFR is intended to be a broad measure

of the cost of borrowing funds overnight in transactions that are collateralized by U.S. Treasury securities. LIBOR is intended to be an

unsecured rate that represents interbank funding costs for different short-term tenors and, other than its overnight setting,

reflects expectations regarding future interest rates. Thus, LIBOR is generally intended to be sensitive to bank credit risk and to short-

term interest rate expectations and SOFR is intended to be insensitive to credit risk and to risks related to interest rates other than

overnight rates. These fundamental differences between LIBOR and SOFR mean we are unable to clearly assess the risk of

transitioning from LIBOR to SOFR for any of our LIBOR-based liabilities or assets.

Due to these risks, we expect that both the impending and actual discontinuation of LIBOR could affect our interest expense and

earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their fair value. For the

same reason, we also can provide no assurance that changes in the fair value of our hedge instruments will effectively offset changes

in the fair value of the assets they are expected to hedge. Furthermore, the transition away from widely used benchmark rates like

LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments,

disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes.

Our inability to manage these risks effectively may adversely affect our business, financial condition, liquidity and results of

operations.

We are subject to market risk and declines in credit quality and changes in credit spreads, which may adversely affect investment

income and cause realized and unrealized losses.

We are exposed to the credit markets and subject to the risk that we will incur losses due to adverse changes in credit spreads.

Adverse changes to these spreads may occur due to changes in fiscal policy, the long term impact of the COVID-19 pandemic, the

economic climate, the liquidity of a market or market segment, insolvency or financial distress of key market makers or participants,

or changes in market perceptions of credit worthiness and/or risk tolerance.

We are subject to risks associated with potential declines in our credit quality, credit quality related to specific issuers or specific

industries, and a general weakening in the economy, all of which are typically reflected through credit spreads. Credit spread is the

additional yield on fixed income securities above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that

market participants require to compensate them for assuming credit, liquidity and/or prepayment risks. Credit spreads vary (i.e.,

increase or decrease) in response to the market’s changing perception of risk and liquidity in a specific issuer or specific sector and are

influenced by the credit ratings, and the reliability of those ratings, published by third party rating agencies. A decline in the quality of

our investment portfolio as a result of adverse economic conditions or otherwise could cause additional realized and unrealized losses

on our investments.

A decline in credit spreads could have an adverse effect on our investment income as we invest cash in new investments that

may earn less than the portfolio’s average yield. An increase in credit spreads could have an adverse effect on the fair value of our

investment portfolio by decreasing the fair values of investments in our investment portfolio that are sensitive to changes in credit

spreads. Any such scenario could materially and adversely affect us.

Hedging against interest rate exposure may materially and adversely affect our results of operations and cash flows.

We pursue hedging strategies in a manner that is consistent with the REIT qualification requirements to reduce our exposure to

interest rates. The strategies are intended to mitigate the effect of interest rate fluctuations on the fair value of the assets at our TRS as

well as debt used to acquire or carry real estate assets at entities other than our TRS. To manage this price risk, we use derivative

financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable

changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCs and our inventory of

loans held for sale as well as MBS and CRTs. For example, with respect to our IRLCs and inventory of loans held for sale, we may

use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and MBS put options

to mitigate the risk of our IRLCs not closing at the rate we expect. In addition, with respect to our MSRs, we may use MBS forward

purchase and sale contracts to address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use

options and swaptions to achieve target coverage levels for larger interest rate shocks.

Our hedging activity will vary in scope based on the risks being mitigated, the level of interest rates, the type of investments

held, and other changing market conditions such as those resulting from the long term impact of the COVID-19 pandemic. Hedging

instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or

regulated by any U.S. or foreign governmental authorities, and our interest rate hedging may fail to protect or could adversely affect us

because, among other things:

• interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

• available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

• the duration of the hedge may not match the duration of the related liability or asset;

• the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it

impairs our ability to sell or assign our side of the hedging transaction;

• the hedging counterparty owing the money in the hedging transaction may default on its obligation to pay; and

• the federal tax regulations applicable to REITs limit our hedge activity outside of the TRS to hedging interest rate

fluctuations with respect to debt used to acquire or carry real estate assets.

In addition, we may fail to recalculate, re‑adjust and execute hedges in an efficient manner. Any hedging activity, which is

intended to limit losses, may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter

into such transactions seeking to reduce interest rate risk, unanticipated changes in interest rates may result in worse overall

investment performance than if we had not engaged in any such hedging transactions. Further, a liquid secondary market may not exist

for a hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could

result in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging

strategies and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of

reasons, we may not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being

hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Numerous

regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly increase our

administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our hedge exposures.

If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin call and require us to

post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could have a material adverse

effect on our business, financial condition, liquidity and results of operations.

We utilize derivative financial instruments, which could subject us to risk of loss.

We utilize derivative financial instruments for hedging purposes, which may include swaps, options and futures. However, the

prices of derivative financial instruments, including futures and options, are highly volatile, as are payments made pursuant to swap

agreements. As a result, the cost of utilizing derivatives may reduce our income that would otherwise be available for distribution to

shareholders or for other purposes, and the derivative instruments that we utilize may fail to effectively hedge our positions. We are

also subject to credit risk with regard to the counterparties involved in the derivative transactions.

We are exposed to a number of risks relating to holding derivative instruments. A liquid secondary market may not exist for a

hedging instrument purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result

in significant losses. In addition, the degree of correlation between price movements of the instruments used in hedging strategies and

price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may

not establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any

such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may significantly

increase our administrative or compliance costs. Our derivative agreements generally provide for the daily mark to market of our

hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure threshold, it may initiate a margin

call and require us to post collateral. If we are unable to satisfy a margin call, we would be in default of our agreement, which could

have a material adverse effect on our business, financial condition, liquidity and results of operations.

The use of derivative instruments is also subject to an increasing number of laws and regulations, including the Dodd-Frank Act

and other federal regulations. These laws and regulations are complex, compliance with them may be costly and time consuming, and

our failure to comply with any of these laws and regulations could subject us to lawsuits or government actions and damage our

reputation, which could materially and adversely affect our business, financial condition, liquidity, results of operations and ability to

make distributions to our shareholders.

Our correspondent production activities could subject us to increased risk of loss.

In our correspondent production activities, we acquire newly originated loans from mortgage lenders and sell or securitize those

loans to or through the Agencies or other third party investors. We also sell the resulting securities into the MBS markets. However,

there can be no assurance that PLS will continue to be successful in operating this business on our behalf or that we will continue to be

able to capitalize on these opportunities on favorable terms or at all. In particular, we have committed, and expect to continue to

commit, capital and other resources to this operation; however, PLS may not be able to continue to source sufficient asset acquisition

opportunities to justify the expenditure of such capital and other resources. In the event that PLS is unable to continue to source

sufficient opportunities for this operation, there can be no assurance that we would be able to acquire such assets on favorable terms or

at all, or that such assets, if acquired, would be profitable to us. In addition, we may be unable to finance the acquisition of these assets

and/or may be unable to sell the resulting MBS in the secondary mortgage market on favorable terms or at all. We are also subject to

the risk that the fair value of the acquired loans may decrease prior to their disposition. The occurrence of any of these risks could

adversely impact our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

The success and growth of our correspondent production activities will depend, in part, upon PLS’ ability to adapt to and

implement technological changes and to successfully develop, implement and protect its proprietary technology.

Our success in the mortgage industry is highly dependent upon the ability of our servicer, PLS, to adapt to constant

technological changes, successfully enhance its current information technology solutions through the use of third-party and proprietary

technologies, and introduce new solutions and services that more efficiently address our needs.

Our correspondent production activities are currently dependent, in part, upon the ability of PLS to effectively interface with our

mortgage lenders and other third parties and to efficiently process loan fundings and closings. The correspondent production process is

becoming more dependent upon technological advancement, and our correspondent sellers expect and require certain conveniences

and service levels. In this regard, PLS has transitioned to a workflow-driven, cloud-based loan acquisition platform.

While we anticipate that PLS’ cloud-based system will increase scalability and produce other efficiencies, there can be no

assurance that PLS’ cloud-based system will prove to be effective or that such correspondent sellers will easily adapt to PLS’ cloud-

based system. Any failure to effectively or timely transition to the new system and meet our expectations and the expectations of our

correspondent sellers could have a material adverse effect on our business, financial condition and results of operations.

The development, implementation and protection of these technologies and becoming more proficient with them may also

require significant capital expenditures by PLS. As these technological advancements increase in the future, PLS will need to further

develop and invest in these technological capabilities to remain competitive. Moreover, litigation has become required for PLS to

protect its technologies and such litigation is expected to be time consuming and result in substantial costs and diversion of PLS

resources.

Any failure of PLS to develop, implement, execute or maintain its technological capabilities and any litigation costs associated

with the protection of its technologies could adversely affect PLS and its ability to effectively perform its loan production and

servicing activities on our behalf, which could adversely affect our business, financial condition, liquidity, results of operations and

ability to make distributions to our shareholders.

We are not an approved Ginnie Mae issuer and an increase in the percentage of government loans we acquire could be

detrimental to our results of operations.

Government-insured or guaranteed loans that are typically securitized through the Ginnie Mae program accounted for 53% of

our purchases in fiscal year 2022. We are not approved as a Ginnie Mae issuer and rely on PLS to acquire such loans from us. As a

result, we are unable to produce or own Ginnie Mae MSRs and we earn significantly less income in connection with our acquisition of

government loans as opposed to conventional loans. Further, market demand for government loans over conventional loans may

increase or PLS may offer pricing to our approved correspondent sellers for government loans that is more competitive in the market

than pricing for conventional loans, the result of which may be our acquisition of a greater proportion of government loans. Any

significant increase in the percentage of government loans we acquire could adversely impact our business, financial condition,

liquidity, results of operations and ability to make distributions to our shareholders.

Risks Related to Our Investments

Our retention of credit risk underlying loans we sell to the GSEs is inherently uncertain and exposes us to significant risk of loss.

In conjunction with our correspondent business, we have previously entered into CRT arrangements with Fannie Mae, whereby

we sell pools of loans into Fannie Mae guaranteed securitizations while retaining a portion of the credit risk and an interest-only

(“IO”) ownership interest in such loans or purchasing Agency securities that absorb losses incurred by such loans. Our CRT-related

investments subject us to credit risks associated with delinquency and foreclosure similar to the risks associated with owning the

underlying loans, and exposes us to risk of loss greater than the risks associated with selling the loans to Fannie Mae without the

retention of such credit risk. Delinquency can result from many factors including unemployment, weak economic conditions or real

estate values, or catastrophic events such as man-made or natural disaster, the long term impact of the COVID-19 pandemic, war or

terrorist attack. Further, the risks associated with delinquency and foreclosure may in some instances be greater than the risks

associated with owning the underlying loans because the structure of certain of the CRT Agreements provides that we may be required

to realize losses in the event of delinquency or foreclosure even where there is ultimately no loss realized with respect to the

underlying loan (e.g., as a result of a borrower’s re-performance). We are also exposed to market risk and, as a result of prevailing

market conditions or the economy generally, may be required to recognize losses associated with adverse changes to the fair value of

the CRT Agreements. Any loss we incur may be significant and may reduce distributions to our shareholders and materially and

adversely affect the market value of our common shares.

Government-sponsored entities have wound down lender risk share transactions such as CRT investments since the end of 2020.

If we are unable to find a suitable alternative investment to investing in CRTs with similar returns, our business, liquidity,

financial condition and results of operations could be materially and adversely affected.

The FHFA instructed government-sponsored entities to gradually wind down lender risk share transactions such as CRT

investments as of the end of 2020 and, accordingly, we are no longer creating new CRT arrangements. As of December 31, 2022, we

continued to hold net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips,

interest-only security payable) totaling $1.1 billion. If we are unable to find suitable alternative investments comparable to CRTs, our

business, liquidity, financial condition and results of operations could be materially and adversely affected.

A portion of our investments is in the form of loans, and the loans in which we invest subject us to costs and losses arising from

delinquency and foreclosure, as well as the risks associated with residential real estate and residential real estate-related

investments, any of which could result in losses to us.

We invest in residential loans that are typically secured by single-family residential property and are subject to risks and costs

associated with delinquency and foreclosure and the resulting risks of loss. Our investments in loans also subject us to the risks of

residential real estate and residential real estate-related investments, including, among others: (i) declines in the value of residential

real estate; (ii) general and local economic conditions, including those resulting from the long term impact of the COVID-19

pandemic; (iii) lack of available mortgage funding for borrowers to refinance or sell their homes; (iv) overbuilding; (v) increases in

property taxes and operating expenses; (vi) changes in zoning laws; (vii) costs resulting from the clean-up of, and liability to third

parties for damages resulting from, environmental problems, such as indoor mold; (viii) casualty or condemnation losses; (ix)

uninsured damages from floods, earthquakes or other natural disasters; (x) limitations on and variations in rents; (xi) fluctuations in

interest rates; (xii) fraud by borrowers, originators and/or sellers of loans; (xiii) undetected deficiencies and/or inaccuracies in

underlying loan documentation and calculations; and (xiv) failure of the borrower to adequately maintain the property. To the extent

that assets underlying our investments are concentrated geographically, by property type or in certain other respects, we may be

subject to certain of the foregoing risks to a greater extent.

We may be required to foreclose on a loan and such actions may subject us to greater concentration of the risks of the residential

real estate markets and risks related to the ownership and management of real property. In the event of a foreclosure, we may assume

direct ownership of the underlying real estate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover

our investment in the loan, resulting in a loss to us. In addition, the foreclosure process may be lengthy and expensive, and any delays

or costs involved in the effectuation of a foreclosure of the loan or a liquidation of the underlying property may further reduce the

proceeds and thus increase the loss.

In the event of the bankruptcy of a loan borrower, the loan to such borrower will be deemed to be secured only to the extent of

the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the loan

will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under

state law.

Our acquisition of mortgage servicing rights exposes us to significant risks.

MSRs arise from contractual agreements between us and the investors (or their agents) in mortgage securities and loans that we

service on their behalf. We generally acquire MSRs in connection with our sale of loans to the Agencies where we assume the

obligation to service such loans on their behalf. Any MSRs we acquire are initially recorded at fair value on our balance sheet. The

determination of the fair value of MSRs requires our management to make numerous estimates and assumptions. Such estimates and

assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving

interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced loans as well as the long

term impact of the COVID-19 pandemic. The ultimate realization of the MSRs may be materially different than the values of such

MSRs as may be reflected in our consolidated balance sheet as of any particular date. Different persons in possession of the same

facts may reasonably arrive at different conclusions as to the inputs and assumptions used to determine MSR fair value. The use of

different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for

such assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Accordingly, there may be material uncertainty about the fair value of any MSRs we acquire.

Prepayment speeds significantly affect MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the

unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We

base the price we pay for MSRs on, among other things, our projection of the cash flows from the related pool of loans. Our

expectation of prepayment speeds is a significant input to our cash flow projections. If prepayment speed expectations increase

significantly, the fair value of the MSRs could decline and we may be required to record a non-cash charge that would have a negative

impact on our financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash

flows we receive from MSRs, and we could ultimately receive substantially less than what we paid for such assets. Moreover,

delinquency rates have a significant impact on the valuation of any MSRs. An increase in delinquencies generally results in lower

revenue because typically we only collect servicing fees from Agencies or mortgage owners when we collect payments from the

borrower. Our expectation of delinquencies is also a significant input underlying our cash flow projections. If delinquencies are

significantly greater than we expect, the estimated fair value of the MSRs could be diminished. When the estimated fair value of

MSRs is reduced, we could suffer a loss, which could have a material adverse effect on our business, financial condition, liquidity,

results of operations and ability to make distributions to our shareholders.

Changes in interest rates are a key driver of the performance of MSRs. Historically, the fair value of MSRs has increased when

interest rates increase and decline when interest rates decrease due to the effect those changes in interest rates have on prepayment

estimates. We may pursue, in a manner that is consistent with our qualification as a REIT, various hedging strategies to seek to reduce

our exposure to adverse changes in fair value resulting from changes in interest rates. Our hedging activity will vary in scope based on

the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to

protect or could adversely affect us. To the extent we do not utilize derivative financial instruments to hedge against changes in fair

value of MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition,

liquidity, results of operations and ability to make distributions to our shareholders would be more susceptible to volatility due to

changes in the fair value of, or cash flows from, MSRs as interest rates change. Furthermore, MSRs and the related servicing activities

are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative

decisions imposing various requirements and restrictions on our business. For example, the CARES Act allows borrowers with

federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the

long term impact of the COVID-19 pandemic.

We are not independently capable of protecting our MSR assets from borrower refinancing through targeted solicitations to, and

origination of, refinance loans for borrowers in our servicing portfolio. Accordingly, unlike traditional mortgage originators and many

servicers, we must rely upon PLS to refinance loans in our servicing portfolio that would otherwise be targeted by other lenders. PLS

has agreed pursuant to the terms of an MSR recapture agreement to transfer cash to us in an amount equal to a tiered recapture fee

based on the fair value of the MSRs relating to loans it refinances, There can be no assurance that PLS will either have or allocate the

time and resources required to effectively and efficiently protect our MSR assets. Its failure to do so, or the termination of our MSR

recapture agreement, could result in accelerated runoff of our MSR assets without offsetting compensation, decreasing its fair value

and adversely impacting our business, financial condition, liquidity, results of operations and ability to make distributions to our

shareholders.

Our failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which we or they are subject

by virtue of ownership of MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities,

including costs, settlements and judgments, any of which could have a material adverse effect on our business, financial condition,

liquidity, results of operations and ability to make distributions to our shareholders.

We may change our investment strategies and policies without shareholder consent, and this may materially and adversely affect

the market value of our common shares and our ability to make distributions to our shareholders.

PCM is authorized by our board of trustees to follow very broad investment policies and, therefore, it has great latitude in

determining the types of assets that are proper investments for us, as well as in making individual investment decisions. In the future,

PCM may make investments with lower rates of return than those anticipated under current market conditions and/or may make

investments with greater risks to achieve those anticipated returns. Our board of trustees will periodically review our investment

policies and our investment portfolio but will not review or approve each proposed investment by PCM unless it falls outside our

investment policies or constitutes a related party transaction.

In conducting periodic reviews, our board of trustees will rely primarily on information provided to it by PCM. Furthermore,

PCM may use complex strategies, and transactions entered into by PMT or by PCM on behalf of PMT may be costly, difficult or

impossible to unwind by the time they are reviewed by our board of trustees. We also may change our investment strategies and

policies and targeted asset classes at any time without the consent of our shareholders, and this could result in our making investments

that are different in type from, and possibly riskier than our current investments or the currently contemplated investments. Changes in

our investment strategies and policies and targeted asset classes may expose us to new risks or increase our exposure to interest rate

risk, counterparty risk, default risk and real estate market fluctuations, and this could materially and adversely affect the market value

of our common shares and our ability to make distributions to our shareholders.

Investments in subordinate loans and subordinated or credit-linked MBS could subject us to increased risk of losses.

Our investments in subordinate loans or subordinate or credit-linked MBS could subject us to increased risk of losses. The

contractual restrictions on transfer, risk retention requirements or the illiquidity of our investments may make it difficult for us to sell

such investments if the need or desire arises. In the event a borrower defaults on a subordinate loan and lacks sufficient assets to

satisfy such loan, we may lose all or a significant part of our investment. In the event a borrower on a subordinated loan becomes

subject to bankruptcy proceedings, we will not have any recourse to the assets, if any, of the borrower that are not pledged to secure

our loan. If a borrower defaults on our loan or on its senior debt (i.e., a first-lien loan), or in the event of a borrower bankruptcy, our

subordinate loan will be satisfied only after all senior debt is paid in full. As a result, we may not recover all or even a significant part

of our investment, which could result in losses. In general, losses on real estate assets securing a loan included in a securitization will

be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit provided by the borrower, if any, and

then by the “first loss” subordinate security holder and then by the “second loss” subordinate security holder. In the event of default

and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest,

we may not recover all or even a significant part of our investment, which could result in losses.

If the underlying mortgage portfolio has been serviced ineffectively by the loan servicer or if the fair values of the assets

subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related MBS, the

securities in which we invest may suffer significant losses. The fair value of subordinate loans or subordinate or credit-linked

investments are generally more sensitive to adverse actual or perceived economic downturns or individual issuer developments than

more highly rated investments. In addition, interest rates and the liquidity of the MBS market may be impacted by the Federal

Reserve increasing the federal funds rate, tapering MBS purchases or selling MBS. An economic downturn or a projection of an

economic downturn, for example, could cause a decline in the price of lower credit quality investments because the ability of obligors

to make principal and interest payments or to refinance may be impaired.

Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks, and other long term

physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans we

own or service, as well as geographic areas where we conduct business.

Climate change, adverse weather conditions, man-made or natural disasters, pandemics, terrorist attacks and other long term

physical and environmental changes and conditions could adversely impact properties that we own or that collateralize loans we own

or service, as well as geographic areas where we conduct business. In addition, such adverse conditions and long term physical and

environmental changes could impact the demand for, and value of, our assets, as well as the cost to service or manage such assets, or

directly impact the value of our assets through damage, destruction or loss, and thereafter materially impact the availability or cost of

insurance to protect against these events. Real estate value declines could also decrease the value supporting certain of our assets, such

as CRTs and subordinate bonds, where we may provide a credit guaranty or otherwise be responsible for all or a portion of any credit

losses. Upon the occurrence of a catastrophic event, we may be unable to continue our operations and may endure significant business

interruptions, reputational harm, delays in servicing our customers and working with our partners, interruptions in the availability of

our technology and systems, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future

operating results. Catastrophic events may also be uninsurable or not economically insurable and might make the insurance proceeds

insufficient to repair or replace a property if it is damaged or destroyed.

There is an increasing global concern over the risks of climate change and related environmental sustainability matters. The

physical risks of climate change may include rising average global temperatures, rising sea levels and an increase in the frequency and

severity of extreme weather events and natural disasters, including floods, wildfires, hurricanes and tornados, and these events could

impact our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets and the local economies

of certain areas in which we operate. Although we believe our owned real estate and the properties collateralizing our loan assets or

underlying our MSR assets are appropriately covered by insurance, we cannot predict at this time if we or our borrowers will be able

to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of

insurance. There also is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to

payment claims due to a deterioration in its financial condition or may even cancel policies due to increasing costs of providing

insurance coverage in certain geographic areas. Further, numerous treaties, laws and regulations have been enacted or proposed in an

effort to regulate climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of “green”

building codes. These laws and regulations may impact the rates at which we obtain property insurance and result in increased

operating costs, or impose substantial costs on our borrowers or affect their ability to obtain appropriate coverage at reasonable costs.

We may also incur costs associated with increased regulations or investor requirements for increased environmental and social

disclosures and reporting. Additionally, climate change concerns could result in transition risk. Changes in consumer preferences and

additional legislation and regulatory requirements, including those associated with a transition to a low-carbon economy, could

increase expenses or otherwise adversely impact our operations and business.

Many of our investments are unrated or, where any credit ratings are assigned to our investments, they will be subject to ongoing

evaluations and revisions and we can provide no assurance that those ratings will not be downgraded.

Many of our current investments are not, and many of our future investments will not be, rated by any rating agency. Therefore,

PCM’s assessment of the fair value and pricing of our investments may be difficult and the accuracy of such assessment is inherently

uncertain; however, certain of our investments may be rated. If rating agencies assign a lower-than expected rating or reduce or

withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the fair value of these

investments could significantly decline, which would materially and adversely affect the fair value of our investment portfolio and

could result in investment losses.

We may be materially and adversely affected by risks affecting borrowers or the asset or property types in which our investments

may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.

Our assets are not subject to any geographic, diversification or concentration limitations except that we will be concentrated in

mortgage-related investments. Accordingly, our investment portfolio may be concentrated by geography, asset, property type and/or

borrower, increasing the risk of loss to us if the particular concentration in our portfolio is subject to greater risks or is undergoing

adverse developments. Adverse conditions in the areas where the properties securing or otherwise underlying our investments are

located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate

conditions (such as oversupply or reduced demand) may have an adverse effect on the fair value of our investments. A material

decline in the demand for real estate in these areas may materially and adversely affect us. Concentration or a lack of diversification

can increase the correlation of non-performance and foreclosure risks among our investments.

Many of our investments are illiquid and we may not be able to adjust our portfolio in response to changes in economic and other

conditions.

Our investments in MSRs, CRT, and securities and loans held in consolidated variable interest entities may be illiquid. As a

result, it may be difficult or impossible to obtain or validate third-party pricing on the investments we purchase. Illiquid investments

typically experience greater price volatility, as a ready market does not exist, and can be more difficult to value. The contractual

restrictions on transfer or the illiquidity of certain of our investments, including subordinate securities we are required to hold under

applicable risk retention rules, may make it difficult for us to sell such investments if the need or desire arises, which could impair our

ability to satisfy margin calls or certain REIT tests. In addition, if we are required to liquidate all or a portion of our portfolio quickly,

we may realize significantly less than the recorded value, or may not be able to obtain any liquidation proceeds at all, thus exposing us

to a material or total loss.

Fair values of many of our investments are estimates and the realization of reduced values from our recorded estimates may

materially and adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash

available for distribution to our shareholders.

The fair values of some of our investments are not readily determinable. We measure the fair value of these investments

monthly, but the fair value at which our assets are recorded may differ from the values we ultimately realize. Ultimate realization of

the fair value of an asset depends to a great extent on economic and other conditions that change during the time period over which the

investment is held and are beyond the control of PCM, us or our board of trustees. Further, for certain investments that are not actively

traded, fair value is an estimate based on good faith judgment of the price at which an investment can be sold since transacted prices

of investments can only be determined by negotiation between a willing buyer and seller.

In certain cases, PCM’s estimation of the fair value of our investments includes inputs provided by third-party dealers and

pricing services, and valuations of certain securities or other assets in which we invest are often difficult to obtain and are subject to

judgments that may vary among market participants. Changes in the estimated fair values of those assets are directly charged or

credited to earnings for the period. If we were to liquidate a particular asset, the realized value may be more than or less than the

amount at which such asset was recorded. Accordingly, in either event, the fair value of our common shares could be materially and

adversely affected by our determinations regarding the fair value of our investments, and such valuations may fluctuate over short

periods of time.

PCM utilizes analytical models and data in connection with the valuation of our investments, and any incorrect, misleading or

incomplete information used in connection therewith would subject us to potential risks.

Given the illiquidity and complexity of our investments and strategies, PCM must rely heavily on models and data, including

analytical models (both proprietary models developed by PCM and those supplied by third parties) and information and data supplied

by third parties. If any third party information is intentionally or negligently misrepresented and such misrepresentation is not

detected, then our model and data results could be materially impacted. Models and data are used to value investments or potential

investments and also in connection with hedging our investments. In the event models and data prove to be incorrect, misleading or

incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models and data,

especially valuation models, PCM may be induced to buy certain investments at prices that are too high, to sell certain other

investments at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging based on faulty models and

data may prove to be unsuccessful.

We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented

information could adversely affect our business, financial condition, liquidity and results of operations.

In connection with our correspondent production activities, we may rely on information furnished by or on behalf of borrowers

and counterparties, including financial statements and other financial information. We also may rely on representations of borrowers

and counterparties as to the accuracy and completeness of that information and, with respect to audited financial statements, on reports

of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not

detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Our controls and processes may not

have detected or may not detect all misrepresented information in our loan acquisitions or from our business clients. Any such

misrepresented information could materially and adversely affect our business, financial condition, results of operations and our

ability to make distributions to our shareholders.

We are subject to counterparty risk and may be unable to seek indemnity or require our counterparties to repurchase loans if they

breach representations and warranties, which could cause us to suffer losses.

When we purchase mortgage assets, our counterparty typically makes customary representations and warranties to us about such

assets. Our residential loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in

the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our loan

purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to

demand repurchase or substitution, or that our counterparty will remain solvent or otherwise be willing and able to honor its

obligations under our loan purchase agreements. Our inability to obtain indemnity or require repurchase of a significant number of

loans could materially and adversely affect our business, financial condition, liquidity, results of operations and our ability to make

distributions to our shareholders.

When we sell loans, we are required to make customary representations and warranties about such loans to the loan purchaser.

As part of our correspondent production activities, PLS re-underwrites a percentage of the loans that we acquire, and we rely upon

PLS to ensure quality underwriting by our correspondent sellers, accurate third-party appraisals, and strict compliance with the

representations and warranties that we require from our correspondent sellers and that are required from us by our investors.

Our residential loan sale agreements may require us to repurchase or substitute loans or indemnify the purchaser against future

losses in the event we breach a representation or warranty given to the loan purchaser or in the event of an early payment default on a

loan. The remedies available to the Agencies, other purchasers and insurers of loans may be broader than those available to us against

the originator or correspondent lender, and if a purchaser or insurer enforces its remedies against us, we may not be able to enforce the

remedies we have against the sellers. The repurchased loans typically can only be financed at a steep discount to their repurchase

price, if at all. Repurchased loans are also typically sold at a discount to the unpaid principal balance, which in some cases can be

significant. Significant repurchase activity could materially and adversely affect our business, financial condition, liquidity, results of

operations and our ability to make distributions to our shareholders.

Our counterparties may terminate our MSRs, which could adversely affect our business, financial condition, liquidity and results

of operations.

As is standard in the industry, under the terms of our master servicing agreements with the Agencies in respect of Agency

MSRs that we retain in connection with our loan production, the Agencies have the right to terminate us as servicer of the loans we

service on their behalf at any time (and, in certain instances, without the payment of any termination fee) and also have the right to

cause us to sell the MSRs to a third party. In addition, our failure to comply with applicable servicing guidelines could result in our

termination under such master servicing agreements by the Agencies with little or no notice and without any compensation. The

owners of other non-Agency loans that we service may also terminate certain of our MSRs if we fail to comply with applicable

servicing guidelines. If the MSRs are terminated on a material portion of our servicing portfolio, our business, financial condition,

liquidity and results of operations could be adversely affected.

We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain

circumstances, which could adversely affect our business, financial condition, liquidity, results of operations and ability to make

distributions to our shareholders.

During any period in which a borrower is not making payments, we may be required under our servicing agreements in respect

of our MSRs to advance our own funds to pay property taxes and insurance premiums, legal expenses and other protective advances,

and may be required to advance principal and interest payments to security holders of the MBS into which the loans are sold. We also

advance funds under these agreements to maintain, repair and market real estate properties on behalf of investors. As home values

change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations,

our contractual obligations may require us to make advances for which we may not be reimbursed. In addition, if a loan serviced by us

is in default or becomes delinquent, the repayment to us of the advance may be delayed until the loan is repaid or refinanced or a

liquidation occurs. Federal, state or local regulatory actions may also result in an increase in the amount of servicing advances that we

are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred while the

loan is delinquent. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for

advances could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make

distributions to our shareholders.

Risks Related to Our Management and Relationship with Our Manager and Its Affiliates

We are dependent upon PCM and PLS and their resources and may not find suitable replacements if any of our service

agreements with PCM or PLS are terminated.

We are externally advised and managed by PCM, an affiliate of PFSI, and we also have other separate contract agreements with

other PFSI affiliates, such as PLS, to provide various services. Under our management agreement, PCM makes all or substantially all

of our investment, financing and risk management decisions, and has significant discretion as to the implementation of our operating

policies and strategies. Under our loan servicing agreement with PLS, PLS provides servicing for our portfolios of loans and MSRs,

and under our mortgage banking services agreement with PLS, PLS provides fulfillment and disposition-related services in connection

with our correspondent production business. The costs of these services impact our operating costs and may reduce our net income,

but we rely on PCM and PLS to provide these services under these contractual agreements because we have limited in-house

capabilities and employees to perform the activities independently.

No assurance can be given that the strategies of PCM, PLS or their affiliates under any of these agreements will be successful,

that any of them will conduct complete and accurate due diligence or provide sound advice, or that any of them will act in our best

interests with respect to the allocation of their resources to our business. The failure of any of them to do any of the above, conduct the

business in accordance with applicable laws and regulations or hold all licenses or registrations necessary to conduct the business as

currently operated would materially and adversely affect our ability to continue to execute our business plan.

In addition, the terms of these agreements extend until June 30, 2025, subject to automatic renewal for additional 18-month

periods, but any of the agreements may be terminated earlier under certain circumstances or otherwise not-renewed. See “Termination

of our management agreement is difficult and costly” below. If any agreement is terminated or not renewed and not replaced by a new

agreement, it would materially and adversely affect our ability to continue to execute our business plan.

If our management agreement or loan servicing agreement is terminated or not renewed, we will have to obtain the services

from another service provider. We may not be able to replace these services in a timely manner or on favorable terms, or at all. With

respect to our mortgage banking services agreement, the services provided by PLS are inherently unique and not widely available, if at

all. This is particularly true because we are not a Ginnie Mae licensed issuer, yet we are able to acquire government loans from our

correspondent sellers that we know will ultimately be purchased from us by PLS. While we generally have exclusive rights to these

services from PLS during the term of our mortgage banking services agreement, in the event of a termination we may not be able to

replace these services in a timely manner or on favorable terms, or at all, and we ultimately would be required to compete against PLS

as it relates to our correspondent business activities.

The failure of PLS or any other servicer to effectively service our portfolio of MSRs and loans would materially and adversely

affect us. Pursuant to our loan servicing agreement, PLS provides us with primary and special servicing. PLS’ loan servicing activities

include collecting principal, interest and escrow account payments, if any, with respect to loans, as well as managing loss mitigation,

which may include, among other things, collection activities, loan workouts, modifications, foreclosures, short sales and sales of REO.

The ability of PLS or any other servicer or subservicer to effectively service our portfolio of loans is critical to our success,

particularly given our large investment in MSRs or in the case of nonperforming loans, effecting property resolutions in a timely,

orderly and economically efficient manner. The failure of PLS or any other servicer or subservicer to effectively service our portfolio

of MSRs and loans would adversely impact our business, financial condition, liquidity, results of operations and our ability to make

distributions to our shareholders.

In addition, our ability, through PLS, to promptly foreclose upon defaulted loans and liquidate the underlying real property plays

a critical role in our valuation of the assets in which we invest and our expected return on those investments. There are a variety of

factors that may inhibit our ability, through PLS, to foreclose upon a loan and liquidate the real property within the time frames we

model as part of our valuation process or within the statutes of limitation under applicable state law, and this could increase our cost of

doing business and/or diminish the expected return on investment.

The management fee structure could cause disincentive and/or create greater investment risk.

Pursuant to our management agreement, PCM is entitled to receive a base management fee that is based on our shareholders’

equity (as defined in our management agreement) each quarter. As a result, significant base management fees would be payable to

PCM for a given quarter even if we experience a net loss during that quarter. PCM’s right to non-performance-based compensation

may not provide sufficient incentive to PCM to devote its time and effort to source and maximize risk-adjusted returns on our

investment portfolio, which could, in turn, materially and adversely affect the market price of our common shares and/or our ability to

make distributions to our shareholders.

Conversely, PCM is also entitled to receive incentive compensation under our management agreement based on our

performance on a rolling four quarter basis. In evaluating investments and other management strategies, the opportunity to earn

incentive compensation based on our net income may lead PCM to place undue emphasis on higher yielding investments and the

maximization of short-term income at the expense of other criteria, such as preservation of capital, maintenance of sufficient liquidity

and/or management of market risk, in order to achieve higher incentive compensation. Investments with higher yield potential are

generally riskier and more speculative.

The servicing fee structure could create a conflict of interest.

For its services under our loan servicing agreement, PLS is entitled to servicing fees that we believe are competitive with those

charged by other loan servicers and include fixed per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure

status of the serviced loan or the REO, as well as activity fees that generally are fixed dollar amounts. PLS is also entitled to

customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and

disposition fees, and assumption, modification and origination fees. Because certain of these fees are earned upon reaching a specific

milestone, this fee structure may provide PLS with an incentive to foreclose more aggressively or liquidate assets for less than their

fair value.

On our behalf, PLS may also refinance performing loans and originate new loans to facilitate the disposition of real estate that

we acquire through foreclosure. In order to provide PLS with an incentive to produce such loans, PLS is entitled to receive origination

fees and other compensation based on market-based pricing and terms that are consistent with the pricing and terms offered by PLS to

unaffiliated third parties on a retail basis. This may provide PLS with an incentive to refinance a greater proportion of our loans than it

otherwise would and/or to refinance loans on our behalf instead of arranging the refinancing with a third party lender, either of which

might give rise to a potential or perceived conflict of interest.

Termination of our management agreement is difficult and costly.

It is difficult and costly to terminate, without cause, our management agreement. Our management agreement provides that it

may be terminated by us without cause under limited circumstances and the payment to PCM of a significant termination fee. The

cost to us of terminating our management agreement may adversely affect our desire or ability to terminate our management

agreement with PCM without cause. PCM may also terminate our management agreement upon at least 60 days’ prior written notice

if we default in the performance of any material term of our management agreement and the default continues for a period of 30 days

after written notice to us, or where we terminate our loan servicing agreement, our mortgage banking services agreement or certain

other of our related party agreements with PCM or PLS without cause (at any time other than at the end of the current term or any

automatic renewal term), whereupon in any case we would be required to pay to PCM a significant termination fee. As a result, our

desire or ability to terminate any of our related party agreements may be adversely affected to the extent such termination would

trigger the right of PCM to terminate the management agreement and our obligation to pay PCM a significant termination fee.

Our relationship with PCM may result in conflicts of interest.

Although our agreements with PCM and PLS provide us with certain exclusivity and other rights and we and PCM have adopted

policies to specifically address some of the conflicts relating to our investment opportunities, there is no assurance that these measures

will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us. We are

also limited in our ability to acquire assets that are not qualifying real estate assets and/or real estate related assets. In addition, PCM

and other entities or accounts that may be managed by PCM in the future may participate in some of our investments, which may not

be the result of arm’s length negotiations and may involve or later result in potential conflicts between our interests in the investments

and those of PCM or such other entities.

We may encounter conflicts of interest in our Manager’s efforts to appropriately allocate its time and services between activities of

PFSI and the management of us, and the loss of the services of our Manager’s management team could adversely affect us.

Pursuant to our management agreement, PCM is obligated to provide us with the services of its senior management team, and

the members of that team are required to devote such time to us as is necessary and appropriate, commensurate with our level of

activity. The members of PCM’s senior management team may have conflicts in allocating their time and services between the

operations of PFSI and our activities, and other entities or accounts that they may manage in the future.

Our failure to appropriately address various issues that may give rise to reputational risk could cause harm to our business and

adversely affect our business, financial condition and results of operations.

Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may give rise

to reputational risk, we could significantly harm our business. Such issues include, but are not limited to, actual or perceived conflicts

of interest and violations of legal or regulatory requirements. Similarly, market rumors and actual or perceived association with

counterparties whose own reputations are under question could harm our business.

We may not adequately monitor and address potential conflicts between our interests and those of PFSI, PCM and PLS. We

have implemented procedures and controls to be followed when real or potential conflicts of interest arise, but it is possible that

potential or perceived conflicts could give rise to the dissatisfaction of, or litigation by, our investors or regulatory enforcement

actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or

appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny, litigation or

reputational risk incurred in connection with conflicts of interest would adversely affect our business in a number of ways and may

adversely affect our results of operations. Reputational risk incurred in connection with conflicts of interest could negatively affect our

financial condition and business, strain our working relationships with regulators and government agencies, expose us to litigation and

regulatory action, impact our ability to attract and retain customers, trading counterparties, investors and employees and adversely

affect our business, financial condition, liquidity, results of operations and our ability to make distributions to our shareholders.

Reputational damage can result from our actual or alleged conduct in any number of activities, including lending and debt

collection practices, corporate governance, and actions taken by government regulators and community organizations in response to

those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. Our

reputation may also be negatively impacted by our environmental, social and governance ("ESG") practices and disclosures, including

climate change practices and disclosures. In addition, various private third party organizations have developed ratings processes for

evaluating companies on their approach to ESG matters. These third party ESG ratings may be used by some investors to assist with

their investment and voting decisions. Any unfavorable ESG ratings may lead to reputational damage and negative sentiment among

our investors and other stakeholders. These factors could impair our working relationships with government agencies and investors,

expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading counterparties and

employees, significantly harm our stock price and ability to raise capital, and adversely affect our results of operations.

Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes

in accounting interpretations or assumptions could impact our financial statements.

Accounting rules for mortgage loan sales and securitizations, valuations of financial instruments and MSRs, investment

consolidations, income taxes and other aspects of our operations are highly complex and involve significant judgment and

assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to

our stockholders and also increase the risk of errors and restatements, as well as the cost of compliance. Our inability to timely prepare

our financial statements in the future would likely be considered a breach of our financial covenants and adversely affect our share

price significantly. Changes in accounting interpretations, assumptions as well as accounting rule misinterpretations could result in

differences in our financial results or otherwise have a material adverse effect on our business, financial condition, liquidity and

results of operations.

PCM and PLS both have limited liability and indemnity rights.

Our agreements with PCM and PLS provide that PCM and PLS will not assume any responsibility other than to provide the

services specified in the applicable agreements. Our management agreement further provides that PCM will not be responsible for any

action of our board of trustees in following or declining to follow its advice or recommendations. In addition, each of PCM and PLS

and their respective affiliates, including each such entity’s managers, officers, trustees, directors, employees and members, will be

held harmless from, and indemnified by us against, certain liabilities on customary terms. As a result, to the extent we are damaged

through certain actions or inactions of PCM or PLS, our recourse is limited and we may not be able to recover our losses.

Risks Related to Our Organization and Structure

Certain provisions of Maryland law, our staggered board of trustees and certain provisions in our declaration of trust could each

inhibit a change in our control.

Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to a Maryland real estate investment

trust may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in our control under

circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then

prevailing market price of such common shares.

In addition, our board of trustees is divided into three classes of trustees. Trustees of each class will be elected for three-year

terms upon the expiration of their current terms, and each year one class of trustees will be elected by our shareholders. The staggered

terms of our trustees may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or

change in control might be in the best interests of our shareholders.

Further, our declaration of trust authorizes us to issue additional authorized but unissued common shares and preferred shares.

Our board of trustees may, without shareholder approval, increase the aggregate number of our authorized common shares or the

number of shares of any class or series that we have authority to issue and classify or reclassify any unissued common shares or

preferred shares and may set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board may

establish a class or series of common shares or preferred shares or take other actions that could delay or prevent a transaction or a

change in our control that might involve a premium price for our common shares or otherwise be in the best interests of our

shareholders.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit

shareholder recourse in the event of actions not in the best interest of our shareholders.

Our declaration of trust limits the liability of our present and former trustees and officers to us and our shareholders for money

damages to the maximum extent permitted under Maryland law. Under current Maryland law, our present and former trustees and

officers will not have any liability to us or our shareholders for money damages other than liability resulting from either (a) actual

receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty by the trustee or officer

that was established by a final judgment and is material to the cause of action.

Our declaration of trust authorizes us to indemnify our present and former trustees and officers for actions taken by them in

those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present and former

trustee or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or

threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to pay or reimburse the expenses

incurred by our present and former trustees and officers without requiring a preliminary determination of their ultimate entitlement to

indemnification. As a result, we and our shareholders may have more limited rights against our present and former trustees and

officers than might otherwise exist absent the current provisions in our declaration of trust and bylaws or that might exist with other

companies, which could limit shareholder recourse in the event of actions not in the best interest of our shareholders.

Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our

shareholders to effect changes to our management.

Our declaration of trust provides that, subject to the rights of holders of any series of preferred shares, a trustee may be removed

only for “cause” (as defined in our declaration of trust), and then only by the affirmative vote of at least two-thirds of the votes entitled

to be cast generally in the election of trustees. Vacancies generally may be filled only by a majority of the remaining trustees in office,

even if less than a quorum, for the full term of the class of trustees in which the vacancy occurred. These requirements make it more

difficult to change our management by removing and replacing trustees and may prevent a change in our control that is in the best

interests of our shareholders.

Our bylaws include an exclusive forum provision that could limit our shareholders’ ability to obtain a judicial forum viewed by

the shareholders as more favorable for disputes with us or our trustees or officers.

Our bylaws provide that the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United

States District Court for the District of Maryland, Baltimore Division, is the exclusive forum for any derivative action or proceeding

brought on our behalf; any action asserting a claim of breach of fiduciary duty; any action asserting a claim against us arising pursuant

to any provision of the Maryland REIT Law; or any action asserting a claim against us that is governed by the internal affairs doctrine.

This exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes

with us or our trustees or officers, which may discourage such lawsuits against us and our trustees and officers. Alternatively, if a

court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may

incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and

financial condition.

Failure to maintain exemptions or exclusions from registration under the Investment Company Act could materially and adversely

affect us.

Because we are organized as a holding company that conducts business primarily through the Operating Partnership and its

wholly-owned subsidiaries, our status under the Investment Company Act is dependent upon the status of our Operating Partnership

which, as a holding company, in turn, will have its status determined by the status of its subsidiaries. If our Operating Partnership or

one or more of its subsidiaries fail to maintain their exceptions or exclusions from the Investment Company Act and we do not have

available to us another basis on which we may avoid registration, we may have to register under the Investment Company Act. This

could subject us to substantial regulation with respect to our capital structure (including our ability to use leverage), management,

operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including

restrictions with respect to diversification and industry concentration, and other matters. It could also cause the breach of covenants

we or our subsidiaries have made under certain of our financing arrangements, which could result in an event of default, acceleration

of debt and/or termination.

There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs, including

guidance and interpretations from the Division of Investment Management of the SEC regarding the exceptions and exclusions

therefrom, will not change in a manner that adversely affects our operations. If the SEC takes action that could result in our or our

subsidiaries’ failure to maintain an exception or exclusion from the Investment Company Act, we could, among other things, be

required to (a) restructure our operations to avoid being required to register as an investment company, (b) effect sales of our assets in

a manner that, or at a time when, we would not otherwise choose to do so or (c) register as an investment company (which, among

other things, would require us to comply with the leverage constraints applicable to investment companies), any of which could

negatively affect the value of our common shares, the sustainability of our business model, our financial condition, liquidity, results of

operations and ability to make distributions to our shareholders.

Further, a loss of our Investment Company Act exceptions or exclusions would allow PCM to terminate our management

agreement with us, and our loan servicing agreement with PLS is subject to early termination in the event our management agreement

is terminated for any reason. If either of these agreements is terminated, we will have to obtain the services on our own, and we may

not be able to replace these services in a timely manner or on favorable terms, or at all. This would have a material adverse effect on

our ability to continue to execute our business strategy and would likely negatively affect our financial condition, liquidity, results of

operations and ability to make distributions to our shareholders.

We intend to operate so that we and each of our subsidiaries are not required to register as investment companies under the

Investment Company Act. We believe that our subsidiary, PMC, qualifies for one or more exemptions under the Investment Company

Act because of the historical and current composition of its assets and income; however, there can be no assurances that the

composition of PMC’s assets and income will remain the same over time such that one or more exemptions will continue to be

applicable.

If PMC is required to register as an investment company, we would be required to comply with a variety of substantive

requirements under the Investment Company Act that impose, among other things: limitations on capital structure; restrictions on

specified investments; prohibitions on transactions with affiliates; compliance with reporting, record keeping, voting and proxy

disclosure; and, other rules and regulations that would significantly increase our operating expenses. Further, if PMC was or is

required to register as an investment company, PMC would be in breach of various representations and warranties contained in its

financial arrangements resulting in a default as to certain of our contracts and obligations. This could also subject us to civil or

criminal actions or regulatory proceedings, or result in a court appointed receiver to take control of us and liquidate our business, any

or all of which could have a material adverse effect on our business, financial condition, liquidity, results of operations, and ability to

make distributions to our shareholders.

Rapid changes in the fair values of our investments may make it more difficult for us to maintain our REIT qualification or

exclusion from the Investment Company Act.

If the fair value or income potential of our residential loans and other real estate-related assets declines as a result of increased

interest rates, prepayment rates or other factors, we may need to increase certain real estate investments and income and/or liquidate

our non-qualifying assets in order to maintain our REIT qualification or exclusion from the Investment Company Act. If the decline

in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish, particularly given the illiquid

nature of our investments. We may have to make investment decisions, including the liquidation of investments at a disadvantageous

time or on unfavorable terms, that we otherwise would not make absent our REIT and Investment Company Act considerations, and

such liquidations could have a material adverse effect on our business, financial condition, liquidity, results of operations, and ability

to make distributions to our shareholders.

Risks Related to Taxation

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our shareholders.

We are organized and operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. Our qualification as

a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other

requirements on a continuing basis. If we were to lose our REIT status in any taxable year, corporate-level income taxes, including

applicable state and local taxes, would apply to all of our taxable income at federal and state tax rates, and distributions to our

shareholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and

would reduce the amount of cash available for distribution to our shareholders, which in turn would have an adverse impact on the

value of our common shares. Unless we were entitled to relief under certain Internal Revenue Code provisions, we also would be

disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.

Even if we qualify as a REIT, we face tax liabilities that reduce our cash flow, and a significant portion of our income may be

earned through TRSs that are subject to U.S. federal income taxation.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and

assets, including taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure, and

state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available

for distribution to our shareholders.

We also engage in business activities that are required to be conducted in a TRS. In order to meet the REIT qualification

requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or

inventory, we hold a significant portion of our assets through, and derive a significant portion of our taxable income and gains in, a

TRS, subject to the limitation that securities in a TRS may not represent more than 20% of our assets in order for us to remain

qualified as a REIT. All taxable income and gains derived from the assets held from time to time in our TRS are subject to regular

corporate income taxation.

The percentage of our assets represented by a TRS and the amount of our income that we can receive in the form of TRS

dividends are subject to statutory limitations that could jeopardize our REIT status.

Currently, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs at the end

of each quarter. We may potentially have to modify our activities or the capital structure of one or more TRSs to comply with this

limitation and maintain our qualification as a REIT. While we intend to manage our affairs so as to satisfy this requirement, there can

be no assurance that we will be able to do so in all market circumstances and even if we are able to do so, compliance with this rule

may reduce our flexibility in operating our business. Although a TRS is subject to U.S. federal, state and local income tax on its

taxable income, we may from time to time need to make distributions of such after-tax income in order to keep the value of our TRS

below 20% of our total assets. However, for purposes of one of the tests we must satisfy to qualify as a REIT, at least 75% of our

gross income must in each taxable year generally be from real estate assets. While we monitor our compliance with both this income

test and the limitation on the percentage of our assets represented by TRS securities, the two may at times be in conflict with one

another. That is, it is possible that we may wish to distribute a dividend from a TRS in order to reduce the value of our TRS below

20% of the required percentage of our assets, but be unable to do so without violating the requirement that 75% of our gross income in

the taxable year be derived from real estate assets. There can be no assurance that we will be able to comply with either or both of

these tests in all market conditions. Our inability to comply with both of these tests could have a material adverse effect on our

business, financial condition, liquidity, results of operations, qualification as a REIT and ability to make distributions to our

shareholders.

Ordinary dividends payable by REITs do not generally qualify for the reduced tax rates applicable to certain corporate dividends.

The Internal Revenue Code provides for a 20% maximum federal income tax rate for dividends paid by regular United States

corporations to eligible domestic shareholders that are individuals, trusts or estates. Dividends paid by REITs are generally not

eligible for these reduced rates. H.R. 1, commonly known as the 2017 Tax Cuts and Job Act (the “Tax Act”), which was enacted on

December 22, 2017, generally may allow domestic shareholders to deduct from their taxable income one-fifth of the REIT ordinary

dividends payable to them for taxable years beginning after December 31, 2017 and before January 1, 2026. To qualify for this

deduction, the shareholder receiving such dividend must hold the dividend-paying REIT shares for at least 46 days (taking into

account certain special holding period rules) of the 91-day period beginning 45 days before the shares become ex-dividend, and cannot

be under an obligation to make related payments with respect to a position in substantially similar or related property. However, even

if a domestic shareholder qualifies for this deduction, the effective rate for such REIT dividends still remains higher than rates for

regular corporate dividends paid to high-taxed individuals. The more favorable rates applicable to regular corporate dividends could

cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive as a federal

income tax matter than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely

affect the value of the stock of REITs, including our common shares.

Some of our early CRT investments may not be eligible REIT assets and are held by our TRS, resulting in a significant portion of

our income from these investments being subject to U.S. federal and state income taxation in order not to jeopardize our REIT

status.

Some of our recent CRT investments have been structured to satisfy our REIT qualification requirements. However, our other

CRT investments may not be considered eligible REIT assets and are therefore held by our TRS in order not to jeopardize our REIT

status. Income from CRT investments that are held in the TRS may be subject to U.S. federal and state income taxation. In the future

we may consider holding other CRT investments in the REIT, depending on the precise structure of such investments and our level of

certainty that such investments are in a form consistent with their characterization as qualifying assets for a REIT. If the Internal

Revenue Service (“IRS”) were to take a position adverse to our interpretation, the consequences of such action could materially and

adversely affect our business, financial condition, liquidity, results of operations, and our ability to make distributions to our

shareholders.

We have not established a minimum distribution payment level and no assurance can be given that we will be able to make

distributions to our shareholders in the future at current levels or at all.

We are generally required to distribute to our shareholders at least 90% of our taxable income each year for us to qualify as a

REIT under the Internal Revenue Code, which requirement we currently intend to satisfy. To the extent we satisfy the 90%

distribution requirement but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax

on our undistributed taxable income. We have not established a minimum distribution payment level, and our ability to make

distributions to our shareholders may be materially and adversely affected by the risk factors discussed in this Report and any

subsequent Quarterly Reports on Form 10-Q. Although we have made, and anticipate continuing to make, quarterly distributions to

our shareholders, our board of trustees has the sole discretion to determine the timing, form and amount of any future distributions to

our shareholders, and such determination will depend upon, among other factors, our historical and projected results of operations,

financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, capital expenditure

and other expense obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters

as our board of trustees may deem relevant from time to time. Among the factors that could impair our ability to continue to make

distributions to our shareholders are:

• our inability to invest the net proceeds from our equity offerings;

• our inability to make attractive risk-adjusted returns on our current and future investments;

• non-cash earnings or unanticipated expenses that reduce our cash flow;

• defaults in our investment portfolio or decreases in its value;

• reduced cash flows caused by delays in repayment or liquidation of our investments; and

• the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

As a result, no assurance can be given that we will be able to continue to make distributions to our shareholders in the future or

that the level of any future distributions will achieve a market yield or increase or even be maintained over time, or that future

dividends might not be a combination of stock and cash, as permitted under IRS guidelines, any of which could materially and

adversely affect the market price of our common shares.

The REIT distribution requirements could materially and adversely affect our ability to execute our business strategies.

We intend to continue to make distributions to our shareholders to comply with the requirements of the Internal Revenue Code

and to avoid paying corporate income tax on undistributed income. However, differences in timing between the recognition of taxable

income and the actual receipt of cash could require us to sell assets, borrow funds on a short-term or long-term basis, or issue equity to

meet the distribution requirements of the Internal Revenue Code. We may find it difficult or impossible to meet distribution

requirements in certain circumstances. Due to the nature of the assets in which we invest and may invest and to our accounting

elections for such assets, we may be required to recognize taxable income from those assets in advance of our receipt of cash flow on

or proceeds from disposition of such assets.

In addition, pursuant to the Tax Act, we generally will be required to recognize certain amounts in income no later than the time

such amounts are reflected on our financial statements filed with the SEC. The application of this rule may require the accrual of

income with respect to loans, MBS, and other types of debt securities or interests in debt securities held by us, such as original issue

discount or market discount, earlier than would be the case under other provisions of the Internal Revenue Code.

As a result, to the extent such income is not realized within a TRS, the requirement to distribute a substantial portion of our net

taxable income could cause us to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts

that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of

our shares as part of a distribution in which shareholders may elect to receive shares or (subject to a limit measured as a percentage of

the total distribution) cash, in order to comply with REIT requirements.

We may be required to report taxable income early in our holding period for certain investments in excess of the economic income

we ultimately realize from them.

We acquire and/or expect to acquire in the secondary market debt instruments that we may significantly modify for less than

their face amount, MBS issued with original issue discount, MBS acquired at a market discount, or debt instruments or MBS that are

delinquent as to mandatory principal and interest payments. In each case, we may be required to report income regardless of whether

corresponding cash payments are received or are ultimately collectible. If we eventually collect less than we had previously reported

as income, there may be a bad debt deduction available to us at that time or we may record a capital loss in a disposition of such asset,

but our ability to benefit from that bad debt deduction would depend on our having taxable income or capital gains, respectively, in

that later taxable year or a subsequent taxable year. This possible “income early, losses later” phenomenon could materially and

adversely affect us and our shareholders if it were persistent and in significant amounts.

The share ownership limits applicable to us that are imposed by the Internal Revenue Code for REITs and our declaration of trust

may restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our

outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to

include certain entities) at any time during the last half of each taxable year following our first year. Our declaration of trust, with

certain exceptions, authorizes our board of trustees to take the actions that are necessary and desirable to preserve our qualification as

a REIT. Under our declaration of trust, no person may own more than 9.8% by vote or value, whichever is more restrictive, of our

outstanding common shares or more than 9.8% by vote or value, whichever is more restrictive, of our outstanding shares of beneficial

interest. Our board may grant an exemption to the share ownership limits in its sole discretion, subject to certain conditions and the

receipt of certain representations and undertakings. These share ownership limits are based upon direct or indirect ownership by

“individuals,” which term includes certain entities.

Ownership limitations are common in the organizational documents of REITs and are intended, among other purposes, to

provide added assurance of compliance with the tax law requirements and to minimize administrative burdens. However, our share

ownership limits might also delay or prevent a transaction or a change in our control that might involve a premium price for our

common shares or otherwise be in the best interests of our shareholders.

Complying with the REIT requirements can be difficult and may cause us to forego otherwise attractive opportunities or liquidate

otherwise attractive investments.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the

sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of

our shares. We may be required to make distributions to our shareholders at disadvantageous times or when we do not have funds

readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive

investments or require us to liquidate from our portfolio otherwise attractive investments. If we are compelled to liquidate our

investments, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be

subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory. These actions could have

the effect of reducing our income and amounts available for distribution to our shareholders.

Complying with the REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets, liabilities and operations. Under

current law, any income from a hedging transaction we enter into either (i) to manage risk of interest rate changes with respect to

borrowings made or to be made to acquire or carry real estate assets, (ii) to manage risk of currency fluctuations with respect to items

of income that qualify for purposes of the REIT 75% or 95% gross income tests or assets that generate such income, or (iii) to hedge

another instrument that hedges risks described in clause (i) or (ii) for a period following the extinguishment of the liability or the

disposition of the asset that was previously hedged by the instrument, provided, that, in each case, such instrument is properly

identified under applicable Treasury regulations, will not be treated as qualifying income for purposes of the REIT gross income tests.

As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could

result in greater risks associated with interest rate or other changes than we would otherwise be subject to.

The tax on prohibited transactions limits our ability to engage in transactions, including certain methods of securitizing loans that

would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other

dispositions of property, other than foreclosure property, but including loans, held primarily for sale to customers in the ordinary

course of business. We would be subject to this tax if we were to sell loans that we held primarily for sale to customers in a

securitization transaction effected through the REIT. Therefore, in order to avoid the prohibited transactions tax, we engage in such

sales of loans through the TRS. We may hold a substantial amount of assets in one or more TRSs that are subject to corporate income

tax on its earnings, which may reduce the cash flow generated by us and our subsidiaries in the aggregate, and our ability to make

distributions to our shareholders.

We acquire and hold residential mortgage-backed securities (“RMBS”) and have engaged, and expect to continue to engage, in

RMBS trading activity as we evaluate our RMBS portfolio on a regular basis and reposition it from time to time as a trader. We

acquire RMBS positions with the intention of holding them for investment and not for sale to customers in the ordinary course of

business. We intend to conduct such trading activities under internal guidelines that we believe are sufficient to demonstrate that this

is the case. We therefore believe that we will not be treated as engaging in “prohibited transactions” that would be subject to a 100%

tax on any net gain derived from RMBS sales. However, we do not expect that such trading activities will fall within a statutory “safe

harbor” that would conclusively protect us against an assertion by the IRS to the contrary. If the IRS were successfully to require

treatment of sales made in the course of such trading activities as “prohibited transactions,” it would subject any net gain derived from

such sales to this 100% tax, but would not affect our qualification as a REIT.

The taxable mortgage pool (“TMP”) rules may increase the taxes that we or our shareholders may incur, and may limit the

manner in which we effect future securitizations.

Certain of our securitizations that involve the issuance of indebtedness rather than sales may likely be considered to result in the

creation of TMPs for U.S. federal income tax purposes. A TMP is always classified as a corporation for U.S. federal income tax

purposes. However, as long as a REIT owns 100% of a TMP, such classification generally does not result in the imposition of

corporate income tax, because the TMP is a “qualified REIT subsidiary.”

In the case of such wholly-REIT owned TMPs, certain categories of our shareholders, such as foreign shareholders otherwise

eligible for treaty benefits, shareholders with net operating losses, and tax exempt shareholders that are subject to unrelated business

income tax, could be subject to increased taxes on a portion of their dividend income received from us that is attributable to the TMP,

or “excess inclusion income.” In addition, to the extent that our shares are owned in record name by tax exempt “disqualified

organizations,” such as certain government-related entities that are not subject to tax on unrelated business income, we may incur a

corporate level tax on our allocable portion of excess inclusion income from such a wholly-REIT owned TMP. In that case and to the

extent feasible, we may reduce the amount of our distributions to any disqualified organization whose share ownership gave rise to the

tax, or we may bear such tax as a general corporate expense. To the extent that our shares owned by disqualified organizations are

held in record name by a broker/dealer or other nominee, the broker/dealer or other nominee would be liable for the corporate level tax

on the portion of our excess inclusion income allocable to the shares held by the broker/dealer or other nominee on behalf of

disqualified organizations. While we intend to attempt to minimize the portion of our distributions that is subject to these rules, the

law is unclear concerning computation of excess inclusion income, and its amount could be significant.

In the case of any TMP that would be taxable as a domestic corporation if it were not wholly-REIT owned, we would be

precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection

with these securitizations that might be considered to be equity interests for tax purposes. This marketing limitation may prevent us

from selling more junior or non-investment grade debt securities in such securitizations and maximizing our proceeds realized in those

offerings.

New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more

difficult or impossible for us to qualify as a REIT.

The rules dealing with federal income taxation, including the present U.S. federal income tax treatment of REITs, may be

modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S.

federal income tax treatment of an investment in our common shares. Changes to the tax laws, including the U.S. federal tax rules that

affect REITs, are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury, which results

in statutory changes as well as frequent revisions to Treasury Regulations and interpretations. Revisions in U.S. federal tax laws and

interpretations thereof could materially and adversely affect us and our shareholders.

We also may enter into certain transactions where the REIT eligibility of the assets subject to such transactions is uncertain. In

circumstances where the application of these rules and regulations affecting our investments is not clear, we may have to interpret

them and their application to us. If the IRS were to take a position adverse to our interpretation, the consequences of such action could

materially and adversely affect our business, financial condition, liquidity, results of operations, and our ability to make distributions

to our shareholders.

General Risks

Our and our Manager’s risk management efforts may not be effective.

We could incur substantial losses and our business operations could be disrupted if we and our Manager are unable to

effectively identify, manage, monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk,

climate risk and other market-related risks, as well as operational and legal risks related to our business, assets, and liabilities. We and

our Manager also are subject to various laws, regulations and rules that are not industry specific, including employment laws related to

employee hiring and termination practices, health and safety laws, environmental laws and other federal, state and local laws,

regulations and rules in the jurisdictions in which we operate. Our and our Manager’s risk management policies, procedures, and

techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have identified, or identify

additional risks to which we may become subject in the future. Our and our Manager’s risk management framework is designed to

identify, monitor and mitigate risks that could have a negative impact on our financial condition or reputation. This framework

includes divisions or groups dedicated to enterprise risk management, credit risk, climate risk, corporate sustainability and ESG,

information security, disaster recovery and other information technology-related risks, business continuity, legal and compliance,

compensation structures and other human resources matters, vendor management and internal audit, among others. Expansion of our

business activities may also result in our being exposed to risks to which we have not previously been exposed or may increase our

exposure to certain types of risks, and we may not effectively identify, manage, monitor, and mitigate these risks as our business

activities change or increase.

We could be harmed by misconduct or fraud that is difficult to detect.

We are exposed to risks relating to misconduct by our and our Manager’s employees, and the employees of our Manager’s

subsidiaries, affiliates, contractors we use, or other third parties with whom we have relationships. For example, such employees could

execute unauthorized transactions, use our assets improperly or without authorization, perform improper activities, use confidential

information for improper purposes, or otherwise try to hide improper activities from us. This type of misconduct could also relate to

our assets managed by PCM. This type of misconduct can be difficult to detect and if not prevented or detected could result in claims

or enforcement actions against us or losses. Accordingly, misconduct by our and our Manager’s employees and its subsidiaries,

affiliates, contractors, or others could subject us to losses or regulatory sanctions and seriously harm our reputation. Our controls may

not be effective in detecting this type of activity.

If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or

prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the

future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act requires us to evaluate

and report on our internal control over financial reporting and have our independent auditors annually attest to our evaluation, as well

as issue their own opinion on our internal control over financial reporting. While we have undertaken substantial work to comply with

Section 404, we cannot be certain that we will be successful in maintaining adequate control over our financial reporting and financial

processes.

If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could

result in an event of default under one or more of our lending arrangements and/or reduce the market value of our common shares.

Additionally, the existence of any material weakness or significant deficiency could require management to devote significant time

and incur significant expense to remediate any such material weakness or significant deficiency, and management may not be able to

remediate any such material weakness or significant deficiency in a timely manner, or at all. Accordingly, our failure to maintain

effective internal control over financial reporting could result in misstatements of our financial results or restatements of our financial

statements or otherwise have a material adverse effect on our business, financial condition, liquidity, results of operations and ability

to make distributions to our shareholders.

Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption to our

operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of

which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our

information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized

access to our information systems for purposes of theft of certain personally identifiable information of consumers, misappropriating

assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include

disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection

and insurance costs, litigation and damage to our investor relationships.

As our reliance on rapidly changing technologies has increased, so have the risks posed to our information systems, both

internal and those provided to us by third-party service providers such as cloud-based computing service providers. System

disruptions and failures caused by fire, power loss, telecommunications outages, unauthorized intrusion, malware, natural disasters

and other similar events may interrupt or delay our ability to provide services to our customers.

Despite our Manager’s efforts to ensure the integrity of our systems and our investment in significant physical and technological

security measures, employee training, contractual precautions, policies and procedures, board oversight and business continuity plans,

there can be no assurance that any such cyber intrusions will not occur or, if they do occur, that they will be adequately addressed. We

also may not be able to anticipate or implement effective preventive measures against all security breaches, especially because the

methods of attack change frequently or may not be recognized until after such attack has been launched, and because security attacks

can originate from a wide variety of sources, including third parties such as persons involved with organized crime or associated with

third party service providers. Our data security management program includes identity, trust, vulnerability and threat management

business processes as well as the adoption of standard data protection policies. We are also held accountable for the actions and

inactions of our third-party vendors regarding cybersecurity and other consumer-related matters.

Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our

customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny, significant litigation

exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition, liquidity,

results of operations and our ability to make distributions to our shareholders.

We operate in a highly competitive market and decreased margins resulting from increased competition or our inability to compete

successfully could adversely affect our business, financial condition, liquidity and results of operations.

We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative,

regulatory and technological changes. We compete in our investment activities with other mortgage REITs, specialty finance

companies, private funds, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking

firms, depository institutions, governmental bodies and other entities, many of which focus on acquiring mortgage assets. In addition,

large commercial banks and savings institutions and other independent mortgage lenders and servicers are becoming increasingly

competitive in the acquisition of newly originated loans. Many of these institutions have competitive advantages over us, including

size, financial strength, access to capital, cost of funds, federal pre-emption and higher risk tolerance. Additionally, our existing and

potential competitors may decide to modify their business models to compete more directly with our correspondent production

business. Competition may result in fewer investments, higher prices, acceptance of greater risk, lower yields and a narrower spread of

yields over our financing costs. Moreover, if more non-bank entities enter these markets and as more commercial banks aggressively

compete, our correspondent production activities may generate lower volumes and/or margins.

Future issuances of debt securities, which would rank senior to our common shares, and future issuances of equity securities,

which would dilute the holdings of our existing shareholders and may be senior to our common shares, may materially and

adversely affect the market price of our common shares.

We may rely on additional common and preferred equity issuances to fund our business, which may rank senior and/or be

dilutive to our current shareholders, or on forms of debt financing that rank senior to our shareholders and require a larger portion of

our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to

our shareholders and other purposes. For example, our outstanding preferred shares have preferences on distribution payments,

including liquidating distributions, which could limit our ability to make distributions, including liquidating distributions, to holders of

our common shares. In addition, upon liquidation, holders of our debt securities and other loans would receive a distribution of our

available assets before holders of our common shares.

Subject to applicable law, our board of trustees has the authority, without further shareholder approval, to issue additional debt,

common shares and preferred shares on the terms and for the consideration it deems appropriate. We have issued, and/or intend to

issue, additional common shares and securities convertible into, or exchangeable or exercisable for, common shares under our equity

incentive plan. We also have an effective shelf registration statement allowing us to issue additional common shares and preferred

shares, including, without limitation, common shares through our “at-the-market” equity program and, as of December 31, 2022, we

have approximately $200 million of common shares available for issuance under that program.

We also may issue from time to time additional common shares in connection with portfolio or business acquisitions and may

grant demand or piggyback registration rights in connection with such issuances. Because our decision to issue securities in any future

offering will depend on market conditions and other factors beyond our control, we cannot predict the effect, if any, of future

issuances of our common shares, preferred shares or other equity-based securities or the prospect of such issuances on the market

price of our common shares. Issuances of a substantial amount of such securities, or the perception that such issuances might occur,

could depress the market price of our common shares.

Thus, holders of our common shares bear the risk that our future issuances of debt or equity securities or other borrowings will

reduce the market price of our common shares and dilute their ownership in us.

Initiating new business activities or investment strategies, developing new products or significantly expanding existing business

activities or investment strategies may expose us to new risks and increase our cost of doing business.

Initiating new business activities or investment strategies, developing new products, or significantly expanding existing business

activities or investment strategies, are ways to grow our businesses and respond to changing circumstances in our industry; however,

they may expose us to new risks and regulatory compliance requirements. We cannot be certain that we will be able to manage these

risks and compliance requirements effectively. Furthermore, our efforts may not succeed and any revenues we earn from any new or

expanded business initiative or investment strategy may not be sufficient to offset the initial and ongoing costs of that initiative, which

would result in a loss with respect to that initiative or strategy.

We may not be able to successfully operate our business or generate sufficient operating cash flows to make or sustain

distributions to our shareholders.

There can be no assurance that we will be able to generate sufficient cash to pay our operating expenses and make distributions

to our shareholders. For example, in the first, second and fourth quarters of fiscal year 2022, we reported net losses attributable to

common shareholders of $29.6 million, $81.2 million and $5.8 million, respectively. The results of our operations and our ability to

make or sustain distributions to our shareholders depends on many factors, including the availability of attractive risk adjusted

investment opportunities that satisfy our investment strategies and our success in identifying and consummating them on favorable

terms, the level and expected movement of home prices, the level and volatility of interest rates, readily accessible short-term and

long-term financing on favorable terms, and conditions in the financial markets, real estate market and the economy, as to which no

assurance can be given.

We also face substantial competition in acquiring attractive investments, both in our investment activities and correspondent

production activities. While we try to diversify our investments among various types of mortgages and mortgage-related assets, the

competition for such assets may compress margins and reduce yields, making it difficult for us to make investments with attractive

risk-adjusted returns. There can be no assurance that we will be able to successfully transition out of investments producing lower

returns into investments that produce better returns, or that we will not seek investments with greater risk to obtain the same level of

returns. Any or all of these factors could cause the fair value of our investments to decline substantially and have a material adverse

effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We do not own or lease any property. Our operations are carried out on our behalf at the principal executive offices of

Pennymac, at 3043 Townsgate Road, Westlake Village, California, 91361.

Item 3. Legal Proceedings

From time to time, we may be involved in various legal actions, claims and proceedings arising in the ordinary course of

business. As of December 31, 2022, we were not involved in any material legal actions, claims or proceedings.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

Securities

Our common shares are listed on the New York Stock Exchange (Symbol: PMT). As of February 22, 2023, our common shares

were held by 136 registered holders.

We intend to pay quarterly dividends and to distribute to our shareholders at least 90% of our taxable income in each year

(subject to certain adjustments). This is one requirement to qualify for the tax benefits accorded to a REIT under the Internal Revenue

Code. We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected for the

reasons described in Part I, Item 1A of this Report in the section entitled “Risk Factors”. All distributions are made at the discretion of

our board of trustees and depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as

our board of trustees may deem relevant from time to time.

Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the quarter ended December 31, 2022.

Repurchase of our Common Shares

The following table summarized PMT common shares of beneficial interest (“Common Shares”) repurchase activity for the

quarter ended December 31, 2022:

Period

Total

number of

purchased

Average

price paid

per share

Total number of

purchased as

part of publicly

announced plans

or programs (1)

Amount

available for

future share

repurchases

under the

plans or

programs (1)

(in thousands, except average price paid per share)

October 1, 2022 – October 31, 2022

1,166

11.80

1,166

101,754

November 1, 2022 – November 30, 2022

13.49

101,730

December 1, 2022 – December 31, 2022

12.42

101,261

(1) On October 24, 2022, the Company’s board of trustees approved an increase to the Company’s common share repurchase

authorization from $400 million to $500 million (the “share repurchase program”). The share repurchase program does not

require the Company to purchase a specific number of common shares, and the timing and amount of any common shares

repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability.

Common share repurchases may be effected through privately negotiated transactions or open market purchases, including

pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Exchange Act. The share repurchase program does not

have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

Item 6. Reserved

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a specialty finance company that invests primarily in mortgage-related assets. Our objective is to provide attractive risk-

adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. Our

investment focus is on the mortgage-related assets that we create through our correspondent production activities, including mortgage

servicing rights (“MSRs”), subordinate mortgage-backed securities (“MBS”), and credit risk transfer (“CRT”) arrangements, which

include CRT Agreements and CRT strips that absorb credit losses on certain of the loans that we sold. We also invest in Agency MBS

and senior non-Agency MBS. We have also historically invested in excess servicing spread (“ESS”) and distressed mortgage assets

(distressed loans and real estate acquired in settlement of loans (“REO”)), which we have substantially liquidated.

We are externally managed by PNMAC Capital Management, LLC (“PCM”), an investment adviser that specializes in and

focuses on U.S. mortgage assets. Our loans and MSRs are serviced by PennyMac Loan Services, LLC (“PLS”). PCM and PLS are

both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”), a publicly-traded mortgage banking and

investment management company.

During the year ended December 31, 2022, we purchased newly originated prime credit quality residential loans with fair values

totaling $88.1 billion as compared to $181.4 billion and $170.0 billion for the years ended December 31, 2021 and

December 31, 2020, respectively, in our correspondent production business. To the extent that we purchase loans that are insured by

the U.S. Department of Housing and Urban Development through the Federal Housing Administration, or insured or guaranteed by

the U.S. Department of Veterans Affairs or U.S. Department of Agriculture, we and PLS have agreed that PLS will fulfill and

purchase such loans, as PLS is a Government National Mortgage Association (“Ginnie Mae”) approved issuer and we are not. This

arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional loans.

During 2022 we began selling certain conventional loans to PLS in order to optimize our use and allocation of capital. Our purchase

volume included $50.6 billion, $67.9 billion and $63.6 billion of loans we sold to PLS during the years ended December 31, 2022,

2021 and 2020, respectively. We receive a sourcing fee from PLS based on the unpaid principal balance (“UPB”) of each loan that we

sell to PLS under such arrangement, and earn interest income on the loan for the period we hold it before the sale to PLS. During the

years ended December 31, 2022, 2021 and 2020, we received sourcing fees totaling $5.0 million, $6.5 million and $11.0 million,

respectively.

We operate our business in four segments: Correspondent production, Interest rate sensitive strategies, Credit sensitive strategies

and our Corporate operations as described below.

Our Investment Activities

Correspondent Production

Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential

loans. Correspondent production serves as the source of our investments in MSRs, private label non-Agency securitizations, and

through 2020, CRT arrangements. Our correspondent production and resulting investment activity are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Sales of loans acquired for sale:

To nonaffiliates

39,077,156

110,919,477

106,306,805

To PennyMac Financial Services, Inc.

50,575,617

67,851,630

63,618,185

89,652,773

178,771,107

169,924,990

Net gains on loans acquired for sale

25,692

87,273

379,922

Investment activities resulting from correspondent production:

Receipt of MSRs as proceeds from sales of loans

670,343

1,484,629

1,158,475

Retention of interests in securitizations of loans secured

by investment properties, net of associated asset-backed financings

23,485

42,256

—

Purchase of subordinate bonds backed by previously-sold loans

secured by investment properties held in consolidated

variable interest entities

—

28,815

—

Investments in CRT arrangements:

Deposits securing CRT arrangements

—

1,700,000

Recognition of firm commitment to purchase CRT securities (1)

—

(38,161

)

Change in face amount of firm commitment to

purchase CRT securities and commitment

to fund Deposits securing CRT arrangements

—

(1,502,203

)

Total investments in CRT arrangements

—

159,636

Total investments resulting from correspondent activities

693,828

1,555,700

1,318,111

(1) Initial recognition of firm commitment upon sale of loans.

Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

• Mortgage servicing rights. During the year ended December 31, 2022, we received approximately $670.3 million of

MSRs as proceeds from sales of loans acquired for sale. We held $4.0 billion of MSRs at fair value at December 31, 2022.

• REIT-eligible Agency and senior mortgage-backed or mortgage-related securities. We purchased approximately

$2.6 billion Agency fixed-rate pass-through securities and non-Agency senior MBS, net of sales, during the year ended

December 31, 2022. We held Agency fixed-rate pass-through securities and non-Agency senior MBS with fair values

totaling approximately $4.3 billion at December 31, 2022.

Credit Sensitive Investments

CRT Arrangements

During the year ended December 31, 2022, we did not acquire any additional CRT investments. We held net CRT-related

investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and an interest-only security payable)

totaling approximately $1.1 billion at December 31, 2022.

Subordinate Credit-Linked Mortgage-Backed Securities

Subordinate credit-linked MBS provide us with a higher yield than senior securities. However, we retain credit risk in the

subordinate credit-linked MBS since they are the first securities to absorb credit losses relating to the underlying loans. We purchased

approximately $184.7 million of subordinate credit-linked MBS during the year ended December 31,2022. We held subordinate

credit-linked MBS with fair values totaling approximate $177.9 million at December 31, 2022.

As the result of the Company’s consolidation of the variable interest entities that issued the subordinate MBS as described in

Note 6 – Variable Interest Entities – Investment in Securities Backed by Loans Secured by investment Properties to the consolidated

financial statements included in this Report, we include loans underlying these and similar transactions totaling approximately

$1.5 billion on our consolidated balance sheet as of December 31, 2022.

Taxation

We believe that we qualify to be taxed as a REIT and as such will not be subject to federal income tax on that portion of our

income that is distributed to shareholders as long as we meet applicable REIT asset, income and share ownership tests. If we fail to

qualify as a REIT, and do not qualify for certain statutory relief provisions, our profits will be subject to income taxes and we may be

precluded from qualifying as a REIT for the four tax years following the year we lose our REIT qualification.

A portion of our activities, including our correspondent production business, is conducted in our taxable REIT subsidiary

(“TRS”), which is subject to corporate federal and state income taxes. Accordingly, we have made a provision for income taxes with

respect to the operations of our TRS. We expect that the effective rate for the provision for income taxes may be volatile in future

periods since only the portion of our income earned in our TRS is subject to the provision. Our goal is to manage the business to take

full advantage of the tax benefits afforded to us as a REIT.

We evaluate our deferred tax assets quarterly to determine if valuation allowances are required based on the consideration of all

available positive and negative evidence using a “more-likely-than-not” standard with respect to whether deferred tax assets will be

realized. Our evaluation considers, among other factors, taxable loss carryback availability, expectations of sufficient future taxable

income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences, and available tax

planning strategies that could be implemented, if required. The ultimate realization of our deferred tax assets depends primarily on

our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible.

Critical Accounting Policies

Preparation of financial statements in compliance with accounting principles generally accepted in the United States (“GAAP”)

requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent

assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Certain of these

estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or

complex judgments. Our critical accounting policies primarily relate to our fair value estimates.

Fair value

Our consolidated balance sheet is substantially comprised of assets that are measured at or based on their fair values.

Measurement at fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the

specific asset or liability and whether we have elected to carry them at fair value. We group financial statement items measured at or

based on fair value in three levels based on the markets in which the assets are traded and the observability of the inputs used to

determine fair value.

The fair value level assigned to an asset or liability is identified based on the lowest level of inputs that are significant to

determining the respective asset’s or liability’s fair value. These levels are:

December 31, 2022

Percentage of

Level

Description

Carrying value

of assets

measured (1)

Total

assets

Total

shareholders'

equity

(in thousands)

Prices determined using quoted prices in active markets for identical assets or

liabilities.

263,307

Prices determined using other significant observable inputs. Observable inputs

are inputs that other market participants would use in pricing an asset or liability

and are developed based on market data obtained from sources independent of

the Company.

7,830,404

399

Prices determined using significant unobservable inputs. Unobservable inputs

reflect our judgments about the factors that market participants use in pricing an

asset or liability, and are based on the best information available in the

circumstances. (2)

5,365,069

273

Total assets measured at or based on fair value

13,458,780

685

Total assets

13,921,564

Total shareholders’ equity

1,962,815

(1) Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the

specific asset or liability and whether we have elected to carry the item at its fair value.

(2) For purposes of this discussion, includes Deposits securing credit risk transfer arrangements which are carried at amortized

cost. These deposits along with the related CRT derivatives and CRT strips are held in the form of securities which are the basis

for valuation of the CRT derivatives and strips.

At December 31, 2022, $13.5 billion, or 97%, of our total assets were carried at fair value on a recurring basis and $7.7 million,

or less than 1% (consisting of REO), were carried based on fair value on a non-recurring basis. Of these assets, $5.4 billion, or 39%, of

total assets are measured using “Level 3” fair value inputs-significant inputs where there is difficulty observing the inputs used by the

market participants to establish fair value. Different approaches to valuing or changes in inputs used to measure these assets can have

a significant effect on the amounts reported for these items and their effects on our results of operations.

Changes in inputs to measurement of Level 3 fair value financial statement items have a significant effect on the amounts

reported for these items including their reported balances and their effects on our pre-tax income as summarized below:

Change in fair value

Year ended

December 31,

Loans at

fair value (1)

Excess

servicing

spread

Interest

rate lock

commitments

CRT Assets

Mortgage

servicing

rights (2)

Total

Pre-tax income

(in thousands)

2022

(2,680

)

—

(234,146

)

(163,908

)

819,727

418,993

63,087

2021

1,182

1,037

(156,840

)

163,290

(39,056

)

(30,387

)

44,661

2020

(1,578

)

(24,970

)

536,943

(267,969

)

(706,107

)

(463,681

)

79,730

(1) Includes loans held for sale and loans at fair value.

(2) Excluding changes in fair value attributable to realization of cash flows.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities,

we are required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may

reasonably arrive at different conclusions as to the inputs to be applied in estimating the fair value of these assets and liabilities. Such

differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these fair

value assets and liabilities, subsequent transactions may be at values significantly different from those reported.

Because the fair value of “Level 3” fair value assets and liabilities is difficult to estimate, our valuation process is conducted by

specialized staff and receives significant management oversight. We have assigned the responsibility for estimating the fair values of

our “Level 3” fair value assets and liabilities, except for interest rate lock commitments (“IRLCs”), to PFSI’s Financial Analysis and

Valuation group (the “FAV group”). With respect to those valuations, PFSI’s FAV group reports to PFSI’s valuation committee,

which oversees the valuations. PFSI’s valuation committee includes the Company’s chief financial, risk, credit and deputy chief

investment officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

The fair value of our IRLCs is developed by our Manager’s Capital Markets Risk Management staff and is reviewed by our

Manager’s Capital Markets Operations group in the exercise of their internal control responsibilities.

Following is a discussion relating to our approach to measuring the assets and liabilities that are most affected by “Level 3” fair

value estimates.

Loans

We carry loans at their fair values. We recognize changes in the fair value of loans in current period income as a component of

either Net gains on loans acquired for sale or Net (losses) gains on investments and financings. We estimate fair value of loans based

on whether the loans are saleable into active markets with observable pricing.

• We categorize loans that are saleable into active markets as “Level 2” fair value assets. Such loans include substantially

all of our loans acquired for sale and our loans held in VIEs. We estimate such loans’ fair values using their quoted market

price or market price equivalent. We held $3.3 billion of such loans at fair value at December 31, 2022.

• We categorize loans that are not saleable into active markets as “Level 3” fair value assets. Such loans include our

investments in distressed loans, home equity and commercial loans held for sale and certain of the loans acquired for sale

which we subsequently repurchased pursuant to representations and warranties or that we identified as non-salable to the

Agencies. We held $14.2 million of such loans at fair value at December 31, 2022.

We estimate the fair value of our “Level 3” fair value loans based on the expected resolution of individual loans for distressed

loans and using a discounted cash flow valuation model for loans held for sale. Inputs to the model include current interest rates, loan

amount, payment status and property type, and forecasts of future interest rates, home prices, prepayment speeds, defaults and loss

severities.

Derivative Assets

Interest Rate Lock Commitments

Our net gains on loans acquired for sale include our estimates of gains or losses we expect to realize upon the sale of loans we

have committed to purchase but have not yet purchased or sold. Therefore, we recognize a substantial portion of our net gain on loans

acquired for sale at fair value before we purchase the loan. In the course of our correspondent production activities, we make

contractual commitments to correspondent sellers to purchase loans at specified terms. We call these commitments IRLCs. We

recognize the fair value of IRLCs at the time we make the commitment to the correspondent seller and adjust the fair value of such

IRLCs during the time the commitment is outstanding.

We carry IRLCs as either derivative assets or derivative liabilities on our consolidated balance sheet. The fair value of an IRLC

is transferred to the fair value of loans acquired for sale at fair value when the loan is funded.

An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using methods and inputs

we believe that market participants use in pricing IRLCs. We estimate the fair value of an IRLC based on quoted Agency MBS prices,

our estimates of the fair value of the MSRs we expect to receive in the sale of the loans and the probability that the loan will be

purchased as a percentage of the commitment we have made (the “pull-through rate”).

Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the mortgage

marketplace. Changes in our estimate of the probability that a loan will fund and changes in mortgage market interest rates are

recognized as IRLCs move through the purchase process and may result in significant changes in the estimates of the fair value of the

IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Net gains on loans acquired for

sale and may be included in Net loan servicing fees – From nonaffiliates – Mortgage servicing rights hedging results when we include

the IRLCs in our MSR hedging activities in the period of the change. The financial effects of changes in the pull-through rates and

MSR fair values generally move in different directions. Increasing interest rates have a positive effect on the fair value of the MSR

component of IRLC fair value but increase the pull-through rate for the principal and interest payment portion of the loans that

decrease in fair value.

A shift in the market for IRLCs or a change in our assessment of an input to the valuation of IRLCs can have an effect on the

amount of gain on sale of loans acquired for sale for the period. We believe that the fair value of IRLCs is most sensitive to changes in

pull-through rate inputs. We held $0.5 million of net IRLC liabilities at December 31, 2022. Following is a quantitative summary of

the effect of changes in pull-through inputs on the fair value of IRLCs at December 31, 2022:

Effect on fair value of a change in pull-through rate

Change in input (1)

Effect on fair value

(in thousands)

(20%)

(10%)

(5%)

(32

)

10%

(68

)

20%

(67

)

(1) Pull-through rate adjustments for individual loans are limited to adjustments that will increase the individual loan’s pull-through

rate to 100%.

Credit Risk Transfer Arrangements

Through late 2020, we had CRT arrangements with Fannie Mae, pursuant to which we sold pools of loans into Fannie Mae-

guaranteed securitizations while retaining recourse obligations as part of the retention of an interest-only ownership interest in such

loans. We carry the strip or derivative asset or liability relating to these transactions at fair value and recognize changes in the

respective assets’ or liability’s fair values in Net (losses) gains on investments and financings in the consolidated statements of

operations.

A shift in the market for CRT arrangements or a change in our assessment of an input to the valuation of CRT arrangements can

have a significant effect on the fair value of CRT arrangements and in our results of operations for the period. We believe that the

most significant “Level 3” fair value inputs to the valuation of CRT arrangements are the pricing spread (discount rate) and the

remaining loss expectation, which is influenced by the changes in the fair value of the properties securing the loans in the reference

pool.

We held $1.1 billion of net CRT arrangement assets at December 31, 2022. Following is a summary of the effect on fair value of

various changes to the pricing spread and property value shifts (which is used in the determination of estimated remaining credit

losses) input used to estimate the fair value of our CRT arrangements as of December 31, 2022:

Effect on fair value of a change in pricing spread input

Effect on fair value of a change in property value

Change in input

Effect on fair value

Change in input

Effect on fair value

(in basis points)

(in thousands)

(100)

42,115

(15%)

(119,403

)

(50)

20,688

(10%)

(70,147

)

(25)

10,246

(5%)

(31,008

)

(10,114

)

24,864

(20,040

)

10%

44,802

100

(39,400

)

15%

60,627

Mortgage Servicing Rights

MSRs represent the value of a contract that obligates us to service the loans on behalf of the owner of the loan in exchange for

servicing fees and the right to collect certain ancillary income from the borrower. We carry all of our investments in MSRs at fair

value and recognize changes in fair value in current period results of operations. Changes in fair value of MSRs are recognized as a

component of Net loan servicing fees – From nonaffiliates – Change in fair value of mortgage servicing rights in our consolidated

statements of operations.

A shift in the market for MSRs or a change in our assessment of an input to the valuation of MSRs can have a significant effect

on the fair value of MSRs and in our results of operations for the period. We believe the most significant “Level 3” fair value inputs to

the valuation of MSRs are the pricing spread (discount rate), prepayment speed and annual per-loan cost of servicing. We held

$4.0 billion of MSRs at December 31, 2022. Following is a summary of the effect on fair value of various changes to these key inputs

that we use in making our fair value estimates as of December 31, 2022:

Effect on fair value of a change in input

Change in input

Pricing spread

Prepayment speed

Servicing cost

(in thousands)

(20%)

221,745

221,309

70,515

(10%)

108,032

107,046

35,258

(5%)

53,330

52,668

17,629

(52,004

)

(51,044

)

(17,629

)

10%

(102,727

)

(100,544

)

(35,258

)

20%

(200,497

)

(195,201

)

(70,515

)

The preceding asset analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the

effect on fair value of a change in a specific input. We expect that in a market shock event, multiple inputs would be affected and the

effects of these changes may compound or counteract each other. Therefore, the preceding analyses are not projections of the effects

of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections.

Critical Accounting Policies Not Tied to Fair Value

Consolidation—Variable Interest Entities

We enter into various types of transactions with special purpose entities (“SPEs”), which are trusts that are established for

limited purposes. Generally, SPEs are formed in connection with securitization transactions. In a securitization transaction, we transfer

loans on our balance sheet to an SPE, which then issues various forms of interests in those assets to investors. In a securitization

transaction, we typically receive cash and/or beneficial interests in the SPE in exchange for the assets we transfer.

SPEs are generally considered variable interest entities (“VIEs”). A VIE is an entity having either a total equity investment that

is insufficient to finance its activities without additional subordinated financial support or whose equity investors lack the ability to

control the activities that most significantly impact the economic performance of the VIE. Variable interests are investments or other

interests that will absorb portions of a VIE’s expected losses or receive portions of the VIE’s expected residual returns. Expected

residual returns represent the expected positive variability in the fair value of a VIE’s net assets.

When an SPE is a VIE, holders of variable interests in that entity must evaluate whether they are the VIE’s primary beneficiary.

The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the VIE and

a variable interest that could potentially be significant to the VIE. The primary beneficiary of a VIE must include the assets and

liabilities of the VIE on its consolidated balance sheet. Therefore, our evaluation of a securitization as a VIE and our status as the

VIE’s primary beneficiary can have a significant effect on our consolidated balance sheet.

We evaluate the securitization trust into which assets are transferred to determine whether the entity is a VIE. To determine

whether a variable interest we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors

regarding the nature, size and form of our involvement with the VIE. We assess whether we are the primary beneficiary of a VIE on

an ongoing basis.

For our financial reporting purposes, the underlying assets owned by the securitization VIEs that we presently consolidate are

shown under Loans at fair value, Derivative assets, Derivative and credit risk transfer strip liabilities and Deposits securing credit

risk transfer agreements on our consolidated balance sheets:

• The VIEs that hold loans we have securitized are shown as their constituent assets and liabilities- Loans at fair value, and

the securities issued to third parties by the consolidated VIE are shown as Asset-backed financings at fair value on our

consolidated balance sheets. We include the interest earned on the loans held by the VIEs in Interest income and interest

attributable to the asset-backed securities issued by the VIEs in Interest expense in our consolidated statements of

operations. Changes in the fair value of loans held in the VIEs and the associated asset-backed financings are included in

Net (losses) gains on investments and financings in our consolidated statements of operations.

• The VIEs that hold assets relating to our CRT arrangements are shown as their constituent assets and liabilities – the

Deposit securing credit risk transfer agreements, Derivative assets and Derivative and credit risk liabilities which

represent our Interest-only (“IO”) ownership interest and Recourse Obligation, and Interest-only security payable at fair

value. We include the income we receive from the IO ownership interests and changes in fair value of the Derivative

assets and Derivative and credit risk liabilities and Interest-only security payable at fair value in Net (losses) gains on

investments and financings in our consolidated statements of operations.

Income Taxes

We have elected to be taxed as a REIT and believe we comply with the provisions of the Internal Revenue Code applicable to

REITs. Accordingly, we believe that we will not be subject to federal income tax on that portion of our REIT taxable income that is

distributed to shareholders as long as we meet the requirements of certain asset, income and share ownership tests. If we fail to qualify

as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to income taxes and may be precluded from

qualifying as a REIT for the four tax years following the year of loss of our REIT qualification.

Our TRS is subject to federal and state income taxes. We provide for income taxes using the asset and liability method. We

recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement

carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using

enacted rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or

settled.

We recognize the effect on deferred taxes of a change in tax rates in income in the period in which the change occurs. We

establish a valuation allowance if, in our judgment, realization of deferred tax assets is not more likely than not.

We recognize tax benefits relating to tax positions we take only if it is more likely than not that the position will be sustained

upon examination by the appropriate taxing authority. We recognize a tax position that meets this standard as the largest amount that

in our judgment exceeds 50 percent likelihood of being realized upon settlement. We will classify any penalties and interest as a

component of income tax expense.

Accounting Developments

Refer to Note 3 – Significant Accounting Policies – Accounting Standard Adopted in 2022 to our consolidated financial

statements for a discussion of recent accounting developments and the effect of these developments on us.

Non-Cash Investment Income

A substantial portion of our net investment income is comprised of non-cash items, including fair value adjustments, recognition

of the fair value of assets created and liabilities incurred in loan sale transactions and the capitalization and amortization of certain

assets and liabilities. Because we have elected, or are required by GAAP, to record certain of our financial assets (comprised of MBS,

loans acquired for sale at fair value, loans at fair value and ESS), our firm commitment to purchase CRT securities, our derivatives

and CRT strips, our MSRs, and our asset-backed financings and interest-only security payable at fair value, a substantial portion of the

income or loss we record with respect to such assets and liabilities results from non-cash changes in fair value.

The amounts of net non-cash investment (loss) income items included in net investment income are as follows:

Year ended December 31,

2022

2021

2020

(dollars in thousands)

Net (losses) gains on investments and financings:

Mortgage-backed securities

(576,758

)

(74,354

)

87,852

Loans:

Held in variable interest entities

(301,164

)

(12,536

)

(6,617

)

Distressed

524

(206

)

(87

)

ESS

—

1,651

(22,729

)

CRT arrangements

(152,576

)

163,126

(161,854

)

Firm commitment to purchase CRT securities

—

(121,067

)

Interest-only security payable at fair value

(11,332

)

164

14,952

Asset-backed financings at fair value

283,586

19,708

5,519

(757,720

)

97,553

(204,031

)

Net gains on loans acquired for sale (1)

620,813

1,379,717

1,199,605

Net loan servicing fees‒MSR valuation adjustments (2)

425,779

(344,435

)

(934,437

)

288,872

1,132,835

61,137

Net investment income

303,771

420,297

469,351

Non-cash items as a percentage of net investment income

270

(1) Amount represents MSRs received, liability for representations and warranties incurred in loan sales transactions and changes in

fair value of loans, IRLCs and hedging derivatives held at year end.

(2) Includes fair value changes related to MSR derivative hedging instruments.

We receive or pay cash relating to:

• Our investments in MBS through monthly principal and interest payments from the issuer of such securities or from sales

of the investment;

• Loan investments when the investments are paid down, paid off or sold, when payments of principal and interest occur on

such loans or when the properties acquired in settlement of loans are sold;

• ESS investments through a portion of the monthly interest payments collected on the loans in the ESS reference pool or

from sales of the investment;

• CRT arrangements through a portion of the interest payments collected on loans in the CRT arrangements’ reference

pools, interest payments from the investment of the deposits securing the arrangement in short-term investments and the

release to us of the deposits securing the arrangements as principal on such loans is repaid;

• Hedging instruments when we receive or make margin deposits as the fair value of respective instruments change, when

the instruments mature or when we effectively cancel the transactions through offsetting trades;

• Our liability for representations and warranties when we repurchase loans or settle loss claims from investors; and

• MSRs in the form of loan servicing fees and placement fees on the deposits we manage on behalf of the borrowers and

investors in the loans we service.

Results of Operations

Overview

The U.S. Federal Reserve raised the federal funds rate during the year ended December 31, 2022 and is expected to further

increase interest rates in the near term, as well as reduce the federal government’s overall holdings of Treasury and mortgage-backed

securities. Increasing interest rates are expected to reduce the size of the mortgage origination market from an estimated $2.2 trillion in

2022 to a current forecast range of $1.6 trillion to $1.9 trillion for 2023 according to leading economists. Lower projected mortgage

transaction volumes are expected to increase competition in the mortgage production business year over year while also leading to

reductions in prepayment speeds in our mortgage servicing portfolio and other mortgage-related assets from the elevated levels

experienced in 2021. Increasing interest rates are also expected to increase the costs of certain borrowings, as well as provide

increased interest income from placement fees on custodial deposits and loans held for sale.

At a macroeconomic level, increasing interest rates may also lead to a reduction in economic activity and slowing home price

growth or depreciation, which could lead to increasing mortgage delinquencies or defaults and increased losses. If these effects are

realized, they could negatively impact the performance of our credit-sensitive assets such as CRT or subordinate credit-linked notes

However, many of the loans underlying our assets have favorable credit characteristics and low loan-to-value ratios which are likely to

help offset the negative impacts of credit performance in an economic downturn.

Due to certain capital rules, Fannie Mae and Freddie Mac have higher capital requirements to guarantee loans delivered by loan

aggregators and may charge higher fees for third party originated loans that we aggregate and deliver to the Agencies as compared to

individual loans delivered by mortgage lenders directly to the Agencies’ cash windows without the assistance of a loan aggregator. To

the extent the Agencies increase the number of cash window purchases and sales for their own accounts, our business and results of

operations could be materially and adversely affected. The competitive landscape for our correspondent business has also been

impacted by the exit of several large entities, which may present an opportunity for growth of our share in that business.

The following is a summary of our key performance measures:

Year ended December 31,

2022

2021

2020

(dollar amounts in thousands, except per common share amounts)

Net investment income

303,771

420,297

469,351

Expenses

240,684

375,636

389,621

Pretax income

63,087

44,661

79,730

Provision for (benefit from) income taxes

136,374

(12,193

)

27,357

Net (loss) income

(73,287

)

56,854

52,373

Dividends on preferred shares

41,819

30,891

24,938

Net (loss) income attributable to common shareholders

(115,106

)

25,963

27,435

Pretax (loss) income by segment:

Credit sensitive strategies

(112,566

)

306,643

(317,143

)

Interest rate sensitive strategies

207,802

(290,065

)

105,697

Correspondent production

27,557

86,936

344,639

Corporate

(59,706

)

(58,853

)

(53,463

)

63,087

44,661

79,730

Return on average common shareholder's equity

(7.2

1.3

1.4

(Loss) earnings per common share:

Basic

(1.26

)

0.26

0.27

Diluted

(1.26

)

0.26

0.27

Dividends per common share

1.81

1.88

1.52

At year end:

Total assets

13,921,564

13,772,708

11,492,011

Book value per common share

15.78

19.05

20.30

Closing price per common share

12.39

17.33

17.47

Our consolidated net income decreased by $130.1 million during the year ended December 31, 2022, reflecting the income tax

effects of shifts in our net investment income from our non-taxed REIT subsidiary to our taxable REIT subsidiary; the decreases in

CRT-related investment fair valuation, gains on loans held for sale and loan origination fees; partially offset by the improved fair

value performance of our MSR investments during the year ended December 31, 2022, as compared to the same period in 2021.

The decrease in pretax results is summarized below:

• Our credit sensitive strategies segment recognized a $434.1 million decrease in net gains on our CRT arrangements as

compared to 2021, due to the effect of credit spread widening due to increasing macroeconomic uncertainty during 2022

as compared to the continuing recovery from the market disruption caused by the COVID-19 pandemic during 2021.

• Our interest rate sensitive strategies segment was positively affected by a $945.6 million increase in net servicing fees

caused by positive fair value changes in our investment in MSRs and hedging results and a $49.2 million decrease in net

interest expense, reflecting increased earnings on placement fees and reduced interest shortfall on repayments relating to

Agency securitizations, partially offset by a $502.4 million increase in losses on MBS, reflecting the effect of increasing

interest rates.

• Our correspondent production segment recognized a $180.2 million decrease in gains on sales of the loans and origination

fees, reflecting decreases in both production volume and gain on sale margins during the year ended December 31, 2022,

resulting from the effect of increasing interest rates on loan demand.

• We recorded income tax provision of $136.4 million due to fair value gains on MSRs held in our TRS as interest rates

increased substantially during the year ended December 31, 2022.

Our consolidated net income during the year ended December 31, 2021 increased by $4.5 million, reflecting the effect of the

improved fair value performance of our CRT-related investments partially offset by decreases in our correspondent production and

interest rate sensitive strategies results, as compared to 2020. The increase in pretax results is summarized below:

• During the year ended December 31, 2021, we recognized a $636.0 million increase in net gains on our CRT

arrangements as compared to 2020, which reflected the severe impact of the market disruption caused by the COVID-19

pandemic on our investments in CRT arrangements during 2020 and the subsequent recovery in 2021.

• Our interest rate sensitive strategies segment was negatively affected by a decrease in net servicing fees of $189.7 million

caused by negative fair value changes in our investment in MSRs and hedging results, a $162.2 million decrease in gains

on MBS and a $50.7 million increase in net interest expense.

• Growth in production volume in our correspondent production segment was more than offset by reductions in our gain on

sale margins as increased market competition compressed such margins, resulting in a $257.7 million decrease in our

pretax income.

• We recorded income tax benefit of $12.2 million due to fair value losses on MSRs held in our TRS.

Net Investment Income

Our net investment income is summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Net loan servicing fees

909,551

(36,022

)

153,696

Net (losses) gains on investments and financings

(658,787

)

304,079

(170,885

)

Net gains on loans acquired for sale

25,692

87,273

379,922

Net loan origination fees

52,085

170,672

147,272

Net interest expense

(26,626

)

(109,498

)

(48,635

)

Other

1,856

3,793

7,981

303,771

420,297

469,351

Net Loan Servicing Fees

Our net loan servicing fees have two primary components: fees earned for servicing loans and the effects of MSR valuation

changes, net of hedging results, as summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Loan servicing fees

651,251

595,346

462,517

Effect of MSRs and hedging results

258,300

(631,368

)

(308,821

)

Net loan servicing fees

909,551

(36,022

)

153,696

Following is a summary of our loan servicing fees:

Year ended December 31,

2022

2021

2020

(in thousands)

Contractually-specified servicing fees

625,210

526,245

406,060

Ancillary and other fees:

Late charges

2,526

1,701

1,498

Other

23,515

67,400

54,959

26,041

69,101

56,457

651,251

595,346

462,517

Average MSR servicing portfolio

222,847,593

196,996,623

147,832,880

MSR recapture fees

13,744

50,859

28,373

UPB of loans recaptured

2,533,115

9,389,260

6,012,911

Loan servicing fees relate to our MSRs which are primarily related to servicing we provide for loans included in Agency

securitizations. These fees are contractually established at an annualized percentage of the UPB of the loans serviced and we collect

these fees from borrower payments. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late

charges, reconveyance fees and fees charged to correspondent lenders for loans repaid by the borrower shortly after purchase.

The change in contractually-specified fees during the year ended December 31, 2022, as compared to 2021, is due primarily to

increased servicing fees resulting from the growth in our loan servicing portfolio. Likewise, the increase in contractually specified

servicing fees during the year ended December 31, 2021 as compared to 2020 is due to growth in our loan servicing portfolio.

The changes in other loan servicing fees for the year ended December 31, 2022, as compared to 2021, is due to a decrease in the

volume of fees charged to correspondent lenders for loans paid off shortly after purchase, reflecting the effect of increasing interest

rates on refinancing activity. Likewise, the increase in such fees between 2020 and 2021 reflects the effect of then-decreasing interest

rates on refinancing activity.

The decrease in MSR recapture fees reflects the effects of increasing interest rates during 2022 which affected refinance loan

volume.

We have elected to carry our servicing assets at fair value. Changes in fair value have two components: changes due to

realization of the contractual servicing fees and changes due to changes in inputs used to estimate the fair value of such items. We

endeavor to moderate the effects of changes in fair value primarily by entering into derivatives transactions.

Changes in fair value of MSRs and hedging results are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Change in fair value of MSRs

Realization of cash flows

(370,292

)

(298,130

)

(232,830

)

Changes in valuation inputs used in valuation model

819,727

(39,056

)

(706,107

)

449,435

(337,186

)

(938,937

)

Hedging results

(204,879

)

(345,041

)

601,743

Total change in fair value of mortgage

servicing rights and hedging results

244,556

(682,227

)

(337,194

)

Recapture income from PFSI

13,744

50,859

28,373

258,300

(631,368

)

(308,821

)

Average balance of mortgage servicing rights

3,615,920

2,506,678

1,354,508

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in

estimates of remaining cash flows to be realized. During the year ended December 31, 2022, as compared to 2021, realization of cash

flows increased primarily due to the significant growth of our investment in MSRs as compared to the year ended December 31, 2021,

partially offset by the effect of reduced prepayment speeds on the rate of realization of expected cash flows.

Changes in fair value due to changes in valuation inputs used in our valuation model during the year ended

December 31, 2022, as compared to 2021, reflect the effects of expectations for slower future prepayments of the underlying loans as

a result of interest rates increasing more significantly during the year ended December 31, 2022, as compared to 2021 and 2020.

Hedging results reflect valuation losses in hedges against increasing interest rates during the year ended December 31, 2022,

during which interest rates rose very sharply, as compared to the same period in 2021 when hedge losses were attributable to a slight

increase in long term interest rates and elevated hedge costs. The loss from hedging activities decreased during the year ended

December 31, 2022, as compared to the same period in 2021, due to the same factors as well as decreased prepayment sensitivity of

the hedged MSRs due to higher interest rate levels in 2022 as well as lower target hedge coverage for fluctuations in MSR value due

to the growth in fair value and interest rate sensitivity of our MBS portfolio, which also serves to offset the fair value changes of our

MSRs.

The decrease in loan recapture income from PFSI reflects the decrease in refinancing activity in our MSR portfolio during the

year ended December 31, 2022, as compared to the same periods in 2021. We have an agreement with PFSI that requires that when

PFSI refinances a loan for which we held the MSRs, we receive a recapture fee. The MSR recapture agreement is summarized in Note

4 ‒ Transactions with Related Parties to the consolidated financial statements included in this Report.

Following is a summary of our loan servicing portfolio:

December 31, 2022

December 31, 2021

(in thousands)

UPB of loans outstanding

229,858,573

215,927,495

Collection status (UPB) (1)

Delinquency:

30-89 days delinquent

1,903,007

1,148,542

90 or more days delinquent:

Not in foreclosure

880,841

1,726,488

In foreclosure

70,921

36,658

Bankruptcy

123,239

130,582

Delinquent loans in COVID-19 pandemic-related forbearance:

30-89 days

176,346

169,654

90 days or more

464,694

614,882

Custodial funds managed by the Company (2)

1,783,157

3,823,527

(1) Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment

relief in accordance with the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”).

(2) Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing

agreements and are not included on the Company’s consolidated balance sheets. The Company earns placement fees on certain of

the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the

Company’s consolidated statements of operations.

Net (Losses) Gains on Investments and Financings

Net (losses) gains on investments and financings are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

From nonaffiliates:

Mortgage-backed securities

(576,758

)

(74,354

)

87,852

Loans at fair value:

Held in consolidated variable interest entities

(301,164

)

(12,536

)

(6,617

)

Distressed

686

611

(837

)

CRT arrangements

(65,137

)

368,999

(145,938

)

Firm commitment to purchase CRT securities

—

(121,067

)

Asset-backed financings at fair value

283,586

19,708

5,519

Hedging derivatives

—

32,932

(658,787

)

302,428

(148,156

)

From PFSI‒Excess servicing spread

—

1,651

(22,729

)

(658,787

)

304,079

(170,885

)

The decrease in net gains on investments for the year ended December 31, 2022, as compared to the year ended

December 31, 2021, was caused primarily by increased losses from our investments in MBS and CRT arrangements as interest rates

increased and credit spreads widened.

The increase in net gain on investments for the year ended December 31, 2021, as compared to 2020, was caused primarily by

increased gains from our CRT arrangements. The increase in gains from CRT arrangements reflects the recovery in fair value from the

dislocation in the credit markets experienced during the year ended December 31, 2020. This increase was partially offset by the

effects of rising interest rates on the fair value of our investments in MBS.

Mortgage-Backed Securities

During 2022, we recognized net valuation losses on MBS of $576.8 million, as compared to net valuation losses of

$74.4 million during 2021. The increase in losses we recognized during the year ended December 31, 2021 reflect a larger portfolio of

assets and greater interest rate increases and spread widening than in 2021. The gains recognized during the year ended

December 31, 2020 reflect the significant decrease in interest rates that was experienced during that year.

Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value

Loans at fair value held in VIEs and Asset-backed financings at fair value incurred net losses of $17.6 million during the year

ended December 31, 2022, as compared to net gains of $7.2 million during the year ended December 31, 2021. The net losses during

the year ended December 31, 2022 reflect the effects of increasing interest rates and widening credit spreads during that year.

The net gains during the year ended December 31, 2021 reflect the gains on the asset-backed financing exceeding the losses on

the underlying assets as the result of tightening credit spreads on our net investments secured by jumbo loans and investment

properties.

The losses during the year ended December 31, 2020 are attributable to the effect of uncertainties surrounding borrower credit

performance experienced in the mortgage market as the result of the COVID-19 pandemic. Unlike our investments in MBS, which

carry Agency guarantees of security payment performance, the loans held in a VIE are the sole source of repayment of the securities.

Therefore, uncertainties about borrower performance are more directly reflected in the fair value of these loans and more than offset

the positive effect of decreasing interest rates for the year ended December 31, 2021.

CRT Arrangements

The activity in and balances relating to our CRT arrangements are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

UPB of loans sold

18,277,263

Investments:

Deposits securing CRT arrangements

1,700,000

Change in expected face amount of firm

commitment to purchase CRT securities

(1,502,203

)

197,797

Net investment income:

Net (losses) gains on investments and financings:

CRT Derivatives and strips:

CRT derivatives

Realized

38,382

93,837

(53,965

)

Valuation changes

(42,220

)

(12,829

)

(82,633

)

(3,838

)

81,008

(136,598

)

CRT strips

Realized

60,389

111,872

54,929

Valuation changes

(110,356

)

175,955

(79,221

)

(49,967

)

287,827

(24,292

)

Interest-only security payable at fair value

(11,332

)

164

14,952

(65,137

)

368,999

(145,938

)

Firm commitments to purchase CRT securities

—

(121,067

)

(65,137

)

368,999

(267,005

)

Net gains on loans acquired for sale — Fair value

of firm commitment to purchase CRT

securities recognized upon sale of loans

—

(38,161

)

Interest income — Deposits securing CRT arrangements

21,324

559

7,012

(43,813

)

369,558

(298,154

)

Net (recoveries received) payments made to settle

(recoveries) losses on CRT arrangements

(19,016

)

(62,387

)

115,475

December 31, 2022

December 31, 2021

(in thousands)

Carrying value of CRT arrangements:

Derivative and credit risk transfer strip assets (liabilities), net

CRT derivatives

(22,098

)

18,964

CRT strips

(137,193

)

(26,837

)

(159,291

)

(7,873

)

Deposits securing CRT arrangements

1,325,294

1,704,911

Interest-only security payable at fair value

21,925

10,593

CRT arrangement assets pledged to secure borrowings:

Derivative assets

1,262

19,627

Deposits securing CRT arrangements (1)

1,325,294

1,704,911

UPB of loans underlying CRT arrangements

25,315,524

30,808,907

Collection status (UPB):

Delinquency (2)

Current

24,673,719

29,581,803

30-89 days delinquent

409,049

349,291

90-180 days delinquent

112,286

120,775

180 or more days delinquent

93,717

748,576

Foreclosure

26,753

8,462

Bankruptcy

54,395

64,694

Delinquent loans in COVID-19 pandemic-related forbearance plans:

30-89 days delinquent

35,388

44,015

90-180 days delinquent

39,033

57,815

180 or more days delinquent

35,588

174,041

(1) For purposes of this discussion, includes Deposits securing credit risk transfer strip liabilities securing $160.6 million and

$27.5 million in CRT strip and CRT derivative liabilities at December 31, 2022 and December 31, 2021, respectively.

(2) Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment

relief in accordance with the CARES Act.

The performance of our investments in CRT arrangements during the year ended December 31, 2022 reflects credit spread

widening (an increase in the interest rate demanded by investors for instruments over those that are considered “risk free”) for CRT

securities in the credit markets. This contrasts with CRT investments’ gains during the year ended December 31, 2021 which reflects a

recovery of the credit markets from the dislocation experienced during the first quarter of 2020 as a result of the onset of the COVID-

19 pandemic and continuing improvement in the performance of the loans underlying this investment.

ESS Purchased from PFSI

We recognized fair value gains relating to our investment in ESS totaling $1.7 million for the year ended December 31, 2021, as

compared to fair value losses of $22.7 million during 2020. The gains were driven by the positive influence on expected future cash

flows of the generally rising interest rates during the portion of 2021 that the ESS was outstanding. The valuation losses during 2020,

resulted from increased prepayment experience and expectations for the loans underlying the ESS and the effect of uncertainties

surrounding future cash flows on the discount rate used to develop the assets’ fair value. The remaining balance of the ESS was sold to

PLS during the quarter ended March 31, 2021.

Net Gains on Loans Acquired for Sale

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

Year ended December 31,

2022

2021

2020

(in thousands)

From non-affiliates:

Cash loss:

Loans

(1,196,384

)

(1,487,649

)

(326,214

)

Hedging activities

596,295

188,733

(504,506

)

(600,089

)

(1,298,916

)

(830,720

)

Non-cash gain:

Receipt of MSRs in loan sale transactions

670,343

1,484,629

1,158,475

Provision for losses relating to representations

and warranties provided in loan sales:

Pursuant to loan sales

(4,442

)

(25,029

)

(19,316

)

Reduction in liability due to change in estimate

4,227

5,812

4,457

(215

)

(19,217

)

(14,859

)

Recognition of fair value of commitment to purchase

credit risk transfer securities relating to loans sold

—

(38,161

)

Change in fair value of financial instruments held at year end:

Interest rate lock commitments

(2,928

)

(69,935

)

61,232

Loans

(4,057

)

31,072

(12,279

)

Hedging derivatives

(42,330

)

(46,832

)

45,197

(49,315

)

(85,695

)

94,150

620,813

1,379,717

1,199,605

Total from nonaffiliates

20,724

80,801

368,885

From PFSI—cash

4,968

6,472

11,037

25,692

87,273

379,922

Interest rate lock commitments issued on

loans acquired for sale to nonaffiliates

44,174,447

108,458,880

117,727,579

Acquisition of loans for sale (UPB):

To nonaffiliates

37,090,031

110,003,574

106,898,339

To PFSI

49,533,119

64,641,218

62,413,089

86,623,150

174,644,792

169,311,428

The changes in gain on loans acquired for sale during the year ended December 31, 2022, as compared to the same period in

2021, reflect the effect of rising interest rates on demand for mortgage loans and gain on sale margins. The changes in Net gains on

loans acquired for sale during the year ended December 31, 2021, as compared to 2020, reflect the tightening of gain on sale margins,

as well as decreasing interest rate lock commitments.

Non-cash elements of gains on sale of loans

Interest Rate Lock Commitments

Our net gains on sale of loans includes our estimates of gains or losses we expect to realize upon the sale of mortgage loans we

have committed to purchase but have not yet purchased or sold. Therefore, we recognize a substantial portion of our Net gains on sale

of loans acquired for sale before we purchase the loans. These gains are reflected on our balance sheet as IRLC derivative assets and

liabilities. We adjust the fair value of our IRLCs as the loan acquisition process progresses until we complete the acquisition or the

commitment is canceled. Such adjustments are included in our Net gains on sale of loans acquired for sale. The fair value of our

IRLCs become part of the carrying value of our loans when we complete the purchase of the loans. The methods and key inputs we

use to measure the fair value of IRLCs are summarized in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated

financial statements included in this Report.

The MSRs and liability for representations and warranties we recognize represent our estimate of the fair value of future

benefits and costs we will realize for years in the future. These estimates change as circumstances change, and changes in these

estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs

significantly affect our results of operations.

Mortgage Servicing Rights

Our methods to measure and update the measurements of our MSRs as well as the effect of changes in valuation inputs on MSR

fair value are detailed in Note 7 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in

this Report.

Firm Commitment to Purchase CRT Securities

During the time we were selling loans into CRT arrangements, we recognized the fair value of our commitment to purchase

CRT securities when we sold loans subject to CRT arrangements. This fair value represents the difference between the expected fair

value of the CRT securities we committed to purchase and their contractual purchase price.

Liability for Losses Under Representations and Warranties

We recognize a liability for losses we expect to incur relating to the representations and warranties we provide to purchasers in

our loan sales transactions. The representations and warranties require adherence to purchaser and insurer origination and

underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit,

income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the

identified defects or indemnify the investor or insurer against credit losses attributable to the loans with indemnified defects. In such

cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent

sellers that, in turn, had sold such loans to us and breached similar or other representations and warranties. In such event, we have the

right to seek a recovery of those repurchase losses from that correspondent seller.

We recorded provisions for losses relating to representations and warranties relating to current loan sales of $4.4 million,

$25.0 million and $19.3 million as part of our loan sales in each of the years ended December 31, 2022, 2021 and 2020, respectively.

The decrease in the provision relating to current loan sales during the year ended December 31, 2022, relating to current loan sales

reflects the decrease of our loan sales volume and reduced default and loss-given default assumptions during 2022 as compared to

2021. The increase in the provision during the year ended December 3, 2021, relating to current loan sales reflects the increase of our

loan sales volume as well as loan sales no longer being subject to credit risk transfer arrangements for which our representation and

warranty loss estimates were less than for other loan sales.

Following is a summary of the indemnification and repurchase activity and loans subject to representations and warranties:

Year ended December 31,

2022

2021

2020

(in thousands)

Indemnification activity (UPB):

Loans indemnified at beginning of year

2,782

4,583

5,697

New indemnifications

6,009

345

450

Less: Indemnified loans repaid or refinanced

683

2,146

1,564

Loans indemnified at end of year

8,108

2,782

4,583

Indemnified loans indemnified by correspondent lenders

at end of year

1,312

1,112

1,497

UPB of loans with deposits received from correspondent

sellers collateralizing prospective indemnification

losses at end of year

2,670

213

Repurchase activity (UPB):

Loans repurchased

92,293

86,954

72,535

Less:

Loans repurchased by correspondent sellers

77,813

52,787

31,306

Loans resold or repaid by borrowers

26,584

33,950

24,837

Net loans (resolved) repurchased with losses chargeable to liability to

representations and warranties

(12,104

)

217

16,392

Net losses charged to liability for representations and warranties

993

861

580

At end of year:

Loans subject to representations and warranties

228,339,312

213,944,023

163,592,788

Liability for representations and warranties

39,471

40,249

21,893

The losses on representations and warranties we have recorded to date have been moderated by our ability to recover most of the

losses inherent in the repurchased loans from the correspondent sellers. As the outstanding balance of loans we purchase and sell

subject to representations and warranties increases, as the loans sold season, as our investors’ and guarantors’ loss mitigation strategies

change and as our correspondent sellers’ ability and willingness to repurchase loans change, we expect that the level of repurchase

activity and associated losses may increase.

The method we use to estimate the liability for representations and warranties is a function of our estimates of future defaults,

loan repurchase rates, severity of loss in the event of default and the probability of reimbursement by the correspondent loan seller.

We establish a liability at the time loans are sold and review our liability estimate on a periodic basis.

The amount of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The

level of loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses

inherent in the repurchased loan from the correspondent seller and other external conditions that change over the lives of the

underlying loans. We may be required to incur losses related to such representations and warranties for several periods after the loans

are sold or liquidated.

We record adjustments to our liability for losses on representations and warranties as economic fundamentals change, as

investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and

as economic conditions affect our correspondent sellers’ ability or willingness to fulfill their recourse obligations to us. Such

adjustments may be material to our financial position and results of operations in future periods.

Adjustments to our liability for representations and warranties are included as a component of our Net gains on loans acquired

for sale at fair value. We recorded reductions in liabilities for representations and warranties for previously sold loans totaling

$4.2 million, $5.8 million and $4.5 million during each of the three years ended December 31, 2022, 2021 and 2020, respectively, due

to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase

claims relating to such loans.

Loan Origination Fees

Loan origination fees represent fees we charge correspondent sellers relating to our purchase of loans from those sellers. The

decrease in fees during 2022, as compared to 2021 and 2020, reflects a decrease in our purchases of loans with delivery fees.

Net Interest Expense

Net interest expense is summarized below:

Year ended December 31, 2022

Year ended December 31, 2021

Year ended December 31, 2020

Interest

income/

Average

yield/

income/

Average

yield/

income/

Average

yield/

expense

balance

cost %

expense

balance

cost %

expense

balance

cost %

(dollars in thousands)

Assets:

Cash and short-term

investments

6,912

332,251

2.05

938

243,548

0.38

3,804

650,630

0.58

Mortgage-backed securities

133,640

3,559,869

3.70

36,180

2,210,940

1.61

59,461

2,921,879

2.00

Loans acquired for sale at

fair value

103,300

1,938,470

5.26

125,438

4,135,140

2.99

103,221

3,469,392

2.93

Loans at fair value:

Held by variable interest

entities

59,263

1,612,103

3.63

17,014

474,808

3.53

10,609

214,596

4.86

Distressed

219

3,879

5.57

369

6,625

5.49

493

9,032

5.37

59,482

1,615,982

3.63

17,383

481,433

3.56

11,102

223,628

4.88

Excess servicing spread

from PFSI

—

1,280

21,563

5.85

8,418

153,768

5.38

Deposits securing CRT

arrangements

21,324

1,468,219

1.43

559

2,307,155

0.02

7,012

1,772,762

0.39

324,658

8,914,791

3.59

181,778

9,399,779

1.91

193,018

9,192,059

2.07

Placement fees relating to

custodial funds

57,961

13,366

28,804

Other

1,175

313

383,794

8,914,791

4.25

195,239

9,399,779

2.05

222,135

9,192,059

2.38

Liabilities:

Assets sold under agreements

to repurchase

165,436

5,625,345

2.90

97,078

6,161,755

1.55

102,131

5,508,147

1.82

Mortgage loan participation

purchase and sale

agreements

1,023

30,024

3.36

606

33,827

1.77

902

44,432

2.00

Notes payable secured by

credit risk transfer and

mortgage servicing assets

137,021

2,646,597

5.11

86,753

2,635,601

3.25

59,261

1,771,370

3.29

Exchangeable senior notes

33,368

541,233

6.08

36,747

445,064

8.14

18,847

269,247

6.89

Asset-backed financings

at fair value

53,570

1,512,590

3.49

15,076

447,247

3.32

10,971

203,795

5.30

Assets sold to PFSI under

agreement to repurchase

—

387

13,020

2.93

3,325

93,264

3.56

390,418

10,355,789

3.72

236,647

9,736,514

2.40

195,437

7,890,255

2.44

Interest shortfall on repayments of

loans serviced for Agency

securitizations

15,806

64,519

71,516

Interest on loan impound deposits

4,196

3,571

3,817

410,420

10,355,789

3.91

304,737

9,736,514

3.09

270,770

7,890,255

3.38

Net interest expense

(26,626

)

(109,498

)

(48,635

)

Net interest margin

-0.29

-1.15

-0.52

Net interest spread

0.34

-1.04

-1.00

The effects of changes in the yields and costs and composition of our investments on our interest expense are summarized

below:

Year ended December 31, 2022

Year ended December 31, 2021

vs.

Year ended December 31, 2021

Year ended December 31, 2020

Increase (decrease)

due to changes in

Increase (decrease)

due to changes in

Rate

Volume

Total

Rate

Volume

Total

(in thousands)

Assets:

Cash and short-term investments

5,517

457

5,974

(1,008

)

(1,858

)

(2,866

)

Mortgage-backed securities

66,233

31,227

97,460

(10,318

)

(12,963

)

(23,281

)

Loans acquired for sale at fair value

65,295

(87,433

)

(22,138

)

2,321

19,896

22,217

Loans at fair value:

Held by variable interest entities

452

41,797

42,249

(3,540

)

9,945

6,405

Distressed

(155

)

(150

)

(135

)

(124

)

457

41,642

42,099

(3,529

)

9,810

6,281

Excess servicing spread from PFSI

—

(1,280

)

(1,280

)

673

(7,811

)

(7,138

)

Deposits securing CRT arrangements

21,042

(277

)

20,765

(8,075

)

1,622

(6,453

)

158,544

(15,664

)

142,880

(19,936

)

8,696

(11,240

)

Placement fees relating to custodial

funds

—

44,595

—

(15,438

)

(15,438

)

Other

—

1,080

—

(218

)

(218

)

158,544

30,011

188,555

(19,936

)

(6,960

)

(26,896

)

Liabilities:

Assets sold under agreements to

repurchase

77,478

(9,120

)

68,358

(16,219

)

11,166

(5,053

)

Mortgage loan participation

purchase and sale agreement

492

(75

)

417

(96

)

(200

)

(296

)

Notes payable secured by credit risk

transfer and mortgage servicing

assets

49,905

363

50,268

(808

)

28,300

27,492

Exchangeable senior notes

(10,393

)

7,014

(3,379

)

3,914

13,986

17,900

Asset-backed financings

at fair value

802

37,692

38,494

(5,234

)

9,339

4,105

Assets sold to PFSI under

agreement to repurchase

—

(387

)

(387

)

(470

)

(2,468

)

(2,938

)

118,284

35,487

153,771

(18,913

)

60,123

41,210

Interest shortfall on repayments of

loans serviced for Agency

securitizations

—

(48,713

)

(48,713

)

—

(6,997

)

(6,997

)

Interest on loan impound deposits

—

625

—

(246

)

(246

)

118,284

(12,601

)

105,683

(18,913

)

52,880

33,967

Increase in net interest expense

40,260

42,612

82,872

(1,023

)

(59,840

)

(60,863

)

The decrease in net interest expense during the year ended December 31, 2022, as compared to 2021, is due to:

• An increase in the yields we earn on our investments in MBS and loans acquired for sale arising from our acquisition

of higher coupon Agency pass through securities, subordinate MBS and loans acquired for sale.

• An increase in placement fee income we receive relating to custodial funds we mange on behalf of borrowers and

investors in our MSR portfolio.

• A decrease in the interest shortfall on repayments of loans serviced for the Agency securitizations, reflecting decreased

prepayment activity in our MSR portfolio as a result of increasing interest rates reducing the incentive of borrowers to

refinance their loans.

The increase in net interest expense during the year ended December 31, 2021, as compared to 2020, is due to:

• An increase in long-term debt issued to finance our investments in CRT Agreements and MSRs as well as the issuance

of unsecured debt. These forms of debt bear higher interest costs as compared to the short-term debt they replace and

do not finance interest-earning assets. Revenues relating to MSRs and CRT arrangements are reflected in Net loan

servicing fees and Net (losses) gains on investments and financings.

• A decrease in earnings from placement fees relating to custodial funds managed for borrowers, and investors, and

deposits securing CRT arrangements which reflects the decrease in interest rates we earn on these assets.

Expenses

Our expenses are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Earned by PennyMac Financial Services, Inc.:

Loan servicing fees

81,915

80,658

67,181

Loan fulfillment fees

67,991

178,927

222,200

Management fees

31,065

37,801

34,538

Loan origination

12,036

28,792

26,437

Professional services

9,569

11,148

6,405

Safekeeping

8,201

9,087

7,090

Compensation

5,941

4,000

3,890

Loan collection and liquidation

5,396

11,279

10,363

Other

18,570

13,944

11,517

240,684

375,636

389,621

Expenses decreased $135.0 million, or 36%, during the year ended December 31, 2022, as compared to 2021, and $14.0 million,

or 4%, during the year ended December 31, 2021, as compared to 2020, primarily due to reduced fees relating to fulfillment activities

performed by PFSI on our behalf.

Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Loan servicing fees:

Loans acquired for sale at fair value

1,018

2,363

2,067

Loans at fair value

529

505

807

MSRs

80,368

77,790

64,307

81,915

80,658

67,181

Average investment in:

Loans acquired for sale at fair value

1,938,470

4,135,140

3,469,392

Loans at fair value

1,615,982

481,433

223,628

Average MSR portfolio UPB

222,847,593

196,996,623

147,832,880

Loan servicing fees increased by $1.3 million during the year ended December 31, 2022, as compared to the same period in

2021 and $13.5 million during the year ended December 31, 2021, as compared to 2020. We incur loan servicing fees primarily in

support of our MSR portfolio. The increase in loan servicing fees year over year was due to the growth in our portfolio of MSRs.

Loan Fulfillment Fees

Loan fulfillment fees represent fees we pay to PLS for the services it performs on our behalf in connection with our acquisition,

packaging and sale of loans. The decrease in loan fulfillment fees of $110.9 million during 2022, as compared to 2021, and

$43.3 million during 2021, as compared to 2020, was due to a decrease in loan commitment volume. Our loan fulfillment fee structure

is described in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report.

Management Fees

Management fees payable to PCM are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Base

31,065

34,794

34,538

Performance incentive

—

3,007

—

31,065

37,801

34,538

Average shareholders' equity amounts used

to calculate base management fee expense

2,079,851

2,348,395

2,330,154

Management fees decreased by $6.7 million during the year ended December 31, 2022, as compared to 2021. This decrease

reflects the nonrecurrence of a performance incentive fee during the year ended December 31, 2022, along with the effect of the

decrease in our average shareholders’ equity on our base management fee during the year ended December 31, 2022, as compared to

the year ended December 31, 2021.

Management fees increased by $3.3 million during the year ended December 31, 2021, as compared to 2020, due to the

recognition of a performance incentive resulting from our increased profitability during certain of the rolling twelve-month

measurement periods ended December 31, 2021, on which the performance incentive fee was based, as compared to our profitability

for the year ended December 31, 2020.

Loan origination

Loan origination expenses decreased $16.8 million, or 58%, during 2022, as compared to 2021, primarily reflecting a decrease

in the volume of loans produced through our correspondent production activities.

Loan origination expenses increased $2.4 million, or 9%, during 2021, as compared to 2020, reflecting the increases in our loan

originations produced through our correspondent production activities.

Compensation

Compensation expense increased $1.9 million during the year ended December 31, 2022, as compared to 2021, and $110,000

during the year ended December 31, 2021, as compared to 2020, respectively, primarily due to increased expectations in achieving

performance targets included in certain performance-based restricted share awards.

Loan collection and liquidation

Loan collection and liquidation expenses decreased by $5.9 million during the year ended December 31, 2022 due to the

reduction in our portfolio of nonperforming mortgage loans and the borrower assistance expenses we incurred relating to loans in our

CRT reference pools.

Loan collection and liquidation expenses increased by $916,000 during 2021 compared to the year ended 2020, due to

continuing collection and liquidation efforts relating to our portfolio of nonperforming mortgage loans and loans included in our CRT

reference pools. We incurred this expense to assist certain borrowers in mitigating loan delinquencies they incurred as a result of

dislocations arising from the COVID-19 pandemic as an alternative to incurring losses in the CRT arrangements.

Other Expenses

Other expenses are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Common overhead allocation from PFSI

8,588

4,906

5,172

Technology

2,058

1,787

1,440

Bank service charges

2,262

1,731

1,924

Insurance

1,622

1,671

1,351

Other

4,040

3,849

1,630

18,570

13,944

11,517

Income Taxes

We have elected to treat PMC as a taxable REIT subsidiary (“TRS”). Income from a TRS is only included as a component of

REIT taxable income to the extent that the TRS makes dividend distributions of income to us. A TRS is subject to corporate federal

and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying consolidated statements of

income.

Our effective tax rates were 216.2% for the year ended December 31, 2022 and (27.3)% for the year ended December 31, 2021.

Our TRS recognized a tax expense of $141.9 million on pretax income of $712.9 million while our consolidated pretax income was

$63.1 million for the year ended December 31, 2022. For 2021, the TRS recognized a tax benefit of $12.2 million on pretax loss of

$175.3 million while our consolidated pretax income was $44.7 million. The relative values between the tax benefit or expense at the

TRS and our consolidated pretax income drive the fluctuation in the effective tax rate. We record a tax provision only at the TRS. As

a result, when TRS pre-tax income is substantially greater than the consolidated pre-tax income, the tax expense provided at the TRS

will be disproportionate to the consolidated income. This correlation resulted in an effective tax rate at the consolidated level of

216.2% for the year ended December 31, 2022. The primary difference between our effective tax rate and the statutory tax rate is due

to nontaxable REIT income resulting from the dividends paid deduction.

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be

generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of December 31, 2022, the valuation

allowance was decreased to zero from the $34.1 million valuation allowance recorded at December 31, 2021 as the result of GAAP

income at the TRS for the year ended December 31, 2022. The amount of deferred tax assets considered realizable could be adjusted

in future periods based on future income.

The Inflation Reduction Act was signed into law on August 16, 2022 (the “Act"). Effective for tax years beginning after

December 31, 2022, the Act imposes a 15% alternative minimum tax ("AMT") on the adjusted financial statement income ("AFSI") of

“Applicable Corporations”. The term "Applicable Corporations" does not include REITs but does include TRSs whose three-year

average AFSI exceeds $1 billion. Based on the current legislation and the definition of AFSI, we do not expect our TRS to be subject

to this AMT in the foreseeable future.

In general, cash dividends declared by the Company will be considered ordinary income to shareholders for income tax

purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years

beginning after December 31, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) (subject to certain limitations) provides a 20%

deduction from taxable income for ordinary REIT dividends.

Below is a reconciliation of GAAP year to date net income to taxable income (loss) and the allocation of taxable income (loss)

between the TRS and the REIT:

Taxable income (loss)

GAAP

net income

GAAP/tax

differences

Total taxable

income (loss)

Taxable

subsidiaries

REIT

Year ended December 31, 2022

(in thousands)

Net investment income

Net loan servicing fees/ESS transactions

909,551

65,857

975,408

—

Net (losses) gains on investments and financings

(658,787

)

715,712

56,925

(14,766

)

71,691

Net gains on loans acquired for sale

25,692

(671,121

)

(645,429

)

(645,429

)

—

Loan origination fees

52,085

—

52,085

—

Net interest (expense) income

(26,626

)

(4,266

)

(30,893

)

(161,277

)

130,384

Results of real estate acquired in settlement of loans

496

(116

)

380

—

Other

1,360

—

1,361

—

Net investment income

303,771

106,066

409,837

207,762

202,075

Expenses

240,684

(3,393

)

237,290

213,824

23,466

REIT dividend deduction

—

178,615

—

178,615

Total expenses and dividend deduction

240,684

175,222

415,905

213,824

202,081

Income (loss) before provision for (benefit from)

income taxes

63,087

(69,156

)

(6,068

)

(6,062

)

Provision for (benefit from) income taxes

136,374

(136,380

)

—

)

Net (loss) income

(73,287

)

67,224

(6,062

)

(6,062

)

—

Balance Sheet Analysis

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

December 31,

2022

2021

(in thousands)

Assets

Cash

111,866

58,983

Investments:

Short-term

252,271

167,999

Mortgage-backed securities at fair value

4,462,601

2,666,768

Loans acquired for sale at fair value

1,821,933

4,171,025

Loans at fair value

1,513,399

1,568,726

Derivative assets

84,940

34,238

Deposits securing credit risk transfer arrangements

1,325,294

1,704,911

MSRs

4,012,737

2,892,855

13,473,175

13,206,522

Other

336,523

507,203

Total assets

13,921,564

13,772,708

Liabilities

Debt:

Short-term

6,616,528

6,721,878

Long-term

4,787,162

4,455,012

11,403,690

11,176,890

Other

555,059

228,300

Total liabilities

11,958,749

11,405,190

Shareholders’ equity

1,962,815

2,367,518

Total liabilities and shareholders’ equity

13,921,564

13,772,708

Total assets increased by approximately $148.9 million, or 1%, from December 31, 2021 to December 31, 2022, primarily

due to an increase in MBS of $1.8 billion and MSRs of $1.1 billion, partially offset by a $2.3 billion decrease in Loans acquired for

sale at fair value and a $379.6 million decrease in Deposits securing credit risk transfer arrangements. The increase in our MBS is

primarily due to our increased investment in Agency pass-through securities. The growth in investment in MSRs reflects the growth in

our servicing portfolio from our correspondent lending activities.

Asset Acquisitions

Our asset acquisitions are summarized below.

Correspondent Production

Following is a summary of our correspondent production acquisitions at fair value:

Year ended December 31,

2022

2021

2020

(in thousands)

Correspondent loan purchases:

Government-sponsored entity ("GSE") eligible (1)

41,575,252

113,667,618

106,472,654

Held for sale to PLS ‒ Government insured or guaranteed

46,562,853

67,702,945

63,574,547

Jumbo loans

5,029

—

Advances to home equity lines of credit

132

—

2,569

88,143,266

181,370,563

170,049,770

(1) GSE eligibility refers to the eligibility of loans for sale to Fannie Mae or Freddie Mac. The Company sells or finances a portion of

its GSE eligible loan production to other investors, including PLS.

During 2022, we purchased for sale $88.1 billion in fair value of correspondent production loans as compared to $181.4 billion

during 2021 and $170.0 billion during 2020. The decrease in loan production during the year ended December 31, 2022 reflects the

effect of decreased loan demand as a result of the increasing interest rate environment during the year ended December 31, 2022, as

compared to the favorable interest rate environment during the same periods in 2021 and 2020.

Other Investment Activities

Following is a summary of our acquisitions of mortgage-related investments held in our credit sensitive strategies and interest

rate sensitive strategies segments:

Year ended December 31,

2022

2021

2020

(in thousands)

Credit sensitive assets:

Credit risk transfer strips

(178,501

)

Deposits and commitments to fund deposits relating to

CRT arrangements

1,700,000

Change in firm commitment to purchase CRT securities

Fair value

(159,228

)

Expected face amount

(1,502,203

)

(1,661,431

)

Loans secured by investment properties, net of associated

asset-backed financing

23,485

71,071

—

23,485

71,071

(139,932

)

Interest rate sensitive assets:

Mortgage-backed securities (net of sales)

2,638,267

932,270

352,307

Excess servicing spread received pursuant to a

recapture agreement

—

557

2,093

Mortgage servicing rights received in loan sales

670,343

1,484,629

1,158,475

3,308,610

2,417,456

1,512,875

3,332,095

2,488,527

1,372,943

Our acquisitions during the three years ended December 31, 2022 were financed through the use of a combination of proceeds

from borrowings and liquidations of existing investments. We continue to identify additional means of increasing our investment

portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash

outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise

additional equity capital.

Investment Portfolio Composition

Mortgage-Backed Securities

Following is a summary of our MBS holdings:

December 31, 2022

December 31, 2021

Average

Fair

Life

Fair

Life

value

Principal

(in years)

Coupon

value

Principal

(in years)

Coupon

(dollars in thousands)

Agency pass-through securities

4,262,502

4,693,045

10.1

3.5

2,666,768

2,649,238

8.6

2.2

Subordinate credit-linked securities

177,898

184,620

4.6

11.2

—

Senior non-Agency securities

22,201

28,103

14.3

2.5

—

4,462,601

4,905,768

2,666,768

2,649,238

Credit Risk Transfer Transactions

Following is a summary of the composition of the loans underlying our investment in funded CRT arrangements.

CRT Transactions

Following is a summary of the composition of our holdings of CRT arrangements.

December 31, 2022

December 31, 2021

(in thousands)

Carrying value of CRT arrangements:

Derivative and credit risk transfer strip assets (liabilities), net

CRT strips

(137,193

)

(26,837

)

CRT derivatives

(22,098

)

18,964

(159,291

)

(7,873

)

Deposits securing CRT arrangements

1,325,294

1,704,911

Interest-only security payable at fair value

(21,925

)

(10,593

)

1,144,078

1,686,445

UPB of loans subject to credit guarantee obligations (1)

25,315,524

30,808,907

(1) UPB for December 31, 2022 includes modified loans that have incurred losses; such loans are excluded from UPB for

December 31, 2021.

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of

December 31, 2022:

Year of origination

2020

2019

2018

2017

2016

2015

Total

(in millions)

UPB (1):

Outstanding

5,085

11,776

3,087

2,588

2,113

667

25,316

Liquidations:

Balances

—

2.8

54.2

155.1

114.0

56.6

382.7

Losses

—

0.2

5.3

18.9

11.8

6.7

42.9

Modifications:

Balances

64.4

532.0

286.2

—

882.6

Losses

0.6

6.9

5.7

—

13.2

(1) Includes modified loans that have incurred losses through December 31, 2022.

Year of origination

Original debt-to income

ratio

2020

2019

2018

2017

2016

2015

Total

(in millions)

<25%

1,049

1,770

286

328

316

3,821

25 - 30%

817

1,490

253

299

286

3,218

30 - 35%

896

1,805

359

399

364

100

3,923

35 - 40%

877

2,103

498

471

403

120

4,472

40 - 45%

875

2,541

733

656

553

181

5,539

>45%

571

2,067

958

435

191

121

4,343

5,085

11,776

3,087

2,588

2,113

667

25,316

Weighted average

33.4

35.8

38.9

36.4

35.0

31.4

35.6

Year of origination

Origination FICO credit

score

2020

2019

2018

2017

2016

2015

Total

(in millions)

600 - 649

169

337

650 - 699

254

1,112

649

394

257

133

2,799

700 - 749

1,204

3,454

1,091

880

671

203

7,503

750 or greater

3,584

7,009

1,266

1,280

1,166

320

14,625

Not available

—

5,085

11,776

3,087

2,588

2,113

667

25,316

Weighted average

763

752

734

744

751

742

751

Year of origination

Origination loan-to value

ratio

2020

2019

2018

2017

2016

2015

Total

(in millions)

<80%

2,388

4,163

988

838

857

267

9,501

80-85%

854

2,254

736

737

570

177

5,328

85-90%

333

663

140

134

115

1,423

90-95%

462

1,249

354

317

236

2,690

95-100%

1,048

3,447

869

562

335

113

6,374

5,085

11,776

3,087

2,588

2,113

667

25,316

Weighted average

80.7

83.3

83.5

82.5

80.6

81.0

82.4

Year of origination

Current loan-to value ratio

(1)

2020

2019

2018

2017

2016

2015

Total

(in millions)

<80%

5,046

11,677

3,064

2,584

2,113

667

25,151

80-85%

—

119

85-90%

—

90-95%

—

95-100%

—

>100%

—

5,085

11,776

3,087

2,588

2,113

667

25,316

Weighted average

56.1

55.9

53.0

48.0

43.9

41.3

53.4

(1) Based on current UPB compared to estimated fair value of the property securing the loan.

Year of origination

Geographic distribution

2020

2019

2018

2017

2016

2015

Total

(in millions)

519

1,134

373

269

399

121

2,815

564

1,150

398

274

229

2,675

615

1,027

247

223

268

103

2,483

268

525

113

123

148

1,240

197

491

139

147

138

1,149

Other

2,922

7,449

1,817

1,552

931

283

14,954

5,085

11,776

3,087

2,588

2,113

667

25,316

Year of origination

Regional geographic

distribution (1)

2020

2019

2018

2017

2016

2015

Total

(in millions)

Northeast

469

1,439

363

372

267

3,008

Southeast

1,734

4,074

1,111

895

668

207

8,689

Midwest

472

1,237

263

248

191

2,459

Southwest

1,337

2,615

589

508

401

140

5,590

West

1,073

2,411

761

565

586

174

5,570

5,085

11,776

3,087

2,588

2,113

667

25,316

(1) Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT, VI; Southeast consists of AL, DC, FL, GA, KY, MD,

MS, NC, SC, TN, VA, WV; Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Southwest consists of AZ, AR,

CO, KS, LA, MO, NM, OK, TX, UT; and West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

Year of origination

Collection status

2020

2019

2018

2017

2016

2015

Total

(in millions)

Delinquency

Current - 89 Days

5,063

11,662

3,022

2,572

2,102

663

25,084

90 - 179 Days

113

180+ Days

—

Foreclosure

—

5,085

11,776

3,087

2,588

2,113

667

25,316

Bankruptcy

Cash Flows

Our cash flows for the years ended December 31, 2022, 2021, and 2020 are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Operating activities

1,784,471

(2,819,714

)

671,656

Investing activities

(1,867,474

)

1,093,013

(15,367

)

Financing activities

135,886

1,727,980

(702,641

)

Net cash flows

52,883

1,279

(46,352

)

Our cash flows resulted in a net increase in cash of $52.9 million during 2022, as discussed below.

Operating activities

Net cash provided by operating activities totaled $1.8 billion during 2022, as compared to net cash used in operating activities of

$2.8 billion during 2021 and net cash provided by operating activities of $671.7 million during 2020. Cash flows from operating

activities are most influenced by cash flows from loans acquired for sale as shown below:

Year ended December 31,

2022

2021

2020

(in thousands)

Operating cash flows from:

Loans acquired for sale

1,417,213

(2,704,816

)

(165,398

)

Other

367,258

(114,898

)

837,054

1,784,471

(2,819,714

)

671,656

Cash flows from loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to end

of the years presented as well as cash flows relating to associated hedging activities. Our inventory of loans acquired for sale

decreased during the year ended December 31, 2022, as compared to 2021, resulting in the cash inflow relating to loans acquired for

sale. The negative cash flows relating to loans acquired for sale during the years ended December 31, 2021 and 2020, respectively,

reflect the increase in our loans acquired for sale inventory and the significant cash hedging costs that reduced cash inflows from loan

sales by more than the decrease in our inventory of loans held for sale.

Investing activities

Net cash used in our investing activities was $1.9 billion during 2022, as compared to net cash provided by investing activities

of $1.1 billion during 2021 and net cash used in investing activities of $15.4 million during 2020. During 2022, net cash was used in

investing activities primarily due to purchases of our investments in MBS in excess of sales and repayments of such assets partially

offset by repayments from our investments in CRT arrangements.

Net cash provided by our investing activities was $1.1 billion during 2021 as compared to net cash used in investing activities

of $15.4 million during 2020 due primarily to the $1.3 billion of distributions from CRT arrangements that were not replaced by new

investments in CRT arrangements.

Financing activities

Net cash provided by our financing activities was $135.9 million during 2022, as compared to net cash provided by financing

activities of $1.7 billion and net cash used in financing activities of $702.6 million during 2021 and 2020, respectively. The change

during 2022 reflects the relative stability in the level of our investments during the year, as compared to the growth experienced during

2021. The change during 2021 reflects the increased borrowings to finance our investment activities.

As discussed below in Liquidity and Capital Resources, our Manager continually evaluates and pursues additional sources of

financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the

payment of dividends. We believe that the cash flows from our investments are adequate to fund our operating expenses and dividend

payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as

well as using such cash to fund our dividend requirements.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our

operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make

investments as our Manager identifies them, pursue our share repurchase program when determined to be advantageous and make

distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain

adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability

to retain earnings and thereby replenish or increase capital to support our activities.

We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our

investments, cash flows from business activities, liquidation of existing investments and proceeds from borrowings and/or additional

equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the

cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash

representing such difference.

Our current debt financing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and

available. We make collateralized borrowings in the form of sales of assets under agreements to repurchase, loan participation

purchase and sale agreements and notes payable, including secured term financing for our MSRs and our CRT arrangements, which

has allowed us to more closely match the terms of our borrowings to the expected lives of the assets securing those borrowings. Our

leverage ratio, defined as all borrowings divided by shareholders’ equity at the date presented, was 5.81 and 4.72 at

December 31, 2022 and December 31, 2021, respectively.

On June 28, 2022, the Company, through its indirect subsidiary, PMT ISSUER TRUST—FMSR, issued an aggregate principal

amount of $305 million in secured term notes (the “2022-FT1 Notes”) to qualified institutional buyers under Rule 144A of the

Securities Act. The 2022-FT1 Notes bear interest at a rate equal to United States 30 Day Average Secured Overnight Financing Rate,

or SOFR, plus 4.19% per annum and will mature on June 25, 2027 or, if extended pursuant to the terms of the 2022-FT1 Notes

Indenture Supplement, either June 25, 2028 or June 25, 2029. The 2022-FT1 Notes rank pari passu with the 2018-FT1 Notes, the

2021-FT2 Notes, and the Series 2017-MSRVF1 Notes issued by PMT ISSUER TRUST—FMSR.

Sales of Assets Under Agreements to Repurchase

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date.

Following is a summary of the activities in our repurchase agreements financing:

Year ended December 31,

Assets sold under agreements to repurchase

2022

2021

2020

(in thousands)

Average balance outstanding

5,625,345

6,161,755

5,508,147

Maximum daily balance outstanding

8,834,936

8,882,538

10,433,609

Ending balance

6,616,528

6,671,890

6,309,418

The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and

sales in our correspondent production business. The total facility size of our assets sold under agreements to repurchase was

approximately $11.6 billion at December 31, 2022.

Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to either renew these

facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient

time to replace any necessary financing.

As discussed above, all of our repurchase agreements, and mortgage loan participation purchase and sale agreements have short-

term maturities:

• The transactions relating to loans and REO under agreements to repurchase generally provide for terms of approximately

one to two years;

• The transactions relating to loans under mortgage loan participation purchase and sale agreements provide for terms of

approximately one year; and

• The transactions relating to assets under notes payable provide for terms ranging from two to five years.

Debt Covenants

Our debt financing agreements require us and certain of our subsidiaries to comply with various financial covenants. As of the

filing of this Report, these financial covenants include the following:

• a minimum of $75 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a

minimum of $75 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated

subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PMC and PennyMac Holdings,

LLC (“PMH”); a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of

$10 million in unrestricted cash and cash equivalents at PMH;

• a minimum tangible net worth for the Company of $1.25 billion; a minimum tangible net worth for our Operating

Partnership of $1.25 billion; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth

for PMC of $300 million;

• a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and PMH and 7:1 for the Company and

our Operating Partnership; and

• at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our

existing debt financing agreements.

Although these financial covenants limit the amount of indebtedness we may incur and impact our liquidity through minimum

cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our

business and obtain the financing necessary to achieve that purpose.

PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our servicer

under certain of our debt financing agreements. The most significant of these financial covenants currently include the following:

• a minimum in unrestricted cash and cash equivalents of $100 million;

• a minimum tangible net worth of $1.25 billion;

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

• at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed

under certain of our existing secured financing agreements.

Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires us to

maintain positive net income for at least one (1) of the previous two consecutive quarters, or other similar measures. For the most

recent fiscal quarter, the Company is compliant with all such conditions. However, we may be required to obtain waivers from certain

lenders in the future if this condition precedent is not met.

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, although in some instances we may agree with the lender upon certain thresholds (in dollar amounts or

percentages based on the market value of the assets) that must be exceeded before a margin deficit will arise. Upon notice from the

applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day

thereafter, depending on the timing of the notice.

Regulatory Capital and Liquidity Requirements

In addition to the financial covenants imposed upon us and PLS under our debt financing agreements, we and/or PLS, as

applicable, are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for

Agency sellers/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net

worth requirements for approved non-depository single-family sellers/servicers in the case of FHFA, and for approved single-family

issuers in the case of Ginnie Mae, as summarized below:

• A minimum net worth of a base of $2.5 million plus 25 basis points of UPB for total 1-4 unit residential loans serviced;

• A tangible net worth/total assets ratio greater than or equal to 6%;

• A liquidity requirement equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis

points of the amount by which total nonperforming Agency servicing UPB (reduced by 70% of the UPB of nonperforming

Agency loans that are in COVID-19 pandemic-related payment forbearance and were current when they entered such

forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy the liquidity requirement,

include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for

trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury

obligations, and unused and available portions of committed servicing advance lines;

• In the case of PLS, liquidity equal to the greater of $1.0 million or 0.10% (10 basis points) of its outstanding Ginnie Mae

single-family securities, which must be met with cash and cash equivalents; and

• In the case of PLS, net worth equal to $2.5 million plus 0.35% (35 basis points) of its outstanding Ginnie Mae single-

family obligations.

We believe that we and PLS are currently in compliance with the applicable Agency requirements. In August 2022, the

Agencies issued revised capital and liquidity requirements. The requirements will be effective at various dates beginning September

30, 2023, for issuers of securities guaranteed by seller/servicers of mortgage loans to Fannie Mae and Freddie Mac and issuers of

Ginnie Mae securities. We believe that we and PLS were in compliance with the applicable Agencies’ revised requirements as of

December 31, 2022.

Our Manager continues to explore a variety of additional means of financing our business, including debt financing through

bank warehouse lines of credit, repurchase agreements, term financing, securitization transactions and additional equity offerings.

However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing

will take or that such efforts will be successful.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements

As of December 31, 2022, we have not entered into any off-balance sheet arrangements.

All debt financing arrangements that matured between December 31, 2022 and the date of this Report have been renewed,

extended or replaced.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the

counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as

of December 31, 2022:

Counterparty

Amount at risk

(in thousands)

Bank of America, N.A.

110,367

Goldman Sachs & Co. LLC

101,768

Citibank, N.A.

95,553

Barclays Capital Inc.

71,837

JPMorgan Chase & Co.

59,677

Wells Fargo Securities, LLC

18,527

Credit Suisse First Boston Mortgage Capital LLC

15,093

Morgan Stanley & Co. LLC

11,452

RBC Capital Markets, L.P.

8,996

Daiwa Capital Markets America Inc.

9,904

Amherst Pierpont Securities LLC

6,744

BNP Paribas Corporate & Institutional Banking

6,480

Nomura Holdings America, Inc

1,707

518,105

Management Agreement. We are externally managed and advised by our Manager pursuant to a management agreement, which

requires our Manager to oversee our business affairs in conformity with the investment policies that are approved and monitored by

our board of trustees. Our Manager is responsible for our day-to-day management and will perform such services and activities related

to our assets and operations as may be appropriate.

Pursuant to our management agreement, our Manager collects a base management fee and may collect a performance incentive

fee, both payable quarterly and in arrears. The management agreement, as amended, expires on June 30, 2025 subject to automatic

renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the servicing agreement.

The base management fee is calculated at a defined annualized percentage of “shareholders’ equity.” Our “shareholders’ equity”

is defined as the sum of the net proceeds from any issuances of our equity securities since our inception (weighted for the time

outstanding during the measurement period); plus our retained earnings at the end of the quarter; less any amount that we pay for

repurchases of our common shares (weighted for the time held during the measurement period); and excluding one-time events

pursuant to changes in GAAP and certain other non-cash charges after discussions between our Manager and our independent trustees

and approval by a majority of our independent trustees.

Pursuant to the terms of our management agreement, the base management fee is equal to the sum of (i) 1.5% per year of

average shareholders’ equity up to $2 billion, (ii) 1.375% per year of average shareholders’ equity in excess of $2 billion and up to $5

billion, and (iii) 1.25% per year of average shareholders’ equity in excess of $5 billion.

The performance incentive fee is calculated at a defined annualized percentage of the amount by which “net income,” on a

rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of annualized return on our “equity.” For the

purpose of determining the amount of the performance incentive fee, “net income” is defined as net income attributable to common

shares or loss computed in accordance with GAAP and adjusted to exclude one-time events pursuant to changes in GAAP and certain

other non-cash charges determined after discussions between PCM and our independent trustees and approval by a majority of our

independent trustees. For this purpose, “equity” is the weighted average of the issue price per common share of all of our public

offerings of common shares, multiplied by the weighted average number of common shares outstanding (including restricted share

units issued under our equity incentive plans) in the four-quarter period.

The performance incentive fee is calculated quarterly and is equal to: (a) 10% of the amount by which net income attributable to

common shares of beneficial interest for the quarter exceeds (i) an 8% return on equity plus the high watermark, up to (ii) a 12%

return on equity; plus (b) 15% of the amount by which net income for the quarter exceeds (i) a 12% return on equity plus the high

watermark, up to (ii) a 16% return on equity; plus (c) 20% of the amount by which net income for the quarter exceeds a 16% return on

equity plus the high watermark.

The “high watermark” is the quarterly adjustment that reflects the amount by which the net income (stated as a percentage of

return on equity) in that quarter exceeds or falls short of the lesser of 8% and the Fannie Mae MBS yield (the target yield) for such

quarter. The “high watermark” starts at zero and is adjusted quarterly. If the net income is lower than the target yield, the high

watermark is increased by the difference. If the net income is higher than the target yield, the high watermark is reduced by the

difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts

required for PCM to earn a performance incentive fee are adjusted cumulatively based on the performance of our net income over (or

under) the target yield, until the net income in excess of the target yield exceeds the then-current cumulative high watermark amount,

and a performance incentive fee is earned.

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including

third-party expenses, incurred on our behalf, it being understood that PCM and its affiliates shall allocate a portion of their personnel’s

time to provide certain legal, tax and investor relations services for our direct benefit. With respect to the allocation of PCM’s and its

affiliates’ personnel, PCM was reimbursed $120,000 per fiscal quarter through June 30, 2020 and is reimbursed $165,000 per fiscal

quarter from and after July 1, 2020, such amount to be reviewed annually and to not preclude reimbursement for any other services

performed by PCM or its affiliates.

We are required to pay PCM and its affiliates a pro rata portion of rent, telephone, utilities, office furniture, equipment,

machinery and other office, internal and overhead expenses of PCM and its affiliates required for our and our subsidiaries’ operations.

These expenses will be allocated based on the ratio of our and our subsidiaries’ proportion of gross assets compared to all remaining

gross assets managed or owned by PCM and/or its affiliates as calculated at each fiscal quarter end.

PCM may also be entitled to a termination fee under certain circumstances. Specifically, the termination fee is payable for

(1) our termination of our management agreement without cause, (2) PCM’s termination of our management agreement upon a default

by us in the performance of any material term of the agreement that has continued uncured for a period of 30 days after receipt of

written notice thereof or (3) PCM’s termination of the agreement after the termination by us without cause (excluding a non-renewal)

of our MBS agreement, our MSR recapture agreement or our servicing agreement (each as described and/or defined below). The

termination fee is equal to three times the sum of (a) the average annual base management fee and (b) the average annual (or, if the

period is less than 24 months, annualized) performance incentive fee earned by our Manager during the 24-month period immediately

preceding the date of termination.

We may terminate the management agreement without the payment of any termination fee under certain circumstances,

including, among other circumstances, uncured material breaches by our Manager of the management agreement, upon a change in

control of our Manager (defined to include a 50% change in the shareholding of our Manager in a single transaction or related series

of transactions).

Our management agreement also provides that, prior to the undertaking by PCM or its affiliates of any new investment

opportunity or any other business opportunity requiring a source of capital with respect to which PCM or its affiliates will earn a

management, advisory, consulting or similar fee, PCM shall present to us such new opportunity and the material terms on which PCM

proposes to provide services to us before pursuing such opportunity with third parties.

Servicing Agreement. We have entered into a loan servicing agreement with PLS, pursuant to which PLS provides servicing for

our portfolio of residential loans and subservicing for our portfolio of MSRs. Such servicing and subservicing provided by PLS

include collecting principal, interest and escrow account payments, if any, with respect to loans, as well as managing loss mitigation,

which may include, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. PLS also

engages in certain loan origination activities that include refinancing loans and financings that facilitate sales of real estate owned

properties, or REOs.

The base servicing fee rates for non-distressed loans subserviced by PLS on our behalf are also calculated through a monthly

per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan.

The base servicing fee rates for loans subserviced on our behalf are $7.50 per month for fixed-rate loans and $8.50 per month for

adjustable-rate loans. To the extent that these loans become delinquent, PLS is entitled to an additional servicing fee per loan falling

within a range of $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month

if the underlying mortgaged property becomes REO. PLS is also entitled to customary ancillary income and certain market-based fees

and charges, including boarding and deboarding fees, liquidation and disposition fees, and assumption, modification and origination

fees, as well as certain fees for COVID-19 related forbearance and modification activities provided for under the CARES Act.

The base servicing fee rates for distressed whole loans are charged based on a monthly per-loan dollar amount, with the actual

dollar amount for each loan based on the delinquency, bankruptcy and/or foreclosure status of such loan or whether the underlying

mortgage property has become REO. The base servicing fee rates for distressed whole loans range from $30 per month for current

loans up to $95 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per

month. To the extent that we rent our REO under our REO rental program, we pay PLS an REO rental fee of $30 per month per REO,

an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to PLS’ cost if

property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of

gross rental income if PLS provides property management services directly. PLS is also entitled to retain any tenant paid application

fees and late rent fees and seek reimbursement for certain third-party vendor fees.

PLS is also entitled to certain activity-based fees for distressed whole loans that are charged based on the achievement of certain

events. These fees range from $750 for a streamline modification to $1,750 for a full modification or liquidation and $500 for a deed-

in-lieu of foreclosure. PLS is not entitled to earn more than one liquidation fee, re-performance fee or modification fee per loan in any

18-month period.

In addition, because we have limited employees and infrastructure, PLS is required to provide a range of services and activities

significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services,

PLS receives a supplemental servicing fee of $25 per month for each distressed whole loan. PLS is entitled to reimbursement for all

customary, good faith reasonable and necessary out-of-pocket expenses incurred by PLS in the performance of its servicing

obligations.

Except as otherwise provided in our MSR recapture agreement, when PLS effects a refinancing of a loan on our behalf and not

through a third-party lender and the resulting loan is readily saleable, or PLS originates a loan to facilitate the disposition of the real

estate acquired by us in settlement of a loan, PLS is entitled to receive from us market-based fees and compensation consistent with

pricing and terms PLS offers unaffiliated third parties on a retail basis.

Mortgage Banking Services Agreement. Pursuant to a mortgage banking services agreement (the “MBS agreement”), PLS

provides us with certain mortgage banking services, including fulfillment and disposition-related services, with respect to loans

acquired by us from correspondent sellers.

Pursuant to the MBS agreement, PLS has agreed to provide such services exclusively for our benefit, and PLS and its affiliates

are prohibited from providing such services for any other third party. However, such exclusivity and prohibition shall not apply, and

certain other duties instead will be imposed upon PLS, if we are unable to purchase or finance loans as contemplated under our MBS

agreement for any reason.

In consideration for the mortgage banking services provided by PLS with respect to our acquisition of loans, through

June 30, 2020, PLS was entitled to a monthly fulfillment fee that shall equal (a) no greater than the product of (i) 0.35% and (ii) the

aggregate initial unpaid principal balance (the “Initial UPB”) of all loans purchased in such month, plus (b) in the case of all loans

other than loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the

aggregate Initial UPB of all such loans sold and securitized in such month; provided however, that no fulfillment fee shall be due or

payable to PLS with respect to any Ginnie Mae loans. We do not hold the Ginnie Mae approval required to issue Ginnie Mae MBS

and act as a servicer. Accordingly, under the MBS agreement, PLS purchased loans underwritten in accordance with the Ginnie Mae

Mortgage-Backed Securities Guide “as is” and without recourse of any kind from us at our cost less an administrative fee plus accrued

interest and, through June 30, 2020, a sourcing fee ranging from two to three and one-half basis points, generally based on the average

number of calendar days that loans are held by us prior to purchase by PLS.

Effective July 1, 2020, the fulfillment fees and sourcing fees were revised as follows:

• Fulfillment fees shall not exceed the following:

(i) the number of loan commitments multiplied by a pull-through factor of either .99 or .80 depending on whether the

loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”,

respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including

16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

(ii) $315 multiplied by the number of purchased loans up to and including 16,500 per quarter and $195 multiplied by

the number of purchased loans in excess of 16,500 per quarter, plus

(iii) $750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae

and Freddie Mac; provided, however, that no fulfillment fee shall be due or payable to PLS with respect to any

Ginnie Mae loans, and as of October 1, 2022, designated Fannie Mae or Freddie Mac loans acquired by PLS.

• Sourcing fees charged to PLS range from one to two basis points, generally based on the average number of calendar

days the loans are held by us before purchase by PLS.

PLS may also purchase conventional loans from us at our mutual consent subject to the same sourcing fees and other terms as

their purchases of Ginnie Mae loans.

Notwithstanding any provision of the MBS agreement to the contrary, if it becomes reasonably necessary or advisable for PLS

to engage in additional services in connection with post-breach or post-default resolution activities for the purposes of a correspondent

agreement, then we have generally agreed with PLS to negotiate in good faith for additional compensation and reimbursement of

expenses to be paid to PLS for the performance of such additional services.

MSR Recapture Agreement. Through June 30, 2020, pursuant to the terms of the MSR recapture agreement entered into by PMC

with PLS, if PLS refinanced through its consumer direct lending business loans for which we previously held the MSRs, PLS was

generally required to transfer and convey to PMC, cash in an amount equal to 30% of the fair market value of the MSRs related to all

such loans so originated.

Effective July 1, 2020, the 2020 MSR recapture agreement changes the recapture fee payable by PLS to a tiered amount equal to:

• 40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”;

• 35% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 15%

and up to 30%; and

• 30% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 30%.

The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to

(ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or

otherwise paid off in such month. The Company has further agreed to allocate sufficient resources to target a recapture rate of 15%.

The MSR recapture agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to

automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

Spread Acquisition and MSR Servicing Agreement. On December 19, 2016, we amended and restated a master spread

acquisition and MSR servicing agreement with PLS (the “12/19/16 Spread Acquisition Agreement”). Pursuant to the 12/19/16 Spread

Acquisition Agreement, we may acquire from PLS, from time to time, the right to receive participation certificates representing

beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by PLS, in which case PLS generally would be required to

service or subservice the related loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the

continued financing of the ESS owned by us in connection with the parties’ participation in the GNMA MSR Facility (as defined

below).

To the extent PLS refinances any of the loans relating to the ESS we have acquired, the 12/19/16 Spread Acquisition Agreement

also contains recapture provisions requiring that PLS transfer to us, at no cost, the ESS relating to a certain percentage of the unpaid

principal balance of the newly originated loans. However, under the 12/19/16 Spread Acquisition Agreement, in any month where the

transferred ESS relating to newly originated Ginnie Mae loans is not equivalent to at least 90% of the product of the excess servicing

fee rate and the unpaid principal balance of the refinanced loans, PLS is also required to transfer additional ESS or cash in the amount

of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae loans is not equivalent to at least

90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified loans, the 12/19/16 Spread

Acquisition Agreement contains provisions that require PLS to transfer additional ESS or cash in the amount of such shortfall. To the

extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its

option, wire cash to us in an amount equal to such fair market value in lieu of transferring such ESS. The remaining balance of the

ESS was repaid during the quarter ended March 31, 2021.

Master Repurchase Agreement with PLS. On December 19, 2016, we, through PMH, entered into a master repurchase

agreement with PLS (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from PLS for the purpose of financing

PMH’s participation certificates representing beneficial ownership in ESS acquired from PLS under the 12/19/16 Spread Acquisition

Agreement. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a

master repurchase agreement by and among PLS, the Issuer Trust and Private National Mortgage Acceptance Company, LLC, as

guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS

relating to such MSRs (the “GNMA MSR Facility”).

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing

beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued

to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as

the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may,

from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term

Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum

principal balance of the VFN is $1,000,000,000.

The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is based upon a

percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation certificates, PMH is required to

repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the

weighted average note rate of the VFN and any outstanding Term Notes) to the date of such repurchase. PLS is then required to repay

the Issuer Trust the corresponding amount under the PC Repurchase Agreement.

As a condition to our entry into the 12/19/16 Spread Acquisition Agreement and our participation in the GNMA MSR Facility,

we were also required to enter into a subordination, acknowledgement and pledge agreement (the “Subordination Agreement”). Under

the terms of the Subordination Agreement, we pledged to the Issuer Trust our rights under the 12/19/16 Spread Acquisition Agreement

and our interest in any ESS purchased thereunder.

The Subordination Agreement contains representations, warranties and covenants by us that are substantially similar to those

contained in our other financing arrangements. To the extent there exists an event of default under the PC Repurchase Agreement or a

“trigger event” (as defined in the Subordination Agreement), the Issuer Trust would be entitled to liquidate any and all of the collateral

securing the PC Repurchase Agreement, including the ESS subject to the PMH Repurchase Agreement. PMH repaid all borrowings

under this agreement in connection with PLS repurchasing the remaining balance of the ESS during the quarter ended March 31, 2021.

Loan Purchase Agreement. We have entered into a loan purchase agreement with our Servicer. Currently, we use the loan

purchase agreement for the purpose of acquiring prime jumbo and Agency-eligible residential loans originated by our Servicer. The

loan purchase agreement contains customary terms and provisions, including representations and warranties, covenants, repurchase

remedies and indemnities. The purchase prices we pay our Servicer for such loans are market-based.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices,

equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are real estate risk,

credit risk, interest rate risk, prepayment risk, inflation risk and market value risk. Our primary trading asset is our inventory of loans

acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable

recently-originated loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of

MSRs, ESS, CRT arrangements and MBS. We believe that the fair values of MSRs, ESS and MBS also respond primarily to changes

in the market interest rates for comparable loans or yields on MBS. Changes in interest rates are reflected in the prepayment speeds

underlying these investments and in the pricing spread (an element of the discount rate) used in their valuation. We believe that the

primary market risks to the fair values of our investment in CRT arrangements are changes in market credit spreads and the fair value

of the real estate securing the loans underlying such arrangements.

Real Estate Risk

Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not

limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other

factors); local real estate conditions (such as an oversupply of housing); construction quality, age and design; demographic factors;

and retroactive changes to building or similar codes. Decreases in property values reduce the value of the collateral and the potential

proceeds available to a borrower to repay loans, which could cause us to suffer losses.

Credit Risk

We are subject to credit risk in connection with our investments. A significant portion of our assets is comprised of or dependent

upon the performance of residential loans. The credit risk related to these investments pertains to the ability and willingness of the

borrowers to pay, which is assessed before credit is granted. We believe that residual loan credit quality is primarily determined by the

borrowers’ credit profiles and loan characteristics. We have entered into CRT arrangements which involve the absorption on our part

of losses relating to certain loans we sell that subsequently default. The fair value of the assets we carry related to these arrangements

are sensitive to credit market conditions generally, perceptions of the performance of the loans in our CRT arrangements’ reference

pools specifically and to the actual performance of such loans.

In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in

credit losses to us, which could materially and adversely affect our business, financial condition, liquidity, results of operations and

prospects. Furthermore, such defaults could have an adverse effect on the spread between our interest earning assets and interest

bearing liabilities.

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 the fair value

of interest income and net servicing income we earn from our mortgage-related investments. This effect is most pronounced with

fixed-rate investments, MSRs and ESS. Changes in interest rates significantly influence the prepayment speed of the loans underlying

our investment in MSRs and ESS which affects those assets’ estimated lives. In general, rising interest rates negatively affect the fair

value of our investments in MBS and loans, while decreasing market interest rates negatively affect the fair value of our MSRs and

ESS.

Our operating results will depend, in part, on differences between the income from our investments and our financing costs.

Presently much of 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 earnings 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, inventory of loans acquired for sale, MBS, ESS, loans and MSRs. 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 our mortgage-based investments differs from what we projected when we

purchased the loans and when we measured fair value as of the end of each reporting period, our gain or loss will be affected. As we

receive prepayments of principal on our MBS investments, any premiums paid for such investments will be amortized against interest

income using the interest method through the expected maturity dates of the investments. In general, an increase in prepayment rates

will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on such MBS investments and will

accelerate the fair value decline of MSRs and ESS thereby reducing net servicing income. Conversely, as we receive prepayments of

principal on our investments, any discounts realized on the purchase of such investments will be accrued into interest income using the

interest method through the expected maturity dates of the investments. In general, an increase in prepayment rates will accelerate the

accrual of purchase discounts, thereby increasing the interest income earned on such MBS investments.

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 so 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 we

may make to our shareholders will be determined by our board of trustees 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.

Risk Management Activities

We engage in risk management activities primarily in an effort to mitigate the effect of changes in interest rates on the fair value

of our assets. To manage this price risk and its impact on our profitability, book value, and available liquidity, we use derivative

financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable

changes in the fair value of our assets, primarily on our MSR investments as well as IRLCs and our inventory of loans held for sale.

Our objective is to maintain our loss coverage levels within established thresholds while minimizing our hedging expense. We do not

use derivative financial instruments other than IRLCs and repurchase agreement derivatives (both of which arise from our operations)

for purposes other than in support of our risk management activities.

Our strategies are reviewed daily within a disciplined risk management framework. We use a variety of interest rate and spread

shifts and scenarios and define target limits for market value and liquidity loss in those scenarios. With respect to our IRLCs and

inventory of loans held for sale, we use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or

resulting MBS, and further use MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. With respect to

our MSRs and other interest rate sensitive assets and liabilities, we seek to mitigate mortgage-based loss exposure utilizing MBS

forward purchase and sale contracts, address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and

use options and swaptions to achieve target coverage levels for larger interest rate shocks.

Fair Value Risk

Our loans, MBS, MSRs, ESS and CRT arrangements are reported at their fair values. The fair value of these assets fluctuates

primarily based on the exposure of the underlying investment. Performing prime loans (along with any related recognized IRLCs),

MBS, MSRs and ESS are more sensitive to changes in market interest rates, while CRT arrangements are more sensitive to changes in

the market credit spreads, underlying real estate values relating to the loans underlying our investments, and other factors such as the

effectiveness and servicing practices of the servicers associated with the properties securing such investment.

Generally, in an interest rate market where interest rates are rising or are expected to rise, the fair value of our loans and MBS

would be expected to decrease, whereas in an interest rate market where interest rates are generally decreasing or are expected to

decrease, loan and MBS values would be expected to increase. The fair value of MSRs and ESS, on the other hand, tends to respond

generally in an opposite manner to that of loans acquired for sale and MBS.

Generally, in a real estate market where values are rising or are expected to rise, the fair value of our investment in CRT

arrangements would be expected to appreciate, whereas in a real estate market where values are generally dropping or are expected to

drop, the fair values of CRT arrangements would be expected to decrease.

The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the

movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and

inputs used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including

operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates

should not be viewed as earnings forecasts.

The following tables summarize the fair value sensitivity of the respective assets to changes in the market inputs that we believe

most affect their fair values as of December 31, 2022.

Mortgage-backed securities at fair value

The following table summarizes the estimated change in fair value of our mortgage-backed securities given several hypothetical

(instantaneous) changes in interest rates and parallel shifts in the yield curve:

Interest rate shift in basis points

-200

-75

-50

200

(in thousands)

Change in fair value

394,796

176,799

120,005

(125,362

)

(188,929

)

(501,175

)

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs given several shifts in pricing spread, prepayment

speeds and annual per-loan cost of servicing:

Change in fair value attributable to shift in:

-20%

-10%

-5%

+5%

+10%

+20%

(in thousands)

Pricing spread

221,745

108,032

53,330

(52,004

)

(102,727

)

(200,497

)

Prepayment speed

221,309

107,046

52,668

(51,044

)

(100,544

)

(195,201

)

Annual per-loan cost of servicing

70,515

35,258

17,629

(17,629

)

(35,258

)

(70,515

)

CRT Arrangements

Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value

of our CRT arrangements given several shifts in pricing spread:

Pricing spread shift in basis points

-100

-50

-25

100

(in thousands)

Change in fair value

42,115

20,688

10,246

(10,114

)

(20,040

)

(39,400

)

Following is a summary of the effect on fair value of various instantaneous changes in home values from those used to estimate

the fair value of our CRT arrangements given several shifts:

Property value shift in %

-15%

-10%

-5%

10%

15%

(in thousands)

Change in fair value

(119,403

)

(70,147

)

(31,008

)

24,864

44,802

60,627

Item 8. Financial Statements and Supplementary Data

The information called for by this Item 8 is hereby incorporated by reference from our Financial Statements and Auditors’

Report beginning at page F-1 of this Report.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our

reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within

the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our

management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding

required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not

absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be

set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial

Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by

paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief

Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by

this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under

the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms,

and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,

as appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in

Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become

inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of its internal control over financial reporting based on the criteria set forth by the Committee

of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on

those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2022.

The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Deloitte &

Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2022, that

have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Trustees of

PennyMac Mortgage Investment Trust

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of PennyMac Mortgage Investment Trust and subsidiaries (the

“Company”) as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the

Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all

material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal

Control—Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)

(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated

February 24, 2023, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of

the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal

Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial

reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with

respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities

and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit

to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness

exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such

other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our

opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of

financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting

principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the

maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the

company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in

accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding

prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect

on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections

of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in

conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP

Los Angeles, California

February 24, 2023

Item 9B. Other Information

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement, or will be

contained in an amendment to this Report, in either case to be filed within 120 days after the end of fiscal year 2022.

Item 11. Executive Compensation

The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement, or will be

contained in an amendment to this Report, in either case to be filed by within 120 days after the end of fiscal year 2022.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

The PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan (the “2019 Plan”) was adopted and approved by the

Company’s shareholders in June 2019. The 2019 Plan provides for the issuance of equity based awards, including share options,

restricted shares, restricted share units, unrestricted common share awards and other awards based on our shares that may be awarded

by us to our officers and trustees, and the members, officers, trustees, directors and employees of PFSI and its subsidiaries or other

entities that provide services to us and the employees of such other entities. The 2019 Plan is administered by our compensation

committee, pursuant to authority delegated by our board of trustees, which has the authority to make awards to the eligible participants

referenced above, and to determine what form the awards will take, and the terms and conditions of the awards. The 2019 Plan allows

for grants of equity-based awards up to an aggregate of 8% of our issued and outstanding common shares on a diluted basis at the time

of the award. However, the total number of shares available for issuance under the 2019 Plan cannot exceed 40 million.

The following table provides information as of December 31, 2022 concerning our common shares authorized for issuance

under our 2019 Plan.

(a)

(b)

(c)

Plan category

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights

Weighted average

exercise price of

outstanding options,

warrants and rights

Number of securities

remaining available for

future issuance under

equity compensation

plans excluding

securities reflected

in column(a))

Equity compensation plans approved by security holders (1)

444,299

—

8,007,008

Equity compensation plans not approved by security holders (2)

—

Total

444,299

—

8,007,008

(1) Represents equity awards outstanding under the 2019 Plan.

(2) We do not have any equity plans that have not been approved by our shareholders.

The information otherwise required by this Item 12 is hereby incorporated by reference from our definitive proxy statement, or

will be contained in an amendment to this Report, in either case to be filed within 120 days after the end of fiscal year 2022.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement, or will be

contained in an amendment to this Report, in either case to be filed within 120 days after the end of fiscal year 2022.

Item 14. Principal Accounting Fees and Services

The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement, or will be

contained in an amendment to this Report, in either case to be filed within 120 days after the end of fiscal year 2022.

PART IV

Item 15. Exhibits and Financial Statement Schedules

Incorporated by Reference from the

Below-Listed Form (Each Filed

under SEC File Number 14-64423)

Exhibit No.

Exhibit Description

Form

Filing Date

3.1

Declaration of Trust of PennyMac Mortgage Investment Trust, as amended and

restated.

10-Q

November 6, 2009

3.2

Second Amended and Restated Bylaws of PennyMac Mortgage Investment

Trust.

8-K

March 16, 2018

3.3

Articles Supplementary classifying and designating the 8.125% Series A Fixed-

to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.

8-A

March 7, 2017

3.4

Articles Supplementary classifying and designating the 8.00% Series B Fixed-to-

Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest.

8-A

June 30, 2017

3.5

Articles Supplementary classifying and designating the 6.75% Series C

Cumulative Redeemable Preferred Shares of Beneficial Interest.

8-A

August 20, 2021

4.1

Description of Securities Registered Pursuant to Section 12 of the Securities

Exchange Act of 1934.

10-K

February 25, 2022

4.2

Specimen Common Share Certificate of PennyMac Mortgage Investment Trust.

10-Q

November 6, 2009

4.3

Specimen Certificate for 8.125% Series A Fixed-to-Floating Rate Cumulative

Redeemable Preferred Shares of Beneficial Interest.

8-A

March 7, 2017

4.4

Specimen Certificate for 8.00% Series B Fixed-to-Floating Rate Cumulative

Redeemable Preferred Shares of Beneficial Interest.

8-A

June 30, 2017

4.5

Specimen Certificate for 6.75% Series C Cumulative Redeemable Preferred

Shares of Beneficial Interest.

8-A

August 20, 2021

4.6

Indenture for Senior Debt Securities, dated as of April 30, 2013, among

PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New

York Mellon Trust Company, N.A.

8-K

April 30, 2013

4.7

Second Supplemental Indenture, dated as of November 7, 2019, among

PennyMac Corp., PennyMac Mortgage Investment Trust and The Bank of New

York Mellon Trust Company, N.A.

8-K

November 8, 2019

4.8

Third Supplemental Indenture, dated as of March 5, 2021, among PennyMac

Corp., PennyMac Mortgage Investment Trust and The Bank of New York

Mellon Trust Company, N.A.

8-K

March 5, 2021

4.9

Form of 5.50% Exchangeable Senior Notes due 2024 (included in Exhibit 4.6).

8-K

November 8, 2019

4.10

Form of 5.50% Exchangeable Senior Notes due 2026 (included in Exhibit 4.7).

8-K

March 5, 2021

10.1

Amended and Restated Limited Partnership Agreement of PennyMac Operating

Partnership, L.P.

10-Q

November 6, 2009

10.2

First Amendment to the Amended and Restated Limited Partnership Agreement

of PennyMac Operating Partnership, L.P., dated as of March 9, 2017.

8-K

March 9, 2017

10.3

Second Amendment to the Amended and Restated Limited Partnership

Agreement of PennyMac Operating Partnership, L.P., dated as of July 5, 2017.

8-K

July 6, 2017

10.4

Third Amendment to the Amended and Restated Limited Partnership Agreement

of PennyMac Operating Partnership, L.P., as amended, dated as of August 24,

2021.

8-K

August 24, 2021

10.5

Registration Rights Agreement, dated as of August 4, 2009, among PennyMac

Mortgage Investment Trust, Stanford L. Kurland, David A. Spector, BlackRock

Holdco 2, Inc., Highfields Capital Investments LLC and Private National

Mortgage Acceptance Company, LLC.

10-Q

November 6, 2009

10.6

Third Amended and Restated Management Agreement, dated as of June 30,

2020, by and among PennyMac Mortgage Investment Trust, PennyMac

Operating Partnership, L.P. and PNMAC Capital Management, LLC.

8-K

July 2, 2020

10.7

Fourth Amended and Restated Flow Servicing Agreement, dated as of June 30,

2020, between PennyMac Operating Partnership, L.P. and PennyMac Loan

Services, LLC.

10-Q

July 2, 2020

10.8

Amendment No. 1 to Fourth Amended and Restated Flow Servicing Agreement,

dated as of March 9, 2021, by and between PennyMac Loan Services, LLC and

PennyMac Operating Partnership, L.P.

10-Q

May 7, 2021

10.9

Amendment No. 2 to the Fourth Amended and Restated Flow Servicing

Agreement, dated as of June 4, 2021, by and between PennyMac Loan Services,

LLC and PennyMac Operating Partnership, L.P.

10-Q

August 6, 2021

10.10

Amendment No. 3 to Fourth Amended and Restated Flow Servicing Agreement,

dated as of September 29, 2021, by and between PennyMac Loan Services, LLC

and PennyMac Operating Partnership, L.P.

10-Q

November 5, 2021

10.11

Flow Servicing Agreement, dated as of June 1, 2022, by and between PennyMac

Loan Services, LLC and PennyMac Corp.

10-Q

August 5, 2022

10.12

Second Amended and Restated Mortgage Banking Services Agreement, dated as

of June 30, 2020, between PennyMac Loan Services, LLC and PennyMac Corp.

8-K

July 2, 2020

10.13

Amendment No. 1 to Second Amended and Restated Mortgage Banking Services

Agreement, dated as of December 8, 2020, between PennyMac Loan Services,

LLC and PennyMac Corp.

10-K

February 26, 2021

10.14

Amendment No. 2 to Second Amended and Restated Mortgage Banking Services

Agreement, dated as of September 28, 2022, by and between PennyMac Loan

Services, LLC and PennyMac Corp., and effective as of October 1, 2022.

10-Q

November 3, 2022

10.15

Amendment No. 3 to Second Amended and Restated Mortgage Banking Services

Agreement, dated as of December 6, 2022, by and between PennyMac Loan

Services, LLC and PennyMac Corp., and effective as of November 1, 2022.

10.16

Second Amended and Restated MSR Recapture Agreement, dated as of June 30,

2020, between PennyMac Loan Services, LLC and PennyMac Corp.

8-K

July 2, 2020

10.17

Amendment No. 1 to Second Amended and Restated MSR Recapture

Agreement, dated as of December 8, 2020, between PennyMac Loan Services,

LLC and PennyMac Corp.

10-K

February 26, 2021

10.18

Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and

between PennyMac Loan Services, LLC and PennyMac Corp.

10-K

February 29, 2016

10.19

Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac

Corp. and PennyMac Loan Services, LLC.

10-Q

August 10, 2015

10.20

HELOC Flow Purchase and Servicing Agreement, dated as of February 25,

2019, by and between PennyMac Loan Services, LLC and PennyMac Corp.

10-Q

May 5, 2019

10.21†

PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan.

10-Q

November 6, 2009

10.22†

First Amendment to the PennyMac Mortgage Investment Trust Equity Incentive

Plan.

10-Q

November 8, 2017

10.23†

Second Amendment to the PennyMac Mortgage Investment Trust Equity

Incentive Plan.

10-K

March 1, 2018

10.24†

PennyMac Mortgage Investment Trust 2019 Equity Incentive Plan.

DEF 14A

April 22, 2019

10.25†

Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage

Investment Trust 2009 Equity Incentive Plan (2019).

10-Q

February 26, 2019

10.26†

Form of Performance Share Unit Award Agreement under the PennyMac

Mortgage Investment Trust 2009 Equity Incentive Plan (2019).

10-Q

February 26, 2019

10.27†

Form of Restricted Share Unit Award Agreement for Non-Employee Trustee

under the PennyMac Mortgage Investment Trust 2009 Equity Incentive Plan

(2019).

10-Q

May 3, 2019

10.28†

Form of Performance Share Unit Award Agreement under the PennyMac

Mortgage Investment Trust 2019 Equity Incentive Plan (2020 MBOs).

10-Q

May 8, 2020

10. 29†

Form of Performance Share Unit Award Agreement under the PennyMac

Mortgage Investment Trust 2019 Equity Incentive Plan (Net Share Withholding)

(2020).

10-Q

May 8, 2020

10.30†

Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage

Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2020).

10-Q

May 8, 2020

10.31†

Form of Restricted Share Unit Award Agreement under the PennyMac Mortgage

Investment Trust 2019 Equity Incentive Plan (Non Employee Trustee) (2020).

10-Q

May 8, 2020

10.32†

Form of Restricted Stock Award Agreement under the PennyMac Mortgage

Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2021).

10-Q

May 7, 2021

10.33†

Form of Performance Stock Award Agreement under the PennyMac Mortgage

Investment Trust 2019 Equity Incentive Plan (Net Share Withholding) (2021).

10-Q

May 7, 2021

10.34†

Form of Restricted Stock Award Agreement under the PennyMac Mortgage

Investment Trust 2019 Equity Incentive Plan (Non Employee Trustee) (2021).

10-Q

May 7, 2021

10.35†

Form of Restricted Stock Award Agreement under the PennyMac Mortgage

Investment Trust 2019 Equity Incentive Plan (Non-Employee Trustee) (2022).

10-Q

May 6, 2022

10.36

Base Indenture, dated as of December 20, 2017, by and among PMT ISSUER

TRUST-FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston

Mortgage Capital LLC.

8-K

December 27, 2017

10.37

Amendment No. 1, dated as of April 25, 2018, to the Base Indenture dated as of

December 20, 2017, by and among PMT ISSUER TRUST - FMSR, Citibank,

N.A., PennyMac Corp., and Credit Suisse First Boston Mortgage Capital LLC

8-K

April 30, 2018

10.38

Amendment No. 2, dated as of July 31, 2020 to the Base Indenture dated as of

December 20, 2017, by and among PMT ISSUER TRUST - FMSR, Citibank,

N.A., PennyMac Corp., and Credit Suisse First Boston Mortgage Capital LLC.

10-Q

August 7, 2020

10.39

Amendment No. 3, dated as of October 20, 2020 to the Base Indenture dated as

of December 20, 2017, by and among PMT ISSUER TRUST – FMSR,

Citibank, N.A., PennyMac Corp., and Credit Suisse First Boston Mortgage

Capital LLC.

10-Q

November 6, 2020

10.40

Amendment No. 4, dated as of March 30, 2021, to the Base Indenture dated as of

December 20, 2017, by and among PMT ISSUER TRUST – FMSR, Citibank,

N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.

8-K

March 31, 2021

10.41

Amendment No. 5, dated as of June 28, 2022, to the Base Indenture dated as of

December 20, 2017, by and among PMT ISSUER TRUST – FMSR, Citibank,

N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.

8-K

July 5, 2022

10.42

Series 2017-VF1 Indenture Supplement, dated as of December 20, 2017, by and

among PMT ISSUER TRUST-FMSR, Citibank, N.A., PennyMac Corp. and

Credit Suisse First Boston Mortgage Capital LLC.

10-K

March 1, 2018

10.43

Amendment No. 1 to the Series 2017-VF1 Indenture Supplement, dated as of

June 29, 2018, by and among PMT ISSUER TRUST-FMSR, Citibank, N.A.,

PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.

8-K

July 6, 2018

10.44

Amendment No. 2 to the Series 2017-VF1 Indenture Supplement, dated as of

August 4, 2020, among PMT ISSUER TRUST - FMSR, Citibank, N.A.,

PennyMac Corp. and Credit Suisse First Boston Mortgage Capital LLC.

8-K

August 10, 2020

10.45^

Amendment No. 3 to Series 2017-VF1 Indenture Supplement, dated as of August

9, 2021, by and among PMT ISSUER TRUST – FSMR, Citibank, N.A.,

PennyMac Corp. and Credit Suisse First Boston Mortgage Capital, LLC.

10-Q

November 5, 2021

10.46

Amendment No. 4 to Series 2017-VF1 Indenture Supplement, dated as of

February 8, 2022, by and among PMT ISSUER TRUST – FSMR, Citibank,

N.A., PennyMac Corp. and Credit Suisse First Boston Mortgage Capital, LLC.

10-Q

May 6, 2022

10.47

Series 2018-FT1 Indenture Supplement, dated as of April 25, 2018 to Base

Indenture dated as of December 20, 2017, by and among PMT ISSUER TRUST

– FMSR, Citibank, N.A., PennyMac Corp., and Credit Suisse First Boston

Mortgage Capital LLC.

8-K

April 30, 2018

10.48

Series 2021-FT1 Indenture Supplement, dated as of March 30, 2021, to Base

Indenture dated as of December 20, 2017, by and among PMT ISSUER TRUST

– FMSR, Citibank, N.A., PennyMac Corp. and Credit Suisse First Boston

Mortgage Capital LLC.

8-K

March 31, 2021

10.49

Series 2022-FT1 Indenture Supplement to Base Indenture, dated as of June 28,

2022, by and among PMT ISSUER TRUST – FMSR, Citibank, N.A., PennyMac

Corp., and Credit Suisse First Boston Mortgage Capital LLC.

8-K

July 5, 2022

10.50

Master Repurchase Agreement, dated as of December 20, 2017, by and among

PennyMac Corp., PMT ISSUER TRUST-FMSR and PennyMac Mortgage

Investment Trust.

8-K

December 27, 2017

10.51

Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment

Trust in favor of PMT ISSUER TRUST – FMSR.

8-K

December 27, 2017

10.52

Master Repurchase Agreement, dated as of December 20, 2017, by and among

PennyMac Holdings, LLC, PennyMac Corp. and PennyMac Mortgage

Investment Trust.

8-K

December 27, 2017

10.53

Guaranty, dated as of December 20, 2017, by PennyMac Mortgage Investment

Trust in favor of PennyMac Corp.

8-K

December 27, 2017

10.54

Subordination, Acknowledgement and Pledge Agreement, dated as of December

20, 2017, between PMT ISSUER TRUST – FMSR and PennyMac Holdings,

LLC.

8-K

December 27, 2017

10.55

Amended and Restated Master Repurchase Agreement, dated as of June 29,

2018, by and among Credit Suisse First Boston Mortgage Capital LLC and

PennyMac Corp.

8-K

July 6, 2018

10.56

Joint Amendment No. 1 to the Series 2017-VF1 Repurchase Agreement and

Amendment No. 2 to the Pricing Side Letter, dated as of August 4, 2020, among

PennyMac Mortgage Investment Trust, PennyMac Corp., Credit Suisse First

Boston Mortgage Capital LLC, and Credit Suisse AG, Cayman Islands Branch

and Citibank, N.A.

8-K

August 10, 2020

10.57

Joint Amendment No. 2 to the Series 2017-VF1 Repurchase Agreement and

Amendment No. 5 to the Pricing Side Letter, dated as of August 9, 2021 by and

among Credit Suisse First Boston Mortgage Capital, LLC, Credit Suisse AG,

Cayman Islands Branch, Citibank, N.A., PennyMac Corp. and PennyMac

Mortgage Investment Trust.

8-K

November 5, 2021

10.58

Amendment No. 3 to the Series 2017-VF1 Repurchase Agreement, dated as of

January 3, 2022, by and among Credit Suisse First Boston Mortgage Capital,

LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N.A., PennyMac

Corp. and PennyMac Mortgage Investment Trust.

10-K

February 25, 2022

10.59

Joint Amendment No. 4 to the Series 2017-VF1 Repurchase Agreement and

Amendment No. 7 to the Pricing Side Letter, dated as of March 30, 2022 by and

among Credit Suisse First Boston Mortgage Capital, LLC, Credit Suisse AG,

Cayman Islands Branch, Citibank, N.A., PennyMac Corp. and PennyMac

Mortgage Investment Trust.

10-Q

May 6, 2022

10.60

Joint Amendment No. 5 to the Series 2017-VF1 Repurchase Agreement and

Amendment No. 9 to the Pricing Side Letter, dated as of June 30, 2022 by and

among Credit Suisse First Boston Mortgage Capital, LLC, Credit Suisse AG,

Cayman Islands Branch, Citibank, N.A., PennyMac Corp. and PennyMac

Mortgage Investment Trust.

10-Q

August 5, 2022

10.61

Joint Amendment No. 6 to the Series 2017-VF1 Repurchase Agreement and

Amendment No. 1 to the Pricing Side Letter, dated as of September 30, 2022 by

and among Credit Suisse First Boston Mortgage Capital, LLC, Credit Suisse AG,

Cayman Islands Branch, PennyMac Corp. and PennyMac Mortgage Investment

Trust.

10-Q

November 3, 2022

10.62

Amended and Restated Guaranty, dated as of June 29, 2018 by PennyMac

Mortgage Investment Trust in favor of Credit Suisse AG, Cayman Island Branch

and Citibank, N.A.

8-K

July 6, 2018

21.1

Subsidiaries of PennyMac Mortgage Investment Trust.

23.1

Consent of Deloitte & Touche LLP.

31.1

Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted

pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Daniel S. Perotti pursuant to Rule 13a-14(a), as adopted pursuant

to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**

Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of

2002.

32.2**

Certification of Daniel S. Perotti pursuant to Rule 13a-14(b) and 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of

2002.

101

Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline

XBRL: (i) the Consolidated Balance Sheets as of December 31, 2022 and

December 31, 2021 (ii) the Consolidated Statements of income for the years

ended December 31, 2022 and December 31, 2021, (iii) the Consolidated

Statements of Changes in Stockholders’ Equity for the years ended December

31, 2022 and December 31, 2021, (iv) the Consolidated Statements of Cash

Flows for the years ended December 31, 2022 and December 31, 2021 and (v)

the Notes to the Consolidated Financial Statements.

101.INS

Inline XBRL Instance Document – the instance document does not appear in the

Interactive Data File because XBRL tags are embedded within the Inline XBRL

document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed herewith

** The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-

Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as

amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be

expressly set forth by specific reference in such filing.

† Indicates management contract or compensatory plan or arrangement

Portions of the exhibit have been redacted.

Item 16. Form 10-K Summary

None.

F-1

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) ..........................................................................

F-2

Financial Statements:

Consolidated Balance Sheets....................................................................................................................................................

F-4

Consolidated Statements of Operations....................................................................................................................................

F-6

Consolidated Statements of Changes in Shareholders’ Equity ................................................................................................

F-7

Consolidated Statements of Cash Flows ..................................................................................................................................

F-8

Notes to Consolidated Financial Statements ............................................................................................................................

F-10

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Trustees of

PennyMac Mortgage Investment Trust

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of PennyMac Mortgage Investment Trust and subsidiaries (the

“Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in shareholders’ equity,

and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the

“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the

Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the

period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)

(PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal

Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our

report dated February 24, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the

Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to

be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit

to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to

error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used

and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe

that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were

communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to

the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical

audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating

the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which

they relate.

Mortgage Servicing Rights (“MSRs”) — Refer to Notes 3, 7 and 12 to the financial statements

Critical Audit Matter Description

The Company accounts for MSRs at fair value and categorizes its MSRs as “Level 3” fair value assets. The Company uses a

discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs

include the applicable pricing spread (a component of the discount rate), the prepayment rates of the underlying loans (“prepayment

speed”) and the annual per-loan cost of servicing, all of which are unobservable. Significant changes to any of those inputs in isolation

could result in a significant change in the MSRs’ fair value measurement.

We identified the pricing spread and prepayment speed assumptions used in the valuation of MSRs as a critical audit matter because

of the significant judgments made by management in determining these assumptions. Auditing these assumptions required a high

degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, to evaluate the

reasonableness of management’s estimates and assumptions related to selection of the pricing spread and prepayment speed.

F-3

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the pricing spread and prepayment speed assumptions used by the Company to estimate the fair value

of MSRs included the following, among others:

• We tested the design and operating effectiveness of internal controls over determining the fair value of MSRs, including

those over the determination of the pricing spread and prepayment speed assumptions

• With the assistance of our fair value specialists, we evaluated the reasonableness of management’s prepayment speed

assumptions by preparing a value for comparison to the Company’s valuation

• We evaluated the reasonableness of management’s prepayment speed assumptions of the underlying mortgage loans, by

comparing historical prepayment speed assumptions to actual results

• We tested management’s process for determining the pricing spread assumptions by comparing them to the implied spreads

within market transactions and other third-party information used by management

Credit Risk Transfer Agreements and Credit Risk Transfer Strip Assets and Liabilities — Refer to Notes 2, 3, 6, 7 and 11 to

the financial statements

Critical Audit Matter Description

The Company invests in credit risk transfer (“CRT”) arrangements whereby it sells pools of recently originated mortgage loans into

Fannie Mae-guaranteed securitizations while retaining a portion of the credit risk underlying such mortgage loans. The Company

retains an interest-only (“IO”) ownership interest in such mortgage loans and an obligation to absorb credit losses arising from such

mortgage loans (“Recourse Obligations”). The Company placed deposits securing CRT arrangements into subsidiary trust entities to

secure its Recourse Obligations. The deposits securing CRT arrangements represent the Company’s maximum contractual exposure to

claims under its Recourse Obligations and is the sole source of settlement of losses. Together, the Recourse Obligations and the IO

ownership interest comprise the CRT agreements and CRT strip assets and liabilities.

The Company accounts for CRT agreements and CRT strip assets and liabilities at fair value and categorizes them as “Level 3” fair

value assets and liabilities. The Company determines the fair value of the CRT agreements and CRT strip assets and liabilities based

on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial interest in

the CRT agreements and CRT strip assets and liabilities and the related deposits. The Company applies adjustments to the indications

of fair value of the CRT strip assets and liabilities when contractual restrictions limit the Company’s ability to sell them. The fair

value of the CRT agreements and CRT strip assets and liabilities are estimated by deducting the balance of the deposits securing the

CRT arrangements from the estimated fair value of the certificates.

We identified the valuation of the CRT agreements and CRT strip assets and liabilities as a critical audit matter. Auditing the related

fair values, particularly developing the discount rate used in the valuation required a high degree of auditor judgment and an increased

extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the fair value of the CRT agreements and CRT strip assets and liabilities included the following,

among others:

• We tested the design and operating effectiveness of internal controls over the evaluation and approval of the fair value

provided by nonaffiliated brokers.

• With the assistance of our fair value specialists, we developed independent fair value estimates of the CRT agreements and

CRT strip assets and liabilities, which included discount rate assumptions, and compared our estimates to the Company’s fair

value.

/s/ Deloitte & Touche LLP

Los Angeles, California

February 24, 2023

We have served as the Company’s auditor since 2009.

F-4

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

2022

2021

(in thousands, except share information)

ASSETS

Cash

111,866

58,983

Short-term investments at fair value

252,271

167,999

Mortgage-backed securities at fair value pledged to creditors

4,462,601

2,666,768

Loans acquired for sale at fair value ($1,801,368 and $4,059,479 pledged to creditors, respectively)

1,821,933

4,171,025

Loans at fair value ($1,510,148 and $1,564,924 pledged to creditors, respectively)

1,513,399

1,568,726

Derivative assets ($1,262 and $19,627 pledged to creditors, respectively)

84,940

34,238

Deposits securing credit risk transfer arrangements pledged to creditors

1,325,294

1,704,911

Mortgage servicing rights at fair value ($3,962,820 and $2,863,544 pledged to creditors, respectively)

4,012,737

2,892,855

Servicing advances ($100,888 and $93,455 pledged to creditors, respectively)

197,972

204,951

Due from PennyMac Financial Services, Inc.

3,560

15,953

Other ($3,297 and $7,293 pledged to creditors, respectively)

134,991

286,299

Total assets

13,921,564

13,772,708

LIABILITIES

Assets sold under agreements to repurchase

6,616,528

6,671,890

Mortgage loan participation purchase and sale agreements

—

49,988

Notes payable secured by credit risk transfer and mortgage servicing assets

2,804,028

2,471,961

Exchangeable senior notes

546,254

502,459

Asset-backed financing of variable interest entities at fair value

1,414,955

1,469,999

Interest-only security payable at fair value

21,925

10,593

Derivative and credit risk transfer strip liabilities at fair value

167,226

42,206

Accounts payable and accrued liabilities

160,212

96,156

Due to PennyMac Financial Services, Inc.

36,372

40,091

Income taxes payable

151,778

9,598

Liability for losses under representations and warranties

39,471

40,249

Total liabilities

11,958,749

11,405,190

Commitments and contingencies ─ Note 17

SHAREHOLDERS’ EQUITY

Preferred shares of beneficial interest, $0.01 par value per share, authorized 100,000,000 shares,

issued and outstanding 22,400,000, liquidation preference $560,000,000

541,482

Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01

par value; issued and outstanding, 88,888,889 and 94,897,255 common shares, respectively

889

949

Additional paid-in capital

1,947,266

2,081,757

Accumulated deficit

(526,822

)

(256,670

)

Total shareholders’ equity

1,962,815

2,367,518

Total liabilities and shareholders’ equity

13,921,564

13,772,708

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

F-5

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and liabilities (the assets of each VIE

can only be used to settle liabilities of that VIE) are summarized below:

December 31,

2022

2021

(in thousands)

ASSETS

Loans at fair value

1,509,942

1,564,565

Derivative assets at fair value

1,262

19,627

Deposits securing credit risk transfer arrangements

1,325,294

1,704,911

Other—interest receivable

4,343

3,701

2,840,841

3,292,804

LIABILITIES

Asset-backed financings at fair value

1,414,955

1,469,999

Derivative and credit risk transfer strip liabilities at fair value

160,553

27,500

Interest-only security payable at fair value

21,925

10,593

Accounts payable and accrued liabilities—interest payable

4,343

3,701

1,601,776

1,511,793

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

F-6

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,

2022

2021

2020

(in thousands, except per common share amounts)

Net investment income

Net loan servicing fees:

From nonaffiliates

Contractually specified

625,210

526,245

406,060

Other

26,041

69,101

56,457

651,251

595,346

462,517

Change in fair value of mortgage servicing rights

449,435

(337,186

)

(938,937

)

Mortgage servicing rights hedging results

(204,879

)

(345,041

)

601,743

895,807

(86,881

)

125,323

From PennyMac Financial Services, Inc.

13,744

50,859

28,373

909,551

(36,022

)

153,696

Net (losses) gains on investments and financings:

From nonaffiliates

(658,787

)

302,428

(148,156

)

From PennyMac Financial Services, Inc.

—

1,651

(22,729

)

(658,787

)

304,079

(170,885

)

Net gains on loans acquired for sale:

From nonaffiliates

20,724

80,801

368,885

From PennyMac Financial Services, Inc.

4,968

6,472

11,037

25,692

87,273

379,922

Loan origination fees

52,085

170,672

147,272

Net interest expense:

Interest income:

From nonaffiliates

383,794

193,959

213,717

From PennyMac Financial Services, Inc.

—

1,280

8,418

383,794

195,239

222,135

Interest expense:

To nonaffiliates

410,420

304,350

267,445

To PennyMac Financial Services, Inc.

—

387

3,325

410,420

304,737

270,770

Net interest expense

(26,626

)

(109,498

)

(48,635

)

Results of real estate acquired in settlement of loans

496

3,075

5,465

Other

1,360

718

2,516

Net investment income

303,771

420,297

469,351

Expenses

Earned by PennyMac Financial Services, Inc.:

Loan servicing fees

81,915

80,658

67,181

Loan fulfillment fees

67,991

178,927

222,200

Management fees

31,065

37,801

34,538

Loan origination

12,036

28,792

26,437

Professional services

9,569

11,148

6,405

Safekeeping

8,201

9,087

7,090

Compensation

5,941

4,000

3,890

Loan collection and liquidation

5,396

11,279

10,363

Other

18,570

13,944

11,517

Total expenses

240,684

375,636

389,621

Income before provision for (benefit from) income taxes

63,087

44,661

79,730

Provision for (benefit from) income taxes

136,374

(12,193

)

27,357

Net (loss) income

(73,287

)

56,854

52,373

Dividends on preferred shares

41,819

30,891

24,938

Net (loss) income attributable to common shareholders

(115,106

)

25,963

27,435

(Loss) earnings per common share

Basic

(1.26

)

0.26

0.27

Diluted

(1.26

)

0.26

0.27

Weighted average common shares outstanding

Basic

91,434

97,402

99,373

Diluted

91,434

97,402

99,373

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

F-7

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Preferred shares

Common shares

Retained

Number

Additional

earnings

Par

paid-in

(accumulated

Amount

value

capital

deficit)

Total

(in thousands, except per share amounts)

Balance at December 31, 2019

12,400

299,707

100,182

1,002

2,127,889

22,317

2,450,915

Net income

—

52,373

Share-based compensation

—

207

663

—

665

Issuance of common shares

—

241

5,652

—

5,654

Issuance cost relating to common shares

—

(57

)

—

(57

)

Dividends:

Preferred shares

—

(24,945

)

(24,945

)

Common shares ($1.52 per share)

—

(150,479

)

(150,479

)

Repurchase of common shares

—

(2,767

)

(27

)

(37,240

)

—

(37,267

)

Balance at December 31, 2020

12,400

299,707

97,863

979

2,096,907

(100,734

)

2,296,859

Net income

—

56,854

Share-based compensation

—

133

1,688

—

1,689

Issuance of exchangeable notes

with cash conversion option

—

39,986

—

39,986

Issuance of preferred shares

10,000

250,000

—

250,000

Issuance costs relating to preferred shares

—

(8,225

)

—

(8,225

)

Dividends:

Preferred shares

—

(30,146

)

(30,146

)

Common shares ($1.88 per share)

—

(182,644

)

(182,644

)

Repurchase of common shares

—

(3,099

)

(31

)

(56,824

)

—

(56,855

)

Balance at December 31, 2021

22,400

541,482

94,897

949

2,081,757

(256,670

)

2,367,518

Cumulative effect of adoption of ASU 2020-06

—

(50,347

)

9,394

(40,953

)

Balance at January 1, 2022

22,400

541,482

94,897

949

2,031,410

(247,276

)

2,326,565

Net loss

—

(73,287

)

(73,287

)

Share-based compensation

—

3,787

—

3,788

Dividends:

Preferred shares

—

(41,819

)

(41,819

)

Common shares ($1.81 per share)

—

(164,440

)

(164,440

)

Repurchase of common shares

—

(6,094

)

(61

)

(87,931

)

—

(87,992

)

Balance at December 31, 2022

22,400

541,482

88,889

889

1,947,266

(526,822

)

1,962,815

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

F-8

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,

2022

2021

2020

(in thousands)

Cash flows from operating activities

Net (loss) income

(73,287

)

56,854

52,373

Adjustments to reconcile net (loss) income to net cash provided by

(used in) operating activities:

Change in fair value of mortgage servicing rights

(449,435

)

337,186

938,937

Mortgage servicing rights hedging results

204,879

345,041

(601,743

)

Net losses (gains) on investments and financings

658,787

(304,079

)

170,885

Net gains on loans acquired for sale

(25,692

)

(87,273

)

(379,922

)

Capitalization of interest and fees on loans at fair value

—

(251

)

—

Accrual of interest on excess servicing spread purchased from

PennyMac Financial Services, Inc.

—

(1,280

)

(8,418

)

Accrual of unearned discounts and amortization of purchase premiums on

mortgage-backed securities, loans at fair value, and asset-backed financings

(9,815

)

9,803

24,712

Amortization of debt issuance costs

16,563

27,156

18,987

Results of real estate acquired in settlement of loans

(496

)

(3,075

)

(5,465

)

Share-based compensation expense

4,310

2,419

2,294

Gain on early extinguishment of debt

—

(1,738

)

Purchase of loans acquired for sale from nonaffiliates

(87,844,404

)

(181,370,296

)

(167,768,999

)

Purchase of loans acquired for sale from PennyMac Financial Services, Inc.

(298,862

)

—

(2,248,896

)

Sale to nonaffiliates and repayment of loans acquired for sale

39,077,156

110,919,477

106,306,805

Sale of loans acquired for sale to PennyMac Financial Services, Inc.

50,575,617

67,851,630

63,618,185

Repurchase of loans subject to representation and warranties

(92,294

)

(105,627

)

(72,493

)

Decrease (increase) in servicing advances

6,979

(83,219

)

(73,129

)

Decrease (increase) in due from PennyMac Financial Services, Inc.

12,393

(7,744

)

(5,244

)

(Increase) decrease in other assets

(189,551

)

(318,237

)

604,211

Increase (decrease) in accounts payable and accrued liabilities

73,162

(27,320

)

34,836

(Decrease) increase in due to PennyMac Financial Services, Inc.

(3,719

)

(46,914

)

38,406

Settlement of repurchase agreement derivatives

—

5,328

Increase (decrease) in income taxes payable

142,180

(13,965

)

21,744

Net cash provided by (used in) operating activities

1,784,471

(2,819,714

)

671,656

Cash flows from investing activities

Net increase in short-term investments

(84,272

)

(40,704

)

(36,459

)

Purchase of mortgage-backed securities

(3,718,093

)

(2,232,923

)

(2,332,096

)

Sale and repayment of mortgage-backed securities

1,358,199

1,696,400

3,022,336

Purchase of subordinate mortgage pass-through security associated with

consolidated variable interest entity

—

(28,815

)

—

Repayment and sale of loans at fair value

159,647

122,260

114,553

Repurchase of loans at fair value

—

(1,058

)

Settlement and repayment of excess servicing spread receivable from

PennyMac Financial Services, Inc.

—

134,624

32,377

Net settlement of derivative financial instruments

25,489

3,863

(8,029

)

Settlement of firm commitment to purchase credit risk transfer securities

—

128,786

Deposit of cash securing credit risk transfer arrangements

—

(1,700,000

)

Distribution from credit risk transfer arrangements

478,388

1,300,061

871,485

Transfer of mortgage servicing rights relating to delinquent loans to Agency

(104

)

—

Sale of mortgage servicing rights

—

Sale of real estate acquired in settlement of loans

7,999

17,096

43,505

(Increase) decrease in margin deposits

(94,727

)

121,151

(150,774

)

Net cash (used in) provided by investing activities

(1,867,474

)

1,093,013

(15,367

)

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

Statements continued on the next page

F-9

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Year ended December 31,

2022

2021

2020

(in thousands)

Cash flows from financing activities

Sale of assets under agreements to repurchase

121,017,757

193,729,139

190,821,908

Repurchase of assets sold under agreements to repurchase

(121,073,659

)

(193,372,527

)

(191,152,716

)

Issuance of mortgage loan participation purchase and sale agreements

3,742,870

4,172,863

5,159,029

Repayment of mortgage loan participation purchase and sale agreements

(3,792,858

)

(4,139,725

)

(5,142,178

)

Issuance of notes payable secured by credit risk transfer and mortgage

servicing assets

944,999

2,022,127

850,000

Repayment of notes payable secured by credit risk transfer and mortgage

servicing assets

(611,943

)

(1,472,508

)

(622,549

)

Issuance of exchangeable senior notes

—

345,000

—

Repayment of exchangeable senior notes

—

(248,262

)

Issuance of asset-backed financings

382,423

690,550

—

Repayment of asset-backed financings

(155,654

)

(115,137

)

(107,333

)

Repurchase of assets sold to PennyMac Financial Services, Inc. under

agreement to repurchase

—

(80,862

)

(26,650

)

Payment of debt issuance costs

(14,170

)

(21,007

)

(23,990

)

Payment of dividends to preferred shareholders

(41,819

)

(30,146

)

(24,945

)

Payment of dividends to common shareholders

(173,546

)

(183,973

)

(151,580

)

Issuance of preferred shares

—

250,000

—

Payment of issuance costs related to preferred shares

—

(8,225

)

—

Payment of vested share-based compensation tax withholdings

(522

)

(730

)

(1,629

)

Issuance of common shares

—

5,654

Payment of issuance costs related to common shares

—

(57

)

Payment of contingent underwriting fees payable related to common shares

—

)

(76

)

Repurchase of common shares

(87,992

)

(56,855

)

(37,267

)

Net cash provided by (used in) financing activities

135,886

1,727,980

(702,641

)

Net increase (decrease) in cash

52,883

1,279

(46,352

)

Cash at beginning of year

58,983

57,704

104,056

Cash at end of year

111,866

58,983

57,704

Supplemental cash flow information

(Refunds) payments, net:

Income taxes

(5,806

)

1,771

5,613

Interest

368,671

298,862

290,225

Non-cash investing activities:

Retention of subordinate mortgage-backed securities in loan securitizations

23,485

42,256

—

Recognition of loans at fair value resulting from initial

consolidation of variable interest entities

405,908

1,542,333

—

Recombination of MSRs to loans at fair value resulting from

initial consolidation of variable interest entity

—

9,824

—

Transfer of loans and advances to real estate acquired in settlement of loans

—

1,166

Receipt of excess servicing spread pursuant to recapture

agreement with PennyMac Financial Services, Inc.

—

557

2,093

Transfer of firm commitment to purchase CRT securities to

investment securities

—

178,501

Receipt of mortgage servicing rights as proceeds from sales of loans

670,343

1,484,629

1,158,475

Non-cash financing activities:

Recognition of asset-backed financings resulting from initial

consolidation of VIEs

382,423

1,471,262

—

Dividends declared, not paid

35,658

44,764

46,093

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

F-10

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Organization

PennyMac Mortgage Investment Trust (“PMT” or the “Company”) is a specialty finance company, which, through its

subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage-related assets. The Company operates in four

segments: credit sensitive strategies, interest rate sensitive strategies, correspondent production, and corporate:

• The credit sensitive strategies segment represents the Company’s investments in credit risk transfer (“CRT”)

arrangements, including CRT agreements (“CRT Agreements”) and other CRT securities (together, “CRT

arrangements”), subordinate mortgage-backed securities (“MBS”), distressed loans and real estate.

• The interest rate sensitive strategies segment represents the Company’s investments in mortgage servicing rights

(“MSRs”), excess servicing spread (“ESS”) purchased from PennyMac Financial Services, Inc. (“PFSI”), a publicly-

traded mortgage banking and investment management company, Agency and senior non-Agency MBS and the related

interest rate hedging activities.

• The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between

lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality loans either

directly or in the form of MBS, using the services of PNMAC Capital Management, LLC (“PCM”) and PennyMac Loan

Services, LLC (“PLS”), both subsidiaries of PFSI.

The Company primarily sells the loans it acquires through its correspondent production activities to government-

sponsored entities (“GSEs”) such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home

Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by the Government

National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an

“Agency” and, collectively, as the “Agencies.”

• The corporate segment includes management fees, corporate expense amounts and certain interest income.

The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary,

PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A wholly-owned

subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.

The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal

Revenue Code of 1986, as amended. To maintain its tax status as a REIT, the Company is required to distribute at least 90% of its

taxable income in the form of qualifying distributions to shareholders.

Note 2—Concentration of Risks

As discussed in Note 1 – Organization above, PMT’s operations and investing activities are centered in residential mortgage-

related assets, including CRT arrangements, MBS and MSRs. CRT arrangements and subordinate MBS are more sensitive to borrower

credit performance than other mortgage-related investments such as traditional loans and Agency MBS. MSRs are sensitive to changes

in prepayment rate activity and expectations.

Credit Risk

Note 6 – Variable Interest Entities details the Company’s investments in CRT arrangements whereby the Company sold pools

of recently-originated loans into Fannie Mae-guaranteed securitizations while either:

• through May 2018, entering into CRT Agreements, whereby it retained a portion of the credit risk underlying such loans

as part of the retention of an interest-only (“IO”) ownership interest in such loans and an obligation to absorb scheduled

credit losses arising from such loans reaching a specific number of days delinquent; or

• from June 2018 through 2020, entering into firm commitments to purchase and purchasing CRT securities and, upon

purchase of such securities, holding CRT strips representing an IO ownership interest that absorbs realized credit losses

arising from such loans. The obligation to absorb the losses for both CRT Agreements and CRT securities represents the

Company’s recourse obligations relating to the CRT arrangements (“Recourse Obligations”).

The Company also invests in subordinate MBS which are among the first beneficial interests in those securitizations to absorb

credit losses on the underlying loans.

F-11

The Company’s retention of credit risk through its investment in CRT arrangements and subordinate MBS subjects it to risks

associated with delinquency and foreclosure similar to the risks of loss associated with owning the underlying loans, which is greater

than the risk of loss associated with selling such loans to the GSEs or other entities without the retention of such credit risk.

CRT Agreements are structured such that loans that reach a specific number of days delinquent (including loans in forbearance

which also includes those subject to the forbearance provided in the Coronavirus Aid, Relief, and Economic Security Act

(“CARES Act”)) trigger losses chargeable to the CRT Agreements based on the size of the loan and a contractual schedule of loss

severity. Therefore, the risks associated with delinquency and foreclosure may in some instances be greater than the risks associated

with owning the related loans because the structure of the CRT Agreements provides that the Company may be required to absorb

losses in the event of delinquency or foreclosure even when there is ultimately no loss realized with respect to such loans (e.g., as a

result of a borrower’s re-performance). In contrast, the structure of the Company’s investment in other CRT securities requires PMT

to absorb losses only when the reference loans realize actual losses.

Fair Value Risk

The Company is exposed to fair value risk in addition to the risks specific to credit and, as a result of prevailing market

conditions or the economy generally, may be required to recognize losses associated with adverse changes to the fair value of its

investments in MSRs, CRT arrangements, and MBS:

• MSRs are generally subject to loss in fair value when prepayment speeds increase as a result of decreasing mortgage

interest rates, when estimates of cost to service the underlying loans increase or when the returns demanded by market

participants increase;

• The fair value of CRT arrangements and subordinate MBS is sensitive to market perceptions of future credit performance

of the underlying loans as well as the actual credit performance of such loans and to the returns required by market

participants to hold such investments; and

• The fair value of Agency and senior non-Agency MBS is sensitive to changes in market interest rates.

Note 3—Significant Accounting Policies

PMT’s significant accounting policies are summarized below.

Basis of Presentation

The Company’s consolidated financial statements have been prepared in compliance with accounting principles generally

accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards

Codification (“ASC”).

Use of Estimates

Preparation of financial statements in compliance with GAAP requires the Company to make estimates and judgments that

affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial

statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

Consolidation

The consolidated financial statements include the accounts of PMT and all wholly-owned subsidiaries. PMT has no significant

equity method or cost-basis investments. Intercompany accounts and transactions are eliminated upon consolidation. The Company

also consolidates the assets and liabilities included in certain Variable Interest Entities (“VIEs”) discussed below.

Variable Interest Entities

The Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”), which

are trusts that are established for a limited purpose. Generally, SPEs are formed in connection with securitization transactions. In a

securitization transaction, the Company transfers assets on its balance sheet to an SPE, which then issues various forms of beneficial

interests in those assets to investors. In a securitization transaction, the Company typically receives a combination of cash and

beneficial interests in the SPE in exchange for the assets transferred by the Company.

SPEs are generally VIEs. A VIE is an entity having either a total equity investment at risk that is insufficient to finance its

activities without additional subordinate financial support or whose equity investors at risk lack the ability to control the entity’s

activities. Variable interests are investments or other interests that will absorb portions of a VIE’s expected losses or receive portions

of the VIE’s expected residual returns. Expected residual returns represent the expected positive variability in the fair value of a VIE’s

net assets.

F-12

PMT consolidates the assets and liabilities of VIEs of which the Company is the primary beneficiary. The primary beneficiary is

the party that has both the power to direct the activities that most significantly impact the economic performance of the VIE and holds

a variable interest that could potentially be significant to the VIE. To determine whether a variable interest the Company holds could

potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and

form of its involvement with the VIE. The Company evaluates whether it is the primary beneficiary of a VIE on an ongoing basis.

The Company also evaluates the securitization trust holding the assets to determine whether the entity is a VIE and whether the

Company is the primary beneficiary and therefore is required to consolidate the securitization trust.

Credit Risk Transfer Arrangements

The Company holds CRT arrangements with Fannie Mae, pursuant to which PennyMac Corp. (“PMC”), through subsidiary

trust entities, sold pools of loans into Fannie Mae-guaranteed loan securitizations while retaining Recourse Obligations for credit

losses and IO ownership interests in such loans. Loans subject to the CRT arrangements were transferred by PMC to subsidiary trust

entities which sold the loans into Fannie Mae loan securitizations. Transfers of loans subject to CRT arrangements received sale

accounting treatment.

The Company has concluded that its subsidiary trust entities holding its CRT arrangements are VIEs and the Company is the

primary beneficiary of the VIEs as it is the holder of the primary beneficial interests which absorb the variability of the trusts’ results

of operations. Consolidation of the VIEs results in the inclusion on the Company’s consolidated balance sheet of the fair value of the

Recourse Obligations, and retained IO ownership interests in the form of derivative and interest-only strip assets and liabilities, the

deposits pledged to fulfill the Recourse Obligations and an interest only security payable at fair value. The deposits represent the

Company’s maximum contractual exposure to claims under its Recourse Obligations and are the sole source of settlement of losses

under the CRT arrangements. Gains and losses on the derivative and interest-only strip assets and liabilities related to CRT

arrangements are included in Net (losses) gains on investments and financings in the consolidated statements of operations.

Subordinate Mortgage-Backed Securities

The Company retains or purchases subordinate MBS backed by loans secured by investment properties in transactions

sponsored by PMC or a nonaffiliate. Subordinate MBS provide the Company with a higher yield than senior securities. However, the

Company retains credit risk in the subordinate MBS since they are the first securities to absorb credit losses relating to the underlying

loans.

Cash inflows from the loans underlying subordinate MBS are distributed to investors and service providers in accordance with

the contractual priority of payments and, as such, most of these inflows must be directed first to service and repay the senior

certificates. The rights of holders of the subordinate certificates to receive distributions of principal and/or interest, as applicable, are

subordinate to the rights of holders of the senior certificates. After the senior certificates are repaid, substantially all cash inflows will

be directed to the subordinate certificates, including those held by the Company, until they are fully repaid.

The Company has concluded that the trusts holding the assets underlying certain of these transactions are VIEs. The Company

has concluded that it is the primary beneficiary of the VIEs as it has the power, through PLS, in its role as the servicer or sub-servicer

of the loans, to direct the activities of the trusts that most significantly impact the trusts’ economic performance and, as a holder of

subordinate securities, that PMT is exposed to losses that could potentially be significant to the VIEs. Therefore, PMT consolidates the

VIEs where it holds subordinate interests and services the majority of the loans held in the VIEs.

Jumbo Loan Securitization Transaction

On September 30, 2013, the Company completed a securitization transaction in which a VIE issued $537.0 million in unpaid

principal balance (“UPB”) of certificates backed by fixed-rate prime jumbo loans at a 3.9% weighted cost.

The securities issued by the VIE are backed by the expected cash flows from its underlying fixed-rate prime jumbo loans. Cash

inflows from these fixed-rate prime jumbo loans are distributed to investors and service providers in accordance with the contractual

priority of payments and, as such, most of these inflows must be directed first to service and repay the senior certificates. After the

senior certificates are repaid, substantially all cash inflows will be directed to the subordinate certificates until fully repaid and,

thereafter, to the residual interest in the trust that the Company owns.

The Company holds beneficial interests in the securitization transaction, including subordinate certificates and residual interests

issued by the VIE. The Company retains credit risk in the securitization because the Company’s beneficial interests include the most

subordinate interests in the securitized assets, which are the first beneficial interests to absorb credit losses on those assets. The

Company expects that any credit losses in the pools of securitized assets will likely be limited to the Company’s subordinate and

residual interests. The Company has no obligation to repurchase or replace securitized assets that subsequently become delinquent or

are otherwise in default other than pursuant to breaches of representations and warranties.

F-13

The VIE is consolidated by PMT as the Company determined that it is the primary beneficiary of the VIE. The Company

concluded that it is the primary beneficiary of the VIE as it has the power, through its affiliate, PLS, in its role as servicer of the loans,

to direct the activities of the trust that most significantly impact the trust’s economic performance and the subordinate and residual

interest trust certificates expose PMT to losses and returns that could potentially be significant to the VIE.

For financial reporting purposes, the loans owned by the consolidated VIEs are included in Loans at fair value and the securities

issued to third parties by the consolidated VIEs are included in Asset-backed financings at fair value on the Company’s consolidated

balance sheets. Both the Loans at fair value and the Asset-backed financings at fair value included in the consolidated VIEs are also

included in a separate statement following the Company’s consolidated balance sheets. The Company previously recognized MSRs

relating to loans owned by one of the consolidated VIEs. Upon purchase of the subordinate securities and consolidation of the VIE,

the Company recombined the MSRs with the loans in the VIE to Loans at fair value.

The Company recognizes the interest income earned on the loans owned by the VIEs and the interest expense attributable to the

asset-backed securities issued to nonaffiliates by the VIEs on its consolidated statements of operations.

Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured at or based on their fair values.

Measurement at or based on fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable

to the specific asset or liability and whether the Company has elected to carry the item at its fair value as discussed in the following

paragraphs.

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities

are traded and the observability of the inputs used to determine fair value. These levels are:

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

• Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that

other market participants would use in pricing an asset or liability and are developed based on market data obtained from

sources independent of the Company.

• Level 3—Prices determined using significant unobservable inputs. In situations where significant observable inputs are

unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the

factors that market participants use in pricing an asset or liability, and are based on the best information available in the

circumstances.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and

liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession

of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and

liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise,

due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly

different from those reported.

The Company reclassifies its assets and liabilities between levels of the fair value hierarchy when the inputs required to

establish fair value at a level of the fair value hierarchy are no longer readily available, requiring the use of lower-level inputs, or

when the inputs required to establish fair value at a higher level of the hierarchy become available.

Fair Value Accounting Elections

The Company identified all of PMT’s non-cash financial assets, its Firm commitment to purchase CRT securities and MSRs to

be accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be

reflected in income as they occur and more timely reflect the results of the Company’s performance.

The Company has also identified its Asset-backed financings at fair value and Interest-only security payable at fair value to be

accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the

assets at fair value collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting

is more appropriate because under this method debt issuance costs are amortized over the term of the debt facility, thereby matching

the debt issuance cost to the periods benefiting from the availability of the debt.

Short-Term Investments

Short-term investments are carried at fair value with changes in fair value recognized in current period results of operations.

Short-term investments represent deposit accounts. The Company categorizes its short-term investments as “Level 1” fair value assets.

F-14

Mortgage-Backed Securities

The Company’s investments in MBS are carried at fair value with changes in fair value recognized in current period results of

operations. Changes in fair value arising from amortization of purchase premiums and accrual of unearned discounts are recognized

using the interest method and are included in Interest income. Changes in fair value arising from other factors are included in Net

(losses) gains on investments and financings. Purchases and sales of MBS are recorded as of the trade date. The Company categorizes

its investments in MBS as “Level 2” fair value assets.

Interest Income Recognition

Interest income on MBS is recognized over the life of the security using the interest method. The Company estimates, at the

time of purchase, the future expected cash flows and determines the effective interest rate based on the estimated cash flows and the

security’s purchase price. The Company updates its cash flow estimates monthly.

Loans

Loans are carried at their fair values with changes in fair value recognized in current period results of operations. Changes in fair

value, other than changes in fair value attributable to accrual of unearned discounts and amortization of purchase premiums, are

included in Net (losses) gains on investments and financings for loans classified as Loans at fair value and Net gains on loans

acquired for sale for loans classified as Loans acquired for sale at fair value. Changes in fair value attributable to accrual of unearned

discounts and amortization of purchase premiums are included in Interest income on the consolidated statements of operations. The

Company categorizes its Loans acquired for sale at fair value that are readily saleable into active markets with observable inputs that

are significant to their fair values and its Loans at fair value held in VIEs as “Level 2” fair value assets. The Company categorizes all

other loans as “Level 3” fair value assets.

Sale Recognition

The Company purchases from and sells loans into the secondary mortgage market without recourse for credit losses. However,

the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under the

representations and warranties it makes to purchasers and insurers of the loans.

The Company recognizes transfers of loans as sales based on whether the transfer is made to a VIE:

• For loans that are transferred to a VIE, the Company recognizes the transfer as a sale when it determines that the

Company is not the primary beneficiary of the VIE.

• For loans that are not transferred to a VIE, the Company recognizes the transfer as a sale when it surrenders control over

the loans. Control over transferred loans is deemed to be surrendered when (i) the loans have been isolated from the

Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge

or exchange the transferred loans, and (iii) the Company does not maintain effective control over the transferred loans

through either (a) an agreement that entitles and obligates the Company to repurchase or redeem the loans before their

maturity or (b) the ability to unilaterally cause the holder to return specific loans.

Interest Income Recognition

The Company has the ability but not the intent to hold loans acquired for sale and loans at fair value other than loans held in

VIEs for the foreseeable future. Therefore, interest income on loans acquired for sale and loans at fair value other than loans held in

VIEs is recognized over the life of the loans using their contractual interest rates.

The Company has both the ability and intent to hold loans held in VIEs for the foreseeable future. Therefore, interest income on

loans held in VIEs is recognized over the estimated remaining life of the loans using the interest method. Unearned discounts and

purchase premiums are accrued and amortized to interest income using the effective interest rate inherent in the estimated cash flows

from the loans.

Income recognition is suspended and the accrued unpaid interest receivable is reversed against interest income when a loan

becomes 90 days delinquent. Income recognition is resumed when the loan becomes contractually current.

Excess Servicing Spread

The Company has acquired the right to receive the ESS related to certain of the MSRs owned by PFSI. ESS is carried at its fair

value. The Company categorizes ESS as a “Level 3” fair value asset.

Interest Income Recognition

Interest income for ESS is accrued using the interest method, based upon the expected yield from the ESS through the expected

life of the underlying mortgages.

F-15

Derivative and Credit Risk Transfer Strip Assets and Liabilities

The Company holds and issues derivative financial instruments in connection with its operating, investing and financing

activities. Derivative financial instruments are created as a result of certain of the Company’s operations and the Company also enters

into derivative transactions as part of its interest rate risk management activities.

Derivative financial instruments created as a result of the Company’s operations include:

• Interest rate lock commitments (“IRLCs”) that are created when the Company commits to purchase loans acquired for

sale; and

• CRT Agreements whereby the Company retained a Recourse Obligation relating to certain loans it sold into Fannie Mae

guaranteed securitizations as part of the retention of an IO ownership interest in such loans.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by the

effects of changes in interest rates on the fair value of certain of its assets and liabilities. The Company bears price risk related to its

mortgage production, servicing and MBS financing activities due to changes in market interest rates as discussed below:

• The Company is exposed to loss if market mortgage interest rates increase because market interest rate increases generally

cause the fair value of MBS, IRLCs and loans acquired for sale to decrease.

• The Company is exposed to losses if market mortgage interest rates decrease because market interest rate decreases

generally cause the fair value of MSRs and ESS to decrease.

To manage the price risk resulting from these interest rate risks, the Company uses derivative financial instruments with the

intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of the

Company’s inventory of loans acquired for sale, IRLCs, MSRs and MBS financing.

The Company records all derivative and CRT strip assets and liabilities at fair value and records changes in fair value in

current period results of operations. The Company does not designate and qualify any of its derivative financial instruments for hedge

accounting.

Cash flows from derivative financial instruments relating to hedging of IRLCs and loans acquired for sale are included in

Cash flows from operating activities in Sale and repayment of loans acquired for sale at fair value to nonaffiliates. Cash flows from

derivative financial instruments relating to hedging of MSRs are included in Cash flows from investing activities.

Firm Commitment to Purchase Credit Risk Transfer Securities

The Company carried its firm commitment to purchase CRT securities at fair value. The firm commitment to purchase CRT

securities was recognized initially as a component of Net gains on loans acquired for sale. Subsequent changes in fair value were

recorded in Net (losses) gains on investments and financings. The Company categorized its firm commitment to purchase CRT

securities as a “Level 3” fair value asset or liability.

Real Estate Acquired in Settlement of Loans

Real estate acquired in settlement of loans (“REO”) is measured at the lower of the acquisition cost of the property (as measured

by the fair value of the loan immediately before acquisition of the property in settlement of a loan) or its fair value reduced by

estimated costs to sell. Changes in fair value to levels that are less than or equal to acquisition cost and gains or losses on sale of REO

are recognized in the consolidated statements of operations under the caption Results of real estate acquired in settlement of loans.

The Company categorizes REO as a “Level 3” fair value asset.

Mortgage Servicing Rights

MSRs arise from contractual agreements between the Company and investors (or their agents) in mortgage securities and loans.

Under these agreements, the Company is obligated to provide loan servicing functions in exchange for fees and other remuneration.

The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding

to borrower inquiries; accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and

insurance premiums; counseling delinquent mortgagors, administering loss mitigation activities, including modification and

forbearance programs; and supervising foreclosures and property dispositions. The Company has engaged PFSI to provide these

services on its behalf.

The Company recognizes MSRs initially at their fair values, either as proceeds from sales of loans where the Company assumes

the obligation to service the loan in the sale transaction, or from the purchase of MSRs. The Company categorizes its MSR as a

“Level 3” fair value asset.

F-16

Servicing Advances

Servicing advances represent advances made on behalf of borrowers and the loans’ investors to fund property tax and insurance

premiums for impounded loans with inadequate impound balances and for non-impounded loans with delinquent property taxes or

insurance premiums and out of pocket collection costs for delinquent loans (e.g., preservation and restoration of mortgaged property,

legal fees, appraisals and insurance premiums). Servicing advances are made in accordance with the Company’s servicing agreements

and, when made, are deemed recoverable. The Company periodically reviews servicing advances for collectability. Servicing

advances are written off when they are deemed uncollectible.

Borrowings

Borrowings, other than Asset-backed financings at fair value and Interest-only security payable at fair value, are carried at

amortized cost. Costs of creating the facilities underlying the agreements and premiums received relating to advances under the

facilities are included in the carrying value of the borrowing facilities and are accrued to Interest expense over the term of revolving

borrowing facilities on the straight-line basis and over non-revolving borrowings’ contractual lives using the interest method.

Asset-backed financings at Fair Value and Interest-only security payable at fair value

The certificates issued to nonaffiliates by the Company relating to the asset-backed financings and interest only security payable

are recorded as borrowings. Certificates issued to nonaffiliates have the right to receive principal and interest payments of the loans

held by the consolidated VIEs. Asset-backed financings of the VIEs and Interest-only security payable at fair value are carried at fair

value. Changes in fair value are recognized in current period results of operations as a component of Net (losses) gains on investments

and financings. The Company categorizes asset-backed financings of the consolidated VIEs at fair value as “Level 2” fair value

liabilities and the Interest-only security payable at fair value as a “Level 3” fair value liability.

Liability for Losses Under Representations and Warranties

The Company provides for its estimate of the losses that it expects to incur in the future as a result of its breach of the

representations and warranties that it provides to the purchasers and insurers of the loans it has sold. The Company’s sales agreements

include representations and warranties related to the loans the Company sells to the Agencies and other investors. The representations

and warranties require adherence to Agency and other investor origination and underwriting guidelines, including but not limited to

the validity of the lien securing the loan, property eligibility, property value, loan amount, 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 loans with

the identified defects or indemnify the investor or insurer against credit losses arising from such loans. In either case, the Company

bears any subsequent credit loss on the loans. The Company’s credit loss may be reduced by any recourse it has to correspondent

sellers that, in turn, had sold such 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 repurchase losses from that correspondent seller.

The Company records a provision for losses relating to representations and warranties as part of its loan sale transactions. The

method used to estimate the liability for representations and warranties is a function of the representations and warranties given and

considers a combination of factors, including, but not limited to, estimated future defaults and loan defect rates, the estimated severity

of loss in the event of default and the probability of reimbursement by the correspondent loan seller. The Company establishes a

liability at the time loans are sold and periodically updates its liability estimate. The level of the liability for representations and

warranties is reviewed and approved by the Company’s management credit committee.

The level of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level

of loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that may change

over the lives of the underlying loans. The Company’s representations and warranties are generally not subject to stated limits of

exposure. However, the Company believes that the current UPB of loans sold by PMT to date represents the maximum exposure to

repurchases related to representations and warranties.

Loan Servicing Fees

Loan servicing fees and other remuneration are received by the Company for servicing residential loans. Loan servicing

activities are described under Mortgage servicing rights above. The Company’s obligation under its loan servicing agreements is

fulfilled as the Company services the loans.

Loan servicing fee amounts are based upon fee rates established at the time a loan sale or securitization is entered into and upon

the unpaid principal balance of the loans. Loan servicing fees are recognized in the period in which they are earned.

Share-Based Compensation

The Company amortizes the fair value of previously granted share-based awards to Compensation expense over the vesting

period using the graded vesting method. The initial cost of share-based awards is established at the Company’s closing share price

F-17

adjusted for the portion of the awards expected to vest on the date of the award. The Company adjusts the cost of its share-based

awards for changes in estimates of the portion of the awards it expects to be forfeited by grantees and for changes in expected

performance attainment in each subsequent reporting period until the units have vested or have been forfeited, the service being

provided is subsequently completed, or, under certain circumstances, is likely to be completed, whichever occurs first.

Income Taxes

The Company has elected to be taxed as a REIT and the Company believes PMT complies with the provisions of the Internal

Revenue Code applicable to REITs. Accordingly, the Company believes PMT will not be subject to federal income tax on that portion

of its REIT taxable income that is distributed to shareholders as long as certain asset, income and share ownership tests are met. If

PMT fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to income taxes and may

be precluded from qualifying as a REIT for the four tax years following the year of loss of the Company’s REIT qualification.

PMC, the Company’s taxable REIT subsidiary (“TRS”), is subject to federal and state income taxes. Income taxes are provided

for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable

to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which the

Company expects those temporary differences to be recovered or settled. The effect on deferred taxes of a change in tax rates is

recognized in income in the period in which the change occurs.

A valuation allowance is established if, in the Company’s judgment, realization of deferred tax assets is not more likely than

not. The Company recognizes a tax benefit relating to tax positions it takes only if it is more likely than not that the position will be

sustained upon examination by the appropriate taxing authority. A tax position that meets this standard is recognized as the largest

amount that exceeds 50 percent likelihood of being realized upon settlement. The Company will classify any penalties and interest as a

component of income tax expense.

Accounting Standard Adopted in 2022

Effective January 1, 2022, the Company adopted FASB Accounting Standards Update 2020-06, Debt – Debt with Conversion

and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)

(“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible instruments by removing certain separation models in ASC

subtopic 470-20, Debt – Debt with Conversion and Other Options for convertible instruments.

As a result of the adoption of ASU 2020-06, the Company reclassified approximately $50.3 million of issuance discount

originally recognized in the issuance of Exchangeable senior notes from Additional paid-in capital to the carrying value of the

Exchangeable senior notes and $9.4 million of previously recognized accrual of the issuance discount, as an adjustment to the

Accumulated deficit effective January 1, 2022. The adoption of ASU 2020-06 reduced Interest expense by approximately $7.1 million

for the year ended December 31, 2022, as the result of the reclassification of the issuance discount.

Note 4—Transactions with Related Parties

Operating Activities

Correspondent Production Activities

The Company is provided fulfillment and other services by PLS under an amended and restated mortgage banking services

agreement.

Through June 30, 2020, pursuant to the terms of the agreement, the monthly fulfillment fee was an amount equal to (a) no

greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all loans purchased in

such month, plus (b) in the case of all loans other than loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than

the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such loans sold and securitized in such month; provided however, that

no fulfillment fee shall be due or payable to PLS with respect to any loans underwritten in accordance with the Ginnie Mae MBS

Guide.

The Company does not hold the Ginnie Mae approval required to issue securities guaranteed by Ginnie Mae MBS and act as a

servicer. Accordingly, under the agreement, PLS currently purchases loans saleable in accordance with the Ginnie Mae MBS Guide

“as is” and without recourse of any kind from the Company at cost less any administrative fees paid by the correspondent to the

Company plus accrued interest and a sourcing fee, which, through June 30, 2020, ranged from two to three and one-half basis points,

generally based on the average number of calendar days loans are held by the Company prior to purchase by PLS. The Company may

also sell conventional loans to PLS under the same arrangement subject to mutual agreement between the parties.

F-18

Effective July 1, 2020, the fulfillment fees and sourcing fees were revised as follows.

Fulfillment and sourcing fees are summarized below:

• Fulfillment fees shall not exceed the following:

(iv) the number of loan commitments issued by the Company multiplied by a pull-through factor of either .99 or

.80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best

efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan

commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment

in excess of 16,500 per quarter, plus

(v) $315 multiplied by the number of purchased loans up to and including 16,500 per quarter and $195 multiplied

by the number of purchased loans in excess of 16,500 per quarter, plus

(vi) $750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie

Mae and Freddie Mac; provided however, that no fulfillment fee shall be due or payable to PLS with respect

to any Ginnie Mae loans, and as of October 1, 2022, designated Fannie Mae or Freddie Mac loans acquired by

PLS.

• Sourcing fees range from one to two basis points of the UPB, generally based on the average number of calendar

days the loans are held by PMT before purchase by PLS.

The mortgage banking services agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025,

subject to automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

The Company may purchase newly originated conforming balance non-government insured or guaranteed loans from PLS under

a mortgage loan purchase and sale agreement.

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

Year ended December 31,

2022

2021

2020

(in thousands)

Loan fulfillment fees earned by PLS

67,991

178,927

222,200

UPB of loans fulfilled by PLS

37,090,031

110,003,574

100,389,252

Sourcing fees received from PLS included in

Net gains on loans acquired for sale

4,968

6,472

11,037

UPB of loans sold to PLS

49,680,267

64,774,728

60,540,530

Purchases of loans acquired for sale from PLS

298,862

—

2,248,896

Tax service fees paid to PLS

8,418

26,126

23,408

December 31, 2022

December 31, 2021

(in thousands)

Loans included in Loans acquired for sale at fair value

pending sale to PLS

159,671

314,995

Loan Servicing

The Company, through its Operating Partnership, has a loan servicing agreement with PLS (the “Servicing Agreement”)

pursuant to which PLS provides subservicing for the Company's portfolio of MSRs, loans held for sale, loans held in VIEs (prime

servicing) and its portfolio of residential loans purchased with credit deterioration (special servicing). The Servicing Agreement

provides for servicing fees earned by PLS that are established at a fixed per loan monthly amount based on the delinquency,

bankruptcy and/or foreclosure status of the serviced loan or REO. The Servicing Agreement expires on June 30, 2025, subject to

automatic renewal for additional 18-month periods, unless terminated earlier in accordance with its terms.

F-19

Prime Servicing

The base servicing fees for prime loans subserviced by PLS on the Company’s behalf are $7.50 per month for fixed-rate loans

and $8.50 per month for adjustable-rate loans.

To the extent that these prime loans become delinquent, PLS is entitled to an additional servicing fee per loan ranging from $10

to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying

mortgaged property becomes REO.

PLS is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and

deboarding fees, liquidation and disposition fees, assumption, modification and origination fees.

Effective July 1, 2020, PLS also receives certain fees for COVID-19 pandemic-related forbearance and modification activities it

provides as required by the CARES Act.

Special Servicing

The base servicing fee rates for loans purchased with credit deterioration (distressed loans) range from $30 per month for

current loans up to $95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $75 per month. PLS

also receives a supplemental servicing fee of $25 per month for each distressed loan.

PLS receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to distressed

loans, as well as other market-based refinancing and loan disposition fees. PLS may also receive REO rental fees, property lease

renewal fees, property management fees, tenant paid application fees, late rent fees, and third-party vendor fees.

MSR Recapture Agreement

The Company has an MSR recapture agreement with PFSI. Pursuant to the terms of the MSR recapture agreement, if PFSI

refinances mortgage loans for which the Company previously held the MSRs, through June 30, 2020, PFSI was generally required to

transfer and convey to the Company cash in an amount equal to 30% of the fair market value of the MSRs related to all such loans so

originated.

Effective July 1, 2020, the 2020 MSR recapture agreement changed the recapture fee payable by PLS to a tiered amount equal to:

• 40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”;

• 35% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 15% and

up to 30%; and

• 30% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 30%.

The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to

(ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or

otherwise paid off in such month. PFSI has further agreed to allocate sufficient resources to target a recapture rate of at least 15%.

The MSR recapture agreement expires, unless terminated earlier in accordance with its terms, on June 30, 2025, subject to

automatic renewal for additional 18-month periods, unless terminated in accordance with its terms.

Following is a summary of loan servicing fees earned by PLS:

Year ended December 31,

2022

2021

2020

(in thousands)

Loan servicing fees:

Loans acquired for sale at fair value

1,018

2,363

2,067

Loans at fair value

529

505

807

MSRs

80,368

77,790

64,307

81,915

80,658

67,181

Average investment in:

Loans acquired for sale at fair value

1,938,470

4,135,140

3,469,392

Loans at fair value

1,615,982

481,433

223,628

Average MSR portfolio UPB

222,847,593

196,996,623

147,832,880

F-20

Management Fees

The Company has a management agreement with PCM pursuant to which PMT pays PCM management fees as follows:

• A base management fee that is calculated quarterly and is equal to the sum of (i) 1.5% per year of average shareholders’

equity up to $2 billion, (ii) 1.375% per year of average shareholders’ equity in excess of $2 billion and up to $5 billion,

and (iii) 1.25% per year of average shareholders’ equity in excess of $5 billion.

• A performance incentive fee that is calculated quarterly at a defined annualized percentage of the amount by which “net

income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on

“equity.”

The performance incentive fee is equal to the sum of: (a) 10% of the amount by which “net income” for the quarter exceeds

(i) an 8% return on “equity” plus the “high watermark”, up to (ii) a 12% return on “equity”; plus (b) 15% of the amount by which “net

income” for the quarter exceeds (i) a 12% return on “equity” plus the high watermark, up to (ii) a 16% return on “equity”; plus (c)

20% of the amount by which “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark”.

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

“Net income” is defined as net income or loss attributable to its common shares of beneficial interest (“Common Shares”)

calculated in accordance with GAAP, and adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-

cash charges after discussion between PCM and the Company’s independent trustees and after approval by a majority of the

Company’s independent trustees.

“Equity” is the weighted average of the issue price per Common Share of all of the Company’s public offerings, multiplied by

the weighted average number of Common Shares outstanding (including restricted share units) in the rolling four-quarter period.

“High watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of

return on “equity”) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the target

yield) for the four quarters then ended. The “high watermark” starts at zero and is adjusted quarterly. If “net income” is lower than the

target yield, the high watermark is increased by the difference. If the “net income” is higher than the target yield, the high watermark

is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the

threshold amounts required for PCM to earn a performance incentive fee are adjusted cumulatively based on the performance of

PMT’s “net income” over (or under) the target yield, until the “net income” in excess of the target yield exceeds the then-current

cumulative “high watermark” amount.

The base management fee and the performance incentive fee are both payable quarterly in arrears. The performance incentive

fee may be paid in cash or a combination of cash and the Company’s Common Shares (subject to a limit of no more than 50% paid in

Common Shares), at the Company’s option.

In the event of termination of the management agreement between the Company and PCM, PCM may be entitled to a

termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base

management fee, and (b) the average annual performance incentive fee earned by PCM, in each case during the 24-month period

before termination.

Following is a summary of management fee expenses:

Year ended December 31,

2022

2021

2020

(in thousands)

Base management

31,065

34,794

34,538

Performance incentive

—

3,007

—

31,065

37,801

34,538

Average shareholders' equity amounts used

to calculate base management fee expense

2,079,851

2,348,395

2,330,154

F-21

Expense Reimbursement and Amounts Payable to and Receivable from PCM

Under the management agreement, PCM is entitled to reimbursement of its organizational and operating expenses, including

third-party expenses, incurred on the Company’s behalf, it being understood that PCM and its affiliates shall allocate a portion of their

personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of the Company. PCM was

reimbursed $120,000 per fiscal quarter through June 30, 2020. Effective July 1, 2020, PMT’s reimbursement of PCM’s and its

affiliates’ compensation expenses was increased from $120,000 to $165,000 per fiscal quarter, such amount to be reviewed annually

and to not preclude reimbursement for any other services performed by PCM or its affiliates.

The Company is required to pay PCM and its affiliates a portion of rent, telephone, utilities, office furniture, equipment,

machinery and other office, internal and overhead expenses of PCM and its affiliates required for the Company’s and its subsidiaries’

operations. These expenses are allocated based on the ratio of the Company’s and its subsidiaries’ proportion of gross assets compared

to all remaining gross assets managed or owned by PCM and/or its affiliates as calculated at each fiscal quarter end.

Following is a summary of the Company’s reimbursements to PCM and its affiliates for expenses:

Year ended December 31,

2022

2021

2020

(in thousands)

Reimbursement of:

Expenses incurred on the Company’s

behalf, net

23,829

18,812

22,583

Common overhead incurred by PCM and

its affiliates

8,588

4,906

5,172

Compensation

660

570

33,077

24,378

28,325

Payments and settlements during the year (1)

144,012

284,381

378,162

(1) Payments and settlements include payments and netting settlements made pursuant to master netting agreements between the

Company and PFSI for the operating, investing and financing activities itemized in this Note.

Investing Activities

Spread Acquisition and MSR Servicing Agreements

The Company, through a wholly-owned subsidiary, PennyMac Holdings, LLC (“PMH”), has an amended and restated master

spread acquisition and MSR servicing agreement with PLS (the “Spread Acquisition Agreement”), pursuant to which the Company

may purchase from PLS, from time to time, participation certificates representing beneficial ownership in ESS arising from Ginnie

Mae MSRs acquired by PLS, in which case PLS generally would be required to service or subservice the related loans for Ginnie Mae.

The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by the Company

in connection with its participation in the GNMA MSR Facility (as defined below).

To the extent PLS refinances any of the loans relating to the ESS the Company has acquired, the Spread Acquisition Agreement

also contains recapture provisions requiring that PLS transfer to the Company, at no cost, the ESS relating to a certain percentage of

the UPB of the newly originated loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS

relating to newly originated Ginnie Mae loans is not equal to at least 90% of the product of the excess servicing fee rate and the UPB

of the refinanced loans, PLS is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month

where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the

excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains

provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market

value of the aggregate ESS to be transferred for the applicable month is less than $200,000, PLS may, at its option, settle its recapture

liability to the Company in cash in an amount equal to such fair market value in lieu of transferring such ESS.

The remaining balance of the ESS was repaid during the quarter ended March 31, 2021.

F-22

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

Year ended December 31,

2021

2020

(in thousands)

ESS:

Received pursuant to a recapture agreement

557

2,093

Repayments

134,624

32,377

Interest income

1,280

8,418

Net gain (loss) included in Net (losses) gains on investments

and financings:

Valuation changes

1,037

(24,970

)

Recapture income

614

2,241

1,651

(22,729

)

Financing Activities

PFSI held 75,000 of the Company’s Common Shares at both December 31, 2022 and December 31, 2021.

Repurchase Agreement with PLS

The Company, through PMH, has a master repurchase agreement with PLS (the “PMH Repurchase Agreement”), pursuant to

which PMH may borrow from PLS for the purpose of financing PMH’s participation certificates representing beneficial ownership in

ESS acquired from PLS under the Spread Acquisition Agreement. PLS then re-pledges such participation certificates to PNMAC

GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and Private

National Mortgage Acceptance Company, LLC, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the

purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

In the first quarter of 2021, PLS repurchased the ESS from PMH at fair market value, effectively terminating the borrowing

arrangements allowing PMH to finance its participation certificates representing beneficial ownership in ESS.

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

Year ended December 31,

2021

2020

(in thousands)

Net repayments of assets sold under agreements to

repurchase

80,862

26,650

Interest expense

387

3,325

Amounts Receivable from and Payable to PFSI

Amounts receivable from and payable to PFSI are summarized below:

December 31, 2022

December 31, 2021

(in thousands)

Due from PFSI-Miscellaneous receivables

3,560

15,953

Due to PFSI:

Allocated expenses and expenses and costs

paid by PFSI on PMT’s behalf

11,447

15,431

Management fees

7,307

8,918

Correspondent production fees

6,835

8,894

Loan servicing fees

6,740

6,848

Fulfillment fees

4,043

—

36,372

40,091

F-23

The Company has also transferred cash to PLS to fund loan servicing advances and REO property acquisition and preservation

costs on its behalf. Such amounts are included in various balance sheet items as summarized below:

Balance sheet line including advance amount

December 31, 2022

December 31, 2021

(in thousands)

Loan servicing advances

197,972

204,951

Real estate acquired in settlement of loans

3,479

7,115

201,451

212,066

Note 5—Loan Sales

The following table summarizes cash flows between the Company and transferees in transfers of loans that are accounted for as

sales where the Company maintains continuing involvement with the loans:

Year ended December 31,

2022

2021

2020

(in thousands)

Cash flows:

Proceeds from sales

39,077,156

110,919,477

106,306,805

Loan servicing fees received

625,210

526,245

406,060

The following table summarizes for the dates presented collection status information for loans that are accounted for as sales

where the Company maintains continuing involvement:

December 31, 2022

December 31, 2021

(in thousands)

UPB of loans outstanding

229,858,573

215,927,495

Collection status (UPB) (1)

Delinquency:

30-89 days delinquent

1,903,007

1,148,542

90 or more days delinquent:

Not in foreclosure

880,841

1,726,488

In foreclosure

70,921

36,658

Bankruptcy

123,239

130,582

Delinquent loans in COVID-19 pandemic-related

forbearance:

30-89 days

176,346

169,654

90 days or more

464,694

614,882

Custodial funds managed by the Company (2)

1,783,157

3,823,527

(1) Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment

relief in accordance with the CARES Act.

(2) Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing

agreements and are not included on the Company’s consolidated balance sheets. The Company earns placement fees on certain of

the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the

Company’s consolidated statements of operations.

Note 6—Variable Interest Entities

The Company is a variable interest holder in various VIEs that relate to its investing and financing activities.

Credit Risk Transfer Arrangements

The Company has previously entered into certain loan sales arrangements pursuant to which it accepts credit risk relating to the

loans sold in exchange for a portion of the interest earned on such loans. These arrangements absorb scheduled or realized credit

losses on such loans and include CRT Agreements, CRT strips and sales of loans that include firm commitments to purchase CRT

securities.

The Company, through its subsidiary, PMC, entered into CRT Agreements with Fannie Mae, pursuant to which PMC, through

subsidiary trust entities, sold pools of loans into Fannie Mae-guaranteed securitizations while retaining Recourse Obligations as part of

the retention of IO ownership interests in such loans. CRT Agreements are structured such that loans that reach a specific number of

days delinquent (including loans in forbearance, which also includes those subject to the forbearance provided in the CARES Act)

F-24

trigger losses chargeable to the CRT Agreements based on the size of the loan and a contractual schedule of loss severity. The

Company placed Deposits securing CRT arrangements into the subsidiary trust entities to secure its Recourse Obligations. The

Deposits securing CRT arrangements represent the Company’s maximum contractual exposure to claims under its Recourse

Obligations and are the sole source of settlement of losses under the CRT Agreements. The Company recognizes its IO ownership

interests and Recourse Obligations on the consolidated balance sheets as CRT Derivatives in Derivative assets and Derivative and

credit risk transfer strip liabilities.

Effective in June 2018, the Company began entering into a different type of CRT arrangement. Under the new arrangement, the

Company sold loans subject to agreements that required PMT to purchase securities that absorb incurred credit losses on such loans.

Unlike the CRT Agreements, these CRT securities require the Company to absorb losses only when the reference loans realize credit

losses. The Company recognized these firm purchase commitments initially as a component of Net gains on loans acquired for sale;

subsequent changes in fair value were recognized in Net (losses) gains on investments and financings. The final sales of loans subject

to this type of CRT arrangement were made during September 2020.

The Company purchased the securities subject to the firm commitments. Similar to the CRT Agreements, the Company

accounts for the deposits collateralizing these securities as Deposits securing CRT arrangements and recognizes its IO ownership

interests and Recourse Obligations as CRT strips which are also included on the consolidated balance sheet in Derivative and credit

risk transfer strip liabilities. Like CRT Agreements, the Deposits securing CRT arrangements relating to these arrangements represent

the Company’s maximum contractual exposure to losses. Gains and losses on the derivatives and strips (including the IO ownership

interest sold to nonaffiliates) included in the CRT arrangements are included in Net (losses) gains on investments and financings in the

consolidated statements of operations.

The Company’s exposure to losses under its Recourse Obligations was initially established at rates ranging from 3.5% to 4.0%

of the UPB of the loans sold under the CRT arrangements. As the UPB of the underlying loans subject to each CRT arrangement is

reduced through repayments, the percentage exposure of each CRT arrangement will increase to maximums ranging from 4.5% to

5.0% of outstanding UPB, although the total dollar amount of exposure to losses does not increase.

F-25

Following is a summary of the CRT arrangements:

Year ended December 31,

2022

2021

2020

(in thousands)

UPB of loans sold

18,277,263

Investments:

Deposits securing CRT arrangements

1,700,000

Change in expected face amount of firm

commitment to purchase CRT securities

(1,502,203

)

197,797

Net investment income:

Net (losses) gains on investments and financings:

CRT Derivatives and strips:

CRT derivatives

Realized

38,382

93,837

(53,965

)

Valuation changes

(42,220

)

(12,829

)

(82,633

)

(3,838

)

81,008

(136,598

)

CRT strips

Realized

60,389

111,872

54,929

Valuation changes

(110,356

)

175,955

(79,221

)

(49,967

)

287,827

(24,292

)

Interest-only security payable at fair value

(11,332

)

164

14,952

(65,137

)

368,999

(145,938

)

Firm commitments to purchase CRT securities

—

(121,067

)

(65,137

)

368,999

(267,005

)

Net gains on loans acquired for sale — Fair value

of firm commitment to purchase CRT

securities recognized upon sale of loans

—

(38,161

)

Interest income — Deposits securing CRT arrangements

21,324

559

7,012

(43,813

)

369,558

(298,154

)

Net (recoveries received) payments made to settle

(recoveries) losses on CRT arrangements

(19,016

)

(62,387

)

115,475

F-26

December 31, 2022

December 31, 2021

(in thousands)

Carrying value of CRT arrangements:

Derivative and credit risk transfer strip assets (liabilities), net

CRT derivatives

(22,098

)

18,964

CRT strips

(137,193

)

(26,837

)

(159,291

)

(7,873

)

Deposits securing CRT arrangements

1,325,294

1,704,911

Interest-only security payable at fair value

21,925

10,593

CRT arrangement assets pledged to secure borrowings:

Derivative assets

1,262

19,627

Deposits securing CRT arrangements (1)

1,325,294

1,704,911

UPB of loans underlying CRT arrangements

25,315,524

30,808,907

Collection status (UPB):

Delinquency (2)

Current

24,673,719

29,581,803

30-89 days delinquent

409,049

349,291

90-180 days delinquent

112,286

120,775

180 or more days delinquent

93,717

748,576

Foreclosure

26,753

8,462

Bankruptcy

54,395

64,694

Delinquent loans in COVID-19 pandemic-related forbearance plans:

30-89 days delinquent

35,388

44,015

90-180 days delinquent

39,033

57,815

180 or more days delinquent

35,588

174,041

(1) Deposits securing credit risk transfer strip liabilities also secure $160.6 million and $27.5 million in CRT strip and CRT

derivative liabilities at December 31, 2022 and 2021, respectively.

(2) Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment

relief in accordance with the CARES Act.

Subordinate Mortgage-Backed Securities

The Company retains or purchases subordinate MBS in transactions sponsored by PMC or a nonaffiliate. Cash inflows from the

loans underlying these securities are distributed to investors and service providers in accordance with the contractual priority of

payments and, as such, most of these inflows must be directed first to service and repay the senior securities.

The rights of holders of the subordinate securities to receive distributions of principal and/or interest, as applicable, are

subordinate to the rights of holders of the senior securities. After the senior securities are repaid, substantially all cash inflows will be

directed to the subordinate securities, including those held by the Company, until they are fully repaid.

The Company’s retention or purchase of subordinate MBS exposes PMT to the credit risk in the underlying loans because the

Company’s beneficial interests are among the first beneficial interests to absorb credit losses on those assets. The Company’s

exposure to losses from its investments in subordinate MBS is limited to its recorded investment in such securities.

F-27

Whether the Company concludes that it is the primary beneficiary of the VIEs issuing these subordinate MBS and therefore

consolidates these entities is based on its exposure to losses that could be significant to the VIEs and its power to direct activities that

most significantly impact the VIEs’ economic performance:

• Certain of the Company’s investments in subordinate MBS either do not expose the Company to losses or residual returns

that could be significant to the issuing VIE or the Company has concluded that it does not have the power to direct the

activities that most significantly impact the VIE’s economic performance. These investments are classified as subordinate

credit-linked securities in its investment in MBS as shown in Note 8 – Mortgage-Backed Securities.

• For other investments in subordinate MBS, comprised of transactions backed by loans purchased by the Company that were

subsequently included in securitizations sponsored by the Company or a nonaffiliate and serviced by PLS, the Company

concluded that it is the primary beneficiary of the VIEs as it has the power, through PLS, in its role as the servicer or sub-

servicer of the loans, to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance and,

as a holder of subordinate securities, is exposed to losses or residual returns that could potentially be significant to the VIEs.

Therefore, PMT consolidates the VIEs that issue those subordinate MBS.

The Company recognizes the interest income earned on the loans owned by the VIEs and the interest expense attributable to the

asset-backed securities issued to nonaffiliates by the VIEs on its consolidated statements of operations.

Following is a summary of the Company’s investment in subordinate mortgage-backed securities held in consolidated VIEs:

Year ended December 31,

2022

2021

2020

(in thousands)

Fair value changes:

Loans at fair value

(301,164

)

(12,536

)

(6,617

)

Asset-backed financings at fair value

283,586

19,708

5,519

Interest income

59,263

17,014

10,609

Interest expense

53,570

15,076

10,971

December 31, 2022

December 31, 2021

(in thousands)

Loans at fair value

1,509,942

1,564,565

Asset-backed financings at fair value

1,414,955

1,469,999

Subordinate MBS retained at fair value pledged to

secure Assets sold under agreements to repurchase

84,044

85,266

Note 7—Fair Value

Fair Value Accounting Elections

The Company identified all of PMT’s non-cash financial assets, firm commitment to purchase CRT securities and MSRs to be

accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be

reflected in income as they occur and more timely reflect the results of the Company’s performance.

The Company also identified PMT’s asset-backed financings of VIEs and interest only security payable to be accounted for at

fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the assets at fair value

collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting is more appropriate

because under this method debt issuance costs are amortized over the term of the debt facility, thereby matching the debt issuance cost

to the periods benefiting from the availability of the debt.

F-28

Financial Statement Items Measured at Fair Value on a Recurring Basis

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

December 31, 2022

Level 1

Level 2

Level 3

Total

(in thousands)

Assets:

Short-term investments

252,271

—

252,271

Mortgage-backed securities at fair value

—

4,462,601

—

4,462,601

Loans acquired for sale at fair value

—

1,811,225

10,708

1,821,933

Loans at fair value

—

1,509,942

3,457

1,513,399

Derivative assets:

Call options on interest rate futures purchase contracts

2,906

—

2,906

Put options on interest rate futures purchase contracts

8,130

—

8,130

Forward purchase contracts

—

418

—

418

Forward sale contracts

—

43,435

—

43,435

MBS put options

—

2,783

—

2,783

CRT derivatives

—

1,262

Interest rate lock commitments

—

3,877

Total derivative assets before netting

11,036

46,636

5,139

62,811

Netting

—

22,129

Total derivative assets after netting

11,036

46,636

5,139

84,940

Mortgage servicing rights at fair value

—

4,012,737

263,307

7,830,404

4,032,041

12,147,881

Liabilities:

Asset-backed financings at fair value

—

1,414,955

—

1,414,955

Interest-only security payable at fair value

—

21,925

Derivative and credit risk transfer strip liabilities:

Forward purchase contracts

—

15,196

—

15,196

Forward sales contracts

—

17,279

—

17,279

CRT derivatives

—

23,360

Interest rate lock commitments

—

4,355

Total derivative liabilities before netting

—

32,475

27,715

60,190

Netting

—

(30,157

)

Total derivative liabilities after netting

—

32,475

27,715

30,033

Credit risk transfer strips

—

137,193

Total derivative and credit risk transfer strip

liabilities

—

32,475

164,908

167,226

—

1,447,430

186,833

1,604,106

F-29

December 31, 2021

Level 1

Level 2

Level 3

Total

(in thousands)

Assets:

Short-term investments

167,999

—

167,999

Mortgage-backed securities at fair value

—

2,666,768

—

2,666,768

Loans acquired for sale at fair value

—

4,140,896

30,129

4,171,025

Loans at fair value

—

1,564,565

4,161

1,568,726

Derivative assets:

Call options on interest rate futures purchase contracts

2,828

—

2,828

Put options on interest rate futures purchase contracts

3,180

—

3,180

Forward purchase contracts

—

5,806

—

5,806

Forward sale contracts

—

6,307

—

6,307

MBS put options

—

3,662

—

3,662

Swaption purchase contracts

—

CRT derivatives

—

19,627

Interest rate lock commitments

—

3,897

Total derivative assets before netting

6,008

15,814

23,524

45,346

Netting

—

(11,108

)

Total derivative assets after netting

6,008

15,814

23,524

34,238

Mortgage servicing rights at fair value

—

2,892,855

174,007

8,388,043

2,950,669

11,501,611

Liabilities:

Asset-backed financings at fair value

—

1,469,999

—

1,469,999

Interest-only security payable at fair value

—

10,593

Derivative liabilities and credit risk transfer strips:

Forward purchase contracts

—

3,620

—

3,620

Forward sales contracts

—

13,782

—

13,782

CRT derivatives

—

663

Interest rate lock commitments

—

1,446

Total derivative liabilities before netting

—

17,402

2,109

19,511

Netting

—

(4,142

)

Total derivative liabilities after netting

—

17,402

2,109

15,369

Credit risk transfer strips

—

26,837

Total derivative and credit risk transfer strip

liabilities

—

17,402

28,946

42,206

—

1,487,401

39,539

1,522,798

F-30

The following is a summary of changes in items measured at fair value on a recurring basis using “Level 3” inputs that are

significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the years presented:

Year ended December 31, 2022

Assets (1)

Loans

acquired

for sale

Loans at

fair

value

CRT

derivatives

Interest rate

lock

commitments

CRT

strips

Mortgage

servicing

rights

Total

(in thousands)

Balance, December 31, 2021

30,129

4,161

18,964

2,451

(26,837

)

2,892,855

2,921,723

Purchases and issuances

13,619

—

(87,393

)

—

(73,774

)

Repayments and sales

(29,674

)

(1,390

)

(37,224

)

—

(60,389

)

—

(128,677

)

Amounts received pursuant to

sales of loans

—

670,343

Changes in fair value included in income

arising from:

Changes in

instrument - specific credit risk

—

Other factors

(3,366

)

686

(3,838

)

(234,146

)

(49,967

)

449,435

158,804

(3,366

)

686

(3,838

)

(234,146

)

(49,967

)

449,435

158,804

Transfers of:

Interest rate lock commitments to loans

acquired for sale (2)

—

318,610

—

318,610

Mortgage servicing rights relating to

delinquent loans to Agency

—

104

Balance, December 31, 2022

10,708

3,457

(22,098

)

(478

)

(137,193

)

4,012,737

3,867,133

Changes in fair value recognized during

the year relating to assets still held at

December 31, 2022

(1,098

)

196

(42,220

)

(478

)

(110,356

)

449,435

295,479

(1) For the purpose of this table, CRT derivative, interest rate lock commitment (“IRLC”), and CRT strip asset and liability

positions are shown net.

(2) The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value

upon purchase of the respective loans.

Liabilities

Year ended

December 31, 2022

(in thousands)

Interest-only security payable:

Balance, December 31, 2021

10,593

Changes in fair value included in results of operations

arising from:

Changes in instrument - specific credit risk

—

Other factors

11,332

Balance, December 31, 2022

21,925

Changes in fair value recognized during the year relating

to liability outstanding at December 31, 2022

11,332

F-31

Year ended December 31, 2021

Assets (1)

Loans

acquired

for sale

Loans at

fair

value

Excess

servicing

spread

CRT

derivatives

Interest

rate lock

commitments

CRT strips

Mortgage

servicing

rights

Total

(in thousands)

Balance, December 31, 2020

33,875

8,027

131,750

31,795

72,386

(202,792

)

1,755,236

1,830,277

Purchases and issuances

86,285

—

76,934

—

163,219

Repayments and sales

(90,603

)

(5,121

)

(134,624

)

(93,839

)

—

(111,872

)

—

(436,059

)

Capitalization of interest

—

251

1,280

—

1,531

ESS received pursuant to a

recapture agreement with PFSI

—

557

—

557

Amounts received pursuant

to sales of loans

—

1,484,629

Changes in fair value included

in results of operations arising from:

Changes in instrument -

specific credit risk

—

Other factors

572

610

1,037

81,008

(156,840

)

287,827

(337,186

)

(122,972

)

572

610

1,037

81,008

(156,840

)

287,827

(337,186

)

(122,972

)

Transfers of:

Loans from REO

—

394

—

394

Interest rate lock commitments

to loans acquired for sale (2)

—

9,971

—

9,971

Recombination of MSRs with loans

at fair value resulting from

consolidation of a VIE

—

(9,824

)

(9,824

)

Balance, December 31, 2021

30,129

4,161

—

18,964

2,451

(26,837

)

2,892,855

2,921,723

Changes in fair value

recognized during the year

relating to assets still held

at December 31, 2021

(157

)

(371

)

—

(12,829

)

2,451

175,955

(337,186

)

(172,137

)

(1) For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.

(2) The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value

upon purchase of the respective loans.

Liabilities

Year ended

December 31, 2021

(in thousands)

Interest-only security payable:

Balance, December 31, 2020

10,757

Changes in fair value included in income arising from:

Changes in instrument - specific credit risk

—

Other factors

(164

)

(164

)

Balance, December 31, 2021

10,593

Changes in fair value recognized during the year

relating to liability outstanding at December 31, 2021

(164

)

F-32

Year ended December 31, 2020

Assets (1)

Loans

acquired

for sale

Loans

fair

value

Excess

servicing

spread

CRT

derivatives

Interest

rate lock

commitments

CRT

strips

Repurchase

agreement

derivatives

Firm

commitments

to purchase

CRT

securities

Mortgage

servicing

rights

Total

(in thousands)

Balance, December 31, 2019

18,567

14,426

178,586

115,863

11,154

54,930

5,275

109,513

1,535,705

2,044,019

Purchases and issuances

74,339

1,058

—

369,802

—

445,199

Repayments and sales

(58,290

)

(5,734

)

(32,377

)

52,530

—

(54,929

)

(5,328

)

(128,786

)

(232,921

)

Capitalization of interest

—

8,418

—

8,418

ESS received pursuant to a

recapture agreement with

PFSI

—

2,093

—

2,093

Amounts (incurred) received

pursuant to sales of loans

—

(38,161

)

1,158,475

1,120,314

Changes in fair value included

in results of operations

arising from:

Changes in instrument -

specific credit risk

—

Other factors

(741

)

(837

)

(24,970

)

(136,598

)

536,943

(24,292

)

(121,067

)

(938,937

)

(710,446

)

(741

)

(837

)

(24,970

)

(136,598

)

536,943

(24,292

)

(121,067

)

(938,937

)

(710,446

)

Transfers of:

Loans to REO

—

(886

)

—

(886

)

Firm commitment to purchase

CRT securities to CRT strips

—

(178,501

)

—

178,501

—

Interest rate lock commitments

to loans acquired for sale (2)

—

(845,513

)

—

(845,513

)

Balance, December 31, 2020

33,875

8,027

131,750

31,795

72,386

(202,792

)

—

1,755,236

1,830,277

Changes in fair value

recognized during the year

relating to assets still held

at December 31, 2020

(899

)

(1,033

)

(24,970

)

(82,633

)

72,386

(79,221

)

—

(938,937

)

(1,055,307

)

(1) For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.

(2) The Company had transfers among the fair value levels arising from transfers of IRLCs to loans acquired for sale at fair value

upon purchase of the respective loans.

Liabilities

Year ended

December 31, 2020

(in thousands)

Interest-only security payable:

Balance, December 31, 2019

25,709

Changes in fair value included in income arising from:

Changes in instrument - specific credit risk

—

Other factors

(14,952

)

(14,952

)

Balance, December 31, 2020

10,757

Changes in fair value recognized during the year

relating to liability outstanding at December 31, 2020

(14,952

)

F-33

Financial Statement Items Measured at Fair Value under the Fair Value Option

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

(including loans acquired for sale, loans held in consolidated VIEs, and distressed loans):

December 31, 2022

December 31, 2021

Fair value

Principal

amount due

upon maturity

Difference

Fair value

Principal

amount due

upon maturity

Difference

(in thousands)

Loans acquired for sale at fair value:

Current through 89 days delinquent

1,819,551

1,795,445

24,106

4,166,177

4,048,967

117,210

90 or more days delinquent:

Not in foreclosure

1,666

1,927

(261

)

4,848

5,801

(953

)

In foreclosure

716

809

(93

)

—

2,382

2,736

(354

)

4,848

5,801

(953

)

1,821,933

1,798,181

23,752

4,171,025

4,054,768

116,257

Loans at fair value:

Held in consolidated VIEs:

Current through 89 days delinquent

1,508,540

1,788,911

(280,371

)

1,561,794

1,514,575

47,219

90 or more days delinquent:

Not in foreclosure

1,231

1,642

(411

)

2,141

2,722

(581

)

In foreclosure

171

226

(55

)

630

809

(179

)

1,402

1,868

(466

)

2,771

3,531

(760

)

1,509,942

1,790,779

(280,837

)

1,564,565

1,518,106

46,459

Distressed:

Current through 89 days delinquent

498

682

(184

)

782

1,455

(673

)

90 or more days delinquent:

Not in foreclosure

1,230

2,964

(1,734

)

1,181

3,824

(2,643

)

In foreclosure

1,729

2,728

(999

)

2,198

5,490

(3,292

)

2,959

5,692

(2,733

)

3,379

9,314

(5,935

)

3,457

6,374

(2,917

)

4,161

10,769

(6,608

)

1,513,399

1,797,153

(283,754

)

1,568,726

1,528,875

39,851

Following are the changes in fair value included in current period results of operations by consolidated statements of operations

line item for financial statement items accounted for under the fair value option:

Year ended December 31, 2022

Net loan

servicing fees

Net (losses) gains

on investments

and financings

Net gains on

loans acquired

for sale

Net interest

expense

Total

(in thousands)

Assets:

Mortgage-backed securities at fair value

—

(576,758

)

—

12,697

(564,061

)

Loans acquired for sale at fair value

—

(539,102

)

—

(539,102

)

Loans at fair value

—

(300,478

)

—

(1,109

)

(301,587

)

Credit risk transfer strips

—

(49,967

)

—

(49,967

)

MSRs at fair value

449,435

—

449,435

(927,203

)

(539,102

)

11,588

(1,005,282

)

Liabilities:

Interest-only security payable at fair value

—

(11,332

)

—

(11,332

)

Asset-backed financings at fair value

—

283,586

—

1,773

285,359

—

272,254

—

1,773

274,027

F-34

Year ended December 31, 2021

Net loan

servicing fees

Net (losses) gains

on investments

and financings

Net gains on

loans acquired

for sale

Net interest

expense

Total

(in thousands)

Assets:

Mortgage-backed securities at fair value

—

(74,354

)

—

(9,323

)

(83,677

)

Loans acquired for sale at fair value

—

3,960

—

3,960

Loans at fair value

—

(11,925

)

—

(1,624

)

(13,549

)

ESS at fair value

—

1,037

—

1,280

2,317

Credit risk transfer strips

—

287,827

—

287,827

MSRs at fair value

(337,186

)

—

(337,186

)

(337,186

)

202,585

3,960

(9,667

)

(140,308

)

Liabilities:

Interest-only security payable at fair value

—

164

—

164

Asset-backed financings at fair value

—

19,708

—

(1,144

)

18,564

—

19,872

—

(1,144

)

18,728

Year ended December 31, 2020

Net loan

servicing fees

Net (losses) gains

on investments

and financings

Net gains on

loans acquired

for sale

Net interest

expense

Total

(in thousands)

Assets:

Mortgage-backed securities at fair value

—

87,852

—

(23,323

)

64,529

Loans acquired for sale at fair value

—

817,158

—

817,158

Loans at fair value

—

(7,454

)

—

2,776

(4,678

)

ESS at fair value

—

(24,970

)

—

8,418

(16,552

)

Credit risk transfer strips

—

(24,292

)

—

(24,292

)

Firm commitment to purchase CRT

securities at fair value

—

(121,067

)

(38,161

)

—

(159,228

)

MSRs at fair value

(938,937

)

—

(938,937

)

(938,937

)

(89,931

)

778,997

(12,129

)

(262,000

)

Liabilities:

Interest-only security payable

—

14,952

—

14,952

Asset-backed financings at fair value

—

5,519

—

(4,218

)

1,301

—

20,471

—

(4,218

)

16,253

Financial Statement Item Measured at Fair Value on a Nonrecurring Basis

Following is a summary of the carrying value of assets that were re-measured during the year based on fair value on a

nonrecurring basis:

Real estate acquired in settlement of loans

Level 1

Level 2

Level 3

Total

(in thousands)

December 31, 2022

—

1,292

December 31, 2021

—

5,147

The following table summarizes the fair value changes recognized during the year on assets held at year end that were

remeasured based on fair value on a nonrecurring basis:

Year ended December 31,

2022

2021

2020

(in thousands)

Real estate asset acquired in settlement of loans

(505

)

279

(1,638

)

The Company remeasures its REO based on fair value when it evaluates the REO for impairment. The Company evaluates its

REO for impairment with reference to the respective properties’ fair values less costs to sell. REO may be revalued after acquisition

F-35

due to the Company receiving greater access to the property, the property being held for an extended period or receiving indications

that the property’s fair value may not be supported by developing market conditions. Any subsequent change in fair value to a level

that is less than or equal to the property’s cost is recognized in Results of real estate acquired in settlement of loans in the Company’s

consolidated statements of operations.

Fair Value of Financial Instruments Carried at Amortized Cost

Most of the Company’s borrowings are carried at amortized cost. The Company’s Assets sold under agreements to repurchase,

Mortgage loan participation purchase and sale agreements, Notes payable secured by credit risk transfer and mortgage servicing

assets and Exchangeable senior notes are classified as “Level 3” fair value liabilities due to the Company’s reliance on unobservable

inputs to estimate these instruments’ fair values.

The Company has concluded that the fair values of these borrowings, other than the Exchangeable senior notes, Notes payable

secured by credit risk transfer and mortgage servicing assets described in Note 15—Long-Term Debt, approximate the agreements’

carrying values due to the borrowing agreements’ variable interest rates and short maturities.

Following are the carrying and fair values of the Notes payable secured by credit risk transfer and mortgage servicing assets

and Exchangeable senior notes:

December 31, 2022

December 31, 2021

Instrument

Carrying value

Fair value

Carrying value

Fair value

(in thousands)

Notes payable secured by credit risk transfer

and mortgage servicing assets

2,804,028

2,721,391

2,471,961

2,480,842

Exchangeable senior notes

546,254

471,781

502,459

536,460

The Company estimates the fair value of the Notes payable secured by credit risk transfer and mortgage servicing assets and

Exchangeable senior notes using indications of fair value provided by nonaffiliate brokers.

Valuation Governance

Most of the Company’s assets, its Asset-backed financings at fair value, Interest-only security payable at fair value and

Derivative and credit risk transfer strip liabilities at fair value are carried at fair value with changes in fair value recognized in current

period results of operations. A substantial portion of these items are “Level 3” fair value assets and liabilities which require the use of

unobservable inputs that are significant to the estimation of the fair values of the assets and liabilities. Unobservable inputs reflect the

Company’s own judgments about the factors that market participants use in pricing an asset or liability and are based on the best

information available under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned

responsibility for estimating the fair value of these assets and liabilities to specialized staff and subjects the valuation process to

significant senior management oversight:

• PFSI’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3”

fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures.

• PFSI’s Capital Markets Risk Management staff is responsible for estimating the fair value of the Company’s IRLCs which

is reviewed by PFSI’s Capital Markets Operations group.

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to PFSI’s senior management valuation committee,

which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets

and liabilities other than IRLCs, including the models’ performance versus actual results, and reports those results to PFSI’s senior

management valuation committee. PFSI’s senior management valuation committee includes the Company’s chief financial, risk,

credit, and deputy chief investment officers as well as other senior members of the Company’s finance, capital markets and risk

management staffs.

The FAV group is responsible for reporting to PFSI’s senior management valuation committee on the changes in the valuation

of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model

methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation

of changes to the significant inputs to the models and for MSRs, comparisons of its estimates of fair value to those procured from

nonaffiliates brokers and comparisons of key inputs used in the Company’s valuation model to published surveys.

F-36

Valuation Techniques and Inputs

The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair

value assets and liabilities:

Mortgage-Backed Securities

The Company categorizes its current holdings of securities accounted for as MBS as “Level 2” fair value assets. Fair value of

these MBS is established based on quoted market prices for the Company’s MBS holdings or similar securities. Changes in the fair

value of MBS are included in Net (losses) gains on investments and financings in the consolidated statements of operations.

Loans

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

• Loans that are saleable into active markets, comprised of most of the Company’s loans acquired for sale at fair value and

all of the loans at fair value held in VIEs, are categorized as “Level 2” fair value assets:

• For loans acquired for sale, the fair values are established using the loans’ contracted selling price or quoted market

price or market price equivalent.

• For the loans at fair value held in VIEs, the quoted indications of fair value of all of the individual securities issued by

the securitization trusts are used to derive fair values for the loans. The Company obtains indications of fair value

from nonaffiliated brokers based on comparable securities and validates the brokers’ indications of fair value using

pricing models and inputs the Company believes are similar to the models and inputs used by other market

participants. The Company adjusts the fair values received from brokers to include the fair value of MSRs

attributable to the loans held by the Company included in the VIEs.

• Loans that are not saleable into active markets, comprised of previously sold loans that the Company repurchased

pursuant to the representation and warranties it provided to the purchaser and distressed loans, are categorized as

“Level 3” fair value assets:

• Fair value for loans acquired for sale categorized as “Level 3” assets is estimated using a discounted cash flow

approach or their contracted selling price when applicable. Inputs to the discounted cash flow model include current

interest rates, payment status, property type, discount rates and forecasts of future interest rates, home prices,

prepayment speeds, default speeds and loss severities.

• Distressed loans’ fair values are estimated based on the expected resolution to be realized from the individual

asset’s disposition strategy. When a cash flow projection is used to estimate the fair value of the resolution, those

cash flows are discounted at annual rates up to 20%.

Derivative and Credit Risk Transfer Strip Assets and Liabilities

CRT Derivatives

The Company categorizes CRT derivatives as “Level 3” fair value assets and liabilities. The fair value of CRT derivatives is

based on indications of fair value provided to the Company by nonaffiliated brokers for the certificates representing the beneficial

interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the Recourse Obligations

and the IO ownership interests. Together, the Recourse Obligation and the IO ownership interest comprise the CRT derivative. Fair

value of the CRT derivatives is derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to

creditors from the fair value of the certificates.

The Company assesses the fair values it receives from nonaffiliated brokers using the discounted cash flow approach. The

significant unobservable inputs used by the Company in its review and approval of the valuation of CRT derivatives are the discount

rate, voluntary and involuntary prepayment speeds and the remaining loss (recovery) expectations of the reference loans. Changes in

fair value of CRT derivatives are included in Net (losses) gains on investments and financings in the consolidated statements of

operations.

F-37

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided

fair values for CRT derivatives:

December 31, 2022

December 31, 2021

(dollars in thousands)

Fair value

CRT derivatives:

Assets

1,262

19,627

Liabilities

23,360

663

UPB of loans in reference pools

5,972,060

7,426,288

Key inputs (1)

Discount rate

Range

8.7% – 11.1%

3.3% – 5.9%

Weighted average

10.8%

5.7%

Voluntary prepayment speed (2)

Range

7.5% – 8.3%

12.6% – 13.1%

Weighted average

7.6%

12.7%

Involuntary prepayment speed (3)

Range

0.5% – 1.3%

(0.1)% – 0.8%

Weighted average

0.6%

0.1%

Remaining loss (recovery) expectation (4)

Range

0.4% – 0.7%

(0.1)% – 0.6%

Weighted average

0.6%

0.1%

(1) Weighted average inputs are based on fair value amounts of the CRT Agreements, except for remaining loss (recovery)

expectation which is based on the UPB of the loans in the reference pools.

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

(3) Involuntary prepayment speed is measured using Life Involuntary CPR. Negative involuntary prepayment speed reflects the

expectation for reinstatement to the reference pool of a portion of the loans that previously triggered contractual losses due to

delinquency while under CARES Act forbearance upon their expected re-performance, as contractually provided for in certain

CRT Agreements.

(4) Remaining loss (recovery) expectation is measured as expected future contractual losses divided by the UPB of the reference

loans. Negative remaining loss expectation reflects the expectation of contractual reversals of previously incurred contractual

losses due to the expected re-performance of a portion of the loans that experienced delinquency while under CARES Act

forbearance.

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair value of IRLCs

based on quoted Agency MBS prices, the probability that the loans will be purchased under the commitments (the “pull-through rate”)

and the Company’s estimate of the fair value of the MSRs it expects to receive upon sale of the loans.

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rates and

the estimated MSRs attributed to the mortgage loans subject to the commitments. Significant changes in the pull-through rate or the

MSR component of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair value. The financial effects of

changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the

MSR component of an IRLC’s fair value, but also increase the pull-through rate for the loan principal and interest payment cash flow

component that has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans acquired for sale in the

consolidated statements of operations.

F-38

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

December 31, 2022

December 31, 2021

Fair value (in thousands) (1)

(478

)

2,451

Committed amount (in thousands)

1,484,384

2,092,129

Key inputs (2)

Pull-through rate

Range

54.8% – 100%

64.3% – 100%

Weighted average

92.1%

91.4%

MSR fair value expressed as

Servicing fee multiple

Range

1.9 – 7.1

0.5 – 6.3

Weighted average

4.7

4.5

Percentage of UPB

Range

0.7% – 3.1%

0.3% – 2.7%

Weighted average

1.9%

1.5%

(1) For purposes of this table, IRLC asset and liability positions are shown net.

(2) Weighted-average inputs are based on the committed amounts.

Hedging Derivatives

Fair value of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair

value assets and liabilities. Fair values of derivative financial instruments based on observable interest rates, volatilities and prices in

the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities. Changes in the fair value of

hedging derivatives are included in Net loan servicing fees – From nonaffiliates – Mortgage servicing rights hedging results, Net

(losses) gains on investments and financings, or Net gains on loans acquired for sale, as applicable, in the consolidated statements of

operations.

Credit Risk Transfer Strips

The Company categorizes CRT strips as “Level 3” fair value assets or liabilities. The fair value of CRT strips is based on

indications of fair value provided to the Company by nonaffiliated brokers for the securities representing the beneficial interests in the

trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the IO ownership interest and Recourse

Obligation. Together, the IO ownership interest and the Recourse Obligation comprise the CRT strip.

Fair value of the CRT strips is derived by deducting the balance of the Deposits securing credit risk transfer arrangements

pledged to creditors from the fair value of the securities derived from indications provided by the nonaffiliated brokers. Through

December 31, 2021, the Company applied adjustments to the fair value derived from these indications to account for contractual

restrictions limiting PMT’s ability to sell certain of the certificates. During the quarter ended March 31, 2022, the contractual

restrictions on the Company’s ability to sell the certificates were removed. Therefore, the Company did not include adjustments

relating to restrictions on the transfer of certificates in the fair value of the certificates as of December 31, 2022.

The Company assesses the indications of fair value it receives from nonaffiliated brokers using the discounted cash flow

approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of the CRT strips are

the discount rate, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in

fair value of CRT strips are included in Net (losses) gains on investments and financings in the consolidated statements of operations.

F-39

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of the adjusted

broker-provided fair values used to derive the value of the CRT strip liabilities:

December 31, 2022

December 31, 2021

(dollars in thousands)

Fair value

137,193

26,837

UPB of loans in the reference pools

19,343,464

23,382,619

Key inputs (1)

Discount rate

Range

4.3% – 11.3%

3.8% – 6.4%

Weighted average

10.5%

6.0%

Voluntary prepayment speed (2)

Range

7.7% – 7.9%

14.9% – 17.6%

Weighted average

7.7%

17.2%

Involuntary prepayment speed (3)

Range

0.6% – 2.0%

0.5% – 1.4%

Weighted average

0.8%

0.6%

Remaining loss expectation (4)

Range

0.7% – 2.0%

0.3% – 1.1%

Weighted average

0.9%

0.5%

(1) Weighted average inputs are based on fair value amounts of the CRT arrangements, except for remaining loss expectation which

is based on the UPB of the loans in the reference pools.

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

(3) Involuntary prepayment speed is measured using Life Involuntary CPR.

(4) Remaining loss expectation is measured as expected future losses divided by the UPB of the loans in the reference pools.

Mortgage Servicing Rights

The Company categorizes MSRs as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate

the fair value of MSRs. The fair value of MSRs is derived from the net positive cash flows associated with the servicing agreements.

The Company receives a servicing fee based on the remaining UPB of the loans subject to the servicing agreements and generally has

the right to receive other remuneration including various mortgagor-contracted fees such as late charges and collateral reconveyance

charges, and is generally entitled to retain any placement fees earned on funds held pending remittance of mortgagor principal,

interest, tax and insurance payments.

The key inputs used in the estimation of the fair value of MSRs include the prepayment speeds of the underlying loans, the

applicable pricing spreads, and the annual per-loan cost to service the loans, all of which are unobservable. Significant changes to any

of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not

directly related. Changes in the fair value of MSRs are included in Net loan servicing fees – From nonaffiliates – Change in fair value

of mortgage servicing rights in the consolidated statements of operations.

MSRs are generally subject to loss in fair value when mortgage interest rates decrease, when returns required by market

participants (pricing spreads) increase, or when annual per-loan cost of servicing increases. Reductions in the fair value of MSRs

affect income primarily through recognition of the change in fair value.

F-40

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

Year ended December 31,

2022

2021

2020

(MSR recognized and UPB of underlying loans amounts

in thousands)

MSR recognized

670,343

1,484,629

1,158,475

UPB of underlying loans

39,014,110

108,424,795

103,136,121

Weighted average annual servicing fee rate (in basis points)

Key inputs (1)

Pricing spread (2)

Range

5.5% – 8.9%

6.0% – 8.0%

6.7% – 11.3%

Weighted average

6.3%

7.2%

7.8%

Prepayment speed (3)

Range

5.5% – 19.7%

5.5% – 12.5%

7.0% – 20.9%

Weighted average

9.3%

8.2%

10.0%

Equivalent average life (in years)

Range

4.0 – 9.6

3.5 – 9.1

3.5 – 9.2

Weighted average

8.0

8.1

7.4

Annual per-loan cost of servicing

Range

$73 – $81

$80 – $81

$78 – $81

Weighted average

$79

$80

(1) Weighted average inputs are based on UPB of the underlying loans.

(2) Through December 31, 2021, the Company applied pricing spreads to the forward rates implied by the United States Dollar

London Inter-Bank Offered Rate (“LIBOR”)/swap curve for purposes of discounting cash flows relating to MSRs. Effective

January 1, 2022, the Company adopted the United States Treasury (“Treasury”) securities yield curve for purpose of

discounting cash flows relating to MSRs. The change in reference rate did not have a significant effect on the Company’s

estimates of fair value.

(3) Prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments.

Equivalent average life is provided as supplementary information.

F-41

Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the

fair value from adverse changes in those inputs:

December 31, 2022

December 31, 2021

(Fair value, UPB of underlying loans

and effect on fair value amounts in thousands)

Fair value

4,012,737

2,892,855

UPB of underlying loans

229,971,035

216,065,626

Weighted average annual servicing fee rate (in basis points)

Weighted average note interest rate

3.5%

3.0%

Key inputs (1)

Pricing spread (2)

Range

4.9% – 8.8%

6.0% – 8.0%

Weighted average

5.7%

7.2%

Effect on fair value of (3):

5% adverse change

$(52,004)

$(39,826)

10% adverse change

$(102,727)

$(78,613)

20% adverse change

$(200,497)

$(153,220)

Prepayment speed (4)

Range

5.1% – 17.4%

5.5% – 12.5%

Weighted average

6.3%

8.2%

Equivalent average life (in years)

Range

3.5 – 9.3

3.5 – 9.1

Weighted average

8.9

8.1

Effect on fair value of (3):

5% adverse change

$(51,044)

$(59,726)

10% adverse change

$(100,544)

$(117,162)

20% adverse change

$(195,201)

$(225,672)

Annual per-loan cost of servicing

Range

$69 – $69

$80 – $81

Weighted average

$69

$80

Effect on fair value of (3):

5% adverse change

$(17,629)

$(17,585)

10% adverse change

$(35,258)

$(35,169)

20% adverse change

$(70,515)

$(70,338)

(1) Weighted-average inputs are based on the UPB of the underlying loans.

(2) Through December 31, 2021, the Company applied pricing spreads to the forward rates implied by the United States Dollar

LIBOR/swap curve for purposes of discounting cash flows relating to MSRs. Effective January 1, 2022, the Company

adopted the Treasury securities yield curve for the purpose of discounting cash flows relating to MSRs. The change in

reference rate did not have a significant effect on the Company’s estimates of fair value.

(3) These sensitivity analyses are limited in that they were performed as of a particular date; only account for the estimated effect

of the movements in the indicated inputs; do not incorporate changes in those inputs in relation to other inputs; are subject to

the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall

financial performance in such events, including operational adjustments to account for changing circumstances. For these

reasons, these estimates should not be viewed as earnings forecasts.

(4) Prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments.

Equivalent average life is provided as supplementary information.

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” fair value asset. Fair value of

REO is established by using a current estimate of fair value from either a broker’s price opinion, a full appraisal, or the price given in

a pending contract of sale.

F-42

REO fair values are reviewed by PLS staff appraisers when the Company obtains multiple indications of fair value and there is a

significant difference between the indications of fair value. PLS staff appraisers will attempt to resolve the difference between the

indications of fair value. In circumstances where the staff appraiser is not able to generate adequate data to support a fair value

conclusion, the staff appraiser obtains an additional appraisal to determine fair value. Recognized changes in the fair value of REO are

included in Results of real estate acquired in settlement of loans in the consolidated statements of operations.

Note 8—Mortgage-Backed Securities

Following is a summary of activity in the Company’s investment in MBS:

Year ended December 31,

2022

2021

2020

(in thousands)

Balance at beginning of year

2,666,768

2,213,922

2,839,633

Purchases

3,718,093

2,232,923

2,332,096

Sales

(1,079,826

)

(1,300,653

)

(1,979,789

)

Repayments

(278,373

)

(395,747

)

(1,042,547

)

Changes in fair value included in income arising from:

Accrual (amortization) of net purchase (discounts) premiums

12,697

(9,323

)

(23,323

)

Valuation adjustments

(576,758

)

(74,354

)

87,852

(564,061

)

(83,677

)

64,529

Balance at end of year

4,462,601

2,666,768

2,213,922

Following is a summary of the Company’s investment in MBS:

December 31, 2022

Principal

balance

Unamortized

net purchase

premiums

(discounts)

Accumulated

valuation

changes

Fair value (1)

(in thousands)

Agency fixed-rate pass-through securities

4,693,045

30,423

(460,966

)

4,262,502

Subordinate credit-linked securities

184,620

(6,774

)

177,898

Senior non-Agency securities

28,103

(876

)

(5,026

)

22,201

4,905,768

29,599

(472,766

)

4,462,601

December 31, 2021

Principal

balance

Unamortized

net purchase

premiums

Accumulated

valuation

changes

Fair value (1)

(in thousands)

Agency fixed-rate pass-through securities

2,649,238

82,938

(65,408

)

2,666,768

(1) All MBS have maturities of more than ten years and are pledged to secure Assets sold under agreements to repurchase at

December 31, 2022 and December 31, 2021.

F-43

Note 9—Loans Acquired for Sale at Fair Value

Following is a summary of the distribution of the Company’s loans acquired for sale at fair value:

Loan type

December 31, 2022

December 31, 2021

(in thousands)

Government-sponsored entity ("GSE") eligible (1)

1,651,554

3,825,901

Held for sale to PLS — Government insured or

guaranteed (2)

159,671

314,995

Home equity lines of credit

2,424

3,265

Commercial real estate

—

964

Repurchased pursuant to representations and

warranties

8,284

25,900

1,821,933

4,171,025

Loans pledged to secure:

Assets sold under agreements to repurchase

1,801,368

4,007,377

Mortgage loan participation purchase and sale

agreements

—

52,102

1,801,368

4,059,479

(1) GSE eligibility refers to the eligibility of loans for sale to Fannie Mae or Freddie Mac. The Company sells or finances a portion of

its GSE eligible loan production to other investors, including PLS.

(2) The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-

insured or guaranteed loans. The Company sells government-insured or guaranteed loans that it purchases from correspondent

sellers to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee as described in Note 4 – Transactions with

Related Parties – Operating activities – Correspondent Production Activities.

Note 10—Loans at Fair Value

Loans at fair value are comprised primarily of loans held in VIEs securing asset-backed financings as discussed in Note 6 –

Variable Interest Entities – Subordinate Mortgage-Backed Securities.

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

Loan type

December 31, 2022

December 31, 2021

(in thousands)

Loans in VIEs:

Agency-conforming loans secured by investment properties

1,459,160

1,495,914

Fixed interest rate jumbo loans

50,782

68,651

1,509,942

1,564,565

Distressed loans

3,457

4,161

1,513,399

1,568,726

Loans at fair value pledged to secure:

Asset-backed financings at fair value (1)

1,509,942

1,564,565

Assets sold under agreements to repurchase

206

359

1,510,148

1,564,924

(1) As discussed in Note 6 ‒ Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities, the Company holds a portion of

the securities issued by the VIEs. At December 31, 2022 and 2021, $84.0 million and $85.3 million, respectively, of such

certificates were pledged to secure Assets sold under agreements to repurchase.

F-44

Note 11— Derivative and Credit Risk Transfer Strip Assets and Liabilities

Derivative and credit risk transfer assets and liabilities are summarized below:

December 31, 2022

December 31, 2021

(in thousands)

Derivative assets

84,940

34,238

84,940

34,238

Derivative liabilities

30,033

15,369

Credit risk transfer strip liabilities

137,193

26,837

167,226

42,206

The Company records all derivatives and CRT strip liabilities at fair value and records changes in fair value in current period

results of operations.

Derivative Activities

Derivative Notional Amounts and Fair Value of Derivatives

The Company had the following derivative assets and liabilities recorded within Derivative assets and Derivative and credit risk

transfer liabilities and related margin deposits recorded in Other assets on the consolidated balance sheets:

December 31, 2022

December 31, 2021

Fair value

Notional

Derivative

Notional

Derivative

Instrument

amount (1)

assets

liabilities

amount (1)

assets

liabilities

(in thousands)

Hedging derivatives subject to master netting

arrangements (2):

Call options on interest rate futures purchase

contracts

1,950,000

2,906

—

1,450,000

2,828

—

Put options on interest rate futures purchase

contracts

1,785,000

8,130

—

1,775,000

3,180

—

Forward purchase contracts

3,929,833

418

15,196

6,945,340

5,806

3,620

Forward sale contracts

11,661,925

43,435

17,279

10,466,182

6,307

13,782

MBS put options

1,050,000

2,783

—

3,400,000

3,662

—

Swaption purchase contracts

—

2,200,000

—

Swap futures

—

1,425,100

—

Bond futures

867,900

—

181,800

—

Other derivatives not subject to master netting

arrangements:

CRT derivatives

5,972,060

1,262

23,360

7,426,288

19,627

663

Interest rate lock commitments

1,484,384

3,877

4,355

2,092,129

3,897

1,446

Total derivative instruments before netting

62,811

60,190

45,346

19,511

Netting

22,129

(30,157

)

(11,108

)

(4,142

)

84,940

30,033

34,238

15,369

Margin deposits placed with (received from)

derivative counterparties included in

derivative balances above, net

52,286

(6,965

)

Derivative assets pledged to secure:

Notes payable secured by credit risk transfer

and mortgage servicing assets

1,262

19,627

(1) Notional amounts provide an indication of the volume of the Company’s derivative activity.

(2) All hedging derivatives are interest rate derivatives and are used as economic hedges.

F-45

Netting of Financial Instruments

The Company has elected to net derivative asset and liability positions, and cash collateral placed with or received from its

derivatives counterparties when subject to a legally enforceable master netting arrangement. The derivative financial instruments that

are not subject to master netting arrangements are CRT derivatives and IRLCs. As of December 31, 2022 and December 31, 2021, the

Company was not a party to any reverse repurchase agreements or securities lending transactions that are required to be disclosed in

the following tables.

Derivative Assets, Financial Instruments and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master

netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for setoff

accounting.

December 31, 2022

December 31, 2021

Net amount

Gross amounts

Net amount

Gross amounts

of assets

not offset in the

of assets

not offset in the

presented

consolidated

presented

consolidated

in the

balance sheet

in the

balance sheet

consolidated

Cash

consolidated

Cash

balance

Financial

collateral

Net

balance

Financial

collateral

Net

sheet

instruments

received

amount

sheet

instruments

received

amount

(in thousands)

CRT derivatives

1,262

—

1,262

19,627

—

19,627

Interest rate lock commitments

3,877

—

3,877

3,897

—

3,897

Morgan Stanley & Co. LLC

33,703

—

33,703

—

Bank of America, N.A.

14,666

—

14,666

1,958

—

1,958

RJ O’Brien & Associates, LLC

11,036

—

11,036

6,008

—

6,008

Wells Fargo Securities, LLC

6,980

—

6,980

—

Credit Suisse Securities (USA) LLC

5,827

—

5,827

—

Goldman Sachs & Co. LLC

2,789

—

2,789

—

Barclays Capital Inc.

2,013

—

2,013

—

J.P. Morgan Securities LLC

110

—

110

2,085

—

2,085

Other

2,677

—

2,677

663

—

663

84,940

—

84,940

34,238

—

34,238

F-46

Derivative Liabilities, Financial Liabilities and Collateral Pledged by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements

to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting

guidance to qualify for setoff accounting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the

liability amount recorded on the consolidated balance sheet.

December 31, 2022

December 31, 2021

Net amount

Gross amounts

Net amount

Gross amounts

of liabilities

not offset in the

of liabilities

not offset in the

presented

consolidated

presented

consolidated

in the

balance sheet

in the

balance sheet

consolidated

Financial

Cash

consolidated

Financial

Cash

balance

instruments

collateral

Net

balance

instruments

collateral

Net

sheet

(1)

pledged

amount

sheet

(1)

pledged

amount

(in thousands)

Interest rate lock commitments

4,355

—

4,355

1,446

—

1,446

CRT derivatives

23,360

—

23,360

663

—

663

J.P. Morgan Securities LLC

1,605,813

(1,605,813

)

—

726,762

(726,762

)

—

Bank of America, N.A.

1,239,293

(1,239,293

)

—

1,088,417

(1,088,417

)

—

Barclays Capital Inc.

1,115,265

(1,115,265

)

—

1,086,104

(1,085,723

)

—

381

Credit Suisse Securities (USA) LLC

675,639

(675,639

)

—

832,610

(830,954

)

—

1,656

Daiwa Capital Markets

439,089

(439,089

)

—

496,231

(495,973

)

—

258

Amherst Pierpont Securities LLC

283,928

(283,294

)

—

634

125,090

(125,090

)

—

RBC Capital Markets, L.P.

268,581

(268,581

)

—

1,293,754

(1,293,754

)

—

Wells Fargo Securities, LLC

262,512

(262,512

)

—

106,088

(104,674

)

—

1,414

Morgan Stanley & Co. LLC

218,730

(218,730

)

—

412,321

(410,413

)

—

1,908

Citigroup Global Markets Inc.

197,229

(195,807

)

—

1,422

131,312

(129,016

)

—

2,296

Goldman Sachs & Co. LLC

156,952

(156,952

)

—

217,459

(212,580

)

—

4,879

BNP Paribas

153,220

(153,220

)

—

171,185

(171,185

)

—

Nomura Holdings America, Inc

4,444

(4,444

)

—

Other

262

—

262

454

—

454

6,648,672

(6,618,639

)

—

30,033

6,689,910

(6,674,541

)

—

15,369

(1) Amounts represent the UPB of Assets sold under agreements to repurchase.

Following are the net gains (losses) recognized by the Company on derivative financial instruments and the consolidated

statements of operations line items where such gains and losses are included:

Year ended December 31,

Derivative activity

Consolidated statements of operations line

2022

2021

2020

(in thousands)

Interest rate lock commitments

Net gains on loans acquired for sale (1)

(2,928

)

(69,935

)

61,232

CRT derivatives

Net (losses) gains on investments

and financings

(3,838

)

81,008

(136,598

)

Repurchase agreement derivatives

Interest expense

—

Hedged item:

Interest rate lock

commitments and

loans acquired for sale

Net gains on loans acquired for sale

553,965

141,901

(459,309

)

Mortgage servicing rights

Net loan servicing fees

(204,879

)

(345,041

)

601,743

Fixed-rate and prepayment

sensitive assets and

LIBOR-indexed

repurchase agreements

Net (losses) gains on investments

and financings

—

32,932

(1) Represents net change in fair value of IRLCs from the beginning to the end of the year. Amounts recognized at the date of

commitment and fair value changes recognized during the period until purchase of the underlying loan or cancellation of the

commitment are shown in the rollforward of IRLCs for the period in Note 7 – Fair Value – Financial Statement Items Measured

at Fair Value on a Recurring Basis.

F-47

Credit Risk Transfer Strips

Following is a summary of the Company’s holdings of CRT strips:

Credit risk transfer strips contractually restricted from sale (1)

December 31, 2022

December 31, 2021

(in thousands)

Currently unrestricted

(137,193

)

5,978

To maturity

—

(32,815

)

(137,193

)

(26,837

)

(1) Through December 31, 2021, the terms of the agreement underlying the CRT securities restricted sales of the securities, other

than under agreements to repurchase, without the approval of Fannie Mae, for specified periods from the date of issuance. The

restriction on sales was removed during the quarter ended March 31, 2022.

Note 12—Mortgage Servicing Rights

Following is a summary of MSRs:

Year ended December 31,

2022

2021

2020

(in thousands)

Balance at beginning of year

2,892,855

1,755,236

1,535,705

MSRs resulting from loan sales

670,343

1,484,629

1,158,475

Transfer to Agency of mortgage servicing rights

relating to delinquent loans

104

—

Sales

—

)

Changes in fair value:

Due to changes in inputs used in valuation

model (1)

819,727

(39,056

)

(706,107

)

Other changes in fair value (2)

(370,292

)

(298,130

)

(232,830

)

449,435

(337,186

)

(938,937

)

Recombination with loans at fair value

resulting from initial consolidation of VIEs (3)

—

(9,824

)

—

Balance at end of year

4,012,737

2,892,855

1,755,236

December 31, 2022

December 31, 2021

(in thousands)

Fair value of mortgage servicing rights

pledged to secure Assets sold under

agreements to repurchase and Notes

payable secured by credit risk transfer

and mortgage servicing assets

3,962,820

2,863,544

(1) Primarily reflects changes in prepayment speed, pricing spread, servicing cost, and UPB for the underlying loans.

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

(3) As discussed in Note 6 ‒ Variable Interest Entities – Subordinate Mortgage-Backed Securities, the Company consolidates

certain VIEs. During 2021, the Company initially consolidated a VIE holding loans for which it had previously recognized

MSRs. Upon initial consolidation of the VIE, the Company recombined the MSRs with the loans in the consolidated VIE to

Loans at fair value.

F-48

Servicing fees relating to MSRs are recorded in Net loan servicing fees – From nonaffiliates on the Company’s consolidated

statements of operations and are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Contractually-specified servicing fees

625,210

526,245

406,060

Ancillary and other fees:

Late charges

2,526

1,701

1,498

Other

23,515

67,400

54,959

26,041

69,101

56,457

651,251

595,346

462,517

Average MSR servicing portfolio

222,847,593

196,996,623

147,832,880

MSR recapture fees

13,744

50,859

28,373

UPB of loans recaptured

2,533,115

9,389,260

6,012,911

Note 13— Other Assets

Other assets are summarized below:

December 31, 2022

December 31, 2021

(dollars in thousands)

Derivative margin deposits

51,463

193,418

Interest receivable

31,027

15,168

Servicing fees receivable

15,727

16,756

Correspondent lending receivables

8,967

27,539

Other receivables

7,657

15,299

Real estate acquired in settlement of loans

7,734

14,382

Other

12,416

3,737

134,991

286,299

Real estate acquired in settlement of loans pledge to secure

Assets sold under agreements to repurchase

3,297

7,293

Note 14—Short-Term Debt

The borrowing facilities described throughout these Notes 14 and 15 contain various covenants, including financial covenants

governing the Company and its subsidiaries’ net worth, debt-to-equity ratio, and liquidity. Management believes that the Company

was in compliance with these covenants as of December 31, 2022.

Assets Sold Under Agreements to Repurchase

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

Year ended December 31,

2022

2021

2020

(dollars in thousands)

Weighted average interest rate (1)

2.81

1.36

1.62

Average balance

5,625,345

6,161,755

5,508,147

Total interest expense

165,436

97,078

102,131

Maximum daily amount outstanding

8,834,936

8,882,538

10,433,609

(1) Excludes the effect of amortization of debt issuance costs of $7.6 million, $13.2 million and $12.9 million for the years ended

December 31, 2022, 2021 and 2020 respectively.

F-49

December 31, 2022

December 31, 2021

(dollars in thousands)

Carrying value:

Unpaid principal balance

Committed facilities

6,189,344

5,799,975

Uncommitted facilities

429,295

874,566

6,618,639

6,674,541

Unamortized debt issuance costs

(2,111

)

(2,651

)

6,616,528

6,671,890

Weighted average interest rate

5.03

1.08

Available borrowing capacity (1):

Committed

217,279

289,436

Uncommitted

4,762,056

4,875,433

4,979,335

5,164,869

Margin deposits (received from) placed with counterparties

included in (Accounts payable and accrued liabilities)

Other assets, net

(13,630

)

67,997

Assets securing agreements to repurchase:

Mortgage-backed securities

4,462,601

2,666,768

Loans acquired for sale at fair value

1,801,368

4,007,377

Loans at fair value:

Securities retained in asset-backed financings

84,044

85,266

Distressed

206

359

CRT arrangements

455,552

—

Mortgage servicing rights (2)

2,092,794

1,598,090

Servicing advances

100,888

93,455

Real estate acquired in settlement of loans

3,297

7,293

(1) The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets

eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets

financed.

(2) Beneficial interests in Fannie Mae MSRs are pledged for both Assets sold under agreements to repurchase and Notes payable

secured by credit risk transfer and mortgage servicing assets.

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

Remaining maturity at December 31, 2022

Unpaid

principal

balance

(in thousands)

Within 30 days

4,342,147

Over 30 to 90 days

1,763,899

Over 90 days to 180 days

62,439

Over 180 days to 1 year

65,154

Over 1 year to 2 years

385,000

6,618,639

Weighted average maturity (in months)

2.2

The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be

required to repay a portion of the borrowings before the respective repurchase agreements mature if the fair value (as determined by

the applicable lender) of the assets securing those repurchase agreements decreases.

F-50

The amounts at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the

counterparty and interest payable) and maturity information relating to the Company’s assets sold under agreements to repurchase are

summarized by pledged asset and counterparty below as of December 31, 2022:

Loans, REO and MSRs

Weighted-average maturity

Counterparty

Amount at risk

Advances

Facility

(in thousands)

Bank of America, N.A.

25,572

January 30, 2023

June 5, 2024

Goldman Sachs & Co. LLC

2,104

March 16, 2023

December 23, 2023

Citibank, N.A.

12,072

February 24, 2023

April 26, 2024

Barclays Capital Inc.

19,214

February 26, 2023

November 13, 2024

JPMorgan Chase & Co.

20,817

March 3, 2023

June 17, 2024

Wells Fargo Securities, LLC

15,321

March 16, 2023

November 17, 2023

Credit Suisse First Boston Mortgage Capital LLC

15,093

March 13, 2023

May 31, 2024

Morgan Stanley & Co. LLC

11,452

March 12, 2023

January 3, 2024

RBC Capital Markets, L.P.

8,996

March 27, 2023

November 10, 2023

BNP Paribas Corporate & Institutional Banking

6,480

March 12, 2023

November 30, 2024

Securities

Counterparty

Amount at risk

Weighted average maturity

(in thousands)

Bank of America, N.A.

24,165

January 17, 2023

Citibank, N.A.

25,570

February 22, 2023

Barclays Capital Inc.

52,623

January 26, 2023

JPMorgan Chase & Co.

38,860

January 20, 2023

Wells Fargo Securities, LLC

3,206

January 6, 2023

Daiwa Capital Markets America Inc.

9,904

January 23, 2023

Amherst Pierpont Securities LLC

6,744

January 20, 2023

Nomura Holdings America, Inc

1,707

January 3, 2023

CRT Arrangements

Counterparty

Amount at risk

Weighted average maturity

(in thousands)

Bank of America, N.A.

60,630

April 3, 2023

Goldman Sachs & Co. LLC

99,664

March 28, 2023

Citibank, N.A.

57,911

July 3, 2023

Mortgage Loan Participation Purchase and Sale Agreement

One of the borrowing facilities secured by loans acquired for sale is in the form of a mortgage loan participation purchase and

sale agreement. Participation certificates, each of which represents an undivided beneficial ownership interest in a pool of loans that

have been pooled with Fannie Mae or Freddie Mac, are sold to the lender pending the securitization of such loans and the sale of the

resulting security. The commitment between the Company and a nonaffiliate to sell such security is also assigned to the lender at the

time a participation certificate is sold.

The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount

of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging

costs and a holdback amount. The holdback amount is based on a percentage of the purchase price and is not required to be paid to the

Company until the settlement of the security and its delivery to the lender.

F-51

The mortgage loan participation purchase and sale agreement is summarized below:

Year ended December 31,

2022

2021

2020

(dollars in thousands)

Average balance

30,024

33,827

44,432

Weighted average interest rate (1)

2.99

1.42

1.63

Total interest expense

1,023

606

902

Maximum daily amount outstanding

91,857

89,879

96,570

(1) Excludes the effect of amortization of debt issuance costs of $125,000 for the years ended December 31, 2022 and 2021 and

$176,000 for the year ended 2020.

December 31, 2022

December 31, 2021

(dollars in thousands)

Carrying value:

Amount outstanding

—

49,988

Unamortized debt issuance costs

—

49,988

Weighted average interest rate

—

1.48

Loans acquired for sale pledged to secure mortgage loan participation

purchase and sale agreements

—

52,102

Note 15—Long-Term Debt

Notes Payable Secured By Credit Risk Transfer and Mortgage Servicing Assets

CRT Arrangement Financing

The Company, through various wholly-owned subsidiaries, issued secured term notes (the “CRT Term Notes”) to qualified

institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). All of the CRT Term Notes

rank pari passu with each other.

Following is a summary of the CRT Term Notes outstanding:

Unpaid

Annual interest rate

Maturity date

Term

notes

Issuance date

Issuance

amount

principal

balance

Index

Spread

Stated

Optional extension (1)

(in thousands)

2021 1R

March 4, 2021

659,156

298,655

LIBOR

2.90

February 28, 2024

February 27, 2026

2020 1R

February 14, 2020

350,000

58,295

LIBOR

2.35

March 1, 2023 (2)

February 27, 2025

2019 3R

October 16, 2019

375,000

54,811

LIBOR

2.70

October 27, 2022

(3)

October 29, 2024

2019 2R

June 11, 2019

638,000

180,933

LIBOR

2.75

May 29, 2023

May 29, 2025

592,694

(1) The indentures relating to these issuances provide the Company with the option of extending the maturity dates of certain of the

CRT Term Notes under the conditions specified in the respective agreements.

(2) During January 2023, the Company exercised its option to extend the maturity of this note

(3) During October 2022, the Company exercised its option to extend the maturity of this note.

Fannie Mae MSR Financing

The Company, through a subsidiary, PMT ISSUER TRUST-FMSR, finances MSRs and ESS pledged or sold by PMC through a

combination of repurchase agreements and term financing.

F-52

The repurchase agreement financing for Fannie Mae MSRs is effected through the issuance of a Series 2017-VF1 Note dated

December 20, 2017 (the "FMSR VFN") by PMT ISSUER TRUST-FMSR to PMC which is then sold to qualified institutional buyers

under an agreement to repurchase. The amount outstanding under the FMSR VFN is included in Assets sold under agreements to

repurchase in the Company’s consolidated balance sheets. The FMSR VFN has a committed borrowing capacity of $700 million and

matures on May 31, 2024.

The Company’s term financing for Fannie Mae MSRs through PMT ISSUER TRUST – FMSR is effected through the issuance

of term notes (the “FT-1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act.

The FT1 Notes and the FMSR VFN are secured by certain participation certificates relating to Fannie Mae MSRs and rank pari

passu with each other.

Following is a summary of the term financing of the Company’s Fannie Mae MSRs:

Unpaid

Annual interest rate

Maturity date

FT-1 Note

Issuance date

Issuance

amount

principal

balance

Index

Spread

Stated

Optional extension (1)

(in thousands)

2022

June 28, 2022

305,000

SOFR (2)

4.19%

June 25, 2027

(3)

2021

March 30, 2021

350,000

LIBOR

3.00%

March 25, 2026

March 27, 2028

2018

April 25, 2018

450,000

LIBOR

2.35%

April 25, 2023

April 25, 2025

1,105,000

(1) The indentures relating to these issuances provide the Company with the option of extending the maturity dates of the term

notes under the conditions specified in the respective agreements.

(2) Secured Overnight Financing Rate (“SOFR”).

(3) Either June 26, 2028 or June 25, 2029.

Freddie Mac MSR Financing

The Company, through PMC and PMH, finances certain MSRs (inclusive of any related excess servicing spread arising

therefrom) relating to loans pooled into Freddie Mac securities through various credit agreements. The total loan amount available

under the agreements is $1.6 billion, bearing interest at an annual rate equal to SOFR plus a spread as defined in each agreement, with

a weighted average maturity of June 2024. The total loan amount available under the agreements may be reduced by other debt

outstanding with the counterparties. Advances under the credit agreements are secured by MSRs relating to loans serviced for Freddie

Mac guaranteed securities.

Following is a summary of financial information relating to notes payable secured by credit risk transfer and mortgage servicing

assets:

Year ended December 31,

2022

2021

2020

(dollars in thousands)

Average balance

2,646,597

2,635,601

1,771,370

Weighted average interest rate (1)

4.92

3.08

3.19

Total interest expense

137,021

86,753

59,261

Maximum daily amount outstanding

3,629,637

3,336,480

2,032,665

(1) Excludes the effect of amortization of debt issuance costs of $6.7 million, $5.5 million and $2.7 million for the years ended

December 31, 2022, 2021 and 2020, respectively.

F-53

December 31,

2022

December 31,

2021

(dollars in thousands)

Carrying value:

Unpaid principal balance:

CRT Term Notes

592,694

1,204,636

FT-1 Notes

1,105,000

800,000

Freddie Mac credit agreements

1,115,000

475,000

2,812,694

2,479,636

Unamortized debt issuance costs

(8,666

)

(7,675

)

2,804,028

2,471,961

Weighted average interest rate

7.30

3.02

Assets securing notes payable:

Mortgage servicing rights (1)

3,962,820

2,863,544

CRT Agreements:

Deposits securing CRT arrangements

869,742

1,704,911

Derivative assets

1,262

19,627

(1) Beneficial interests in Freddie Mac MSRs are pledged as collateral for the Notes payable secured by credit risk transfer and

mortgage servicing assets. Beneficial interests in Fannie Mae MSRs are pledged for both Assets sold under agreements to

repurchase and Notes payable secured by credit risk transfer and mortgage servicing assets.

Exchangeable Senior Notes

On March 5 and March 9, 2021, PMC issued $345 million aggregate principal amount of exchangeable senior notes (the

“2026 Exchangeable Notes”) in a private offering. The 2026 Exchangeable Notes will mature on March 15, 2026 unless repurchased

or exchanged in accordance with their terms before such date. The 2026 Exchangeable Notes bear interest at a rate of 5.50% per year,

payable semiannually.

On November 4 and November 19, 2019, PMC issued $210 million in principal amount of exchangeable senior notes due 2024

(the “2024 Exchangeable Notes” and, together with the 2026 Exchangeable Notes, the “Exchangeable Notes”) in a private offering.

The 2024 Exchangeable Notes will mature on November 1, 2024 unless repurchased or exchanged in accordance with their terms

before such date. The 2024 Exchangeable Notes bear interest at 5.50% per year, payable semiannually.

The 2026 Exchangeable Notes and the 2024 Exchangeable Notes are fully and unconditionally guaranteed by the Company and

are exchangeable for Common Shares, cash, or a combination thereof, at PMC’s election, at any time until the close of business on the

second scheduled trading day immediately preceding the maturity date, subject to the satisfaction of certain conditions if the exchange

occurs before December 15, 2025 and August 1, 2024, respectively. The exchange rates are equal to 46.1063 and 40.101 Common

Shares per $1,000 principal amount of the 2026 Exchangeable Notes and 2024 Exchangeable Notes, respectively, and are subject to

adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest.

F-54

Following is financial information relating to the Exchangeable Notes:

Year ended December 31,

2022

2021

2020

(in thousands)

Average balance

541,233

445,064

269,247

Weighted average interest rate (1)

5.64

7.74

6.43

Interest expense:

Coupon

30,525

27,152

15,556

Amortization of:

Conversion option (2)

—

7,306

1,801

Issuance cost

2,843

2,289

1,490

33,368

36,747

18,847

December 31,

2022

December 31,

2021

(in thousands)

Carrying value:

UPB

555,000

Conversion option allocated to Additional

paid-in capital (2)

—

(40,952

)

Unamortized debt issuance costs

(8,746

)

(11,589

)

(8,746

)

(52,541

)

546,254

502,459

(1) Excludes the effect of amortization of debt issuance and conversion option costs.

(2) As discussed in Note 3 ‒ Significant Accounting Policies ‒ Accounting Standard Adopted in 2022, the Company adopted

ASU 2020-06 effective January 1, 2022. As a result of the adoption of ASU 2020-06, the Company reclassified

approximately $50.3 million of issuance discount attributable to the conversion options originally recognized in the issuance

of Exchangeable senior notes from Additional paid-in capital to the carrying value of the Exchangeable senior notes and

$9.4 million of previously recognized accrual of the issuance discount, as an adjustment to the Accumulated deficit effective

January 1, 2022.

Asset-Backed Financing of Variable Interest Entities at Fair Value

Following is a summary of financial information relating to the asset-backed financings at fair value described in Note 6 ‒

Variable Interest Entities ‒ Subordinate Mortgage-Backed Securities:

Year ended December 31,

2022

2021

2020

(dollars in thousands)

Average balance

1,512,590

447,247

203,795

Total interest expense

53,570

15,076

10,971

Weighted average interest rate (1)

3.42

3.63

3.30

(1) Excludes the effect of amortization (accrual) of debt issuance costs (premiums) of $1.8 million, $(1.1) million and $4.2 million

for the years ended December 31, 2022, 2021 and 2020, respectively.

December 31, 2022

December 31, 2021

(dollars in thousands)

Fair value

1,414,955

1,469,999

Unpaid principal balance

1,681,410

1,442,379

Weighted average interest rate

3.22

3.18

The asset-backed financings are non-recourse liabilities and are secured solely by the assets of consolidated VIEs and not by

any other assets of the Company. The assets of the VIEs are the only source of funds for repayment of the certificates.

F-55

Maturities of Long-Term Debt

Contractual maturities of long-term debt obligations (based on stated maturity dates) are as follows:

Year ended December 31,

Total

2023

2024

2025

2026

2027

Thereafter

(in thousands)

Notes payable secured by credit risk transfer

and mortgage servicing assets (1)

2,812,694

689,227

1,468,467

—

350,000

305,000

—

Exchangeable senior notes

555,000

—

210,000

—

345,000

—

Asset-backed financings at fair value (2)

1,681,410

—

1,681,410

Interest-only security payable at fair value (2)

21,925

—

21,925

Total

5,071,029

689,227

1,678,467

—

695,000

305,000

1,703,335

(1) Based on stated maturity. As discussed above, certain of the Notes payable secured by credit risk transfer and mortgage servicing

assets allow the Company to exercise optional extensions.

(2) Contractual maturity does not reflect expected repayment as borrowers of the underlying loans generally have the right to repay

their loans at any time.

Note 16—Liability for Losses Under Representations and Warranties

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

Year ended December 31,

2022

2021

2020

(in thousands)

Balance, beginning of year

40,249

21,893

7,614

Provision for losses:

Pursuant to loan sales

4,442

25,029

19,316

Reduction in liability due to change in estimate

(4,227

)

(5,812

)

(4,457

)

Losses incurred, net

(993

)

(861

)

(580

)

Balance, end of year

39,471

40,249

21,893

UPB of loans subject to representations and warranties

at end of year

228,339,312

213,944,023

163,592,788

Note 17—Commitments and Contingencies

Commitments

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

December 31, 2022

(in thousands)

Commitments to purchase loans acquired for sale

1,484,384

Contingencies

Litigation

From time to time, the Company may be involved in various legal and regulatory proceedings, claims and legal actions arising

in the ordinary course of business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but

despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and

exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or

cash flows of the Company.

Cessation of the LIBOR Index

The Company historically used a LIBOR index to establish the applicable interest rates in lending and financing transactions.

One-week and two-month United States Dollar LIBOR rates were discontinued as of December 31, 2021 and non-U.S. dollar LIBOR

settings have ceased to be representative. In addition, the principal United States Dollar LIBOR tenors (overnight and one, three, six

F-56

and 12 months) will cease to be published by any administrator or will no longer be representative as of June 30, 2023. The Company

services LIBOR-based adjustable rate mortgages and other financial arrangements that may incorporate fallback provisions or

replacement provisions related to the LIBOR transition.

The discontinuation of LIBOR could affect the Company’s interest expense and earnings, cost of capital, and the fair value of

certain of its assets and the instruments used to hedge their value. Furthermore, the transition away from widely used benchmark rates

like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend

payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related

changes.

Note 18—Shareholders’ Equity

Preferred Shares of Beneficial Interest

Preferred shares of beneficial interest are summarized below:

Preferred

Dividends per share, year ended December 31,

series

Description (1)

Number

of shares

Liquidation

preference

Issuance

discount

Carrying

value

2022

2021

2020

Fixed-to-floating rate cumulative redeemable

(in thousands, except dividends per share)

8.125% Issued March 2017

4,600

115,000

3,828

111,172

2.03

8.00% Issued July 2017

7,800

195,000

6,465

188,535

2.00

Fixed-rate cumulative redeemable

6.75% Issued August 2021

10,000

250,000

8,225

241,775

1.68

0.52

—

22,400

560,000

18,518

541,482

(1) Par value is $0.01 per share.

The Company’s Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A

Preferred Shares”) pay cumulative dividends at a fixed rate of 8.125% per year based on the $25.00 per share liquidation preference

to, but not including, March 15, 2024. From, and including, March 15, 2024 and thereafter, the Company will pay cumulative

dividends on the Series A Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend

determination date plus a spread of 5.831% per year based on the $25.00 per share liquidation preference.

The Company’s Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series B

Preferred Shares”) pay cumulative dividends at a fixed rate of 8.00% per year based on the $25.00 per share liquidation preference to,

but not including, June 15, 2024. From, and including, June 15, 2024 and thereafter, the Company will pay cumulative dividends on

the Series B Preferred Shares at a floating rate equal to three-month LIBOR as calculated on each applicable dividend determination

date plus a spread of 5.99% per year based on the $25.00 per share liquidation preference.

The Company’s Series C Fixed Rate Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C Preferred

Shares” together with the Series A Preferred Shares and Series B Preferred Shares, the “Preferred Shares”) pay cumulative dividends

at a fixed rate of 6.75% per year based on the $25.00 per share liquidation preference to, but not including, August 24, 2026.

The Series A Preferred Shares, the Series B Preferred Shares and Series C Preferred Shares will not be redeemable before

March 15, 2024, June 15, 2024 and August 24, 2026, respectively, except in connection with the Company’s qualification as a REIT

for U.S. federal income tax purposes or upon the occurrence of a change of control. On or after the date the Preferred Shares become

redeemable, or 120 days after the first date on which such change of control occurred, the Company may, at its option, redeem any or

all of the Preferred Shares at $25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date.

The Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain

outstanding indefinitely unless redeemed or repurchased by the Company or converted into Common Shares in connection with a

change of control by the holders of the Preferred Shares.

Common Shares of Beneficial Interest

“At-The-Market” (ATM) Equity Offering Program

The Company periodically enters into ATM equity offering programs allowing it to offer and sell securities on an as-and-when-

needed basis through designated broker-dealers. On June 15, 2021, the Company entered into a new ATM equity offering program

allowing it to offer up to $200 million in Common Shares, all of which were available for issuance as December 31, 2022.

F-57

Following is a summary of the activities under the ATM equity offering program:

Year ended

December 31,

2020

(in thousands)

Number of Common Shares issued

241

Gross proceeds

5,654

Net proceeds

5,597

Common Share Repurchase Program

The Company has a Common Share repurchase program. On October 24, 2022, the Company’s board of trustees approved an

increase to the Company’s Common Share repurchase authorization from $400 million to $500 million.

The following table summarizes the Company’s Common Share repurchase activity:

Year ended December 31,

Cumulative

2022

2021

2020

total (1)

(in thousands)

Common Shares repurchased

6,094

3,099

2,767

26,691

Cost of Common Shares repurchased (2)

87,992

56,855

37,267

398,739

(1) Amounts represent the Common Share repurchase program total from its inception in August 2015 through December 31, 2022.

(2) Cumulative total cost of Common Shares repurchased includes $533,824 of transaction fees.

Note 19—Net (Losses) Gains on Investments and Financings

Net (losses) gains on investments and financings are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

From nonaffiliates:

Mortgage-backed securities

(576,758

)

(74,354

)

87,852

Loans at fair value:

Held in VIEs

(301,164

)

(12,536

)

(6,617

)

Distressed

686

611

(837

)

CRT arrangements

(65,137

)

368,999

(145,938

)

Firm commitment to purchase CRT securities

—

(121,067

)

Asset-backed financings at fair value

283,586

19,708

5,519

Hedging derivatives

—

32,932

(658,787

)

302,428

(148,156

)

From PFSI ‒ Excess servicing spread

—

1,651

(22,729

)

(658,787

)

304,079

(170,885

)

F-58

Note 20—Net Gains on Loans Acquired for Sale

Net gains on loans acquired for sale are summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

From nonaffiliates:

Cash losses:

Sales of loans

(1,196,384

)

(1,487,649

)

(326,214

)

Hedging activities

596,295

188,733

(504,506

)

(600,089

)

(1,298,916

)

(830,720

)

Non-cash gains:

Recognition of fair value of firm commitment to

purchase CRT securities

—

(38,161

)

Receipt of MSRs in mortgage loan sale transactions

670,343

1,484,629

1,158,475

Provision for losses relating to representations

and warranties provided in loan sales:

Pursuant to loans sales

(4,442

)

(25,029

)

(19,316

)

Reduction of liability due to change in estimate

4,227

5,812

4,457

(215

)

(19,217

)

(14,859

)

Change in fair value of loans and derivatives

Interest rate lock commitments

(2,928

)

(69,935

)

61,232

Loans

(4,057

)

31,072

(12,279

)

Hedging derivatives

(42,330

)

(46,832

)

45,197

(49,315

)

(85,695

)

94,150

620,813

1,379,717

1,199,605

Total from nonaffiliates

20,724

80,801

368,885

From PFSI ‒ cash gains

4,968

6,472

11,037

25,692

87,273

379,922

F-59

Note 21—Net Interest Expense

Net interest expense is summarized below:

Year ended December 31,

2022

2021

2020

(in thousands)

Interest income:

From nonaffiliates:

Cash and short-term investments

6,912

938

3,804

Mortgage-backed securities

133,640

36,180

59,461

Loans acquired for sale at fair value

103,300

125,438

103,221

Loans at fair value:

Held in consolidated variable interest entities

59,263

17,014

10,609

Distressed

219

369

493

Deposits securing CRT arrangements

21,324

559

7,012

Placement fees relating to custodial funds

57,961

13,366

28,804

Other

1,175

313

383,794

193,959

213,717

From PFSI ‒ Excess servicing spread

—

1,280

8,418

383,794

195,239

222,135

Interest expense:

To nonaffiliates:

Assets sold under agreements to repurchase

165,436

97,078

102,131

Mortgage loan participation purchase and sale agreements

1,023

606

902

Notes payable secured by credit risk transfer and

mortgage servicing assets

137,021

86,753

59,261

Exchangeable senior notes

33,368

36,747

18,847

Asset-backed financings at fair value

53,570

15,076

10,971

Interest shortfall on repayments of loans serviced

for Agency securitizations

15,806

64,519

71,516

Interest on loan impound deposits

4,196

3,571

3,817

410,420

304,350

267,445

To PFSI ‒ Assets sold under agreement to repurchase

—

387

3,325

410,420

304,737

270,770

Net interest expense

(26,626

)

(109,498

)

(48,635

)

Note 22—Share-Based Compensation

The Company has adopted an equity incentive plan (“2019 Plan”) which provides for the issuance of equity based awards based

on PMT’s Common Shares that may be made by the Company to its officers and trustees, and the members, officers, trustees,

directors and employees of PCM, PFSI, or their affiliates and to PCM, PFSI and other entities that provide services to PMT and the

employees of such other entities.

The 2019 Plan is administered by the Company’s compensation committee, pursuant to authority delegated by PMT’s board of

trustees, which has the authority to make awards to the eligible participants referenced above, and to determine what form the awards

will take, and the terms and conditions of the awards.

The Company's 2019 Plan allows for the grant of restricted and performance-based share and unit awards.

The shares underlying award grants will again be available for award under the 2019 Plan if:

• any shares subject to an award granted under the 2019 Plan are forfeited, canceled, exchanged or surrendered;

• an award terminates or expires without a distribution of shares to the participant; or

• shares are surrendered or withheld by PMT as payment of either the exercise price of an award and/or withholding taxes

for an award.

F-60

Restricted share units have been awarded to trustees and officers of the Company and to other employees of PFSI and its

subsidiaries at no cost to the grantees. Such awards generally vest over a one- to three-year period. The Company expect 0% to 6%

forfeiture rates based on the grantees’ classifications.

The following table summarizes the Company’s share-based compensation activity:

Year ended December 31,

2022

2021

2020

(in thousands)

Grants:

Restricted share units

134

105

Performance share units

151

126

112

285

231

204

Grant date fair value:

Restricted share units

2,101

1,992

1,978

Performance share units

2,350

2,399

2,425

4,451

4,391

4,403

Vestings:

Restricted share units

123

129

Performance share units (1)

143

120

171

272

Forfeitures:

Restricted share units

—

Performance share units

—

Compensation expense relating to share-based grants

4,310

2,419

2,294

(1) The actual number of performance-based restricted share units (“RSUs”), that vested during the year ended December 31,

2022 was 39,001 Common Shares, which is approximately 32% of the originally granted performance-based RSUs with

80,870 performance-based RSUs that vested with zero attainment.

December 31, 2022

Restricted share units

Performance share units

Shares expected to vest:

Number of units (in thousands)

225

219

Grant date average fair value per unit

17.31

16.91

Average remaining vesting period (in months)

Note 23—Income Taxes

The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the

Internal Revenue Code. Therefore, PMT generally will not be subject to corporate federal or state income tax to the extent that

qualifying distributions are made to shareholders and the Company meets the REIT requirements including the asset, income,

distribution and share ownership tests. The Company believes that it has met the distribution requirements, as it has declared

dividends sufficient to distribute substantially all of its taxable income. Taxable income will generally differ from net income. The

primary differences between net income and the REIT taxable income (before deduction for qualifying distributions) are the taxable

income of the TRS and the method of determining the income or loss related to valuation of the REMIC and excess servicing interests

owned by the qualified REIT subsidiary.

In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax

purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years

beginning after December 31, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) (subject to certain limitations) provides a 20%

deduction from taxable income for ordinary REIT dividends.

F-61

The approximate tax characterization of the Company’s distributions is as follows:

Year ended December 31,

Ordinary

income

Long term

capital gain

Return of

capital

2022

2021

100

2020

The Company has elected to treat its subsidiary, PMC, as a TRS. Income from a TRS is only included as a component of REIT

taxable income to the extent that the TRS makes dividend distributions of income to the Company. The TRS made a $30 million

distribution in 2022 which did not result in dividend income to the Company but was instead treated as a return of capital as the TRS

did not have cumulative or current year tax earnings and profits. A TRS is subject to corporate federal and state income tax.

Accordingly, a provision for income taxes for PMC is included in the consolidated statements of operations.

The following table details the Company’s provision for (benefit from) income taxes which relates primarily to the TRS for the

years presented:

Year ended December 31,

2022

2021

2020

(in thousands)

Current expense (benefit):

Federal

)

—

State

—

Total current expense (benefit)

)

Deferred expense (benefit) :

Federal

113,894

(14,692

)

20,440

State

22,485

2,488

6,905

Total deferred expense (benefit)

136,379

(12,204

)

27,345

Total provision for (benefit from) income taxes

136,374

(12,193

)

27,357

The following table is a reconciliation of the Company’s provision for (benefit from) income taxes at statutory rates to the

(benefit from) provision for income taxes at the Company’s effective rate for the years presented:

Year ended December 31,

2022

2021

2020

Amount

Rate

Amount

Rate

Amount

Rate

(dollars in thousands)

Federal income tax expense at statutory tax rate

13,248

21.0

9,379

21.0

16,743

21.0

Effect of non-taxable REIT loss (income)

136,465

216.3

(46,193

)

(103.4

15,076

18.9

State income taxes, net of federal benefit

27,573

43.7

(7,175

)

(16.1

5,370

6.7

Convertible debt permanent adjustment

(6,786

)

(10.8

(2,215

)

(5.0

3,446

4.3

Valuation allowance

(34,121

)

(54.0

34,011

76.2

(13,502

)

(16.9

Other

)

(—

—

(—

224

0.3

Provision for (benefit from) income taxes

136,374

216.2

(12,193

)

(27.3

27,357

34.3

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

Year ended December 31,

2022

2021

2020

(in thousands)

Real estate valuation loss

758

437

Mortgage servicing rights

157,559

52,818

27,179

Net operating loss carryforward

4,075

(60,314

)

31,622

Liability for losses under representations and warranties

269

(4,435

)

(3,486

)

Excess interest expense disallowance

9,134

(35,769

)

(15,749

)

Other

(603

)

727

844

Valuation allowance

(34,121

)

34,011

(13,502

)

Total provision for (benefit from) deferred income taxes

136,379

(12,204

)

27,345

F-62

The components of income taxes payable are as follows:

December 31, 2022

December 31, 2021

(in thousands)

Taxes currently receivable

(1,820

)

(7,620

)

Deferred income taxes payable

153,598

17,218

Income taxes payable

151,778

9,598

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

December 31, 2022

December 31, 2021

(in thousands)

Deferred income tax assets:

Net operating loss carryforward

121,853

125,929

Excess interest expense disallowance

57,618

66,752

Liability for losses under representations and warranties

9,552

9,821

REO valuation loss

178

244

Other

537

—

Gross deferred tax assets

189,738

202,746

Valuation allowance

—

(34,121

)

Deferred tax assets after valuation allowance

189,738

168,625

Deferred income tax liabilities:

Mortgage servicing rights

341,993

184,433

Other

1,343

1,410

Gross deferred tax liabilities

343,336

185,843

Net deferred income tax liability

153,598

17,218

The net deferred income tax liability is included in Income taxes payable in the consolidated balance sheets.

The Company has net operating loss carryforwards of $470.2 million and $466.5 million at December 31, 2022 and

December 31, 2021, respectively. Losses that occurred prior to 2018 expire between 2033 and 2036. Net operating losses arising in tax

years beginning after December 31, 2017 can be carried forward indefinitely but their use is limited to 80% of taxable income for tax

years beginning after December 31, 2020.

We evaluated the deferred tax assets of our TRS and determined that a deferred tax valuation allowance is no longer required

due to sufficient TRS GAAP income. In our evaluation, we consider, among other things, taxable loss carryback availability,

expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of

temporary differences, and available tax planning strategies that could be implemented, if required. We establish valuation allowances

based on the consideration of all available evidence using a more-likely-than-not standard.

At December 31, 2022 and December 31, 2021, the Company had no unrecognized tax benefits and does not anticipate any

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 December 31, 2022 and

December 31, 2021.

The Company files U.S. federal and state income tax returns for both the REIT and the TRS. These federal income tax returns

for 2019 and forward are subject to examination. The Company’s state income tax returns are generally subject to examination for

2018 and forward.

Note 24—Earnings Per Common Share

The Company grants restricted share units which entitle the recipients to receive dividend equivalents during the vesting period

on a basis equivalent to the dividends paid to holders of Common Shares. Unvested share-based compensation awards containing non-

forfeitable rights to receive dividends or dividend equivalents (collectively, “dividends”) are classified as “participating securities” and

are included in the basic earnings per share calculation using the two-class method.

Under the two-class method, all earnings (distributed and undistributed) are allocated to Common Shares and participating

securities based on their respective rights to receive dividends. Basic earnings per share is determined by dividing net income

available to common shareholders (net income reduced by preferred dividends and income attributable to the participating securities)

by the weighted average Common Shares outstanding during the period.

F-63

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which, during the year

ended December 31, 2020, added back to net income the interest expense, net of applicable income taxes, on the 5.375%

exchangeable notes due May 1, 2020 by the weighted average Common Shares outstanding, assuming all dilutive securities were

issued.

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

Year ended December 31,

2022

2021

2020

(in thousands except per share amounts)

Net (loss) income

(73,287

)

56,854

52,373

Dividends on preferred shares

(41,819

)

(30,891

)

(24,938

)

Effect of participating securities—share-based compensation awards

(408

)

(318

)

(287

)

Net (loss) income attributable to common shareholders

(115,514

)

25,645

27,148

Weighted average basic shares outstanding

91,434

97,402

99,373

Dilutive securities‒shares issuable under share-based compensation

plan

—

Diluted weighted average shares outstanding

91,434

97,402

99,373

Basic (loss) earnings per share

(1.26

)

0.26

0.27

Basic (loss) earnings per share

(1.26

)

0.26

0.27

Calculation of diluted earnings per share requires certain potentially dilutive shares to be excluded when the inclusion of such

shares would be anti-dilutive. The following table summarizes the potentially dilutive shares excluded from the diluted earnings per

share calculation as inclusion of such shares would have been anti-dilutive:

Year ended December 31,

2022

2021

2020

(in thousands)

Shares issuable under share-based compensation plan

136

162

172

Shares issuable pursuant to exchange of the Exchangeable Senior Notes

24,328

—

2,529

Note 25—Segments

The Company operates in four segments as described in Note 1 ‒ Organization.

The Company’s reportable segments are identified based on PMT’s investment strategies. The Company’s chief operating

decision maker is its chief executive officer. The following disclosures about the Company’s business segments are presented

consistent with the way the Company’s chief operating decision maker organizes and evaluates financial information for making

operating decisions and assessing performance.

F-64

Financial highlights by operating segment are summarized below:

Credit

Interest rate

sensitive

Correspondent

Year ended December 31, 2022

strategies

production

Corporate

Total

(in thousands)

Net investment income:

Net loan servicing fees

—

909,551

—

909,551

Net (losses) gains on investments and financings

(93,739

)

(565,048

)

—

(658,787

)

Net gains on loans acquired for sale

—

25,687

—

25,692

Net interest expense:

Interest income

38,810

238,527

103,065

3,392

383,794

Interest expense

52,385

285,304

70,531

2,200

410,420

(13,575

)

(46,777

)

32,534

1,192

(26,626

)

Other

537

—

52,857

547

53,941

(106,772

)

297,726

111,078

1,739

303,771

Expenses:

Loan fulfillment and servicing fees

payable to PFSI

219

81,696

67,991

—

149,906

Management fees

—

31,065

Other

5,575

8,228

15,530

30,380

59,713

5,794

89,924

83,521

61,445

240,684

Pretax (loss) income

(112,566

)

207,802

27,557

(59,706

)

63,087

Total assets at end of year

1,614,977

9,991,621

1,936,797

378,169

13,921,564

Credit

Interest rate

sensitive

Correspondent

Year ended December 31, 2021

strategies

production

Corporate

Total

(in thousands)

Net investment income:

Net loan servicing fees

—

(36,022

)

—

(36,022

)

Net (losses) gains on investments and financings:

376,725

(72,646

)

—

304,079

Net gains on loans acquired for sale

)

—

87,275

—

87,273

Net interest expense:

Interest income

2,739

64,528

125,056

2,916

195,239

Interest expense

59,545

160,525

84,667

—

304,737

(56,806

)

(95,997

)

40,389

2,916

(109,498

)

Other

3,204

—

171,261

—

174,465

323,121

(204,665

)

298,925

2,916

420,297

Expenses:

Loan fulfillment and servicing fees

payable to PFSI

363

80,295

178,927

—

259,585

Management fees

—

37,801

Other

16,115

5,105

33,062

23,968

78,250

16,478

85,400

211,989

61,769

375,636

Pretax (loss) income

306,643

(290,065

)

86,936

(58,853

)

44,661

Total assets at end of year

1,848,294

7,363,878

4,325,750

234,786

13,772,708

F-65

Credit

Interest rate

sensitive

Correspondent

Year ended December 31, 2020

strategies

production

Corporate

Total

(in thousands)

Net investment income:

Net loan servicing fees

—

153,696

—

153,696

Net (losses) gains on investments and financings:

(237,049

)

66,164

—

(170,885

)

Net gains on loans acquired for sale

(43,813

)

—

423,735

—

379,922

Net interest expense:

Interest income

8,902

108,036

102,779

2,418

222,135

Interest expense

39,237

153,338

76,892

1,303

270,770

(30,335

)

(45,302

)

25,887

1,115

(48,635

)

Other

5,857

—

147,600

1,796

155,253

(305,340

)

174,558

597,222

2,911

469,351

Expenses:

Loan fulfillment and servicing fees

payable to PFSI

807

66,374

222,200

—

289,381

Management fees

—

34,538

Other

10,996

2,487

30,383

21,836

65,702

11,803

68,861

252,583

56,374

389,621

Pretax (loss) income

(317,143

)

105,697

344,639

(53,463

)

79,730

Total assets at end of year

2,920,558

4,593,127

3,781,010

197,316

11,492,011

Note 26—Regulatory Capital and Liquidity Requirements

The Company, through PMC, is subject to financial eligibility requirements established by the Federal Housing Finance Agency

for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include:

• A tangible net worth of $2.5 million plus 25 basis points of the UPB of the Company’s total 1-4 unit servicing portfolio,

excluding mortgage loans subserviced for others;

• A tangible net worth/total assets ratio greater than or equal to 6%; and

• A liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of

total nonperforming Agency servicing UPB less 70% of such nonperforming Agency servicing UPB in excess of 600

basis points where the underlying loans are in COVID-19 forbearance but were current at the time they entered

forbearance.

The Agencies’ capital and liquidity amounts and requirements are summarized below:

Net worth (1)

Tangible net worth /

total assets ratio (1)

Liquidity (1)

Fannie Mae and Freddie Mac

Actual

Required

Actual

Required

Actual

Required

(dollars in thousands)

December 31, 2022

1,138,331

586,436

343,286

79,372

December 31, 2021

938,218

557,229

108,536

74,771

(1) Calculated in accordance with the Agencies’ requirements.

In August 2022, the Agencies issued revised capital and liquidity requirements. The requirements will be effective at various

dates beginning September 30, 2023, for issuers of securities guaranteed by seller/servicers of mortgage loans to Fannie Mae and

Freddie Mac. The Company believes it was in compliance with the Agencies’ revised requirements as of December 31, 2022.

Noncompliance with the Agencies’ capital and liquidity requirements can result in the Agencies taking various remedial actions

up to and including removing the Company’s ability to sell loans to and service loans on behalf of the Agencies.

F-66

Note 27—Parent Company Information

The Company’s debt financing agreements require PMT and certain of its subsidiaries to comply with financial covenants that

include a minimum tangible net worth as summarized below:

December 31, 2022

Company consolidated

Debt covenant

requirement

Calculated

balance

(1)

(in thousands)

PennyMac Mortgage Investment Trust

1,250,000

1,962,815

PennyMac Operating Partnership, L.P.

700,000

2,018,327

PennyMac Holdings, LLC

250,000

836,113

PennyMac Corp.

300,000

1,141,891

(1) Calculated in accordance with the lenders’ requirements.

The Company’s subsidiaries are limited from transferring funds to the Parent by these minimum tangible net worth

requirements.

F-67

PENNYMAC MORTGAGE INVESTMENT TRUST

CONDENSED BALANCE SHEETS

Following are condensed parent-only financial statements for the Company:

December 31,

2022

2021

(in thousands)

Assets

Short-term investment

507

3,542

Investments in subsidiaries

2,220,692

2,518,953

Due from subsidiaries

150

Other assets

904

—

Total assets

2,222,253

2,522,584

Liabilities

Dividends payable

35,658

44,764

Capital notes due to subsidiaries

200,780

100,679

Accounts payable and accrued liabilities

342

1,233

Due to affiliates

280

421

Due to subsidiaries

1,586

244

Total liabilities

238,646

147,341

Shareholders' Equity

1,983,607

2,375,243

Total liabilities and shareholders' equity

2,222,253

2,522,584

F-68

PENNYMAC MORTGAGE INVESTMENT TRUST

CONDENSED STATEMENTS OF OPERATIONS

Year ended December 31,

2022

2021

2020

(in thousands)

Income

Dividends from subsidiaries

214,885

213,794

176,216

Intercompany interest

140

Other

—

475

Total income

214,893

213,836

176,831

Expenses

Intercompany interest

14,244

3,663

1,509

Other

Total expenses

14,315

3,748

1,571

Income before (benefit from) provision for income taxes and

distribution in excess of earnings

200,578

210,088

175,260

(Benefit from) provision for income taxes

)

Income before equity in undistributed earnings of subsidiaries

200,583

210,077

175,247

Distributions in excess of earnings of subsidiaries

(251,409

)

(133,576

)

(139,620

)

Net (loss) income

(50,826

)

76,501

35,627

F-69

PENNYMAC MORTGAGE INVESTMENT TRUST

CONDENSED STATEMENTS OF CASH FLOWS

Year ended December 31,

2022

2021

2020

(in thousands)

Cash flows from operating activities:

Net (loss) income

(50,826

)

76,501

35,627

Adjustments to reconcile net (loss) income to net cash provided by

operating activities:

Distributions in excess of earnings of subsidiaries

251,409

133,576

139,620

Decrease in due from subsidiaries

753

967

697

(Increase) decrease in other assets

(903

)

571

(Decrease) increase in accounts payable and accrued liabilities

(891

)

854

(1,266

)

Decrease (increase) in due from affiliates

(141

)

(26

)

Increase in due to affiliates

1,342

297

Net cash provided by operating activities

200,743

212,814

174,703

Cash flows from investing activities:

Increase in investment in subsidiaries

—

(242,125

)

(5,596

)

Net decrease (increase) in short-term investments

3,035

2,940

(3,663

)

Net cash provided by (used in) investing activities

3,035

(239,185

)

(9,259

)

Cash flows from financing activities:

Net increase in intercompany unsecured note payable

100,101

56,300

44,380

Issuance of preferred shares

—

250,000

—

Payment of issuance costs related to preferred shares

—

(8,225

)

—

Issuance of Common Shares

—

5,654

Payment of issuance costs related to Common Shares

—

(57

)

Payment of withholding taxes related to share-based compensation

(522

)

(730

)

(1,629

)

Payment of dividends to preferred shareholders

(41,819

)

(30,146

)

(24,945

)

Payment of dividends to common shareholders

(173,546

)

(183,973

)

(151,580

)

Repurchase of Common Shares

(87,992

)

(56,855

)

(37,267

)

Net cash (used in) provided by financing activities

(203,778

)

26,371

(165,444

)

Net change in cash

—

Cash at beginning of year

—

Cash at end of year

—

Non-cash investing activities:

Investment in subsidiary pursuant to share based compensation plan

4,309

2,418

2,289

Non-cash financing activities:

Contribution of equity to subsidiary pursuant to share based compensation plan

4,309

2,418

2,289

Dividends payable

35,658

44,764

46,093

Note 28—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial

statements. During this period:

• All agreements to repurchase assets that matured before the date of this Report were extended or renewed.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this

report to be signed on its behalf by the undersigned, thereunto duly authorized.

PENNYMAC MORTGAGE INVESTMENT TRUST

By:

/s/ David A. Spector

David A. Spector

Chairman and Chief Executive Officer

(Principal Executive Officer)

Dated: February 24, 2023

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on

behalf of the registrant in the capacities and on the dates indicated.

Signatures

Title

Date

/s/ David A. Spector

David A. Spector

Chairman and Chief Executive Officer

(Principal Executive Officer)

February 24, 2023

/s/ Daniel S. Perotti

Daniel S. Perotti

Senior Managing Director and

Chief Financial Officer

(Principal Financial Officer)

February 24, 2023

/s/ Gregory L. Hendry

Gregory L. Hendry

Chief Accounting Officer

(Principal Accounting Officer)

February 24, 2023

/s/

Scott W. Carnahan

Trustee

February 24, 2023

/s/ Preston DuFauchard

Preston DuFauchard

Trustee

February 24, 2023

/s/ Randall D. Hadley

Randall D. Hadley

Trustee

February 24, 2023

/s/ Nancy McAllister

Nancy McAllister

Trustee

February 24, 2023

/s/ Renee R Schultz

Renee R Schultz

Trustee

February 24, 2023

/s/ Marianne Sullivan

Marianne Sullivan

Trustee

February 24, 2023

/s/ Stacey D. Stewart

Stacey D. Stewart

Trustee

February 24, 2023

/s/ Catherine A. Lynch

Catherine A. Lynch

Trustee

February 24, 2023

EXECUTIVE OFFICERS*

David A. Spector

Chairman and Chief Executive Officer

James Follette

Senior Managing Director and

Chief Mortgage

Operations Officer

Doug Jones

Trustee, President and Chief Mortgage Banking

Officer

William Chang

Senior Managing Director and Chief

Investment Officer

Daniel S. Perotti

Senior Managing Director and Chief

Financial

Officer

Don White

Senior

Managing Director and Chief Risk

Officer

*as of April 1, 2023

BOARD OF TRUSTEES*

David A. Spector

Chairman and Chief Executive Officer,

PennyMac Mortgage Investment Trust

Douglas Jones

Trustee, President and Chief Mortgage

Banking Officer, PennyMac Mortgage

Investment Trust

Scott W. Carnahan

(1)(3)(5)

Senior Advisor and former Senior Managing

Director, FTI Consulting, Inc.

Catherine A. Lynch

(1)(5)

Independent Director, Blackrock Fixed

Income Mutual Funds

Nancy McAllister

(2)(3)(6)

Senior Advisor, Star Mountain Capital, LLC

Star Mountain Stimulus Fund, L.P.

Renee R. Schultz

(2)(3)

Trustee, St. Mary’s College

Preston P. DuFauchard

(4)(5)(6)

Former General Counsel, Robertston Stephens

Randall D. Hadley

(1)(5)

Independent Lead Trustee

Certified Public Accountant and

former Partner, Grant Thornton LLP

Stacey D. Stewart

(2)(4)

Chief Executive Officer, Mothers Against

Drunk Driving

Marianne Sullivan

(4)(5)(6)

Chief Operating Officer, Sagent

*as of April 1, 2023

Board Committees:

(1)

Audit Committee

(2)

Compensation Committee

(3)

Finance Committee

(4)

Nominating and Corporate Governance Committee

(5)

Related Party Matters Committee

(6)

Risk Committee