Overview

Our Company

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

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

We were formed as a Delaware corporation on July 2, 2018. We became the 
top-level parent holding company for the consolidated PennyMac business 
pursuant to a corporate reorganization (the “Reorganization”) that was 
consummated on November 1, 2018. Before the Reorganization, PNMAC Holdings, 
Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings”) 
was our top-level parent holding company and our public company registrant.

One result of the consummation of the Reorganization was that our equity 
structure was changed to create a single class of publicly-held common stock as 
opposed to the two classes that were in place before the Reorganization. For 
tax purposes, the Reorganization was to be treated as an integrated transaction 
that qualifies as a reorganization within the meaning of Section 368(a) of the 
Internal Revenue Code and/or a transfer described in Section 351(a) of the 
Internal Revenue Code. PNMAC Holdings’ financial statements remain our 
historical financial statements.

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

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

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

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

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

Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), 
a Delaware limited liability company registered with the Securities and 
Exchange Commission (“SEC”) as an investment adviser under the Investment 
Advisers Act of 1940, as amended. PCM manages PennyMac Mortgage Investment 
Trust (“PMT”), a mortgage real estate investment trust listed on the New York 
Stock Exchange under the ticker symbol PMT.

Results of Operations

During the quarter ended March 31, 2020, the United States was significantly 
impacted by the effects of the COVID-19 pandemic (the “Pandemic” or “COVID-19”) 
and the effects of market and government responses to the pandemic. These 
developments have triggered an economic recession in the United States. Initial 
unemployment claims totaled 26 million for the five weeks ended April 18 as 
compared to one million for the preceding five weeks.

This sudden and significant increase in unemployment has created financial 
hardships for many existing borrowers. As part of its response to the Pandemic, 
the federal government included requirements in the Coronavirus Aid, Relief, 
and Economic Security (“CARES”) Act that we provide borrowers with substantial 
payment forbearance on loans we service subject to Agency securitizations. As a 
result of this requirement, we have seen and expect to further see a large 
increases in delinquencies in our servicing portfolio which will increase our 
cost to service those loans and require us to finance substantial amounts of 
advances of principal and interest payments to the holders of the securities 
holding those loans.

In the near term, or in subsequent quarters, we expect this development to have 
a negative effect on the earnings of our servicing segment before taking into 
account the effect of future developments on the valuation of our MSRs by, 
among other things, reducing servicing fee income, reducing our ability to earn 
gains on early buyout loans and reducing the amount of placement fees we earn 
on custodial deposits related to these loans, increasing our cost to service 
due to higher delinquency and default rates, as well as increased financing 
costs due to the need to advance funds on behalf of delinquent borrowers. These 
effects may be offset by growth in our loan servicing portfolio, increases in 
the servicing fees we earn from PMT for servicing the delinquent loans in its 
loan servicing portfolio and gains on early buyout loans as those borrowers 
reperform.

Before the onset of the Pandemic, the mortgage origination market was 
experiencing healthy demand owing to historically low interest rates in the 
United States. The government’s response to the onset of the Pandemic, 
including fiscal stimulus and infusions of additional liquidity by the Federal 
Reserve into financial markets acted to further lower market mortgage interest 
rates. These developments have acted to sustain heightened demand for new 
mortgage loans despite the slowdown in overall economic activity. The mortgage 
origination market for 2019 was estimated at $2.3 trillion; current forecasts 
estimate the origination market to approximate $2.4 trillion for 2020 and $2.2 
trillion for 2021. However, the uncertainties and strains on many organizations 
introduced by the Pandemic have caused some market participants to scale back 
or exit mortgage loan production activities which, combined with constraints on 
mortgage industry origination capacity that existed before the Pandemic, has 
allowed us to realize higher gain-on sale margins in our production segment.

The Pandemic had a substantial negative effect on the investments of PMT. As a 
result, PMT recognized a net loss of $595 million. Because the effects of the 
Pandemic began to be realized during March of 2020, its effects on the base 
management fees were we earn from PMT were not significant. However, we expect 
base management fees to be significantly reduced in future periods and we do 
not expect to recognize performance incentive fees for the foreseeable future 
because of the losses PMT incurred during the quarter ended March 31, 2020.

The current environment caused by the Pandemic in the United States is 
historically unprecedented and the source of much uncertainty surrounding 
future economic and market prospects and the ongoing effects of this developing 
situation on our future prospects are difficult to anticipate, for further 
discussion of the potential impacts of the Pandemic please also see “Risk 
Factors” in Part II, Item 1A.

For the quarter ended March 31, 2020, income before provision for income taxes 
increased $354.4 million compared to the same period in 2019. The increase was 
primarily due to:

increases in production income (Net gains on loans held for sale at fair value, 
Loan origination fees and Fulfillment fees from PennyMac Mortgage Investment 
Trust); and

increases in Net loan servicing fees, partially offset by;

increases in total expenses.


The increases in production income reflect higher production volume and 
improved profit margins. The increase in Net loan servicing fees was due to a 
combination of increased loan servicing fees resulting from growth in our loan 
servicing portfolio and changes in the fair value of our MSRs, MSLs and ESS, 
net of hedging results, compared to the same period in 2019. The increases in 
total expenses were mainly due to increases in loan origination and 
compensation expenses, reflecting the continuing growth of our mortgage banking 
activities.


Net Gains on Loans Held for Sale at Fair Value


During the quarter ended March 31, 2020, we recognized Net gains on loans held 
for sale at fair value totaling $344.3 million, an increase of $259.5 million, 
compared to the same period in 2019. The increase was primarily due to the 
combined effects of decreasing interest rates on demand for loans and of 
reduced industry capacity on profit margins during 2020 as compared to 2019 as 
discussed above.

Our gain on sale of loans held for sale includes both cash and non-cash 
elements. We receive proceeds on sale that include our estimate of the fair 
value of MSRs and we incur liabilities for mortgage servicing liabilities 
(which represents the fair value of the costs we expect to incur in excess of 
the fees we receive for early buyout of delinquent loans (“EBO loans”) we have 
resold) and for the fair value of our estimate of the losses we expect to incur 
relating to the representation and warranties we provide in our loan sale 
transactions.


Non-cash elements of gain on sale of loans


The MSRs, MSLs, and liability for representations and warranties we recognize 
represent our estimate of the fair value of future benefits and costs we will 
realize for years in the future. These estimates represented approximately 79% 
of our gain on sale of loans at fair value for the quarters ended March 31, 
2020, as compared to 128% for the quarter ended March 31, 2019. How we measure 
and update our measurements of MSRs and MSLs is detailed in Note 6 – Fair value 
– Valuation Techniques and Inputs to the consolidated financial statements 
included in this Quarterly Report.

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

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

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

We recorded provisions for losses under representations and warranties relating 
to current loan sales as a component of Net gains on loans held for sale at 
fair value totaling $3.7 million for the quarter ended March 31, 2020, compared 
to $1.1 million for the quarter ended March 31, 2019. We also recorded a 
reduction in the liability of $1.7 million during the quarter ended March 31, 
2020, compared to $4.2 million during the quarter ended March 31, 2019. The 
reductions in the liability resulted from previously sold loans meeting 
performance criteria established by the Agencies which significantly limits the 
likelihood of certain repurchase or indemnification claims.

During the quarter ended March 31, 2020, we repurchased loans totaling $16.3 
million and we recorded losses of $280,000 net of recoveries. If the 
outstanding balance of loans we purchase and sell subject to representations 
and warranties increases, the loans sold continue to season, economic 
conditions change or investor and insurer loss mitigation strategies are 
adjusted, the level of repurchase and loss activity may increase.

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

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


Loan origination fees

Loan origination fees increased $33.6 million during the quarter ended March 
31, 2020, compared to the same period in 2019. The increase was primarily due 
to an increase in volume of loans we produced.

Fulfillment fees from PennyMac Mortgage Investment Trust

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

Net loan servicing fees increased $177.2 million during the quarter ended March 
31, 2020, compared to the same period in 2019. The increase was due to an 
increase of $134.7 million in changes in fair value of MSRs and mortgage 
servicing liabilities (“MSLs”), net of hedging results and ESS fair value 
changes, and an increase of $42.6 million in loan servicing fees for the 
quarter ended March 31, 2020, resulting from an increase in our average 
servicing portfolio of 22% for the quarter ended March 31, 2020, compared to 
the same period in 2019.

As discussed above, the decreasing interest rate environment, along with 
expectations of higher costs to service loans in the coming months and 
increased returns demanded by market participants in response to the 
uncertainties created by the Pandemic, resulted in a 36% reduction in fair 
value (as measured by the December 31, 2019 fair value) of our investment in 
MSRs. This reduction in fair value was offset by our hedging results and change 
in fair value of ESS.

There can be no assurance that our hedging activities will continue to perform 
in a like manner in the future. As discussed above, we expect the effects of 
the Pandemic and the requirements of the CARES Act to reduce our servicing 
income and to increase our servicing expenses due to the increased number of 
delinquent loans, and significant levels of forbearance that we have and 
continue to grant, as well as the resolution of loans that we expect to 
ultimately default as the result of the Pandemic.


Net Interest Income


Net interest income decreased $9.7 million during the quarter ended March 31, 
2020, compared to the same period in 2019. The decrease was primarily due to:

increases in interest expense on repurchase agreements, reflecting the 
expiration of a master repurchase agreement in August 2019 that provided us 
with incentives to finance mortgage loans approved for satisfying certain 
consumer relief characteristics as provided in the agreement. We recorded $9.3 
million of such incentives as reductions in Interest expense during the quarter 
ended March 31, 2019. An increase in average borrowing balances during the 
quarter ended March 31, 2020 to fund a higher volume of loan inventory compared 
to the same period in 2019 also contributed to the increase in the interest 
expense; and increases in interest income on loans held for sale due to larger 
average loan inventory balances during the quarter ended March 31, 2020 as 
compared to 2019.

Management fees and Carried Interest

Management fees increased $1.8 million during the quarter ended March 31, 2020, 
compared to the same period in 2019. The increase was due to an increase of 
$2.9 million in base management fees, reflecting the increase in PMT’s average 
shareholders’ equity upon which its base management fees are based, partially 
offset by a decrease of $1.1 million in incentive fees due to the loss PMT 
incurred during the quarter ended March 31, 2020 compared to the same period in 
2019. As discussed above, because the effects of the Pandemic began to be 
realized during March of 2020, its effects on the base management fees we earn 
from PMT were not significant. However, in future periods we expect base 
management fees to be significantly reduced and we do not expect to recognize 
performance incentive fees for the foreseeable future because of the losses PMT 
incurred during the quarter ended March 31, 2020.


Compensation expense increased $61.8 million during the quarter ended March 31 
2020, compared to the same period in 2019. The increase was primarily due to 
increases in incentive compensation resulting from performance-based incentives 
in our mortgage banking business and higher than expected attainment of 
profitability targets along with increases in salaries and wages due to 
increased average headcounts resulting from the growth in our mortgage banking 
activities.

Loan origination

Loan origination expense increased $31.5 million during the quarter ended March 
31, 2020, compared to the same period in 2019. The increase was primarily due 
to increases in wholesale brokerage fees and loan file compilation expenses, 
resulting from increased consumer and broker direct lending activities, as well 
as an increase in discounts offered to generate sufficient incentives for 
borrowers to refinance during the quarter ended March 31, 2020 compared to the 
same period during 2019.

Servicing

Servicing expenses increased $11.9 million during the quarter ended March 31, 
2020, compared to the same period in 2019. The increases were primarily due to 
increased purchases of EBO loans from Ginnie Mae guaranteed pools for the 
quarter ended March 31, 2020, compared to the same period in 2019. During the 
quarter ended March 31, 2020, we purchased $920.6 million in UPB of EBO loans, 
compared to $351.7 million during the same period in 2019.

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

Total assets increased $687.1 million from $10.2 billion at December 31, 2019 
to $10.9 billion at March 31, 2020. The increase was primarily due to increases 
of $629.0 million in loans held for sale at fair value resulting from an 
increase in loan production volume, $ 690.5 million in cash, and $273.5 million 
in derivative assets, partially offset by a decrease of $733.1 million in MSRs. 
We increased our holding of cash during the quarter ended March 31, 2020 due to 
cash collected from our hedging activities combined with an increase in our 
short-term borrowings. Historically, we used excess cash to pay down 
borrowings, but in response to the uncertainties surrounding the Pandemic, we 
determined to maintain greater cash liquidity.

Total liabilities increased $384.5 million from $8.1 billion at December 31, 
2019 to $8.5 billion at March 31, 2020. The increase was primarily attributable 
to an increase in borrowings required to finance a larger inventory of loans 
held for sale.

Cash Flows

Our cash flows resulted in a net increase in cash and restricted cash of $690.5 
million during the quarter ended March 31, 2020 as discussed below.

Operating activities

Net cash used in operating activities totaled $730.3 million during the quarter 
ended March 31, 2020 compared with $134.2 million during the same period in 
2019. Our cash flows from operating activities are primarily influenced by 
changes in the levels of our inventory of mortgage loans as shown below:

Investing activities


Net cash provided by investing activities during the quarter ended March 31, 
2020 totaled $1.1 billion primarily due to $942.0 million in net settlement of 
derivative financial instruments used to hedge our investment in MSRs, and a 
decrease in margin deposits of $133.0 million. Net cash used in investing 
activities during the quarter ended March 31, 2019 totaled $92.8 million 
primarily due to the purchase of MSRs totaling $211.5 million, partially offset 
by a $125.7 million net settlement of derivative financial instruments used to 
hedge our investment in MSRs.


Financing activities

Net cash provided by financing activities totaled $304.5 million during the 
quarter ended March 31, 2020, primarily to finance the growth in our inventory 
of mortgage loans held for sale. Net cash provided by financing activities 
totaled $216.0 million during the quarter ended March 31, 2019, primarily to 
finance the growth in our inventory of mortgage loans held for sale.


Liquidity and Capital Resources


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

The impact of the Pandemic on our operations, liquidity and capital resources 
remain uncertain and difficult to predict, for further discussion of the 
potential impacts of the Pandemic please also see “Risk Factors” in Part II, 
Item 1A.

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


Our repurchase agreements represent the sales of assets together with 
agreements for us to buy back the respective assets at a later date.

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

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

positive net income during one of the two most recent calendar quarters;

a minimum in unrestricted cash and cash equivalents of $40 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.


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

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

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

a minimum of unrestricted cash and cash equivalents equal to $40 million;

a minimum of tangible net worth of $1.25 billion;

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

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

Although these financial covenants limit the amount of indebtedness that we may 
incur and affect our liquidity through minimum cash reserve requirements, we 
believe that these covenants currently provide us with sufficient flexibility 
to successfully operate our business and obtain the financing necessary to 
achieve that purpose.

Our debt financing agreements also contain margin call provisions that, upon 
notice from the applicable lender at its option, require us to transfer cash 
or, in some instances, additional assets in an amount sufficient to eliminate 
any margin deficit. A margin deficit will generally result from any decline in 
the market value (as determined by the applicable lender) of the assets subject 
to the related financing agreement. Upon notice from the applicable lender, we 
will generally be required to satisfy the margin call on the day of such notice 
or within one business day thereafter, depending on the timing of the notice.

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


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

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

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

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

On January 31, 2020, FHFA proposed changes to the eligibility requirements, 
which would increase the tangible net worth requirement to $2.5 million plus 35 
basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of 
the UPB of all other 1-4 unit loans serviced, and increase the liquidity 
requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and 
Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 
basis points of total nonperforming Agency servicing UPB (including 
nonperforming Agency loans that are in payment forbearance) in excess of 4% of 
total Agency servicing UPB.

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

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

In June 2017, our board of directors approved a stock repurchase program that 
allows us to repurchase up to $50 million of our common stock using open market 
stock purchases or privately negotiated transactions in accordance with 
applicable rules and regulations. The stock repurchase program does not have an 
expiration date and the authorization does not obligate us to acquire any 
particular amount of common stock. We intend to finance the stock repurchase 
program through cash on hand. From inception through March 31, 2020, we have 
repurchased $19.1 million of shares under our stock repurchase program.


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


Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of March 31, 2020, we have not entered into any off-balance sheet 
arrangements.

Contractual Obligations

As of March 31, 2020, we had contractual obligations aggregating $16.2 billion, 
comprised of borrowings, commitments to purchase and originate mortgage loans 
and a payable to exchanged Private National Mortgage Acceptance Company, LLC 
unitholders under a tax receivable agreement. We also lease our office 
facilities.


Debt Obligations

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

Under the terms of these agreements, PLS is required to comply with certain 
financial covenants, as described further above in “Liquidity and Capital 
Resources,” and various non-financial covenants customary for transactions of 
this nature. As of March 31, 2020, we believe we were in compliance in all 
material respects with these covenants.

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

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

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


The borrowing of $50 million with Credit Suisse First Boston Mortgage Capital 
LLC is in the form of a sale of a variable funding note under an agreement to 
repurchase up to a maximum of $600 million, less any amount utilized under the 
Credit Suisse AG note payable and an agreement to repurchase relating to the 
financing of Fannie Mae MSRs.

The amount at risk (the fair value of the assets pledged plus the related 
margin deposit, less the amount advanced by the counterparty and accrued 
interest) relating to our assets sold under agreements to repurchase is 
summarized by counterparty below as of March 31, 2020:

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


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



All debt financing arrangements that matured between March 31, 2020 and the 
date of this Report have been renewed or extended and are described in Note 
11—Borrowings to the accompanying consolidated financial statements.


Quantitative and Qualitative Disclosures About Market Risk


Market risk is the exposure to loss resulting from changes in interest rates, 
foreign currency exchange rates, commodity prices, equity prices, real estate 
values and other market based risks. The primary market risks that we are 
exposed to are credit risk, interest rate risk, prepayment risk, inflation risk 
and fair value risk.

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


Controls and Procedures

Disclosure Controls and Procedures


We maintain disclosure controls and procedures that are designed to ensure that 
information required to be disclosed in our reports filed under the Securities 
Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, 
summarized and reported within the time periods specified in the SEC’s rules 
and forms, and that such information is accumulated and communicated to our 
management, including our Chief Executive Officer and Chief Financial Officer, 
as appropriate, to allow timely decisions regarding required disclosures. 
However, no matter how well a control system is designed and operated, it can 
provide only reasonable, not absolute, assurance that it will detect or uncover 
failures within the Company to disclose material information otherwise required 
to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief 
Executive Officer and Chief Financial Officer, of the effectiveness of our 
disclosure controls and procedures as of the end of the period covered by this 
Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. 
Based on our evaluation, our Chief Executive Officer and Chief Financial 
Officer have concluded that our disclosure controls and procedures were 
effective, as of the end of the period covered by this Report, to provide 
reasonable assurance that information required to be disclosed by us in the 
reports that we file or submit under the Exchange Act is recorded, processed, 
summarized and reported within the time periods specified in the applicable 
rules and forms, and that it is accumulated and communicated to our management, 
including our Chief Executive Officer and Chief Financial Officer, as 
appropriate, to allow timely decisions regarding required disclosure.



Changes in Internal Control over Financial Reporting

In the ordinary course of business, we review our system of internal control 
over financial reporting and make changes that we believe will improve the 
efficiency and effectiveness of controls, ensure sufficient precision of 
controls, and appropriately mitigate the risk of material misstatement in the 
financial statements.

Management has evaluated, with the participation of our Chief Executive Officer 
and Chief Financial Officer, whether any changes in our internal control over 
financial reporting that occurred during our last fiscal quarter have 
materially affected, or are reasonably likely to materially affect, our 
internal control over financial reporting. There have been no changes in our 
internal control over financial reporting since December 31, 2019 that have 
materially affected, or are reasonably likely to material affect, our internal 
control over financial reporting.


Legal Proceedings

From time to time, the Company may be involved in various legal and regulatory 
proceedings, lawsuits and other claims arising in the ordinary course of its 
business. The amount, if any, of ultimate liability with respect to such 
matters cannot be determined, but despite the inherent uncertainties of 
litigation, management 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. Set forth below are material updates to legal 
proceedings of the Company.

On December 20, 2018, a purported shareholder of the Company filed a complaint 
in a putative class and derivative action in the Court of Chancery of the State 
of Delaware, captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et 
al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action 
alleges, among other things, that certain current directors and officers of the 
Company breached their fiduciary duties to the Company and its shareholders by, 
among other things, agreeing to and entering into the Reorganization without 
ensuring that the Reorganization was entirely fair to the Company or public 
shareholders. The Reorganization was approved by 99.8% of voting shareholders 
on October 24, 2018. On December 19, 2019, the Delaware Court denied a motion 
to dismiss filed by the Company and certain of its directors and officers. 
While no assurance can be provided as to the ultimate outcome of this claim or 
the account of any losses to the Company, the Company believes the Garfield 
Action is without merit and plans to vigorously defend the matter, which 
remains pending.

On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned 
indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand 
for Jury Trial in the Circuit Court for the Fourth Judicial Circuit in and for 
Duval County, Florida (the “Florida State Court”), captioned Black Knight 
Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 
2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI 
Complaint include breach of contract and misappropriation of MSP® System trade 
secrets in order to develop an imitation mortgage-processing system intended to 
replace the MSP® System. The BKI Complaint seeks damages for breach of contract 
and misappropriation of trade secrets, injunctive relief under the Florida 
Uniform Trade Secrets Act and declaratory judgment of ownership of all 
intellectual property and software developed by or on behalf of PLS as a result 
of its wrongful use of and access to the MSP® System and related trade secret 
and confidential information. On April 6, 2020, the Florida State Court entered 
an order granting a motion to compel arbitration filed by the Company. On April 
21, 2020, BKI filed a motion for reconsideration of the order compelling 
arbitration. On May 6, 2020, the Florida State Court entered an order denying 
BKI's motion for reconsideration. Also on May 6, 2020, BKI filed a notice of 
appeal with respect to both orders. While no assurance can be provided as to 
the ultimate outcome of the BKI Complaint or the account of any losses to the 
Company, the Company believes the BKI Complaint is without merit and plans to 
vigorously defend the matter, which remains pending.



Risk Factors

There have been no material changes from the risk factors set forth under Item 
1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended 
December 31, 2019, filed with the SEC on February 28, 2020, except for the 
following:

Our business, financial condition and results of operations have been, and will 
likely continue to be, adversely affected by the emergence of the COVID-19 
pandemic.

The COVID-19 pandemic has created unprecedented economic, financial and public 
health disruptions that have adversely affected, and are likely to continue to 
adversely affect, our business, financial condition and results of operations. 
The extent to which COVID-19 continues to negatively affect our business, 
financial condition and results of operations will depend on future 
developments, which are highly uncertain and cannot be predicted, including the 
scope and duration of the pandemic and actions taken by governmental 
authorities and other third parties in response to COVID-19.

The federal government enacted the CARES Act, which allows borrowers with 
federally-backed loans to request temporary payment forbearance in response to 
the increased borrower hardships resulting from COVID-19. As a result of the 
CARES Act forbearance requirements, we expect to record additional increases in 
delinquencies in our servicing portfolio that may require us to finance 
substantial amounts of advances of principal and interest payments to the 
holders of the securities 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.. We also expect the effects of the CARES Act 
forbearance requirements to reduce our servicing income and increase our 
servicing expenses due to the increased number of delinquent loans, significant 
levels of forbearance that we have granted and continue to grant, as well as 
the resolution of loans that we expect to ultimately default as the result of 
COVID-19.

Financial markets have experienced substantial volatility and reduced 
liquidity, resulting in unprecedented federal government intervention to lower 
the federal funds rate to near zero and support market liquidity by purchasing 
assets in many financial markets, including the mortgage-backed securities 
market. The CARES Act forbearance requirements and the decline in financial 
markets have negatively impacted the fair value of our servicing assets. In 
addition, the CARES Act forbearance requirements and the decline in financial 
markets have materially and negatively impacted the book value of PMT and, as a 
result, our net assets under management. Consequently, we expect PMT base 
management fees to be significantly reduced, and we do not expect to earn 
performance incentive fees from PMT for the foreseeable future. Further market 
volatility may result in additional declines in the value of our servicing 
assets, lower base management fees and make it increasingly difficult to 
optimize our hedging activities. Also, our liquidity and/or regulatory capital 
could be adversely impacted by volatility and disruptions in the capital and 
credit markets. In addition, if we fail to meet or satisfy any of the covenants 
in our repurchase agreements or other financing arrangements as a result of the 
impact of the COVID-19 pandemic, we would be in default under these agreements, 
which could result in a cross-default or cross-acceleration under other 
financing arrangements, and our lenders could elect to declare outstanding 
amounts due and payable (or such amounts may automatically become due and 
payable), terminate their commitments, require the posting of additional 
collateral and enforce their respective interests against existing collateral.

We may also 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 are also adversely impacted by 
the volatility and dislocations in the financial markets and may not be willing 
to continue to extend us credit on the same terms, or on favorable terms, or at 
all.

In addition, our business could be disrupted if we are unable to operate due to 
changing governmental restrictions such as travel bans and quarantines placed 
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.

Governmental authorities have taken additional measures to stabilize the 
financial markets and support the economy. The success of these measures are 
unknown and they may not be sufficient to address the current 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 COVID-19. The scope and duration of COVID-19 and the efficacy of the 
extraordinary measures put in place to address it are currently unknown. Even 
after COVID-19 subsides, the economy may not fully recover for some time and we 
may be materially and adversely affected by a prolonged recession or economic 
downturn.

To the extent the COVID-19 pandemic adversely affects our business, financial 
condition and results of operations, it may also have the effect of heightening 
many of the other risks described in our Annual Report on Form 10-K for the 
year ended December 31, 2019 under the heading “Risk Factors.”

If forbearances resulting from the COVID-19 pandemic and the CARES Act are 
determined to be delinquent by the FHFA and the Agencies, it will significantly 
impact our liquidity and financial condition.

As described in Liquidity and Capital Resources, the FHFA establishes certain 
liquidity requirements for Agency and Ginnie Mae loan servicers that are 
generally tied to the UPB of loans serviced by such loan servicer for the 
Agencies. To the extent that the percentage of seriously delinquent loans 
("SDQ"), i.e., loans that are 90 days or more delinquent, exceeds defined 
thresholds, the liquidity requirements for loan servicers increase materially. 
If the FHFA and the Agencies determine that forbearances resulting from 
COVID-19 are delinquent for the purposes of the SDQ thresholds and the 
associated liquidity requirements, we expect that the significant number of 
such forbearances will result in delinquencies that exceed the SDQ thresholds. 
Exceeding such SDQ thresholds would result in substantially higher liquidity 
requirements, as well as a reduction in the advance rates applicable to our MSR 
financing structure that are tied to such SDQ thresholds, all of which may 
materially impact our results of operations and financial condition, and the 
market value of our common shares.



Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the quarter ended 
March 31, 2020.

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


Other Information

Contribution Agreement and Plan of Merger, dated as of August 2, 2018, by and 
among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc., 
New PennyMac Merger Sub, LLC, Private National Mortgage Acceptance Company, 
LLC, and the Contributors.

Amended and Restated Certificate of Incorporation of New PennyMac Financial 
Services, Inc.

Amended and Restated Bylaws of New PennyMac Financial Services, Inc.

Amendment to Amended and Restated Bylaws of PennyMac Financial Services, Inc. 
(formerly known as New PennyMac Financial Services, Inc.).

Tax Receivable Agreement, dated as of May 8, 2013, between PennyMac Financial 
Services, Inc., Private National Mortgage Acceptance Company, LLC and each of 
the Members.

Master Repurchase Agreement, dated as of December 19, 2016, by and among PNMAC 
GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage 
Acceptance Company, LLC.

Master Repurchase Agreement, dated as of December 19, 2016, by and among, 
Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman 
Islands Branch, and PennyMac Loan Services, LLC.

Guaranty, dated as of December 19, 2016, by Private National Mortgage 
Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital 
LLC.

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

Second Amended and Restated Stockholder Agreement, dated February 12, 2020, by 
and among PennyMac Financial Services, Inc. (formerly known as New PennyMac 
Financial Services, Inc.) and BlackRock Mortgage Ventures, LLC.

Amendment No. 8 to the Third Amended and Restated Master Repurchase Agreement, 
dated as of March 6, 2020, among Credit Suisse First Boston Mortgage Capital 
LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, 
PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, 
LLC.

Amendment No. 9 to the Third Amended and Restated Master Repurchase Agreement, 
dated as of April 1, 2020, among Credit Suisse First Boston Mortgage Capital 
LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, 
PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, 
LLC.

Amendment No. 10 to Third Amended and Restated Master Repurchase Agreement, 
dated as of April 24, 2020, among Credit Suisse First Boston Mortgage Capital 
LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, 
PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, 
LLC.

Master Repurchase Agreement, dated as of April 1, 2020, by and among Credit 
Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands 
Branch and PennyMac Loan Services, LLC.

Amended and Restated Guaranty, dated April 1, 2020, made by Private National 
Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston 
Mortgage Capital LLC.

Series 2020-SPIADVF1 Indenture Supplement, dated as of April 1, 2020, to Third 
Amended and Restated Base Indenture, dated as of April 1, 2020, by and among 
PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and Credit 
Suisse First Boston Mortgage Capital LLC.

Third Amended and Restated Base Indenture, dated as of April 1, 2020, by and 
among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, 
Credit Suisse First Boston Mortgage Capital LLC and Pentalpha Surveillance LLC.

Amended and Restated Master Repurchase Agreement, dated as of April 1, 2020, by 
and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC and Private 
National Mortgage Acceptance Company, LLC.

Joint Amendment No. 2 to Loan and Security Agreement and Amendment No. 1 to 
Pricing Side Letter, dated as of April 1, 2020, by and among Credit Suisse 
First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, 
Private National Mortgage Acceptance Company, LLC and PennyMac Loan Services, 
LLC.


Joint Amendment No. 1 to the Series 2020-SPIADVF1 Repurchase Agreement and 
Amendment No. 1 to the Pricing Side Letter, dated as of April 24, 2020, among 
Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse Ag, Cayman 
Islands Branch and PennyMac Loan Services, LLC.

Amendment No. 2 to the Amended and Restated Series 2016-MSRVF1 Indenture 
Supplement, dated as of April 24, 2020, by and among PNMAC GMSR ISSUER TRUST, 
Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston 
Mortgage Capital LLC.

PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted 
Stock Unit Subject to Continued Service Award Agreement for Non Employee 
Directors (2020).

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


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

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


Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), 
a Delaware limited liability company registered with the Securities and 
Exchange Commission (“SEC”) as an investment adviser under the Investment 
Advisers Act of 1940, as amended. PCM manages PennyMac Mortgage Investment 
Trust (“PMT”), a mortgage real estate investment trust listed on the New York 
Stock Exchange under the ticker symbol PMT. Table of Contents

Results of Operations

During the quarter ended March 31, 2020, the United States was significantly 
impacted by the effects of the COVID-19 pandemic (the “Pandemic” or “COVID-19”) 
and the effects of market and government responses to the pandemic. These 
developments have triggered an economic recession in the United States. Initial 
unemployment claims totaled 26 million for the five weeks ended April 18 as 
compared to one million for the preceding five weeks.


This sudden and significant increase in unemployment has created financial 
hardships for many existing borrowers. As part of its response to the Pandemic, 
the federal government included requirements in the Coronavirus Aid, Relief, 
and Economic Security (“CARES”) Act that we provide borrowers with substantial 
payment forbearance on loans we service subject to Agency securitizations. As a 
result of this requirement, we have seen and expect to further see a large 
increases in delinquencies in our servicing portfolio which will increase our 
cost to service those loans and require us to finance substantial amounts of 
advances of principal and interest payments to the holders of the securities 
holding those loans.


In the near term, or in subsequent quarters, we expect this development to have 
a negative effect on the earnings of our servicing segment before taking into 
account the effect of future developments on the valuation of our MSRs by, 
among other things, reducing servicing fee income, reducing our ability to earn 
gains on early buyout loans and reducing the amount of placement fees we earn 
on custodial deposits related to these loans, increasing our cost to service 
due to higher delinquency and default rates, as well as increased financing 
costs due to the need to advance funds on behalf of delinquent borrowers. These 
effects may be offset by growth in our loan servicing portfolio, increases in 
the servicing fees we earn from PMT for servicing the delinquent loans in its 
loan servicing portfolio and gains on early buyout loans as those borrowers 
reperform.


Before the onset of the Pandemic, the mortgage origination market was 
experiencing healthy demand owing to historically low interest rates in the 
United States. The government’s response to the onset of the Pandemic, 
including fiscal stimulus and infusions of additional liquidity by the Federal 
Reserve into financial markets acted to further lower market mortgage interest 
rates. These developments have acted to sustain heightened demand for new 
mortgage loans despite the slowdown in overall economic activity. The mortgage 
origination market for 2019 was estimated at $2.3 trillion; current forecasts 
estimate the origination market to approximate $2.4 trillion for 2020 and $2.2 
trillion for 2021. However, the uncertainties and strains on many organizations 
introduced by the Pandemic have caused some market participants to scale back 
or exit mortgage loan production activities which, combined with constraints on 
mortgage industry origination capacity that existed before the Pandemic, has 
allowed us to realize higher gain-on sale margins in our production segment.

The Pandemic had a substantial negative effect on the investments of PMT. As a 
result, PMT recognized a net loss of $595 million. Because the effects of the 
Pandemic began to be realized during March of 2020, its effects on the base 
management fees were we earn from PMT were not significant. However, we expect 
base management fees to be significantly reduced in future periods and we do 
not expect to recognize performance incentive fees for the foreseeable future 
because of the losses PMT incurred during the quarter ended March 31, 2020.

The current environment caused by the Pandemic in the United States is 
historically unprecedented and the source of much uncertainty surrounding 
future economic and market prospects and the ongoing effects of this developing 
situation on our future prospects are difficult to anticipate, for further 
discussion of the potential impacts of the Pandemic please also see “Risk 
Factors” in Part II, Item 1A.


For the quarter ended March 31, 2020, income before provision for income taxes 
increased $354.4 million compared to the same period in 2019. The increase was 
primarily due to:

increases in production income (Net gains on loans held for sale at fair value, 
Loan origination fees and Fulfillment fees from PennyMac Mortgage Investment 
Trust); and

increases in Net loan servicing fees, partially offset by;

increases in total expenses.

The increases in production income reflect higher production volume and 
improved profit margins. The increase in Net loan servicing fees was due to a 
combination of increased loan servicing fees resulting from growth in our loan 
servicing portfolio and changes in the fair value of our MSRs, MSLs and ESS, 
net of hedging results, compared to the same period in 2019. The increases in 
total expenses were mainly due to increases in loan origination and 
compensation expenses, reflecting the continuing growth of our mortgage banking 
activities.


Net Gains on Loans Held for Sale at Fair Value

During the quarter ended March 31, 2020, we recognized Net gains on loans held 
for sale at fair value totaling $344.3 million, an increase of $259.5 million, 
compared to the same period in 2019. The increase was primarily due to the 
combined effects of decreasing interest rates on demand for loans and of 
reduced industry capacity on profit margins during 2020 as compared to 2019 as 
discussed above.

Our gain on sale of loans held for sale includes both cash and non-cash 
elements. We receive proceeds on sale that include our estimate of the fair 
value of MSRs and we incur liabilities for mortgage servicing liabilities 
(which represents the fair value of the costs we expect to incur in excess of 
the fees we receive for early buyout of delinquent loans (“EBO loans”) we have 
resold) and for the fair value of our estimate of the losses we expect to incur 
relating to the representation and warranties we provide in our loan sale 
transactions.


Non-cash elements of gain on sale of loans

The MSRs, MSLs, and liability for representations and warranties we recognize 
represent our estimate of the fair value of future benefits and costs we will 
realize for years in the future. These estimates represented approximately 79% 
of our gain on sale of loans at fair value for the quarters ended March 31, 
2020, as compared to 128% for the quarter ended March 31, 2019. How we measure 
and update our measurements of MSRs and MSLs is detailed in Note 6 – Fair value 
– Valuation Techniques and Inputs to the consolidated financial statements 
included in this Quarterly Report.

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

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

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

We recorded provisions for losses under representations and warranties relating 
to current loan sales as a component of Net gains on loans held for sale at 
fair value totaling $3.7 million for the quarter ended March 31, 2020, compared 
to $1.1 million for the quarter ended March 31, 2019. We also recorded a 
reduction in the liability of $1.7 million during the quarter ended March 31, 
2020, compared to $4.2 million during the quarter ended March 31, 2019. The 
reductions in the liability resulted from previously sold loans meeting 
performance criteria established by the Agencies which significantly limits the 
likelihood of certain repurchase or indemnification claims.

During the quarter ended March 31, 2020, we repurchased loans totaling $16.3 
million and we recorded losses of $280,000 net of recoveries. If the 
outstanding balance of loans we purchase and sell subject to representations 
and warranties increases, the loans sold continue to season, economic 
conditions change or investor and insurer loss mitigation strategies are 
adjusted, the level of repurchase and loss activity may increase.

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

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

Loan origination fees

Loan origination fees increased $33.6 million during the quarter ended March 
31, 2020, compared to the same period in 2019. The increase was primarily due 
to an increase in volume of loans we produced.


Fulfillment fees from PennyMac Mortgage Investment Trust

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

Fulfillment fees increased $14.4 million during the quarter ended March 31, 
2020, compared to the same period in 2019. The increase was primarily due to an 
increase in PMT’s loan production volume, partially offset by an increase in 
discretionary reductions in the fulfillment fee rate during the quarter ended 
March 31, 2020, compared to the same period in 2019.

Net loan servicing fees increased $177.2 million during the quarter ended March 
31, 2020, compared to the same period in 2019. The increase was due to an 
increase of $134.7 million in changes in fair value of MSRs and mortgage 
servicing liabilities (“MSLs”), net of hedging results and ESS fair value 
changes, and an increase of $42.6 million in loan servicing fees for the 
quarter ended March 31, 2020, resulting from an increase in our average 
servicing portfolio of 22% for the quarter ended March 31, 2020, compared to 
the same period in 2019.

As discussed above, the decreasing interest rate environment, along with 
expectations of higher costs to service loans in the coming months and 
increased returns demanded by market participants in response to the 
uncertainties created by the Pandemic, resulted in a 36% reduction in fair 
value (as measured by the December 31, 2019 fair value) of our investment in 
MSRs. This reduction in fair value was offset by our hedging results and change 
in fair value of ESS.

There can be no assurance that our hedging activities will continue to perform 
in a like manner in the future. As discussed above, we expect the effects of 
the Pandemic and the requirements of the CARES Act to reduce our servicing 
income and to increase our servicing expenses due to the increased number of 
delinquent loans, and significant levels of forbearance that we have and 
continue to grant, as well as the resolution of loans that we expect to 
ultimately default as the result of the Pandemic.


Net Interest Income

Net interest income decreased $9.7 million during the quarter ended March 31, 
2020, compared to the same period in 2019. The decrease was primarily due to:

increases in interest expense on repurchase agreements, reflecting the 
expiration of a master repurchase agreement in August 2019 that provided us 
with incentives to finance mortgage loans approved for satisfying certain 
consumer relief characteristics as provided in the agreement. We recorded $9.3 
million of such incentives as reductions in Interest expense during the quarter 
ended March 31, 2019. An increase in average borrowing balances during the 
quarter ended March 31, 2020 to fund a higher volume of loan inventory compared 
to the same period in 2019 also contributed to the increase in the interest 
expense; and

increases in interest shortfall on repayments of loans serviced for Agency 
securitizations, reflecting increased loan payoffs as a result of the lower 
interest rates in 2020 as compared to 2019, partially offset by;

increases in interest income on loans held for sale due to larger average loan 
inventory balances during the quarter ended March 31, 2020 as compared to 2019.



Management fees and Carried Interest

Management fees increased $1.8 million during the quarter ended March 31, 2020, 
compared to the same period in 2019. The increase was due to an increase of 
$2.9 million in base management fees, reflecting the increase in PMT’s average 
shareholders’ equity upon which its base management fees are based, partially 
offset by a decrease of $1.1 million in incentive fees due to the loss PMT 
incurred during the quarter ended March 31, 2020 compared to the same period in 
2019. As discussed above, because the effects of the Pandemic began to be 
realized during March of 2020, its effects on the base management fees we earn 
from PMT were not significant. However, in future periods we expect base 
management fees to be significantly reduced and we do not expect to recognize 
performance incentive fees for the foreseeable future because of the losses PMT 
incurred during the quarter ended March 31, 2020.

Compensation expense increased $61.8 million during the quarter ended March 31 
2020, compared to the same period in 2019. The increase was primarily due to 
increases in incentive compensation resulting from performance-based incentives 
in our mortgage banking business and higher than expected attainment of 
profitability targets along with increases in salaries and wages due to 
increased average headcounts resulting from the growth in our mortgage banking 
activities.


Loan origination

Loan origination expense increased $31.5 million during the quarter ended March 
31, 2020, compared to the same period in 2019. The increase was primarily due 
to increases in wholesale brokerage fees and loan file compilation expenses, 
resulting from increased consumer and broker direct lending activities, as well 
as an increase in discounts offered to generate sufficient incentives for 
borrowers to refinance during the quarter ended March 31, 2020 compared to the 
same period during 2019.


Servicing

Servicing expenses increased $11.9 million during the quarter ended March 31, 
2020, compared to the same period in 2019. The increases were primarily due to 
increased purchases of EBO loans from Ginnie Mae guaranteed pools for the 
quarter ended March 31, 2020, compared to the same period in 2019. During the 
quarter ended March 31, 2020, we purchased $920.6 million in UPB of EBO loans, 
compared to $351.7 million during the same period in 2019.

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

Provision for Income Taxes

Our effective income tax rate was 26.2% during the quarter ended March 31, 
2020, compared to 23.5% during the quarter ended March 31, 2019. The increase 
in effective tax rate in the quarter ended March 31, 2020 compared to the same 
period in 2019 was primarily due to the lower impact of the permanent and 
favorable tax adjustment for equity compensation in the quarter ended March 31, 
2020 compared to the same period in 2019.


LIABILITIES AND STOCKHOLDERS' EQUITY

Total assets increased $687.1 million from $10.2 billion at December 31, 2019 
to $10.9 billion at March 31, 2020. The increase was primarily due to increases 
of $629.0 million in loans held for sale at fair value resulting from an 
increase in loan production volume, $ 690.5 million in cash, and $273.5 million 
in derivative assets, partially offset by a decrease of $733.1 million in MSRs. 
We increased our holding of cash during the quarter ended March 31, 2020 due to 
cash collected from our hedging activities combined with an increase in our 
short-term borrowings. Historically, we used excess cash to pay down 
borrowings, but in response to the uncertainties surrounding the Pandemic, we 
determined to maintain greater cash liquidity.

Total liabilities increased $384.5 million from $8.1 billion at December 31, 
2019 to $8.5 billion at March 31, 2020. The increase was primarily attributable 
to an increase in borrowings required to finance a larger inventory of loans 
held for sale.

Cash Flows

Our cash flows resulted in a net increase in cash and restricted cash of $690.5 
million during the quarter ended March 31, 2020 as discussed below.

Operating activities

Net cash used in operating activities totaled $730.3 million during the quarter 
ended March 31, 2020 compared with $134.2 million during the same period in 
2019. Our cash flows from operating activities are primarily influenced by 
changes in the levels of our inventory of mortgage loans as shown below:

Investing activities

Net cash provided by investing activities during the quarter ended March 31, 
2020 totaled $1.1 billion primarily due to $942.0 million in net settlement of 
derivative financial instruments used to hedge our investment in MSRs, and a 
decrease in margin deposits of $133.0 million. Net cash used in investing 
activities during the quarter ended March 31, 2019 totaled $92.8 million 
primarily due to the purchase of MSRs totaling $211.5 million, partially offset 
by a $125.7 million net settlement of derivative financial instruments used to 
hedge our investment in MSRs.

Financing activities

Net cash provided by financing activities totaled $304.5 million during the 
quarter ended March 31, 2020, primarily to finance the growth in our inventory 
of mortgage loans held for sale. Net cash provided by financing activities 
totaled $216.0 million during the quarter ended March 31, 2019, primarily to 
finance the growth in our inventory of mortgage loans held for sale.



Liquidity and Capital Resources

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

The impact of the Pandemic on our operations, liquidity and capital resources 
remain uncertain and difficult to predict, for further discussion of the 
potential impacts of the Pandemic please also see “Risk Factors” in Part II, 
Item 1A.

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


Our repurchase agreements represent the sales of assets together with 
agreements for us to buy back the respective assets at a later date.

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

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

positive net income during one of the two most recent calendar quarters;

a minimum in unrestricted cash and cash equivalents of $40 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.

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


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

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

a minimum of unrestricted cash and cash equivalents equal to $40 million;

a minimum of tangible net worth of $1.25 billion;

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

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

Although these financial covenants limit the amount of indebtedness that we may 
incur and affect our liquidity through minimum cash reserve requirements, we 
believe that these covenants currently provide us with sufficient flexibility 
to successfully operate our business and obtain the financing necessary to 
achieve that purpose.

Our debt financing agreements also contain margin call provisions that, upon 
notice from the applicable lender at its option, require us to transfer cash 
or, in some instances, additional assets in an amount sufficient to eliminate 
any margin deficit. A margin deficit will generally result from any decline in 
the market value (as determined by the applicable lender) of the assets subject 
to the related financing agreement. Upon notice from the applicable lender, we 
will generally be required to satisfy the margin call on the day of such notice 
or within one business day thereafter, depending on the timing of the notice.

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

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

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

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

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

On January 31, 2020, FHFA proposed changes to the eligibility requirements, 
which would increase the tangible net worth requirement to $2.5 million plus 35 
basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of 
the UPB of all other 1-4 unit loans serviced, and increase the liquidity 
requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and 
Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 
basis points of total nonperforming Agency servicing UPB (including 
nonperforming Agency loans that are in payment forbearance) in excess of 4% of 
total Agency servicing UPB.

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

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

In June 2017, our board of directors approved a stock repurchase program that 
allows us to repurchase up to $50 million of our common stock using open market 
stock purchases or privately negotiated transactions in accordance with 
applicable rules and regulations. The stock repurchase program does not have an 
expiration date and the authorization does not obligate us to acquire any 
particular amount of common stock. We intend to finance the stock repurchase 
program through cash on hand. From inception through March 31, 2020, we have 
repurchased $19.1 million of shares under our stock repurchase program.

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

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of March 31, 2020, we have not entered into any off-balance sheet 
arrangements.


Contractual Obligations

As of March 31, 2020, we had contractual obligations aggregating $16.2 billion, 
comprised of borrowings, commitments to purchase and originate mortgage loans 
and a payable to exchanged Private National Mortgage Acceptance Company, LLC 
unitholders under a tax receivable agreement. We also lease our office 
facilities.


Debt Obligations


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

Under the terms of these agreements, PLS is required to comply with certain 
financial covenants, as described further above in “Liquidity and Capital 
Resources,” and various non-financial covenants customary for transactions of 
this nature. As of March 31, 2020, we believe we were in compliance in all 
material respects with these covenants.

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

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


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

The borrowing of $50 million with Credit Suisse First Boston Mortgage Capital 
LLC is in the form of a sale of a variable funding note under an agreement to 
repurchase up to a maximum of $600 million, less any amount utilized under the 
Credit Suisse AG note payable and an agreement to repurchase relating to the 
financing of Fannie Mae MSRs.

The amount at risk (the fair value of the assets pledged plus the related 
margin deposit, less the amount advanced by the counterparty and accrued 
interest) relating to our assets sold under agreements to repurchase is 
summarized by counterparty below as of March 31, 2020:


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

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

All debt financing arrangements that matured between March 31, 2020 and the 
date of this Report have been renewed or extended and are described in Note 
11—Borrowings to the accompanying consolidated financial statements.


Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, 
foreign currency exchange rates, commodity prices, equity prices, real estate 
values and other market based risks. The primary market risks that we are 
exposed to are credit risk, interest rate risk, prepayment risk, inflation risk 
and fair value risk.

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

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that 
information required to be disclosed in our reports filed under the Securities 
Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, 
summarized and reported within the time periods specified in the SEC’s rules 
and forms, and that such information is accumulated and communicated to our 
management, including our Chief Executive Officer and Chief Financial Officer, 
as appropriate, to allow timely decisions regarding required disclosures. 
However, no matter how well a control system is designed and operated, it can 
provide only reasonable, not absolute, assurance that it will detect or uncover 
failures within the Company to disclose material information otherwise required 
to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief 
Executive Officer and Chief Financial Officer, of the effectiveness of our 
disclosure controls and procedures as of the end of the period covered by this 
Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. 
Based on our evaluation, our Chief Executive Officer and Chief Financial 
Officer have concluded that our disclosure controls and procedures were 
effective, as of the end of the period covered by this Report, to provide 
reasonable assurance that information required to be disclosed by us in the 
reports that we file or submit under the Exchange Act is recorded, processed, 
summarized and reported within the time periods specified in the applicable 
rules and forms, and that it is accumulated and communicated to our management, 
including our Chief Executive Officer and Chief Financial Officer, as 
appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

In the ordinary course of business, we review our system of internal control 
over financial reporting and make changes that we believe will improve the 
efficiency and effectiveness of controls, ensure sufficient precision of 
controls, and appropriately mitigate the risk of material misstatement in the 
financial statements.

Management has evaluated, with the participation of our Chief Executive Officer 
and Chief Financial Officer, whether any changes in our internal control over 
financial reporting that occurred during our last fiscal quarter have 
materially affected, or are reasonably likely to materially affect, our 
internal control over financial reporting. There have been no changes in our 
internal control over financial reporting since December 31, 2019 that have 
materially affected, or are reasonably likely to material affect, our internal 
control over financial reporting.


Legal Proceedings

From time to time, the Company may be involved in various legal and regulatory 
proceedings, lawsuits and other claims arising in the ordinary course of its 
business. The amount, if any, of ultimate liability with respect to such 
matters cannot be determined, but despite the inherent uncertainties of 
litigation, management 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. Set forth below are material updates to legal 
proceedings of the Company.

On December 20, 2018, a purported shareholder of the Company filed a complaint 
in a putative class and derivative action in the Court of Chancery of the State 
of Delaware, captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et 
al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action 
alleges, among other things, that certain current directors and officers of the 
Company breached their fiduciary duties to the Company and its shareholders by, 
among other things, agreeing to and entering into the Reorganization without 
ensuring that the Reorganization was entirely fair to the Company or public 
shareholders. The Reorganization was approved by 99.8% of voting shareholders 
on October 24, 2018. On December 19, 2019, the Delaware Court denied a motion 
to dismiss filed by the Company and certain of its directors and officers. 
While no assurance can be provided as to the ultimate outcome of this claim or 
the account of any losses to the Company, the Company believes the Garfield 
Action is without merit and plans to vigorously defend the matter, which 
remains pending.

On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned 
indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand 
for Jury Trial in the Circuit Court for the Fourth Judicial Circuit in and for 
Duval County, Florida (the “Florida State Court”), captioned Black Knight 
Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 
2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI 
Complaint include breach of contract and misappropriation of MSP® System trade 
secrets in order to develop an imitation mortgage-processing system intended to 
replace the MSP® System. The BKI Complaint seeks damages for breach of contract 
and misappropriation of trade secrets, injunctive relief under the Florida 
Uniform Trade Secrets Act and declaratory judgment of ownership of all 
intellectual property and software developed by or on behalf of PLS as a result 
of its wrongful use of and access to the MSP® System and related trade secret 
and confidential information. On April 6, 2020, the Florida State Court entered 
an order granting a motion to compel arbitration filed by the Company. On April 
21, 2020, BKI filed a motion for reconsideration of the order compelling 
arbitration. On May 6, 2020, the Florida State Court entered an order denying 
BKI's motion for reconsideration. Also on May 6, 2020, BKI filed a notice of 
appeal with respect to both orders. While no assurance can be provided as to 
the ultimate outcome of the BKI Complaint or the account of any losses to the 
Company, the Company believes the BKI Complaint is without merit and plans to 
vigorously defend the matter, which remains pending.


Risk Factors

There have been no material changes from the risk factors set forth under Item 
1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended 
December 31, 2019, filed with the SEC on February 28, 2020, except for the 
following:

Our business, financial condition and results of operations have been, and will 
likely continue to be, adversely affected by the emergence of the COVID-19 
pandemic.

The COVID-19 pandemic has created unprecedented economic, financial and public 
health disruptions that have adversely affected, and are likely to continue to 
adversely affect, our business, financial condition and results of operations. 
The extent to which COVID-19 continues to negatively affect our business, 
financial condition and results of operations will depend on future 
developments, which are highly uncertain and cannot be predicted, including the 
scope and duration of the pandemic and actions taken by governmental 
authorities and other third parties in response to COVID-19.

The federal government enacted the CARES Act, which allows borrowers with 
federally-backed loans to request temporary payment forbearance in response to 
the increased borrower hardships resulting from COVID-19. As a result of the 
CARES Act forbearance requirements, we expect to record additional increases in 
delinquencies in our servicing portfolio that may require us to finance 
substantial amounts of advances of principal and interest payments to the 
holders of the securities 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.. We also expect the effects of the CARES Act 
forbearance requirements to reduce our servicing income and increase our 
servicing expenses due to the increased number of delinquent loans, significant 
levels of forbearance that we have granted and continue to grant, as well as 
the resolution of loans that we expect to ultimately default as the result of 
COVID-19.

Financial markets have experienced substantial volatility and reduced 
liquidity, resulting in unprecedented federal government intervention to lower 
the federal funds rate to near zero and support market liquidity by purchasing 
assets in many financial markets, including the mortgage-backed securities 
market. The CARES Act forbearance requirements and the decline in financial 
markets have negatively impacted the fair value of our servicing assets. In 
addition, the CARES Act forbearance requirements and the decline in financial 
markets have materially and negatively impacted the book value of PMT and, as a 
result, our net assets under management. Consequently, we expect PMT base 
management fees to be significantly reduced, and we do not expect to earn 
performance incentive fees from PMT for the foreseeable future. Further market 
volatility may result in additional declines in the value of our servicing 
assets, lower base management fees and make it increasingly difficult to 
optimize our hedging activities. Also, our liquidity and/or regulatory capital 
could be adversely impacted by volatility and disruptions in the capital and 
credit markets. In addition, if we fail to meet or satisfy any of the covenants 
in our repurchase agreements or other financing arrangements as a result of the 
impact of the COVID-19 pandemic, we would be in default under these agreements, 
which could result in a cross-default or cross-acceleration under other 
financing arrangements, and our lenders could elect to declare outstanding 
amounts due and payable (or such amounts may automatically become due and 
payable), terminate their commitments, require the posting of additional 
collateral and enforce their respective interests against existing collateral.

We may also 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 are also adversely impacted by 
the volatility and dislocations in the financial markets and may not be willing 
to continue to extend us credit on the same terms, or on favorable terms, or at 
all.

In addition, our business could be disrupted if we are unable to operate due to 
changing governmental restrictions such as travel bans and quarantines placed 
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.

Governmental authorities have taken additional measures to stabilize the 
financial markets and support the economy. The success of these measures are 
unknown and they may not be sufficient to address the current 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 COVID-19. The scope and duration of COVID-19 and the efficacy of the 
extraordinary measures put in place to address it are currently unknown. Even 
after COVID-19 subsides, the economy may not fully recover for some time and we 
may be materially and adversely affected by a prolonged recession or economic 
downturn.

To the extent the COVID-19 pandemic adversely affects our business, financial 
condition and results of operations, it may also have the effect of heightening 
many of the other risks described in our Annual Report on Form 10-K for the 
year ended December 31, 2019 under the heading “Risk Factors.”

If forbearances resulting from the COVID-19 pandemic and the CARES Act are 
determined to be delinquent by the FHFA and the Agencies, it will significantly 
impact our liquidity and financial condition.

As described in Liquidity and Capital Resources, the FHFA establishes certain 
liquidity requirements for Agency and Ginnie Mae loan servicers that are 
generally tied to the UPB of loans serviced by such loan servicer for the 
Agencies. To the extent that the percentage of seriously delinquent loans 
("SDQ"), i.e., loans that are 90 days or more delinquent, exceeds defined 
thresholds, the liquidity requirements for loan servicers increase materially. 
If the FHFA and the Agencies determine that forbearances resulting from 
COVID-19 are delinquent for the purposes of the SDQ thresholds and the 
associated liquidity requirements, we expect that the significant number of 
such forbearances will result in delinquencies that exceed the SDQ thresholds. 
Exceeding such SDQ thresholds would result in substantially higher liquidity 
requirements, as well as a reduction in the advance rates applicable to our MSR 
financing structure that are tied to such SDQ thresholds, all of which may 
materially impact our results of operations and financial condition, and the 
market value of our common shares.