PFSI 10-K & 10-Q changes, risk factors and insider trading

Our business is significantly impactedaffected by changes in interest rates. Changes in prevailing interest rates, rising inflation rates, U.S. monetary policies or other macroeconomic conditions that affect interest rates may have a detrimental effect on our business and earnings.

Our operations, financial performance and earnings are affected by factors including prevailing interest rates, United States monetary policies or other macroeconomic conditions such as inflation fluctuations, recessions, consumer confidence and demand. For example, thehigher U.S. Federal Reserve’s elevated federal fundsinterest rates and inflationary pressures overin the2024 periodand 2025 have constrained mortgage origination and refinancing activity resultingas in our net revenues decreasing from $3.2 billion in fiscal year 2021compared to $1.6previous billion in fiscal year 2024.years. In addition, the pricing and liquidity of the MBS market may be impacted by futuresignificant saleschanges and reallocations ofin the Federal Reserve’s MBS portfolio. Future reductions of the Federal Reserve’s balance sheet or its MBS portfolio may result in higher interest rate volatility and wider mortgage-backed security spreads that could negatively impactaffect our investments.

Furthermore, borrowings under our warehouse lines of credit,credit and MSR and servicing advance facilities are generally at variable rates of interest, which exposesexpose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our variable-rate indebtedness will increase even though the amount borrowed remains the same, and our earnings and cash flows may correspondingly decrease. In addition, we may not be able to adjust our operational capacity and staffing in a timely manner, or at all, in response to increases or decreases in loan production volume resulting from changes in prevailing interest rates. Any of the increases or decreases discussed above could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Our revenuesbusiness areis highly dependent on macroeconomic factors andmacroeconomic, real estate, mortgage and financial market conditions that could materially and adversely affect our business, financial condition, liquiditycondition and results of operations.

The success of our business strategies and our results of operations are materially affected by current or future conditions in the real estate market, mortgage markets, financial markets and the economy generally. Factors such as inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, government shutdowns, pandemics, wars and armed conflicts, climate change and the availability and cost of credit may contribute to increased volatility and unclear expectations for the economy in general and the real estate, mortgage market and financial markets in particular going forward. A significant deterioration in macroeconomic conditions could reduce the amount of disposable income consumers have and negatively impact consumers’ ability to take out new loans and repay existing loans. A destabilization of the real estate market, mortgage market and financial markets or deterioration in these markets also could reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we originate or acquire, either at a profit or at all. Inflation and future expectations of inflation could also increase our operating expenses and may affect our profitability if the additional operating costs are not recoverable through increased revenues or profit margins. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of operations.markets.

Delinquencies can result from many factors including unemployment, weak economic conditions or real estate values, or catastrophic events such as man-made or natural disasters, pandemics, wars and armed conflicts, and terrorist attacks. A decrease in home prices may result in higher loan-to-value ratios (“LTVs”),ratios, lower recoveries in foreclosure and an increase in loss severities above those that would have been realized had property values not decreased. Some borrowers domay not have sufficient equity in their homes to permit them to refinance their existing loans, which may reduce the volume of our loan production business. This may also provide borrowers with an incentive to default on their mortgage loans even if they have the ability to make principal and interest payments.

During any period in which a borrower is not making payments, we may be required under our servicing agreements in respect of our MSRs to advance our own funds to pay property taxes and insurance premiums, legal expenses and other protective advances, and may be required to advance scheduled principal and interest payments to security holders of the MBS into which the loans are sold. We also advance funds under theseour servicing agreements to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may require us to make advances for which we may not be reimbursed. In addition, if a loan serviced by us is in default or becomes delinquent, the repayment to us of the advance may be delayed until the loan is repaid or refinanced or a liquidation occurs. Federal, state or local regulatory actions may also result in an increase in the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred while the loan is delinquent. In addition, the average share of borrowers' mortgage payments allocated to property taxes and insurance premiums has been steadily rising in recent years due to inflation and other factors, which could impact housing affordability, mortgage delinquencies, defaults, and foreclosures. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders.

We may also be subject to additional curtailments to servicing and advance reimbursements if we have not satisfied VA, USDA or FHA timing, service and other regulatory or investor requirements during the foreclosure and conveyance process.processes. Any significant increase in delinquencies, defaults and foreclosures on loans that increase our servicing advances, reduce property value or otherwise delay our ability to dispose of the properties underlying the loan could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Our ability to finance our business operations and repay maturing obligations rests in large part on our ability to borrow money. Unlike some of our competitors who fund mortgage loans through bank deposits, we generally fund our mortgage loans through borrowings under warehouse facilities and other financing arrangements from banking institutions andbanks, private equity firms and other institutional investors and with funds from our operations. Our borrowings are generally repaid with the proceeds we receive from mortgage loan sales. We require new and continued financing to fund mortgage loans and operate our business. We are generally required to renew many of our financing arrangements on a regular basis, which exposes us to refinancing and interest rate risks. Our ability to refinance our existing financial obligations and borrow additional funds is affected by a variety of factors beyond our control including:

We are also dependent on a limited number of banking institutions andbanks, private equity firms and institutional investors to extend us credit on terms that we have determined to be commercially reasonable. These banking institutions andbanks, private equity firms and institutional investors are subject to their own risk management frameworks, profitability and risk thresholds and tolerances, any of which may change materially and negatively impact their business strategies, including their extension of credit to us specifically or mortgage lenders and servicers generally. Certain financial firms have already exited the mortgage lending market, and others financial firms may decide to exit the mortgage lending business in the future. Such actions may increase our cost of capital and limit or otherwise eliminate our access to capital, in which case our business, financial condition, liquidity and results of operations would be materially and adversely affected.

In addition, we invest in certain assets, including MSRs and EBOs, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs and EBOs under secured financing arrangements. Freddie Mac MSRs aremay be pledged through a special purpose entity to secure borrowings under a master repurchase agreement. Fannie Mae and Ginnie Mae MSRs aremay be pledged to special purpose entities, each of which issues variable funding notes, term loans and term notes that are secured by such Fannie Mae or Ginnie Mae assets, as applicable, and repaid through the servicing cash flows. Some of our EBOs are contributed to a special purpose entity, which issues participation certificates pledged to secure borrowings under a master repurchase agreement. In each case, similar to our repurchase agreements, the cash that we receive under these secured financing arrangements is less than the fair value of the assets and a decrease in the fair value of the pledged collateral can result in a margin call. Should a margin call occur, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to satisfy a margin call, the secured parties may sell the collateral, which may result in significant losses to us.

We may in the future utilize other sources of borrowings, including bank or private credit financing facilities and other structured financing arrangements, among others.arrangements. The amount of leverage we employ varies depending on the asset class being financed, our available capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of, among other things, the stability of our cash flows. We can provide no assurance that we will have access to any debt or equity capital on favorable terms or at the desired times, or at all. Our inability to raise such capital or obtain financing on favorable terms could materially and adversely impact our business, financial condition, liquidity and results of operations.

Our various financing agreements require us and/or our subsidiaries to comply with various restrictive covenants and conditions precedent to funding, including those relating to tangible net worth, profitability and our ratio of total liabilities to tangible net worth. Incurring substantial debt subjects us to the risk that our cash flows from operations may be insufficient to repurchase the assets that we have sold under our repurchase agreements or otherwise service the debt incurred under our other financing agreements. Our lenders also require us to maintain minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. In addition, the repayment of the unsecured senior notes will depend in part on our restricted subsidiaries’ generation of cash flow and our restricted subsidiaries’ ability to make such cash available to us, by dividend, debt repayment or other means. The unsecured senior note indentures contain additional restrictive covenants that may limit our and our restricted subsidiaries’ ability to engage in specified types of transactions, including our ability and/or the ability of our restricted subsidiaries to:

Fair value determinations require many assumptions and complex analyses, especially to the extent there are no active markets for identical assets. For example, the fair value estimate of our MSR investment is based on the cash flows projected to result from the servicing of the related mortgage loans and continually fluctuates due to a number of factors. These factors include prepayment speeds, interest rate changes, costs to service the loans and other market conditions. We use internal financial models that utilize our understanding of inputs used by market participants to value our MSRs to determine the price that we pay for portfolios of MSRs and to acquire loans for which we will retain MSRs. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. We may also encounter analytical results that may be inaccurate or inconsistent inaccurate with other market observations as we update our valuation model.

The geographic concentration of ourOur servicing portfolio may be affected by weaker economic conditions or adverse events specific to certain geographic regions which could decrease the fair value of our MSRs and adversely affect our business, financial condition, liquidity and results of operations.

MSRs arise from contractual agreements between us and the investors (or their agents) in loans and MBS that we service on their behalf. We generally acquire MSRs in connection with our sale of loans to the Agencies where we assume the obligation to service such loans on their behalf. Any MSRs we acquire are initially recorded at fair value on our balance sheet. The determination of the fair value of MSRs requires our management to make numerous estimates and assumptions. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced loans. The ultimate realization of the MSRs may be materially different than the values of such MSRs as may be reflected in our consolidated balance sheet as of any particular date. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs and assumptions used to determine MSR fair value. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Changes in interest rates are a key driver of the performance of MSRs. Historically, the fair value of MSRs has increased when interest rates increase and decreased when interest rates decrease due to the effect those changes in interest rates have on prepayment estimates. Prepayment speeds significantly affect MSRs. In general, prepayment on residential mortgage loans may occur at any time without penalty when the homeowner satisfies or pays off the mortgage upon selling or refinancing the mortgaged property. Prepayment speed is the measurement ofmeasures how quickly borrowers pay down the unpaid principal balance of their mortgage loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We base the price we pay for MSRs on, among other things, our projection of the cash flows from the related pool of loans. Our expectation of prepayment speeds is a significant input to our cash flow projections. If prepayment speed expectations increase significantly, the fair value of the MSRs could declinedecrease and we may be required to record a non-cash charge that would have a negative impact on our financial results.

Changes in interest rates are a key driver of the performance of MSRs. Historically, the fair value of MSRs has increased when interest rates increase and decrease when interest rates decrease due to the effect those changes in interest rates have on prepayment estimates. We may pursue various hedging strategies to seek to reduce our exposure to adverse changes in the fair value resulting from changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us. To the extent we do not utilize derivative financial instruments to hedge against changes in the fair value of MSRs or the derivatives we use in our hedging activities do not perform as expected, our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders would be more susceptible to volatility.

OurFailure counterpartiesto service loans according to various Servicing Guidelines and other contractual requirements may terminateresult in the termination of our servicing agreements and MSRs, which could adversely affect our business, financial condition, liquidity and results of operations.

Our duties and obligations as a servicer are defined through contractual agreements with the Agencies via each Agency’s servicing or MBS guidelines as well as pooling, securitization and other servicing agreements for non-agency MBS (collectively the “Servicing Guidelines”). In addition, if we are engaged as subservicer, our duties to service the loans underlying our MSRs are defined by a subservicing agreement, and may differ from the Servicing Guidelines. The value of our MSRs and other mortgage investments is dependent on the satisfactory performance of our servicing obligations as a servicer or subservicer. As is standard in the industry, under the terms of our master servicing agreements with the Agencies in respect of Agency MSRs that we retain in connection with our loan production, the Agencies have the right to terminate us as servicer of the loans we service on their behalf at any time (and, in certain instances, without the payment of any termination fee) and also have the right to cause us to sell the MSRs to a third party. In addition, our failure to comply with applicable servicingServicing guidelinesGuidelines could result in our termination under such master servicing agreements by the Agencies with little or no notice and without any compensation. The owners of other non-Agency loans that we service may also terminate certain of our MSRs if we fail to comply with applicable servicingServicing guidelines.Guidelines. If the MSRs are terminated on a material portion of our servicing portfolio, our business, financial condition, liquidity and results of operations could be adversely affected.

We may not be ableFailure to expand our subservicing business with third parties orcould enterimpact intoour additionalbusiness and increase our subservicing agreementscompliance on favorable terms.risks.

Our subservicing business with third parties is a growing part of our overall servicing portfolio, however, we may not be able to develop and maintain sufficient subservicing relationships to justifyestablish thea businesssuccessful expenditures require to offer this service.business. Under such contracts, the primary servicers for which we conduct subservicing activities may have the right to terminate our subservicing contracts with or without cause, with limited notice and with no termination fee upon a change of control. In addition, weWe may not have control over whether a subservicing client sells off its portfolio or the volume and timing of such sales. If we are unable to grow our subservicing business or if subservicing contracts are terminated with limited notice, then the growth of our subservicing business could be impacted and we could incur significant expenses. In addition, increasing our exposure to multiple subservicing arrangements will increase our operational servicing costs and our exposure to regulatory examinations and other subservicing compliance risks.

Most of the loans that we produce are either pooled into MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae.Mae, Inor addition,sold theto liquidity of the MBS market may be impacted by future sales and reallocations of the Federal Reserve’s MBS portfolio resulting in wider mortgage-backed security spreads.PMT. Any significant disruption or period of illiquidity in the general MBS market would directly affect our own liquidity because no existing alternative secondary market would likely be willing and able to accommodate on a timely basis the volume of loans that we typically sell in any given period. Furthermore, we would remain contractually obligated to fund loans under our outstanding IRLCs without being able to sell our existing inventory of mortgage loans. Accordingly, if the MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we produce into the secondary market in a timely manner or at favorable prices and we would be required to hold a larger inventory of loans than we have committed facilities to fund or we may be required to repay a portion of the debt secured by these assets, which could materially and adversely affect our business, financial condition and results of operations.

Repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. Although our indemnification and repurchase exposure cannot be quantified with certainty, to recognize these potential indemnification and repurchase losses, we have recorded a liability of $29.1$34.9 million relating to $413.4$490.8 billion in UPB of loans subject to representations and warranties as of December 31, 2024.2025. Should home values decrease and negatively impact the related loan values, our realized loan losses from indemnifications and repurchases may increase as well. As such, our indemnification and repurchase costs may increase well beyond our current expectations. In addition, our mortgage banking services agreement with PMT requiresmay require us to indemnify itPMT with respect to loans for which we provide fulfillment services in certain instances. If we are required to indemnify PMT or other purchasers against losses, or repurchase loans from PMT or other purchasers, that result in losses that exceed the recorded liability, this could have a material adverse effect on our business, financial condition, liquidity and results of operations.

We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions remains high. Greater than expected investigation costs and litigation, including class action lawsuits associated with compliance related issues, substantial legal liability or significant regulatory or government action against us could also have adverse effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn could adversely impact our business results and prospects. Consumers, clients and other counterparties could also become increasingly litigious, and we may experience a significant volume of litigation and other disputes, including claims for contractual indemnification, with counterparties regarding relative rights and responsibilities.

Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may give rise to reputational risk, we could significantly harm our business prospects and earnings. Such issues include, but are not limited to, actual or perceived conflicts of interest, violations of legal or regulatory requirements,requirements and any of the other risks discussed in this Item 1A.risks. Similarly, market rumors and actual or perceived association with counterparties whose own reputations are under question could harm our business.

Certain of our senior officers also serve as senior officers of PMT, a real estate investment trust we manage that invests in residential mortgage-related assets and is separately listed on the New York Stock Exchange. PCM, our registered investment advisor, has a management agreement with PMT. As we expand the scope of our businesses, we increasingly confront potential conflicts of interest relating to investment activities that we manage for PMT. Reputational risk incurred in connection with conflicts of interest could negatively affect our business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain clients, customers, trading counterparties, investors and employees and adversely affect our results of operations.

Reputational damage can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. Our reputation may also be negatively impacted by our corporate sustainability practices as various private third party organizations and institutional investors have developed ratings processes for evaluating companies based on their approach to corporate sustainability matters.criteria. Third party corporate sustainability ratings and reports may be used by some investors to advocate for certain investment and voting decisions. In addition, opponents of corporate sustainability programs could oppose our corporate initiatives and advocate for other investment and voting decisions. Any unfavorable corporate sustainability rating or decision may lead to reputational damage and negative sentiment among our investors and other stakeholders.

Accounting rules for mortgage loan sales andsales, securitizations, variable interest entities, valuations of financial instruments and MSRs, investment consolidations, income taxes and other aspects of our operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our stockholders and also increase the risk of errors and restatements, as well as the cost of compliance. Our inability to timely prepare our financial statements in the future would likely be considered a breach of our financial covenants and adversely affect our share price significantly. Changes in accounting interpretations or assumptions as well as accounting rule misinterpretations could result in differences in our financial results or otherwise have a material adverse effect on our business, financial condition, liquidity and results of operations.

As our reliance on rapidly changing technology has increased, so have the risks posed to our information systems, both proprietary and those provided to us by third party service providers including cloud-based computingand artificial intelligence service providers. System disruptions and failures caused by unauthorized intrusion, malware, computer viruses, natural disasters and other similar events have interrupted or delayed our ability to provide services to our customers. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists,threat actors, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased, which, in turn, may lead to increased costs to protect our network and systems.

Many of our services are dependent on the secure, efficient, and uninterrupted operation of our technology infrastructure, including our computer systems, related software applications and cloud-based and artificial intelligence systems, as well as those of certain third parties and affiliates. Our information systems must accommodate a high volume of traffic and deliver frequently updated, accurate and timely information. Like other companies in our industry, we, and our third-party vendors, have experienced threats and cybersecurity incidents relating to our information technology systems and infrastructure. We have experienced, and may in the future experience, service disruptions and failures caused by system or software failure, human error or misconduct, external attacks (e.g., computer hackers, hacktivists, nation state-backed hackers), denial of service or information, malicious or destructive code (e.g., ransomware, computer viruses and disabling devices), as well as natural disasters, pandemics, strikes, and other similar events, and our contingency planning may not be sufficient for all situations. The implementation of technology changes and upgrades to maintain current and integrate new technology systems may also cause service interruptions. Any such disruptions could materially interrupt or delay our ability to provide services to our customers, and could also impair the ability of third parties to provide critical services to us. If our operations are disrupted or otherwise negatively affected by a technology disruption or failure, this could result in material adverse impacts on our business.

We license third party software and depend on services from various third parties for use in our products. For example, we rely on third-party vendors for cloud-based and artificial intelligence systems and for certain mortgage production and servicing applications. Third party software applications, products, and services are constantly evolving, and we may not be able to maintain or modify our mortgage loan production and servicing offerings to ensure its compatibility with third party offerings following development changes. In addition, some of our competitors, partners, or other service providers may take actions that disrupt the interoperability of our business with their own products or services, or exert strong business influence on our ability to, and the terms on which we operate our business. Loss of the right to use any third party software or services could result in decreased functionality of our products and services until equivalent technology is either developed by us or, if available from another provider, is identified, obtained and integrated, which could adversely affect our reputation and our future financial condition and results of operations.

Our success in the mortgage industry is highly dependent upon our ability to adapt to constant technological changes, successfully enhance our current information technology solutions through the use of third party and our proprietary technologies, and introduce new solutions and services that more efficiently address the needs of our customers. We utilize a workflow-driven, cloud-basedcloud and artificial intelligence based platform reliant on a third party cloud infrastructure providerproviders and there can be no assurance that our cloud-based platformtechnology will prove to be effective or consistently reliable, have sufficient uptime or meet the expectations of our customers. Our mortgage loan production businesses are dependent upon our ability to effectivelyquickly interface with our borrowers, mortgage lenders and other third parties and to efficiently process loan applications and closings. TheOur consumer and broker direct lending processesbusinesses are becoming more dependent upon technological advances, such ason our continued ability to provide fast responses, process applications over the Internet,online, accept electronic signatures, provide process status updates instantly and other borrower or counterparty-expectedcounterparty conveniences.

There is no assurance that we will be able to successfully adopt new technologies as critical systems and applications become obsolete andor better ones become available. Any failure by us to develop, implement, integrate, execute or maintain our technological capabilities and any litigation costs associated with protection of our technologies or compliance with third party contractual rights could have a material adverse effect on our business, financial condition and results of operations.

The development, implementation, maintenance and protection of our proprietary technologies requiresrequire significant capital and legal expenditures and we must continuously invest in additional technological capabilities to remain competitive. For example, the development and expansion of our proprietary technology to manage loan servicing operations may increase our exposure to regulatory, compliance and litigation risks and capital expenditures. In addition, protecting our proprietary technologies may be time consuming and expensive. For example, our recent litigation with Black Knight resulted in a final arbitration award against us in which we recognized a pretax accrual of $158.4 million in fiscal year 2023 and payment of $160.0 million in fiscal year 2024.2024 to settle a dispute regarding our proprietary technologies. Any failure to develop, implement or maintain our proprietary technological capabilities and any legal costs associated with the protection of our proprietary technologies could have a material adverse effect on our business, financial condition and results of operation.

We believe the development and proliferation of artificial intelligence will have a significant impact in our industry; however, the incipientrecent naturedevelopment of artificial intelligence presents risks, challenges, and unintended consequences, including potential defects in the design and development of the technologies used to automate processes, misapplication of technologies, the reliance on data, rules or assumptions that may prove inadequate, information security vulnerabilities and failure to meet customer expectations, among others. ForThe example,use of artificial intelligence can introduce the generation, processing or use of erroneous and “hallucinated” information into our systems, workflows, processes and procedures that can cause service interruptions. In addition, the use of artificial intelligence algorithms may raise ethical concerns and legal issues due to perceived or actual unintentional bias and/or inaccuracies in the processing and servicing of mortgage loans. While we aim to develop and use artificial intelligence responsibly, we may be unsuccessful in identifying or resolving issues before they arise. Artificial intelligence-related issues, including potential government regulation of artificial intelligence, deficiencies or failures could give rise to legal and regulatory actions, damage our reputation or otherwise materially impact our business, financial condition, and liquidity.

Laws and regulations related to artificial intelligence are evolving, and there is uncertainty as to potential adoption of new laws and regulations that may restrict or impose burdensome and costly requirements on our ability to use and scale the deployment of artificial intelligence. We may receive claims from third parties, including our competitors, alleging that the use of artificial intelligence technology infringes on or violates such third party's intellectual property rights. Adverse consequences of these risks related to artificial intelligence could undermine the decisions, predictions or analyses such technologies produce and subject us to competitive harm, legal liability, heightened regulatory scrutiny and brand or reputational harm.

We may face significant competition in the market and may be unable to developdevelop, implement and implementscale artificial intelligence at the same rate to keep pace with our competitors.

Changes in fair value of our holdings of assets carried at or based on fair value have significant effects on our financial position and income. As summarized above, changes in fair values of “Level 1” and “Level 2” fair value assets are determinable with reference to direct quotes in active markets on the measurement date in the case of “Level 1” fair value assets, or reference to publicly available pricing inputs (such as reference interest rates and credit spreads and prices of similar assets) in the case of “Level 2” fair value assets.

During the three years ended December 31, 2024,2025, we recognized significant changes in the fair value of our holdings of “Level 3” fair value assets and liabilities as shown below:

Because the fair value of “Level 3” fair value assets and liabilities are difficult to estimate, our valuation process includes performance of these items’ fair value estimation by specialized staff with significant senior management oversight. We have assigned the responsibility for estimating the fair values of non-interest rate lock commitment (“IRLC”) “Level 3” fair value assets and liabilities to our capital markets valuation staff, which is responsible for valuing and monitoring these items and maintenance of our valuation policies and procedures for non- IRLC assets and liabilities. The capital markets valuation staff submits the results of itsreports valuations to our senior management valuation subcommittee,subcommittee whichresponsible overseesfor themonitoring and overseeing valuations. Our senior management valuation subcommittee includes the Company’s chief financial, credit, investment and capital markets officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the marketplace. Market interest rates and our estimate of the probability that a loan will be funded are updated as the loans move through the funding or purchase process and as market interest rates change and these updates may result in significant changes into our estimates of the fair value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Net gains on loans held for sale at fair value in the period of the change. The financial effects of changes in these inputs are generally inversely correlated. Increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value but increase the pull-through rate for the loan principal and interest payment cash flow component, which decreases in fair value.

We include changes in the fair value of MSRs and MSLs in current period income as a component of Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities. Both our estimate of the change in fair value attributable to realization of cash flows and of other changes in fair value are affected by changes in fair value inputs. In the year ended December 31, 2024,2025, we recognized a $433.3$1.4 millionbillion net decrease in fair value of MSRs and MSLs: $840.7$1.2 millionbillion of decrease due to realization of cash flows underlying the fair value of MSRs and MSLs,MSLs partiallyand offset by $407.4$251.7 million of increasedecrease due to changes in fair value inputs.

We believe the most significant “Level 3” fair value inputs to the valuation of MSRs and MSLs are the prepayment speed, OAS or pricing spread (the OAS and pricing spread are components of the discount rate) and annual per-loan cost of servicing. A shift in the market for MSRs and MSLs or a change in our assessment of an input to the valuation of MSRs and MSLs can have a significant effect on their fair value and in our income for the period. The net fair value of MSRs and MSLs that we held at December 31, 20242025 was $8.7$9.6 billion.

Refer to Note 3 – Significant Accounting Policies ‒ Recently Issued Accounting PronouncementsPronouncement Adopted in 2025 to our consolidated financial statements for a discussion of recent accounting developments and the expected effect on the Company.

TheRecent macroeconomic trends and U.S. Federal Reserve has reduced the federal fundsgovernment rateactions somewhatwith fromrespect itsto highesttrade, leveltariffs, sincegovernment 2007cost asreduction inflationaryinitiatives, pressures have abated,inflation and longer-term interest rates remainhave nearled theirto mostsignificant elevated levelsvolatility in recentfinancial years.markets and uncertainty regarding the economic outlook. Elevated interest rates in recent years have constrained growth in the size of the mortgage origination market, which grewis slightlycurrently projected to increase from $1.5 trillion in 2023 to an estimated $1.7 trillion in 2024, and is expected to grow modestly to $2.0$1.9 trillion in 2025 to $2.3 trillion in 2026 according to mortgage industry economists.

In the year ended December 31, 2024,2025, we recorded income before provision for income taxes of $401.0$551.4 million, an increase of $217.4$150.4 million, or 118%38%, from 2023.2024. The increase was due to a $309.5$302.0 million increase in production revenues (net gains on sales of loans, loan origination fees and fulfillment fees) primarily due to higher production volumes and gain on sale margins and a $25.3$172.0 million decrease in total expenses, partially offset by a $108.9 million decreaseincrease in Net loan servicing fees reflectingresulting decreasedfrom valuationgrowth ofin ourservicing MSRs,fees, netpartially ofoffset hedgingby resultsa primarily$302.4 duemillion toincrease higherin hedgingtotal costs.expenses. The decreaseincrease in the total expense was primarily due to decreases in legal settlements and professional services relating to a claim against us by Black Knight Servicing Technologies, LLC, partially offset by increases in compensation,compensation and loan origination and servicing expenses.

In the year ended December 31, 2023,2024, we recorded income before provision for income taxes of $183.6$401.0 million, aan decreaseincrease of $481.6$217.4 millionmillion, or 72%118%, from 2022.2023. The decreaseincrease was due to a $309.6$309.5 million decreaseincrease in production revenues primarily due to lowerhigher production volumevolumes and gain on sale margins and a shift$25.3 million decrease in thetotal mixexpenses, ofpartially productionoffset to lower margin channels andby a $308.7$108.9 million decrease in Net loan servicing fees reflecting decreased valuation of our MSRs, net of hedging results,results partiallyprimarily offsetdue byto ahigher $102.5hedging million decrease in total expenses.costs. The decrease in the total expense was primarily due to a $246.5 million reduction in compensation, loan origination and marketing and advertising expenses, partially offset by a $158.1 million increase in legal settlements. The increasedecreases in legal settlements expenseand reflectsprofessional anservices arbitrator’srelating finding into a claim made against us by Black Knight Servicing Technologies, LLC.LLC, Thispartially claim,offset whichby is discussedincreases in detailcompensation, inloan Note 19–Commitmentsorigination and Contingenciesservicing to the consolidated financial statements included in this Report, resulted in a charge to our results of operations of $115.8 million net of income taxes or a reduction to earnings per diluted share of common stock of $2.20.expenses.

In the year ended December 31, 2024,2025, we recognized Net gains on loans held for sale at fair value totaling $817.4$1.1 million,billion, as compared to $545.9$817.4 million and $791.6$545.9 million in 20232024 and 2022,2023, respectively. The increase in Net gains on loans held for sale at fair value for the year ended December 31, 2025 compared to 2024 was primarily due to increased volumes across all production channels. The increase in Net gains on loans held for sale at fair value for the year ended December 31, 2024 compared to 2023 was primarily due to increased volumes and gain on sale margins across all production channels. The decrease in Net gains on loans held for sale at fair value for the year ended December 31, 2023 compared to 2022 was primarily due to decreased production volumes and gain on sale margins and lower EBO loan redelivery gains due to reduced reperformance and modifications and diminished redelivery margins.

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.insurer against future credit losses. 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.

In the years ended December 31, 2025, 2024, 2023, and 20222023 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 $16.5$17.2 million, $13.0$16.5 million, and $9.6$13.0 million, respectively. The increase in provision relating to current loan sales from the year ended December 31, 20242025 compared to the yearyears ended December 31, 2024 and 2023 reflects the increase in our loan production in 2024. The increasevolume in the provision relating to current loan sales in the year ended December 31, 2023 compared to 2022 was primarily attributable to an increase in loans sold and a change in the mix between government guaranteed or insured loans and conventional loans during 2023.2025.

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

If the outstanding balance of loans we purchase and sell subject to representations and warranties increases, the loans sold continue to season, economic conditions change, correspondent lenders become unwilling or unable to repurchase defective loans, or investor and insurer loss mitigation strategies are adjusted,change, the level of repurchase and loss activity may increase. Furthermore, as economic conditions, such as interest rates, home values and borrower default rates change, our realized loss rates may increase. Such increases may require us to adjust our estimate of future losses relating to loans previously sold. Such increased loss estimates would be recognized in Net gains on loans held for sale at fair value in the period we recognize the change.

The increases in marketElevated interest ratesrate inlevels recentmay years have affectedaffect certain of our correspondent sellers’ ability to honor their obligations to repurchase defective loans. Though the U.S. Federal Reserve has cut the federal funds rate in recent months, interest rates remain elevated. Increasing interest ratesloans, may also increase the level of borrower defaults,defaults increasingand may increase the level of repurchases we are required to make, and may make it more difficult to minimize losses on repurchased loans due to decreasing fair values for resales of loans and reduced opportunities to refinance loans.make. We expect thatthese thisdevelopments development willmay increase the losses we incur in relation to our recorded liability for representations and warranties compared to our historical experience. However, we believe our recorded liability is presently adequate to absorb thesuch losses we currently expect to incur.losses.

Loan origination fees increased $50.1 million and $39.6 million in the year ended December 31, 20242025 and 2024, respectively, compared to 2024 and 2023, respectively, primarily due to increases in volume across all production channels. Loan origination fees decreased $23.7 million in the year ended December 31, 2023 compared to 2022, primarily due to a decrease in the volume of consumer direct loans we produced.

Fulfillment fees decreased $1.5$2.5 million and $40.2$1.5 million in the years ended December 31, 20242025 and 2023,2024, respectively, compared to 20232024 and 2022,2023, respectively, primarily due to decreases in correspondent loan production volumes for PMT’s account that reflect our increased purchases of conventional correspondent loans from PMT.account.

Loan servicing fees from non-affiliates generally relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the unpaid principal balance of the loan serviced and we collect these fees from borrower payments. Loan servicing fees from PMT are primarily related to PMT’s MSRs and are established at monthly per-loan amounts based on whether the loan is a fixed-rate or adjustable-rate loan and the loan’s delinquency or foreclosure status as detailed in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Annual Report. Subservicing fees from non-affiliates are based upon rates negotiated between the Company and the owner of the servicing rights at the time a subservicing agreement is entered into. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges and reconveyance fees and fees charged to correspondent lenders relating to loans that are repaid shortly after we purchase them.

Effects of Mortgage Servicing Rights and Mortgage Servicing Liabilities Net of Hedging Results We have elected to carry our servicing assets and liabilities at fair value. Changes in fair value have two components: changes due to realization of the contractual servicing fees and changes due to changes in market inputs used to estimate the fair value of MSRs and MSLs. We endeavor to moderate the effects of changes in fair value by entering into derivative transactions and holding principal-only stripped mortgage-backed securities.

Changes in fair value of MSRs and MSLs attributable to changes in fair value inputs increased in the year ended December 31, 2024 compared to 2023 primarily due to the effect on fair value of a significant increase in interest rates during 2024 as compared to 2023. Changes in fair value of MSRs and MSLs attributable to changes in fair value inputs decreased in the year ended December 31, 20232025 compared to 20222024 and 2023 primarily due to the smallereffect increaseon fair value of a decrease in interest rates induring 2023 as2025 compared to 2022.the Increasinghigher rate environments in 2024 and 2023. Decreasing interest rates reduceincrease the rate of prepayments of the underlying loans associated with the servicing rights, which increasesdecreases the cash flows expected from the servicing rights, while decreasingincreasing interest rates have the opposite effect.

Hedging results reflect valuation losses attributable to the effects of interest rate increasesdecreases on the fair value of the hedging instruments, as well as the embedded costs of maintaining the hedge positions in the years ended December 31, 2024,2025, 20232024 and 2022.2023.

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of the remaining cash flows to be realized. Realization of cash flows increased in the year ended December 31, 20242025 compared to 20232024 and 2022 primarily2023 due to both the growth in our investment in MSRs.MSRs and the effect of increased expected and realized prepayment speeds that increases the projected rate of realization of future cash flows on the MSR asset.

Management fees decreased $139,000$1.0 million and $2.3 million$139,000 in the year ended December 31, 20242025 and 20232024 compared to 20232024 and 2022,2023, respectively, reflecting the decrease in PMT’s average shareholders’ equity upon which its base management fees are based.

Loan origination expense increased $87.9 million and $49.6 million in the yearyears ended December 31, 2025 and 2024 compared to 20232024 and 2023, respectively, due to increased lending activities and decreased $59.1 million in the year ended December 31, 2023, compared to 2022 due to decreased lending activities.

Servicing expense increased $16.6 million and $36.6 million in the yearyears ended December 31, 2025 and 2024 compared to 20232024 and 2023, respectively, primarily due to an increase in provision for losses on servicing advances resulting from higher delinquent loan balances during the yearyears ended December 31, 2025 and 2024 compared to 2023.2024 Servicingand expense2023, increased $9.8 million in the year ended December 31, 2023 compared to 2022 primarily due to the non-recurrence in 2023 of the reversal of the provision for estimated servicing advance losses that was recognized during 2022 as COVID-19 related delinquencies decreased significantly.respectively.

Total assets increased $7.2$3.3 billion from $18.8 billion at December 31, 2023 to $26.1 billion at December 31, 2024.2024 to $29.4 billion at December 31, 2025. The increase was primarily due to a $3.8$1.3 billion increase in loans eligible for repurchase, a $905.9 million increase in loans held for sale at fair value, a $1.6 billion increase in MSRs, a $1.3 billion increase in loans eligible for repurchasevalue and a $825.9$854.4 million increase in principal-only stripped MBS at fair value, partially offset by a $289.6 million decrease in cash and short-term investments.MSRs.

Total liabilities increased by $7.0$2.8 billion from $15.3$22.3 billion as of December 31, 20232024 to $22.3$25.1 billion at December 31, 2024.2025. The increase was primarily due to a $5.8$945 billionmillion increase in borrowingslong-term debt, along with increased short-term debt used to fund our inventory of loans held for sale and MSRs and a $1.3 billion increase in liability for loans eligible for repurchase.

Net cash (used in) provided by operating activities totaled $(4.5)$1.7 billion, $(1.6)$4.5 billion,billion and $6.0$1.6 billion in the years ended December 31, 2025, 2024, 2023, and 2022,2023, respectively. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of loans held for sale as shown below:

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 equity or debt offerings. We believe that our liquidity isand sufficientcapital toresources meetare our current liquidity needs.sufficient.

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, notes payable, a capital lease and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for advances with terms ranging from 30 days to 364 days. Because a significant portion of our current debt facilities consist 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.

On MayFebruary 23,6, 2024,2025, the Company, together with its subsidiaries,PFSI issued $650$850 million in 7.125%6.875% unsecured senior notes due in 20302033 in a private placement to “qualified institutional buyers” under Rule 144A of the Securities Act.

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

We are also subject to liquidity and net worth requirements established by 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 requirements and revised their net worth requirements for their approved non-depository single-family sellers/servicers orin the case of Fannie Mae, Freddie Mac, and Ginnie Mae for their approved single-family issuers, and Ginnie Mae has also issued risk-based capital requirements. We believe that we are in compliance with the FHFA and Ginnie MaeAgency’s requirements as of December 31, 2024.2025.

Recent macroeconomic trend and U.S. federal government administration actions with respect to trade, tariffs, government cost reduction efforts and foreign military action have led to significant volatility in financial markets and uncertainty regarding the economic outlook, including inflation and interest rates. Elevated interest rates in recent years have also constrained the mortgage origination market, which is currently projected to increase from $1.9 trillion in 2025 to $2.3$2.2 trillion in 2026 according to mortgage industry economists.economists, although recent increases in interest rates may lead to a reduction in origination estimates for 2026.

TheRecent increases in interest and mortgage rates have limited consumers’ opportunity for refinancingrefinancing. hasIf increasedmortgage inrates remain at recent periods,levels drivenor bycontinue interestto rate volatility and a greater proportion of outstanding mortgages with note rates near current market rates. If such interest rate volatility continues, it may drive greaterincrease, mortgage production activity and higher prepayment speeds thanwill wedecrease havefrom experiencedlevels observed in recentlate years.2025 and early 2026. Additionally, reductions in the Federal Reserve’s federal funds rate have reduced the costs of floating rate borrowings and placement fees we receive in relation to custodial funds that we manage as compared to prior periods; however, market indicators currently suggest that the sameFederal periodsReserve could begin increasing short-term interest rates later in the prior year.2026. The current period of economic uncertainty and market volatility may also lead to a reduction in economic activity and slowing home price growth or depreciation, which could lead to increasing mortgage delinquencies or defaults and increase losses from the representations and warranties we provide in our loan sales transactions.

We define “Adjusted EBITDA” as net income plus provision for income taxes, depreciation and amortization, excluding decrease (increase) in fair value of mortgage servicing rights (“MSRs”) net of mortgage servicing liabilities (“MSLs”), due to changes in the valuation inputs we use in our valuation models, hedging (gains) losses associated with MSRs, principal-only stripped mortgage-backed securities (“MBS”) valuation-related accretion changes, provision for (reversal of) losses on active loans, stock-based compensation, interest expense on corporate debt or corporate revolving credit facilities and capital lease and certain unusual or non-recurring items.

For the quarter ended MarchJune 31,30, 2026, income before income taxes increaseddecreased $495,000$44.9 million compared to the same quarter in 2025. The increasedecrease was primarily due to increases in compensation expense of $35.3 million, origination expense of $25.0 million, servicing expense of $14.2 million and other expense of $16.0 million, partially offset by a $150.2$55.3 million increase in loan production revenue due to higher volume acrossin allthe productionbroker channels,and partiallyconsumer offsetdirect bychannels and a $11.5 million decrease in Net loan servicing fees resulting from increases in net MSR valuation losses in excess of growth in servicing fees, a $23.3$12.1 million increase in Netother interest expense and a $113.6 million increase in total expenses.income.

In our production segment, revenues reflect the effects of larger mortgage market volumes and increased share in our broker and consumer direct lending channels during the quarter and six months ended MarchJune 31,30, 2026 compared to the same quarterperiods in 2025. During the quarter and six months ended MarchJune 31,30, 2026, we recognized Net gains on loans held for sale at fair value totaling $345.0$280.3 million and $625.3 million, respectively, representing an increase of $123.9$45.7 million and $169.6 million, respectively, compared to the same quarterperiods in 2025.

The MSRs, MSLs, and liabilities 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 208%231% and 218% of our gains on sales of loans held for sale at fair value for the quarter and six months ended MarchJune 31,30, 2026, respectively, as compared to 293%346% and 321% for the same quarterperiods in 2025. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. Subsequent changes in the fair value of our MSRs may significantly affect our income.

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 $4.5$5.8 million and $10.3 million for the quarter and six months ended MarchJune 31,30, 20262026, respectively, compared to $3.5$4.1 million and $7.6 million for the same quarterperiods in 2025. The increases in the provision relating to current loan sales was primarily attributable to ana increasechange in productionthe volumemix of loans sold for the quarter and six months ended MarchJune 31,30, 2026 compared to the same periods in 2025 We also recorded reductions in the liability of $3.7 million and $6.7 million for the quarter and six months ended June 30, 2026, respectively, compared to $2.2 million and $3.6 million for the same periods in 2025. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limit the likelihood of certain repurchase or indemnification claims.

During the quarter and six months ended MarchJune 31,30, 2026, we repurchased loans totaling $24.9$31.5 million.million and $56.4 million, respectively. We charged losses of $567,000$659,000 and $1.2 million against the liability during the quarter and six months ended MarchJune 31,30, 2026.2026, respectively. Our losses arising from representations and warranties have historically been minimized by our ability to either recover most of the losses from our correspondent sellers or from our ability to profitably refinance and resell repurchased loans.

Loan origination fees increased $25.8$10.4 million and $36.2 million during the quarter and six months ended MarchJune 31,30, 2026, respectively, compared to the same quarterperiods in 2025 primarily due to an increase in production volume.volumes in the broker and consumer direct lending channels.

Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packagingpackaging, sale and salesecuritization of loans. The fulfillment fees are calculated based on the number of loans we fulfill for PMT and an increase in the number of loans included in PMT’s non-Agency securitization and loan sales.

Fulfillment fees increaseddecreased $447,000$791,000 and $344,000 during the quarter and six months ended MarchJune 31,30, 2026, respectively, compared to the same quarterperiods in 2025; the increasedecrease was primarily due to ana increasedecrease in correspondent loan production volumes for PMT’s account and an increase in non-Agency securitization and loan sales.account.

Our net loan servicing fee income has two primary components: fees earned for servicing the loans and the effects of MSR and MSL valuation changes, net of hedging resultsresults, as summarized below:

Loan servicing fees from non-affiliates and other fees increased during the quarter and six months ended MarchJune 31,30, 2026 compared to the same quarterperiods in 2025. The increases were primarily due to growth of our loan servicing portfolio. Other servicing fees decreased primarily due to decreased incentives received for loss mitigation activities.

Effects of Mortgage Servicing Rights and Mortgage Servicing Liabilities We have elected to carry our servicing assets and liabilities at fair value. Changes in fair value have two components: changes due to realization of cash flows of the MSRs and MSLs and changes due to changes in market inputs used to estimate the fair value of MSRs and MSLs. We endeavor to moderate the effects of changes in fair value arising from changes in market inputs by entering into derivatives transactions and holding principal-only stripped mortgage-backed securities (“MBS”).MBS.

Changes in fair value of MSRs attributable to changes in fair value inputs increased during the quarter and six months ended MarchJune 31,30, 2026 compared to the same quarterperiods in 2025 due to increases in interest rates during the quarter and six months ended MarchJune 31,30, 2026 as compared to flat to decreasing interest rates during the same quarterperiods in 2025. Increasing interest rates reduce the rate of prepayments of the underlying loans, which increases the cash flows expected from the servicing rights, while decreasing interest rates have the opposite effect.

Hedging results reflect valuation losses offsetting the valuation gains from increasing interest rates in the quartersquarter and six months ended MarchJune 31,30, 2026 compared to the opposite circumstances and effects in the same quarterperiods in 2025.

Changes in fair value attributable to realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of the remaining cash flows to be realized. During the quarter and six months ended MarchJune 31,30, 2026, realization of cash flows increased compared to the same quarterperiods in 2025, primarily due to expectationshigher forprepayment faster loan prepaymentsspeeds in the first quarter of 2026 asperiods opposed toand the same periodgrowth in 2025.our investment in MSRs.

Following is a summary of characteristics of our MSR and MSL servicing portfolio as of MarchJune 31,30, 2026:

Net interest expense increased $23.3$10.6 million and $33.9 million during the quarter and six months ended MarchJune 31,30, 20262026, respectively, compared to the same quarterperiods in 2025. The increases were primarily due to an increase in interest expense on borrowings attributable to reductions in yield on principal-only stripped MBS, reflecting slower prepayment expectations combined with the Company financing a larger investment in MSRs and increased interest shortfalls on repayments of loans serviced for Agency securitizations during 2026, partially offset by an increase in interest income from loans held for sale and placement fees.

Management fees decreased $250,000$59,000 and $309,000 during the quarter and six months ended MarchJune 31,30, 20262026, respectively, compared to the same quarterperiods in 2025, due to decreases in PMT’s average shareholders’ equity which is the basis for the base management fees.

Compensation expenses increased $34.4$35.2 million and $69.7 million during the quarter and six months ended MarchJune 31,30, 20262026, respectively, compared to the same quarterperiods in 2025. The increaseincreases waswere primarily due to an increase in head count and increased incentive compensation reflecting higher loan production volume.

Loan origination expenses increased $35.6$25.0 million and $60.6 million for the quarter and six months ended MarchJune 31,30, 20262026, respectively, compared to the same quarterperiods in 2025. The increases were primarily due to higher origination volumes.volumes in the broker and consumer direct lending channels.

Technology expenses increased $5.9$2.2 million and $8.1 million during the quarter and six months ended MarchJune 31,30, 20262026, respectively, compared to the same quarterperiods in 2025. The increases were primarily due to an increase in software license expenses and a $371,000$1.2 million and $1.5 million impairment of capitalized software recorded during the quarter and six months ended MarchJune 31,30, 2026.2026, respectively.

Servicing expenses increased $16.4$14.2 million and $30.6 million during the quarter and six months ended MarchJune 31,30, 20262026, respectively, compared to the same quarterperiods in 2025. The increase was primarily due to increases in provision for losses on servicing advances resulting from higher delinquent loan balances resulting fromreflecting a larger servicing portfolio and a larger proportion of delinquencies of 90 days ofor greater.

Marketing and advertising expenses increased $11.7$4.5 million and $16.2 million during the quarter and six months ended MarchJune 31,30, 20262026, respectively, compared to the same quarterperiods in 2025. The increaseincreases waswere primarily due to additional marketing expenses incurred as an Official Supporter of Team USA, including marketing during the 2026 winter Olympics and increased marketing expenses for consumer direct lending.Olympics.

Our effective income tax rates were 21.4%31.1% and 26.8%(78.5)% for the quarters ended MarchJune 31,30, 2026 and 2025, respectively, and 23.6% and (17.8)% for the six months ended June 30, 2026 and 2025, respectively. The decreaseincrease in the effective income tax raterates for the quarter and six months ended MarchJune 31,30, 2026 compared to the same quarterperiods ended in 2025 is primarily due the non-recurrence of a $81.6 million net income tax benefit recognized in the prior year period, due to the effetrepricing of andeferred increasetax inliabilities deductibleresulting compensation,from aschanges wellto as a favorable change in CaliforniaCalifornia’s apportionment rules enacted into law in June 2025 allowingrequiring usthe Company to apportion income to California using a single sales factor instead of a factor equally weighedweighted withamong property, payroll and sales.

Total assets increased $2.5$470.8 billionmillion from $29.4 billion at December 31, 2025 to $31.9$29.9 billion at MarchJune 31,30, 2026. The increase was primarily due to an increase of $1.2$987.9 billionmillion of mortgage servicing rights and an increase of $880.9 million of loans eligible for repurchase, anpartially increaseoffset by a decrease of $831.1$1.3 millionbillion in loans held for sale at fair value and an increase of $550.1 million of mortgage servicing rights.value.

Total liabilities increased $2.5$442.9 billionmillion from $25.1 billion at December 31, 2025 to $27.6$25.5 billion at MarchJune 31,30, 2026. The increase was primarily due to an increase of $1.2$880.9 billionmillion in liability for loans eligible for repurchaserepurchase, andpartially anoffset increaseby a decrease of $1.5$358.8 billionmillion in short-term borrowings due to financea increasesdecrease in loans held for sale and MSRs.sale. As a result of our increaseddecreased inventory financing requirements, our leverage ratios increasedslightly decreased during the quarterperiod ended MarchJune 31,30, 2026 from December 31, 2025.

The net decrease in cash of $82.2$87.4 million during the quartersix months ended MarchJune 31,30, 2026 is discussed below.

Net cash usedprovided inby operating activities totaled $1.3$801.1 billionmillion during the quartersix months ended MarchJune 31,30, 2026 compared with net cash provided by operating activities of $1.1$934.6 billionmillion during the same quarterperiod in 2025. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans held for sale as shown below:

The decrease in cashflowscash flows from other operating sources relateswas toprimarily driven by an increase in servicing advances and the paymentspayment of several large accrued liabilities during the quartersix months ended MarchJune 31,30, 2026, as compared to the same quarterperiod in 2025.2025

Net cash used in investing activities during the quartersix months ended MarchJune 31,30, 2026 totaled $144.5$533.6 million, primarily due to $171.6$262.9 million in net settlement of derivative financial instruments used to hedge our investment in MSRsMSRs, a $229.8 million increase in margin deposit and ana $124.3 million increase of $24.2 million in short-term investment, partially offset by $58.1 million in proceeds from the repayment of principal-only stripped mortgage-backed securities.investment. Net cash providedused byin investing activities during the quartersix months ended MarchJune 31,30, 2025 totaled $30.4$127.0 million, primarily due to $74.6a $140.7 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and $37.8 million in repayment of principal-only stripped mortgage-backed securities, partially offset by increases of $22.8 million in short-term investment and $51.6 millionincrease in margin deposits.

Net cash providedused byin financing activities totaled $1.4$354.9 billionmillion during the quartersix months ended MarchJune 31,30, 2026, primarily due to ana increasedecrease of $1.5$261.7 billionmillion in borrowings.borrowings and a $50.0 million repurchase of common shares. The increasedecrease in borrowings primarily reflects the increasedecrease in inventory of loans held for sale. Net cash used in financing activities totaled $1.1$883.9 billionmillion during the quartersix months ended MarchJune 31,30, 2025, primarily due to a decrease of $1.1$811.5 billionmillion in borrowings. The decrease in borrowings primarily reflects the decrease in inventory of loans held for sale.sale during the six months ended June 30, 2026 and 2025.

The differences between the average and maximum daily balances on our repurchase agreements reflect both the effect of increasing loan inventory levels during the quarter ended MarchJune 31,30, 2026 and the fluctuations throughout the periods of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.

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, and Ginnie Mae has issued risk-based capital requirements. We believe that we are in compliance with each Agency’s requirements as of MarchJune 31,30, 2026.

We have a common stock repurchase program which allows us to repurchase common shares of up to $2 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through MarchJune 31,30, 2026, we have repurchased approximately $1.8 billion of common shares under our stock repurchase program.

PLS is required to comply with financial and other restrictive covenants in certain financing agreements, as described further above in “Liquidity and Capital Resources”. As of MarchJune 31,30, 2026, we believe PLS was in compliance in all material respects with these covenants.

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 MarchJune 31,30, 2026:

Our Annual Report on Form 10-K for the year ended December 31, 2025 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates. There have been no significant changes in our critical accounting policies and estimates during the quarter ended MarchJune 31,30, 2026 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025.