Note 7— Fair Value

Fair Value Accounting Elections

The Company identified all of PMT’s non-cash financial assets and MSRs to be accounted for at fair value. The Company has elected to account for these assets at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.

The Company has also identified its Asset-backed financings of variable interest entities at fair value and Interest-only security payable at fair value to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of the assets at fair value collateralizing these financings. For other borrowings, the Company has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt facility, thereby matching the debt issuance cost to the periods benefiting from the availability of the debt.

Financial Statement Items Measured at Fair Value on a Recurring Basis

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


	December 31, 2025
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	190,518	$	—	$	—	$	190,518
Mortgage-backed securities		—		4,380,357		72,502		4,452,859
Loans held for sale		—		2,695,817		3,581		2,699,398
Loans held for investment		—		8,530,939		1,705		8,532,644
Derivative assets with nonaffiliates:
Call options on interest rate futures purchase contracts		1,289		—		—		1,289
Put options on interest rate futures purchase contracts		4,109		—		—		4,109
Forward purchase contracts		—		4,113		—		4,113
Forward sale contracts		—		2,381		—		2,381
Credit risk transfer derivatives		—		—		32,659		32,659
Total derivative assets with nonaffiliates before netting		5,398		6,494		32,659		44,551
Netting		—		—		—		5,145
Total derivative assets with nonaffiliates after netting		5,398		6,494		32,659		49,696
Derivative assets with PennyMac Financial Services, Inc.:
Interest rate lock commitments		—		—		4,605		4,605
Forward purchase contracts		—		1,784		—		1,784
Total derivative assets with PennyMac Financial Services, Inc. before netting		—		1,784		4,605		6,389
Netting		—		—		—		(142	)
Total derivative assets with PennyMac Financial Services, Inc. after netting		—		1,784		4,605		6,247
Mortgage servicing rights		—		—		3,644,702		3,644,702
	$	195,916	$	15,615,391	$	3,759,754	$	19,576,064
Liabilities:
Interest-only security payable	$	—	$	—	$	37,650	$	37,650
Asset-backed financings of variable interest entities		—		7,789,303		—		7,789,303
Derivative and credit risk transfer strip liabilities with nonaffiliates:
Forward purchase contracts		—		158		—		158
Forward sales contracts		—		17,340		—		17,340
Total derivative liabilities with nonaffiliates before netting		—		17,498		—		17,498
Netting		—		—		—		(16,565	)
Total derivative liabilities with nonaffiliates after netting		—		17,498		—		933
Credit risk transfer strips		—		—		5,999		5,999
Total derivative and credit risk transfer strip liabilities with nonaffiliates		—		17,498		5,999		6,932
Derivative liabilities with PennyMac Financial Services, Inc:
Interest rate lock commitments		—		—		2,257		2,257
Forward purchase contracts		—		142		—		142
Total derivative liabilities with PennyMac Financial Services, Inc before netting		—		142		2,257		2,399
Netting		—		—		—		(142	)
Total derivative liabilities with PennyMac Financial Services, Inc after netting:		—		142		2,257		2,257
	$	—	$	7,806,943	$	45,906	$	7,836,142


	December 31, 2024
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investments	$	103,198	$	—	$	—	$	103,198
Mortgage-backed securities		—		3,977,446		86,260		4,063,706
Loans held for sale		—		2,108,347		7,971		2,116,318
Loans held for investment		—		2,191,709		1,866		2,193,575
Derivative assets:
Call options on interest rate futures purchase contracts		156		—		—		156
Put options on interest rate futures purchase contracts		6,372		—		—		6,372
Forward purchase contracts		—		614		—		614
Forward sale contracts		—		54,056		—		54,056
MBS put options		—		2,114		—		2,114
CRT derivatives		—		—		29,377		29,377
Interest rate lock commitments		—		—		3,562		3,562
Total derivative assets before netting		6,528		56,784		32,939		96,251
Netting		—		—		—		(39,411	)
Total derivative assets after netting		6,528		56,784		32,939		56,840
Mortgage servicing rights		—		—		3,867,394		3,867,394
	$	109,726	$	8,334,286	$	3,996,430	$	12,401,031
Liabilities:
Interest-only security payable	$	—	$	—	$	34,222	$	34,222
Asset-backed financings of variable interest entities		—		2,040,375		—		2,040,375
Derivative liabilities and credit risk transfer strips:
Forward purchase contracts		—		6,336		—		6,336
Forward sales contracts		—		1,753		—		1,753
Interest rate lock commitments		—		—		3,118		3,118
Total derivative liabilities before netting		—		8,089		3,118		11,207
Netting		—		—		—		(7,916	)
Total derivative liabilities after netting		—		8,089		3,118		3,291
Credit risk transfer strips		—		—		4,060		4,060
Total derivative and credit risk transfer strip liabilities		—		8,089		7,178		7,351
	$	—	$	2,048,464	$	41,400	$	2,081,948

The following is a summary of changes in items measured at fair value on a recurring basis using Level 3 inputs that are significant to the estimation of the fair values of the assets and liabilities at either the beginning or end of the years presented:


	Year ended December 31, 2025
Assets (1)	Interest-only stripped mortgage-backed securities			Loans held for sale			Loans held for investment			CRT derivatives			Interest rate lock commitments with nonaffiliates			Interest rate lock commitments with PFSI			CRT strips			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2024	$	86,260		$	7,971		$	1,866		$	29,377		$	444		$	—		$	(4,060	)	$	3,867,394		$	3,989,252
Purchases and issuances		—			3,290			—			—			8,152			17,614			—			—			29,056
Repayments and sales		(17,802	)		(8,265	)		(159	)		(11,054	)		—			—			(39,401	)		—			(76,681	)
Accrual of unearned discounts		8,677			—			—			—			—			—			—			—			8,677
Amounts received pursuant to sales of loans		—			—			—			—			—			—			—			190,141			190,141
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—			—			—			—
Other factors		(4,633	)		585			(2	)		14,336			11,920			17,798			37,462			(413,709	)		(336,243	)
		(4,633	)		585			(2	)		14,336			11,920			17,798			37,462			(413,709	)		(336,243	)
Transfers of:
Interest rate lock commitments to loans held for sale (2)		—			—			—			—			(20,516	)		(33,064	)		—			—			(53,580	)
Mortgage servicing rights relating to delinquent loans to Agency		—			—			—			—			—			—			—			876			876
Balance, December 31, 2025	$	72,502		$	3,581		$	1,705		$	32,659		$	—		$	2,348		$	(5,999	)	$	3,644,702		$	3,751,498
Changes in fair value recognized during the year relating to assets still held at December 31, 2025	$	(4,633	)	$	127		$	(28	)	$	3,572		$	—		$	2,348		$	(1,727	)	$	(413,709	)	$	(414,050	)

(1)

For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.

(2)

The Company had transfers among the fair value levels arising from transfers of IRLCs to loans held for sale at fair value upon purchase of the respective loans.


Liabilities	Year ended December 31, 2025
	(in thousands)
Interest-only security payable:
Balance, December 31, 2024	$	34,222
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—
Other factors		3,428
		3,428
Balance, December 31, 2025	$	37,650
Changes in fair value recognized during the year relating to liability outstanding at December 31, 2025	$	3,428


	Year ended December 31, 2024
Assets (1)	Interest-only stripped mortgage-backed securities			Loans held for sale			Loans held for investment			CRT derivatives			Interest rate lock commitments			CRT strips			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2023	$	94,231		$	6,318		$	2,131		$	16,160		$	7,532		$	(46,692	)	$	3,919,107		$	3,998,787
Purchases and issuances		—			8,132			—			—			38,086			—			29,429			75,647
Repayments and sales		(149,983	)		(6,139	)		(144	)		(13,803	)		—			(45,573	)		—			(215,642	)
Accrual of unearned discount		9,093			—			—			—			—			—			—			9,093
Amounts received pursuant to sales of loans		—			—			—			—			—			—			219,001			219,001
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—			—			—
Other factors		2,624			(340	)		(121	)		27,020			(10,882	)		88,205			(170,409	)		(63,903	)
		2,624			(340	)		(121	)		27,020			(10,882	)		88,205			(170,409	)		(63,903	)
Exchange of mortgage servicing spread for interest-only stripped mortgage -backed securities		130,295			—			—			—			—			—			(130,295	)		—
Transfers of:
Interest rate lock commitments to loans held for sale (2)		—			—			—			—			(34,292	)		—			—			(34,292	)
Mortgage servicing rights relating to delinquent loans to Agency		—			—			—			—			—			—			561			561
Balance, December 31, 2024	$	86,260		$	7,971		$	1,866		$	29,377		$	444		$	(4,060	)	$	3,867,394		$	3,989,252
Changes in fair value recognized during the year relating to assets still held at December 31, 2024	$	2,624		$	(261	)	$	(140	)	$	13,529		$	444		$	42,632		$	(173,271	)	$	(114,443	)

(1)

For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.

(2)

The Company had transfers among the fair value levels arising from transfers of IRLCs to loans held for sale at fair value upon purchase of the respective loans.


Liabilities	Year ended December 31, 2024
	(in thousands)
Interest-only security payable:
Balance, December 31, 2023	$	32,667
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—
Other factors		1,555
		1,555
Balance, September 30, 2024	$	34,222
Changes in fair value recognized during the year relating to liability outstanding at December 31, 2024	$	1,555


	Year ended December 31, 2023
Assets (1)	Interest-only stripped mortgage-backed securities			Loans acquired for sale			Loans at fair value			CRT derivatives			Interest rate lock commitments			CRT strips			Mortgage servicing rights			Total
	(in thousands)
Balance, December 31, 2022	$	—		$	10,708		$	3,457		$	(22,098	)	$	(478	)	$	(137,193	)	$	4,012,737		$	3,867,133
Purchases and issuances		—			7,151			119			—			4,591			—			16,258			28,119
Repayments and sales		(3,417	)		(11,291	)		(548	)		(18,286	)		—			(46,252	)		—			(79,794	)
Accrual of unearned discount		2,673			—			—			—			—			—			—			2,673
Amounts received pursuant to sales of loans		—			(496	)		—			—			—			—			292,527			292,031
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—			—			—			—			—			—			—			—
Other factors		(8,572	)		246			(437	)		56,544			15,205			136,753			(296,847	)		(97,108	)
		(8,572	)		246			(437	)		56,544			15,205			136,753			(296,847	)		(97,108	)
Exchange of mortgage servicing spread for interest-only stripped mortgage-backed securities		103,547			—			—			—			—			—			(105,096	)		(1,549	)
Transfers of:																							—
Loans to REO		—			—			(460	)		—			—			—			—			(460	)
Interest rate lock commitments to loans held for sale (2)		—			—			—			—			(11,786	)		—			—			(11,786	)
Mortgage servicing rights relating to delinquent loans to Agency		—			—			—			—			—			—			(472	)		(472	)
Balance, December 31, 2023	$	94,231		$	6,318		$	2,131		$	16,160		$	7,532		$	(46,692	)	$	3,919,107		$	3,998,787
Changes in fair value recognized during the year relating to assets still held at December 31, 2023	$	(8,572	)	$	(21	)	$	(964	)	$	38,020		$	7,532		$	90,501		$	(296,847	)	$	(170,351	)

(1)

For the purpose of this table, CRT derivative, IRLC, and CRT strip asset and liability positions are shown net.

(2)

The Company had transfers among the fair value levels arising from transfers of IRLCs to loans held for sale at fair value upon purchase of the respective loans.


Liabilities	Year ended December 31, 2023
	(in thousands)
Interest-only security payable:
Balance, December 31, 2022	$	21,925
Changes in fair value included in income arising from:
Changes in instrument - specific credit risk		—
Other factors		10,742
		10,742
Balance, December 31, 2023	$	32,667
Changes in fair value recognized during the year relating to liability outstanding at December 31, 2023	$	10,742

Financial Statement Items Measured at Fair Value under the Fair Value Option

Following are the fair values and related principal amounts due upon maturity of loans accounted for under the fair value option:


	December 31, 2025							December 31, 2024
	Fair value		Principal amount due upon maturity		Difference			Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Loans held for sale:
Current through 89 days delinquent	$	2,696,128	$	2,627,441	$	68,687		$	2,114,556	$	2,092,030	$	22,526
90 or more days delinquent:
Not in foreclosure		1,273		1,271		2			1,687		2,114		(427	)
In foreclosure		1,997		2,289		(292	)		75		96		(21	)
		3,270		3,560		(290	)		1,762		2,210		(448	)
	$	2,699,398	$	2,631,001	$	68,397		$	2,116,318	$	2,094,240	$	22,078
Loans held for investment:
Held in consolidated VIEs:
Current through 89 days delinquent	$	8,529,906	$	8,353,814	$	176,092		$	2,190,432	$	2,413,214	$	(222,782	)
90 or more days delinquent:
Not in foreclosure		700		844		(144	)		1,277		1,658		(381	)
In foreclosure		333		428		(95	)		—		—		—
		1,033		1,272		(239	)		1,277		1,658		(381	)
		8,530,939		8,355,086		175,853			2,191,709		2,414,872		(223,163	)
Distressed:
Current through 89 days delinquent		371		476		(105	)		445		595		(150	)
90 or more days delinquent:
Not in foreclosure		942		2,553		(1,611	)		1,421		3,796		(2,375	)
In foreclosure		392		1,120		(728	)		—		—		—
		1,334		3,673		(2,339	)		1,421		3,796		(2,375	)
		1,705		4,149		(2,444	)		1,866		4,391		(2,525	)
	$	8,532,644	$	8,359,235	$	173,409		$	2,193,575	$	2,419,263	$	(225,688	)

Following are the changes in fair value included in current period income by consolidated statements of income line item for financial statement items accounted for under the fair value option:


	Year ended December 31, 2025
	Net gains on investments and financings			Net gains on loans held for sale		Net loan servicing fees			Net interest expense			Total
	(in thousands)
Assets:
Mortgage-backed securities	$	148,344		$	—	$	—		$	51,325		$	199,669
Loans held for sale		—			149,579		—			—			149,579
Loans held for investment		112,838			—		—			(30,726	)		82,112
Credit risk transfer strips		37,462			—		—			—			37,462
Mortgage servicing rights		—			—		(413,709	)		—			(413,709	)
	$	298,644		$	149,579	$	(413,709	)	$	20,599		$	55,113
Liabilities:
Interest-only security payable	$	(3,428	)	$	—	$	—		$	—		$	(3,428	)
Asset-backed financings of VIEs		(96,439	)		—		—			10,984			(85,455	)
	$	(99,867	)	$	—	$	—		$	10,984		$	(88,883	)


	Year ended December 31, 2024
	Net gains on investments and financings			Net gains on loans held for sale		Net loan servicing fees			Net interest expense			Total
	(in thousands)
Assets:
Mortgage-backed securities	$	(80,838	)	$	—	$	—		$	28,773		$	(52,065	)
Loans held for sale		—			24,457		—			—			24,457
Loans held for investment		15,516			—		—			(1,808	)		13,708
Credit risk transfer strips		88,205			—		—			—			88,205
Mortgage servicing rights		—			—		(170,409	)		—			(170,409	)
	$	22,883		$	24,457	$	(170,409	)	$	26,965		$	(96,104	)
Liabilities:
Interest-only security payable	$	(1,555	)	$	—	$	—		$	—		$	(1,555	)
Asset-backed financings of VIEs		(7,396	)		—		—			(3,653	)		(11,049	)
	$	(8,951	)	$	—	$	—		$	(3,653	)	$	(12,604	)


	Year ended December 31, 2023
	Net gains on investments and financings			Net gains on loans held for sale		Net loan servicing fees			Net interest expense			Total
	(in thousands)
Assets:
Mortgage-backed securities	$	74,984		$	—	$	—		$	1,986		$	76,970
Loans held for sale		—			15,025		—			—			15,025
Loans held for investment		17,439			—		—			(2,127	)		15,312
Credit risk transfer strips		136,753			—		—			—			136,753
Mortgage servicing rights		—			—		(296,847	)		—			(296,847	)
	$	229,176		$	15,025	$	(296,847	)	$	(141	)	$	(52,787	)
Liabilities:
Interest-only security payable	$	(10,742	)	$	—	$	—		$	—		$	(10,742	)
Asset-backed financings of VIEs		(13,678	)		—		—			(496	)		(14,174	)
	$	(24,420	)	$	—	$	—		$	(496	)	$	(24,916	)

Financial Statement Item Measured at Fair Value on a Nonrecurring Basis

Following is a summary of the carrying value of assets that were remeasured during the year based on fair value on a nonrecurring basis:


Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2025	$	—	$	—	$	30	$	30
December 31, 2024	$	—	$	—	$	532	$	532

The following table summarizes the fair value changes recognized during the years on assets held at year end that were remeasured during the year based on fair value on a nonrecurring basis:


	Year ended December 31,
	2025			2024			2023
	(in thousands)
Real estate acquired in settlement of loans	$	(68	)	$	(348	)	$	(223	)

The Company remeasures its REO based on fair value when it evaluates the properties for impairment. The Company evaluates its REO for impairment with reference to the respective properties’ fair values less costs to sell. REO may be revalued after acquisition due to the Company receiving greater access to the property, the property being held for an extended period or receiving indications that the property’s fair value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the property’s cost is recognized in Results of real estate acquired in settlement of loans in the Company’s consolidated statements of income.

Fair Value of Financial Instruments Carried at Amortized Cost

Most of the Company’s borrowings are carried at amortized cost. The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by credit risk transfer and mortgage servicing assets and the exchangeable senior notes included in Unsecured senior notes are classified as “Level 3” fair value liabilities due to the Company’s reliance on unobservable inputs to estimate these instruments’ fair values. The Company classifies its senior notes as “Level 2” fair value liabilities.

The Company has concluded that the fair values of these borrowings other than term notes and term loans included in Notes payable secured by credit risk transfer and mortgage servicing assets and the Unsecured senior notes approximate the agreements’ carrying values due to the borrowing agreements’ variable interest rates and short maturities.

The Company estimates the fair values of the term notes and term loans included in Notes payable secured by credit risk transfer and mortgage servicing assets using indications of fair value provided by nonaffiliate brokers for the term notes and internal estimates of fair value for the term loans. The Company estimates the fair values of its Unsecured senior notes using pricing services. The fair values and carrying values of these liabilities are summarized below:


	December 31, 2025				December 31, 2024
Instrument	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Notes payable secured by credit risk transfer and mortgage servicing assets	$	2,258,128	$	2,268,438	$	2,929,790	$	2,944,956
Unsecured senior notes	$	1,028,300	$	1,073,341	$	605,860	$	606,185

Valuation Governance

Most of the Company’s assets, its Asset-backed financings of variable interest entities at fair value, Interest-only security payable at fair value and Derivative and credit risk transfer strip liabilities at fair value are carried at fair value with changes in fair value recognized in current period income. A substantial portion of these items are “Level 3” fair value assets and liabilities which require the use of unobservable inputs that are significant to the estimation of the fair values of the assets and liabilities. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability and are based on the best information available under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair values of these assets and liabilities to specialized staff within PFSI's capital markets group and subjects the valuation process to significant senior management oversight.

With respect to “Level 3” valuations other than IRLCs, the capital markets valuation staff reports to PFSI’s senior management valuation subcommittee, which oversees the valuations. The capital markets valuation staff monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities other than IRLCs, including the models’ performance versus actual results, and reports those results to PFSI’s senior management valuation subcommittee. PFSI’s senior management valuation subcommittee includes the Company’s chief financial and investment officers as well as other senior members of PFSI’s finance, risk management and capital markets staffs.

The capital markets valuation staff is responsible for reporting to PFSI’s senior management valuation subcommittee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the capital markets valuation staff presents an analysis of the effect on the valuation of changes to the significant inputs to the models and, for MSRs, comparisons of its estimates of fair value and key inputs to those procured from nonaffiliate brokers and published surveys.

The fair values of the Company’s IRLCs are developed by PFSI's capital markets risk management staff and are reviewed by its capital markets operations staff.

Valuation Techniques and Inputs

The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:

Mortgage-Backed Securities

The Company’s categorization of its current holdings of MBS is based on whether the respective security is an IO stripped MBS:

•

The Company categorizes its current holdings of MBS other than IO stripped MBS as “Level 2” fair value assets. Fair value of these securities is established based on quoted market prices for the Company’s MBS holdings or similar securities.

•

The Company categorizes its current holdings of IO stripped MBS as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair values of its IO stripped MBS.

The key inputs used in the estimation of the fair value of IO stripped MBS include option-adjusted spread ("OAS") or pricing spread (OAS and pricing spread are each a component of discount rate) and prepayment speed. Significant changes to those inputs in isolation may result in significant changes in the IO stripped MBS' fair value measurements. Changes in these key inputs are not directly related.

Beginning in the third quarter of 2025, the Company enhanced its discounted cash flow approach to estimate the period-end fair value of its IO stripped MBS with the adoption of an OAS discounted cashflow model. The OAS model allows the Company to account for the likelihood of interest rates moving along different paths as economic conditions change in its assessment of the fair value of IO stripped MBS as opposed to a single assumed rate path. Adoption of the OAS model did not have a significant effect on the fair value of IO stripped MBS.

Following are the key inputs used in determining the fair value of IO stripped MBS:


	December 31, 2025		December 31, 2024
Fair value (in thousands)	$	72,502	$	86,260
Key inputs (1)
Option-adjusted spread (2)
Range	4.7% – 4.7%
Weighted average	4.7%
Pricing spread (3)
Range			5.9% – 6.5%
Weighted average			6.5%
Annual total prepayment speed (4)
Range	11.0% – 13.6%		9.4% – 10.2%
Weighted average	11.0%		9.4%
Equivalent life (in years)
Range	4.0 – 7.7		4.6 – 8.0
Weighted average	7.6		7.9

(1)

Weighted-average inputs are based on the UPB of the underlying loans.

(2)

Beginning July 1, 2025, the Company applied an option-adjusted spread to multiple simulated paths of a derived United States Treasury securities (“Treasury") yield curve for purposes of discounting cash flows relating to IO stripped MBS.

(3)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. Through June 30, 2025, the Company applied a pricing spread to a derived Treasury yield curve for purposes of discounting cash flows relating to IO stripped MBS.

(4)

Prepayment speed is measured using life total Conditional Prepayment Rate (“CPR”). Equivalent life is provided as supplementary information.

Changes in the fair value of MBS are included in Net gains on investments and financings in the consolidated statements of income.

Loans

Fair value of loans is estimated based on whether the loans are saleable into active markets:

•

Loans that are saleable into active markets, comprised of most of the Company’s loans held for sale and all of the loans held for investment in VIEs, are categorized as “Level 2” fair value assets:

•

Fair values of loans held for sale are established using the loans’ contracted selling prices, quoted market prices or market price equivalents.

•

Fair values of loans held for investment in VIEs are developed using the quoted indications of fair value of all of the individual securities issued by the securitization trusts holding the loans. The Company obtains indications of fair value from nonaffiliate brokers based on comparable securities and/or pricing services and validates the brokers’ or pricing services’ indications of fair value using pricing models and inputs the Company believes are similar to the pricing models and inputs used by other market participants. The Company adjusts the fair values received from brokers and/or pricing services to include the fair value of MSRs attributable to the loans included in the VIEs.

•

Loans that are not saleable into active markets, comprised of home equity lines of credit, previously sold loans that the Company repurchased pursuant to the representation and warranties it provided to the purchaser and distressed loans, are categorized as “Level 3” fair value assets:

•

Fair values of loans held for sale categorized as “Level 3” assets (home equity lines of credit and previously sold loans repurchased pursuant to representations and warranties) are estimated using a discounted cash flow approach or the loans' contracted selling prices when applicable. Inputs to the discounted cash flow model include current interest rates, payment statuses, property types, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds and loss severities.

•

Fair values of distressed loans are estimated based on the fair values of the real estate collateralizing the loans.

Changes in fair values of loans held for sale are included in Net gains on loans held for sale at fair value in the consolidated statements of income. Changes in fair values of loans held for investment are included in Net gains on investments and financings in the consolidated statements of income.

Derivative and Credit Risk Transfer Strip Assets and Liabilities

CRT Derivatives

The Company categorizes CRT derivatives as “Level 3” fair value assets. The fair values of CRT derivatives are based on indications of fair value provided to the Company by nonaffiliate brokers for the certificates representing the beneficial interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the recourse obligations and the IO ownership interests. Together, the recourse obligation and the IO ownership interest comprise the CRT derivative. Fair values of the CRT derivatives are derived by deducting the balances of the Deposits securing credit risk transfer arrangements pledged to creditors from the fair values of the certificates representing the beneficial interests in the trusts.

The Company assesses the fair values it receives from nonaffiliate brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of CRT derivatives are the discount rates, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT derivatives are included in Net gains on investments and financings in the consolidated statements of income.

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of broker-provided fair values for CRT derivatives:


	December 31, 2025		December 31, 2024
	(dollars in thousands)
Fair value	$	32,659	$	29,377
UPB of loans in reference pools	$	4,555,682	$	4,961,644
Key inputs (1)
Discount rate
Range	8.6% – 14.1%		9.0% – 11.4%
Weighted average	8.8%		9.3%
Voluntary prepayment speed (2)
Range	6.3% – 7.6%		7.0% – 7.6%
Weighted average	7.3%		7.3%
Involuntary prepayment speed (3)
Range	0.1% – 0.3%		0.1% – 0.2%
Weighted average	0.1%		0.1%
Remaining loss expectation
Range	0.0% – 0.1%		0.0% – 0.2%
Weighted average	0.1%		0.1%

(1)

Weighted average inputs are based on fair value amounts of the CRT arrangements, except for remaining loss expectation which is based on the UPB of the loans in the reference pools.

(2)

Voluntary prepayment speed is measured using life voluntary CPR.

(3)

Involuntary prepayment speed is measured using life involuntary CPR.

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets and liabilities. The Company estimates the fair values of IRLCs based on quoted Agency MBS prices, the probability that the loans will be purchased under the commitments (the “pull-through rate”) and the Company’s estimate of the fair values of the MSRs it expects to receive upon sale of the loans.

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rates and the estimated MSRs attributed to the mortgage loans subject to the commitments. Significant changes in the pull-through rates or the MSR components of the IRLCs, in isolation, may result in a significant change in the IRLCs’ fair values. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of an IRLC’s fair value, but also increase the pull-through rate for the loan principal and interest payment cash flow component that has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value in the consolidated statements of income.

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


	December 31, 2025		December 31, 2024
Fair value (in thousands) (1)	$	2,348	$	444
Committed amount (in thousands)	$	1,207,859	$	1,166,566
Key inputs (2)
Pull-through rate
Range	50.5% – 100%		51.0% – 98.0%
Weighted average	90.9%		86.3%
MSR fair value expressed as
Servicing fee multiple
Range	1.7 – 8.4		2.6 – 7.8
Weighted average	5.4		5.7
Percentage of unpaid principal balance
Range	0.4% – 3.2%		0.6% – 2.7%
Weighted average	1.9%		1.9%

(1)

For purposes of this table, IRLC asset and liability positions are shown net.

(2)

Weighted-average inputs are based on the committed amounts.

Hedging Derivatives

Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities. Fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities. Changes in the fair value of hedging derivatives are included in Net gains on investments and financings, Net gains on loans held for sale at fair value or Net loan servicing fees – from nonaffiliates – Mortgage servicing rights hedging results, as applicable, in the consolidated statements of income.

Credit Risk Transfer Strips

The Company categorizes CRT strips as “Level 3” fair value liabilities. The fair values of CRT strips are based on indications of fair value provided to the Company by nonaffiliate brokers for the securities representing the beneficial interests in the trusts holding the Deposits securing credit risk transfer arrangements pledged to creditors, the IO ownership interests and the recourse obligations. Together, the IO ownership interest and the recourse obligation comprise the CRT strip.

Fair values of the CRT strips are derived by deducting the balance of the Deposits securing credit risk transfer arrangements pledged to creditors from the indications of fair value of the securities provided by the nonaffiliate brokers.

The Company assesses the indications of fair value it receives from nonaffiliate brokers using the discounted cash flow approach. The significant unobservable inputs used by the Company in its review and approval of the valuation of the CRT strips are the discount rates, voluntary and involuntary prepayment speeds and the remaining loss expectations of the reference loans. Changes in fair value of CRT strips are included in Net gains on investments and financings in the consolidated statements of income.

Following is a quantitative summary of key unobservable inputs used in the Company’s review and approval of the broker-provided fair values used to derive the fair value of the CRT strip liabilities:


	December 31, 2025		December 31, 2024
	(dollars in thousands)
Fair value	$	5,999	$	4,060
Unpaid principal balance of loans in the reference pools	$	14,961,848	$	16,287,660
Key inputs (1)
Discount rate
Range	5.0% – 8.6%		7.1% – 9.1%
Weighted average	8.1%		8.8%
Voluntary prepayment speed (2)
Range	7.0% – 7.5%		6.9% – 7.5%
Weighted average	7.1%		7.0%
Involuntary prepayment speed (3)
Range	0.1% – 0.3%		0.1% – 0.3%
Weighted average	0.1%		0.1%
Remaining loss expectation
Range	0.4% – 1.4%		0.4% – 1.5%
Weighted average	0.5%		0.5%

(1)

Weighted average inputs are based on fair value amounts of the CRT arrangements, except for remaining loss expectation which is based on the UPB of the loans in the reference pools.

(2)

Voluntary prepayment speed is measured using life voluntary CPR.

(3)

Involuntary prepayment speed is measured using life involuntary CPR.

Mortgage Servicing Rights

The Company categorizes MSRs as “Level 3” fair value assets. The fair values of MSRs are derived from the net positive cash flows associated with the servicing agreements. The Company uses a discounted cash flow approach to estimate the fair values of MSRs. The Company receives a servicing fee based on the remaining UPB of the loans subject to the servicing agreements and generally has the right to receive other remuneration including various mortgagor-contracted fees such as late charges and collateral reconveyance charges,

and is generally entitled to retain any placement fees earned on certain custodial funds held pending remittance of mortgagor principal, interest, tax and insurance payments.

Beginning in the third quarter of 2025, the Company enhanced its discounted cash flow approach to estimate the period-end fair value of its MSRs with the adoption of an OAS discounted cash flow model. The OAS model allows the Company to account for the likelihood of interest rates moving along different paths as economic conditions change in its assessment of the fair value of MSRs as opposed to a single assumed rate path. Adoption of the OAS model did not have a significant effect on the fair value of MSRs.

The key inputs used in the estimation of the fair value of MSRs include the applicable prepayment rate (prepayment speed), OAS or pricing spread (the OAS and pricing spread are components of the discount rate), and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees – From nonaffiliates – Change in fair value of mortgage servicing rights in the consolidated statements of income.

MSRs are generally subject to loss in fair value when prepayment speed expectations and experience increase, when returns required by market participants (expressed as OAS or pricing spreads) increase, or when the annual per-loan cost of servicing increases. Reductions in the fair value of MSRs affect income primarily through recognition of the change in fair value.

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


	Year ended December 31,
	2025		2024		2023
MSRs recognized (in thousands)	$	190,141	$	219,001	$	292,527
Unpaid principal balance of underlying loans (in thousands)	$	10,233,335	$	12,240,231	$	15,966,491
Weighted average annual servicing fee rate (in basis points)	33		35		39
Key inputs (1)
Prepayment speed (2)
Range	8.7% – 15.5%		8.7% – 26.7%		10.1% – 22.7%
Weighted average	9.8%		12.2%		12.4%
Equivalent average life (in years)
Range	3.7 – 8.3		3.4 – 8.1		2.8 - 7.2
Weighted average	8.0		6.9		6.8
Pricing spread (3)
Range	4.8% – 10.0%		5.4% – 8.5%		5.5% – 8.8%
Weighted average	5.6%		5.6%		5.8%
Annual per-loan cost of servicing
Range	$68 – $91		$68 – $87		$68 – $83
Weighted average	$69		$69		$70

(1)

Weighted-average inputs are based on the UPB of the underlying loans.

(2)

Annual total prepayment speed is measured using life total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

(3)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to a derived Treasury yield curve for purposes of discounting cash flows relating to its initial recognition of MSRs.

Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those inputs:


	December 31, 2025		December 31, 2024
Fair value (in thousands)	$	3,644,702	$	3,867,394
Unpaid principal balance of underlying loans (in thousands)	$	215,781,639	$	226,237,613
Weighted average annual servicing fee rate (in basis points)	28		27
Weighted average note interest rate	3.9%		3.8%
Key inputs (1)
Prepayment speed (2)
Range	7.0% – 21.5%		6.5% – 17.7%
Weighted average	8.4%		6.7%
Equivalent average life (in years)
Range	2.1 – 7.9		2.4 – 8.9
Weighted average	7.7		8.6
Effect on fair value (in thousands) of (3):
5% adverse change	$(61,563)		$(51,798)
10% adverse change	$(120,960)		$(102,010)
20% adverse change	$(233,683)		$(197,970)
Option-adjusted spread (4)
Range	3.6% – 6.2%
Weighted average	3.6%
Pricing spread (5)
Range			5.4% – 8.1%
Weighted average			5.4%
Effect on fair value (in thousands) of (3):
5% adverse change	$(30,295)		$(47,568)
10% adverse change	$(60,089)		$(94,018)
20% adverse change	$(118,218)		$(183,710)
Annual per-loan cost of servicing
Range	$68 – $90		$69 – $89
Weighted average	$68		$69
Effect on fair value (in thousands) of (3):
5% adverse change	$(15,979)		$(16,645)
10% adverse change	$(31,959)		$(33,291)
20% adverse change	$(63,918)		$(66,582)

(1)

Weighted-average inputs are based on the UPB of the underlying loans.

(2)

Prepayment speed is measured using life total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

(3)

These sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made to account for changing circumstances. For these reasons, these analyses should not be viewed as earnings forecasts.

(4)

The option-adjusted spread is a margin that is applied to a reference interest rate’s projected curve to develop periodic discount rates. Beginning July 1, 2025, the Company applies an option-adjusted spread to multiple simulated paths of a derived Treasury yield curve for purposes of discounting cash flows relating to period-end MSRs.

(5)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. Through June 30, 2025, the Company applied a fixed pricing spread to a derived Treasury yield curve for purposes of discounting cash flows relating to period-end MSRs.

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” fair value asset. Fair value of REO is established by using a current estimate of fair value from either a broker’s price opinion, a full appraisal, or the price given in a pending contract of sale.

REO fair values are reviewed by PLS staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the indications of fair value. PLS staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the staff appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers obtain an additional appraisal to determine fair value. Recognized changes in the fair value of REO are included in Results of real estate acquired in settlement of loans in the consolidated statements of income.

Historical Timeline

Fiscal Year	Filed
2025	Feb 18, 2026	Showing above
2020	Feb 26, 2021

About Fair Value Disclosures

Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.

Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.

PennyMac Mortgage Investment Trust Fair Value Disclosure

Historical Timeline

About Fair Value Disclosures

Other Available Disclosures