PennyMac Mortgage Investment Trust (PMT) 2011 Q3 法說會逐字稿

Good morning, everyone.

How's the sound back there -- it's traveling?

I don't care about the PennyMac guys.

Anyway, I want to welcome everybody to our investor day.

We're in our new Moorpark facilities.

You're positioned at what will, in a couple of weeks, be our trading floor, which is one of the last parts that we're moving from our Calabasas operations.

We thought it'd be fun to have the presentation in this format.

For those of you that have made the trip to our new operations facility, and for those of you who are listening on webcast, we thank you for devoting your valuable time to enhance your understanding of PennyMac.

We hope to provide you with an array of useful information that will broaden your understanding of our strategies and unique structural operations and capabilities of our company.

After I provide you with an overview of the Company, its strategies and the overall direction of the mortgage market, David Spector, PMT's President and Chief Operating Officer and Anne McCallion, PMT's Chief Financial Officer, will discuss results of PMT's third quarter in greater detail.

Then, we will turn our attention to a panel of company executives that will help better explain our business in distressed whole loan investing.

Shortly thereafter, we'll break for lunch at the PennyMac pantry located downstairs.

We will reconvene after lunch for another full executive panel that will cover our Correspondent Lending Group, which we will refer to as CLG throughout the day.

And, finally, we will end the day with a Q&A wrap up and a tour of our facilities.

We're happy to take questions that you may have at the end of each presentation throughout the day.

As I'm sure you're all aware, PMT has announced this morning $20.5 million in earnings for the third quarter or $0.73 per share.

We also declared a dividend of $0.50 per share for the quarter.

David and Anne will take you through the details of the quarter in just a little bit.

But I first want to take some time to address how we see the changing residential mortgage market, and how we think PMT is extremely well positioned to capitalize on the opportunities in the years to come.

Before we begin, please turn to slide one, and familiarize yourself with our forward-looking statement.

Slide two.

PMT is an externally managed REIT that is focused on the US residential mortgage market.

PMT leverages the capabilities of its external manager, PNMAC Capital Management, or what we'll refer to throughout the day as PCM.

And it uses its affiliate PennyMac Loan Services or PLS to participate in opportunistic investments in distress mortgages, as well as correspondent loan activities for newly originated prime mortgages.

PMT is the only public REIT that invests opportunistically in distressed residential whole loans.

The capabilities to effectively manage the investment distressed mortgage loan and the operationally extensive specialty servicing activities are substantial.

We look to continue to pursue opportunistic investments in distressed mortgages that benefit from our focused operational capabilities of PCM and PLS.

Throughout the presentation today, we will be emphasizing the systems and the expertise that exist at PennyMac to successfully pursue these investments.

Over time, we anticipate that the mortgage markets will normalize.

No one really knows with any certainty what the new normal will be.

There are a variety of reforms and visions for the future of the mortgage market.

Our long-term strategy for PMT is to be positioned at the forefront of new non-bank mortgage intermediaries that will emerge to aggregate and securitize mortgages.

It is likely that such an aggregator will produce value by generating superior investment opportunities for its shareholders, while producing trust and alignment for security investors.

To this end, our manager, PCM, has devoted time, and capital to creating the core functionality of our Correspondent Lending Group.

As I mentioned earlier, part of this presentation today will bring more focus to the strides and the growing of CLG's initiatives that are essential to the direction of the Company.

To place the Company's strategy and approach in context, let's turn to slide three and take a look at the transformation of the mortgage market.

The residential mortgage market is an extremely large and significant portion of the overall US economy.

It's no surprise that the economy has struggled without a rebound in housing, or in the mortgage market and we would expect that relationship to continue.

The economy will go as housing goes.

For decades, the mortgage markets were strong and vibrant.

There were numerous market participants from banks, to independent lenders and brokers.

GSEs and non-agency loan had efficient outlets, that kept financing costs low for borrowers throughout the use of securitization.

Today, there is a substantial overhang of legacy assets mainly held by large banks.

This, along with the large inventory of homes in foreclosure, is creating an uncertain outlook for the housing industry.

Many small, independent mortgage companies were consumed by the credit crisis.

And the market that was left is dominated by five large banks.

With a shaky economy, and strict lending standards, the origination market has shrunk considerably with the only reliable outlet for mortgages being the GSEs.

While the mortgage markets have slightly improved, there is a very long way to go.

This brings me to where we are going.

As we have heard in announcements by different institutions over the last several years, some of the large mega banks are beginning to pull back from the mortgage market.

And new firms and capital are entering into this space.

Mortgage servicing is beginning to move away if the large banks to specialized firms that have more operational capacity.

The prime non-agency market will need to be reestablished, especially with the loan limits on GSE eligible mortgages declining.

For this market to reemerge, new intermediary institutions are needed to sponsor securitization.

These are intermediaries must be willing to co-invest in these securitizations and have skin in the game.

With transparency and willingness to invest in the ongoing risk of securitization, investors will return to the non-agency residential mortgage markets.

Let's take a look at some additional industry factors, requiring the need for a new financial intermediary on slide four.

As we move to slide four, we believe that a series of regulatory and competitive forces in the industry are creating the need for new mortgage entities to step up and fill the vacuum as the needs of the mortgage market unfolds.

As I discussed on the previous slide, banks are working diligently through their legacy assets, causing them to reduce their mortgage exposure.

Also, as Basal III and new capital requirements become implemented over time, banks will be required to hold more capital against their mortgage servicing rights and subordinated bonds.

Banks are reducing their correspondent lending activities as a way to shrink their MSR asset and improve their capital requirements.

Regulators want to see a reduction to the over-concentration in mortgages and mortgage-related activities that is done by a hand full of mega banks.

In addition, GSEs have been mandated to reduce their portfolios over the coming years.

This will necessitate new firms in the mortgage landscape that are able to step in and effectively manage these assets.

All of these forces result in the need for a non-bank mortgage firm, such as PMT, to provide support.

So let's turn to slide five to take a look at the specific opportunities that are available.

PMT is focused on two sets of opportunities, those resulting from the legacy mortgage assets such as non-performing loans, and those of available in the new mortgage market.

We estimate that over $400 billion of legacy whole loans are currently in some form of delinquency.

More of those loans -- or most of those loan are held by large banks, which as we discussed earlier are under pressure to dispose of those loans.

To-date, this is the market that PMT has focused on, and we believe that this investment will be available for several years into the future, possibly longer.

We have also begun to see large banks sell mortgage servicing rights, as pressure from GSEs and securitization investors increases.

As we discussed earlier, regulatory pressure and new capital requirements are creating a void in the correspondent's base.

Approximately $300 billion in new mortgage originations is flowing through the correspondent channel every year.

In addition, some of the large banks announced plans to reduce their market share or to exit that market entirely.

Our manager, PCM, has been building the Correspondent Lending Group capabilities through much of 2010 and 2011 to capitalize on this specific opportunity.

One area that has become a specific focus for the market is non-agency jumbo mortgages.

As conventional limits begin to reduce, this broadens the overall size of the jumbo mortgage market.

Also, we expect to see more attractive opportunities in mortgage servicing rights, as regulators adopt new standards for reducing the minimum servicing fee.

So, let's turn to slide six to see how PMT leveraging the operational capabilities of its manager and servicer position to take advantage of these opportunities.

PMT's relationship with PCM and PLS, provides it with sophisticated operational capabilities for all of the critical functions required to successfully capitalize on the opportunities available in the residential mortgage market.

As you can see from the slide, our investment manager, PCM has established capabilities in sourcing, valuing, assessing credit risk, pricing loans, and running proper due diligence.

It has a unique Portfolio Strategy Group, which quantifies and directs the servicer's decision making.

Furthermore, our Capital Markets Group provides the key functionalities for secondary marketing activities.

All of these functions must work together towards the shared goal of optimizing return on investment.

Let's turn to slide seven, and look at the management team that leads PMT and its manager and servicer.

PennyMac has a seasoned and veteran management team with deep expertise in all facets of mortgage banking.

This chart is just an abbreviated version of our management structure, which has considerable depth beyond what is shown here.

The executives highlighted in blue are all individuals who are participating and will speaking today.

Combined, our manager and servicer has over 350 employees today.

And they continue to make considerable additions to staff as our activities increase in scale.

Let's turn to slide eight, and look at the current long-term strategy.

Our current focus is on distressed mortgage acquisitions, and that remains our primary focus through the medium term.

We believe that the distressed market should be fairly active for at least the next couple of years, and anticipate PMT to continue as a purchaser of distressed residential mortgage assets over that time.

However, we expect the opportunities in the distressed market will eventually decline.

And in preparation for that, we have developed the Correspondent Lending Group.

Due to the market forces I described earlier, PMT will look to grow as a trusted non-bank financial intermediary.

PMT's strategic evolution will provide correspondent acquisitions of prime, conventional and jumbo mortgage loans.

Both structuring and investing secure -- and investing in securitizations.

And we will look to acquire certain mortgaging servicing rights on an opportunistic basis.

With the capabilities of our investment manager and servicer, we are uniquely positioned to fill the growing need of a new mortgage intermediary.

Let's quickly look at the potential returns associated with each of these strategies on slide nine.

We will be going into considerable depth on the economics of many of these areas as we continue during the day today.

This slide illustrates the potential returns and assumptions for the strategies we participate in and will be discussing later.

As you can see from this slide, PMT's strategies have a potential to generate attractive returns, while at the same time, utilizing modest amounts of leverage for each of the specified strategies that are noted.

Let's turn to slide 10, for a high level look at how PMT's business has developed over the last year.

Over the last year, PMT has experienced tremendous growth through steady investment in mortgage assets.

PMT's distressed mortgage assets have grown 154% in the past year, and now stand at just over $1 billion.

Our correspondent volume has experienced tremendous growth over the same time, and we continue to steadily ramp up its volume.

This asset growth has led to an increase in net income of over 165% with earnings per share growth at 60%.

PMT has continued deliver attractive and improving returns to our shareholders.

Let's now turn to slide 11, and see how we have built out our capital structure for PMT.

In addition to operational capabilities, we have worked diligently to build PMT's financing platform and capital structure.

We have developed and structured multiple credit facilities in close partnership with major banks and broker-dealers to finance the Company's activities across its different investment areas.

We believe that these financing capabilities are further to our advantage that uniquely positions PMT to execute on its strategies.

Let's turn to slide 12 to see the available capacity for growth for both the servicer and for the investment manager.

As you can see and will see through the course of the day, PMT's manager and servicer had built substantial capabilities that are able to support many multiples of the Company's current activities.

Our Correspondent Lending Group is positioned to ramp up from $145 million per month today to a target of $1 billion per month in originations by the end of next year.

Our servicing operation has the management systems and processes in place to scale, and, as you can see by this building, the fiscal infrastructure in place to support the management of approximately $40 billion of high touch servicing over the next 12 months.

I'd like to now turn to slide 13, to go over and summarize the investment opportunity in PMT.

In summary, PMT is a unique company dedicated to opportunities in the residential mortgage market.

We have been successfully investing in distressed whole loans, and are building on the relationships to grow our Correspondent Lending Group.

As the concentration of market share and banks declines, and the GSEs retreat, there is a need for a new private enterprise to serve as an intermediary in the mortgage market for both agency and non-agency mortgage loans.

There are significant barriers to entry, as this business requires sophisticated management and sophisticated operating and operational capabilities.

We believe PMT is best positioned with the capital, bank relationships, and management across all areas of mortgage banking necessary to succeed.

I would now like to turn it over to David Spector, PMT's President and Chief Operating Officer, to go over the highlights of the third quarter.

Thank you, Stan.

As mentioned earlier, PMT had a strong third quarter.

Let's turn to slide 15 and take a look at the highlights of the quarter.

For the third quarter, PMT reported net income of $20.5 million or $0.73 per diluted share, a net investment income of $42 million.

Net income increased by 24% from the previous quarter, while net investment income increased by 39%.

Cash flow generated from our whole loan, REO, and MBS investments totaled $67 million.

Valuation gains on our investments were $24 million.

And Anne will go into further details of our financial results later on in the presentation.

Moving toward resolution and liquidation activity in our whole loan portfolio continues to be the main driver of earnings for PMT.

Also, our ability over the last few quarters to prudently increase the leverage in our whole loan investments has enhanced PMT's return on equity.

The forward trade completed early in the third quarter resulted in an increased to PMT's leverage on its whole loan portfolio to 1.1 times equity at the end of the third quarter.

The Board of Trustees has approved a dividend of $0.50 per share for the quarter.

This dividend represents an annualized yield of 13% based on the September 30 closing stock price.

Let's now review our markets for investment opportunities on slide 16.

During the third quarter, our manager, PCM, evaluated over $3 billion in whole loans, bringing the year-to-date total to over $10 billion.

Volume of approximately $1 billion per month has remained fairly stable throughout the year, and we expect that to continue throughout the rest of 2011.

We will take a deeper look into our distressed mortgage investment activity in one of the later presentations.

We made some modest investments in non-agency mortgage backed securities during the third quarter, reinvesting proceeds from PMT's portfolio.

As pricing has continued to drop over the past two quarters, we saw an opportunity to acquire some front pay cash flowing bonds at attractive yields.

We'll continue to opportunistically purchase MBS.

However, our main investment targets will remain distressed whole loans and our investment and correspondent lending activities.

Our correspondent and lending activities continue to expand as our manager added 21 new correspondent sellers during the quarter, bringing the total number of approved sellers to 76.

We will also take a deeper dive into our correspondent business in one of the later presentations, and you'll get to meet some of the people leading that effort.

Let's turn to slide 18, and take a look at how the portfolio of distressed mortgage assets performed during the quarter.

PMT continues its consistent and disciplined growth of distressed mortgage assets, which now surpasses the $1 billion mark.

During the third quarter, distressed mortgage assets grew over 30%, mostly from the completion of the forward trade.

Our MBS portfolio grew slightly during the quarter from the purchases we discussed earlier.

During the third quarter, we invested $266 million in whole loans in REO properties.

Of this amount, $173 million was the result of the forward trade.

At present, loans that are over 90 days delinquent or in foreclosure make up 78% of the unpaid principal balance in our whole loan pools.

Of those loans, 21% are geographically located in California, while 11% are located in Florida.

Let's now take a look at the quarterly resolution activity in the distressed loan portfolio on slide 19.

In the third quarter, PMT had liquidations totaling $91 million in UPB, as compared to $81 million in UPB for the second quarter.

Short sale activity was by far the most active with almost $53 million in UPB getting resolved over the quarter.

REO sales [resolved] $26 million in UPB, as PLS our servicer, continues to do a good job of progressing the pipeline of REOs through liquidation.

We'll take a look at the REO inventory a little later in the presentation.

At the end of the quarter, 86% of PMT's non-performing loans were on an active resolution path, with 35% of the portfolio in the active stages of a modification short sale or deed in lieu of foreclosure.

44% of the portfolio is currently on the path to foreclosure sale and 14% of the loans are in pre-foreclosure and solicitation stages.

These loans include delinquent mortgages that have not yet reached the foreclosure stage, as well as those in process for foreclosure referral.

PLS actively solicits borrowers for modifications, deed in lieu in short sale activities by telephone, direct mail, and property visits.

The pipeline of foreclosure activity increased in the third quarter, and our modification pipeline decreased.

This is largely attributable to working through our second quarter pipeline and modifications and the forward trade, which bought our servicing system in the third quarter, consisting of more loans progressing down the foreclosure path.

As we continue to work the loans through the process, we expect the modification pipeline to increase.

In addition to return some timely payment of principle interests, we can achieve greater returns on certain modified loans.

For example, qualifying modifications that remain current for some period of time may be refinanced and sold under the FHA's negative equity refinance program.

This program is a highly effective loan resolution, as it reduces the borrower's payment, provides the borrower with a permanent reduction in the size of their loan, and provides a liquidation event for PMT's investment.

Let's now turn to slides 20 and 21 for an in-depth look at how PMT's loan acquisitions have progressed since the beginning of 2010.

The tables in these two slides take all of PMT's loan acquisitions completed in a specific quarter, and tracks their progress each quarter since their acquisition.

For example, the chart on the top of the slide looks at the loans acquired in the first quarter of 2010, and shows the status of those loans at the end of each subsequent quarter.

As you can see, 55% of the loans PMT acquired in the first quarter of 2010 remain in the portfolio, meaning that 45% have been liquidated.

Of the remaining loans, approximately 28% are current, up from 6% at acquisition.

This is the result of our servicer, PLS, working diligently to collect payments as well as providing our borrowers with modifications when possible.

The amount of loans that PLS is able to convert to current performing loans have been higher than expected and, as I described earlier, can provide greater returns on certain loans.

You can also see the way each of the portfolios is progressing since its acquisition on these two pages.

Now, let's turn to slide 22 for a closer look at our REO inventory.

13.8 million or 28% of the value of our REO properties at the end of the second quarter were liquidated in the third quarter.

As you can see from the highlight to come at the middle of the table, most of the liquidations were aged more than three months.

In fact, over 8.7 million or 63% of PMT's REO liquidations were in our REO inventory for longer than three months.

Our inventory of REO increased during the third quarter by 43%.

As we continue to acquire new NPL pools and progress our current portfolio through the liquidation and resolution process, we would expect our REO inventory to increase.

However, we continue to closely monitor and manage the aging of our REO inventory, and work to liquidate properties in a manner and timeframe that generates the highest return on these investments.

Let's now turn to slide 24 to take a quick look at our correspondent lending business.

As I mentioned earlier, a much deeper dive will take place later today.

And as an overview, our Correspondent Lending Group, or CLG, funded $220 million in prime loan during the third quarter compared to $53 million in the second quarter.

FHA VA still remains the predominant loan product, representing almost two-thirds of production.

Remember that PMT receives a referral fee and net interest warehouse spread on these loans, as PMT is not an approved Ginnie Mae seller servicer.

For the month of October, CLG fundings are projected to be over $140 million with (inaudible) expected to exceed the $300 million mark.

As we continue to build out our operations and capabilities, our goal is to eclipse $1 billion per month in fundings by the end of 2012.

I would now like to turn it over to Anne McCallion, PMT's Chief Financial Officer to discuss the quarterly financials in greater detail.

Anne?

David, thank you.

As stated earlier, PMT earned $20.5 million or $0.73 per diluted share for the quarter ended September 30, 2011.

Quarterly earnings per share increased 24% from the second quarter results of $0.59 per diluted share.

Net investment income was $42 million, an increase of 39% from the second quarter.

Interest income, primarily from coupon payments on mortgage loans and mortgage backed securities, capitalization of interest on modified loans, and collection of unpaid interest on liquidated loans, along with the discount accrual on our mortgage back securities was $9.8 million.

And gains and losses on investments, primarily gains on loans, added $31.5 million to income.

Our correspondent activities during the quarter contributed about $102,000 to PMT's net income.

This amount is included in various line items on our income statement.

An increase in volume and production shifts to conventional and jumbo versus government loans, should cause this number to become more meaningful in the future.

Expenses for the third quarter totaled $17.1 million, compared to $12.2 million in the second quarter of 2011.

This increase was largely attributable to increases in interest expense of $2.3 million, and an increase in servicing expenses of $1.2 million.

I'll break down these expenses a little bit later in the presentation.

Pointing to the increase in PMT's tax provision for the third quarter, a portion of our assets is owned by, and a portion of our income is earned, in or taxability REIT subsidiary, or TRS, as such, we incur income tax expense on these earnings.

We continually look to take full advantage of the tax benefits that are accorded to us as a REIT.

However, given the nature of the assets that we invest in, and in the opportunities that we seek, we expect to incur some level of income taxes each quarter.

As I have disclosed in previous quarterly presentations, PMT's dividend policy is to generally distribute at least 90% of our taxable income.

The key variables influencing the timing and amount of dividends are actual and projected results of operations, actual and projected financial condition, cash flows and liquidity, and other factors that our Board of Trustees deems relevant.

For 2011, we project our REIT taxable income to be lower than our GAAP income, due to income earned in the TRS and to timing differences.

Primarily for this reason, our Board of Trustees has determined that a dividend of $0.50 per share for the third quarter is prudent, and will help assure a sustainable dividend level at a reasonable parity with REIT taxable income.

Now, I will discuss PMT's valuation gains as they relate to our whole loan investments.

Turning to slide 27, you can see the breakdown of our net gain on mortgage loan investments.

I'd like to spend some time discussing the composition of this line item.

Of the total $32.3 million in gains, roughly $24 million was due to valuation changes, and $8.5 million was due to gains on settlement of the loans.

Because we account for our portfolio of mortgage loan held for investment at fair value, changes in fair value are included in the results of our operations each period.

Theoretically, if the entire portfolio was sold on the first day of the new quarter, we would record virtually no gain or loss on that sale.

All other factors held constant, non-performing loan increase in value as they move closer to resolution, due to the shorter time to monetization and the increased certainty of resolution.

These changes in value are non-cash items when recognized in our operations.

However when a loan is monetized, significant cash flows are generally received often with a relatively small impact on income for that period.

From inception through September 30, 2011, gains of slightly over $35 million have been realized on asset settled.

And gains of approximately $57 million relate to distressed mortgage loans and REO owned at September 30, 2011.

Let's turn to slide 28, and take a look at a basis example of how fair value accounting works.

This example is an overly simplified look at how the valuation increase impacts PMT from an accounting standpoint and a cash flow standpoint.

First, let me walk you through the example.

A single loan is purchased at a price of $50 in the first quarter.

Over the next two quarters, there are valuation gains on the loan.

In the fourth quarter, the loan is liquidated through a short sale at a price of $75.

Let's begin with what occurs from an accounting standpoint.

In the first quarter, our mortgage loan portfolio increases by the fair value of the loan acquired or $50.

Cash also decreases by $50 to pay for the loan.

This assumes no leverage.

In the second and third quarters, we recognize the valuation gain in each quarter and increase the balance of our portfolio loans at fair value.

In the fourth quarter, we record net proceeds of $75 and a decrease in the fair value of our mortgages by the same amount.

The cash flows for this investment are fairly straightforward, as we have a cash outflow in the first quarter to pay for the loan, $50, and a cash inflow of 75 in the fourth quarter.

Our total gain on this particular loan is $25, of which all but $5 came through valuation increases.

We utilize fair value accounting to mark our loans to their market value every quarter, as we believe this method is most transparent and representative of our results.

This way, as investors, you know the value of the assets that we're invested in, and tail risk is mitigated because loans are always recorded at fair value with changes in fair value flowing through current period earnings.

Moving to side 29, I'll spend some time reviewing the expenses for the quarter.

On this slide, I've taken a look at total expenses, interest expense, and servicing fees as a percent of PMT's distressed mortgage loan and REO portfolio.

I've utilized the distressed mortgage assets as the denominator because they've been the primary driver of expenses to-date.

This analysis is useful at this point in time, but the use of distressed mortgage asset portfolio as the denominator of this fraction will decline in relevance as our correspondent lending becomes a larger part of our operations.

As you can see, our expenses appear to be normalizing as the portfolio grows and PMT has become fully invested.

Due diligence and other acquisition costs are expenses incurred.

So the nature, volume and timing of purchase transactions will impact period expenses.

Interest expense increased as a percentage of our distressed mortgage asset portfolio, as a result of increased leverage during the quarter, notably the recording of the forward trade as the loan purchasing financing.

Servicing fees consist of a monthly fee that is a percent of UPB, and milestone fees that generally occur either at the beginning or end of a loan's life cycle with PMT.

Note also that the percentages on this graph are over fair value rather than UPB.

Turning to slide 30, let's take a look at the balance sheet.

As you can see, PMT's assets grew 31% from the second quarter, mostly as a result of the forward purchase entered into in the quarter.

Our inventory of correspondent lending loans is shown on the line, mortgage loans acquired for sale at fair value.

Note that this asset increased to nearly $41 million at September 30, and is expected to grow as correspondent lending volumes increase.

Our liabilities were $625 million at the end of the third quarter, up 73% primarily as the result of the forward purchase transaction.

During the third quarter, our cash and short-term investments increased by approximately $2 million.

Financing activities provided $67 million for the quarter, including receipt of approximately $84 million from financing mortgage assets less dividends paid during the quarter of $14 million.

We have approximately $34 million for operations, which is net income adjusted for non-cash items and changes in operating assets and liabilities.

We used $31 million for investing activities, including net cash outlays for mortgage loan investments.

Now that we've discussed PMT's strategy and our operational and financial results for the third quarter, we'll be happy to answer any questions that you may have.

Can you walk through the difference between the REIT taxable income versus what you're earnings reported?

What percentage of the REIT taxable income have you now paid out here today?

It is a little bit of a difficult question to answer because the tax calculations are sort of moving targets.

But, we do expect that we will have paid out by the end of the year an amount that is equal to or slightly larger than the REIT taxable income.

Just to sort of -- still on that topic, do you expect that you'll sort of have a similar amount of income in the taxable REIT subsidiary?

Or, is there more ways to sort of optimize that?

As I mentioned, we're continually evaluating strategies and business activities that will allow us to take advantage of the REIT provisions and to have the income that's earned be REIT taxable income and then subject to the favorable tax treatment.

Due to largely the nature of non-performing loans and some of the tax nuances and requirements that are associated with those, some of the activities associated with non-performing loans are conducted in the taxable REIT subsidiary.

So the amount of taxable REIT income -- I'm sorry, the amount of TRS income or the income that we have to pay taxes on, is really dependent upon liquidation activity and the volumes of loans that we acquire, the state that they're in when we acquire them, the means that we use to finance them and a few other factors.

You know, try to clarify and add to that, when we're looking at pools of mortgage loans, certain loans are so advanced in their delinquency that they're not eligible qualified REIT assets, so they have to go into the TRS.

But, we're looking at them as still producing a significant value, so we're not going to dismiss that as an opportunity for investment.

We do have -- because of our potential for growth in the correspondent lending activity, we'll be adding mortgage servicing rights.

And mortgage servicing rights have a tax advantage to them in that they fall under a Safe Harbor, whereby the value of base servicing rights are not immediately taxable.

So, while not eliminating the tax expense, it does defer the tax liability to over the life of the mortgage servicing rights.

So, to the extent that we're building mortgage servicing rights at the same time that we have this taxable REIT income, we can change the nature of when those taxes are due, or, in other words, create deferrals that offset the actual liability.

I have questions about the velocity of resolutions and the timing.

Can you talk about the reasons for the extension and liquidation timelines on the--from Q2 to Q3 of REO?

And, can you talk about how all resolutions are performing in terms of timing vis-a-vis your original projections at the time of purchase?

So, we'll be spending a good amount of time in the next panel going over this.

I think that the -- when you look at the number of days to resolution there's a lot of factors that go into that number.

And when we -- when you look at the increase from 82 to 101, the way I look at the 101, it's still a very active velocity as you would call it.

I think that there's a -- as you start to see real estate values stabilize in certain areas, you're going to start trying to move the listing price of the price you're going to resolve the property up a bit.

And so, it's not just a function of the number of days, but it's where you resolve those properties.

I think that what we're seeing in PLS is we're seeing a continued good amount of properties moving through the resolution process.

As I said, the 101 versus the 82 is still a very good number from an industry perspective.

And you have to continue to look at where values are in the marketplace that you're operating in.

Anecdotally to add to that, you could have a very fast turnover in REO and perform horribly because you're just simply discounted the properties such that they sell instantaneously.

And so, there is a balance and looking for the exact amount of work to do on the house, the more precise time to hold it on the market so you're going to generate the highest value versus what produces the highest net present value.

And so, I think -- we'll provide more and more of this history, and I think it will be clear.

In a sense, you don't want to see a lot of homes marketed in the couple of weeks.

And remember, that also, that REO represents only a fraction of the liquidations that we're involved in.

There's short sales, which have and produce a higher value generally, and there is the growing refinance (inaudible) for the loan that we're bringing current.

Thanks.

To go back to the TRS issue just for a moment, is there -- understanding that you're looking a ways of generating offsets to the taxable or REIT income, are there ways that we can think about either the existing portfolio or with the purchases that you're bringing on, what characteristics of those loans ultimately are going to lend to those being in the TRS?

And what kind of -- the valuation gains, I assume is what is generating those incomes that are being taxed -- just so we can have an understanding of what that with loans coming in and migrating over time.

What's going to be within the TRS, just so we can, you know, think about our modeling exercise a little bit more precisely?

Generally speaking, as Stan indicated, when a loan is -- when foreclosure is imminent, that loan is a TRS investment as opposed to a REIT investment.

In terms of some of the differences for tax purposes, the taxable REITs subsidiary is on a mark to market basis, but the REIT itself is not.

And so, those are two of the primary factors that are causing some of the book and tax differences.

But, for -- as an example, the market as it generates the opportunity to invest in more re-performing loans.

So a lot of loans have gone through modification, but they're still likely to have strategic default those loans and we've seen packages of those loans offered, all of that in that example would go into the qualified REIT [sub] because they're currently paying mortgages.

And then as we got to a resolution event, they would be sold right before that to the taxable REITs sub.

And that's how you reduce the volume of income at the TRS on that type of trade.

We have another question.

I guess I'm having a little bit of a hard time understanding what the definition of imminent is?

So, are we talking of something that's 180 days down that is ultimately going to be in the TRS?

Is there a migrations as you're having a loan go from a non-performing to a re-performing status, does it move out of the TRS, and just so we can understand some of the ebbs and flows?

The question that you just asked is sort of the holy grail in terms of tax interpretation and tax positions.

So we work closely with external tax advisers council and accountants to help us determine an appropriate definition of imminent that's compliant with the tax requirements, but isn't resulting in unnecessary amounts of tax expense.

The slide that you guys had with the returns from the correspondent business, I think it was roughly 10 to 30 basis points, and looked like it was on an after tax basis because it goes into the TRS.

It's on slide nine.

And I'm kind of curious what should we use as the gross up.

And what are you guys currently seeing in the market and kind of on a gross pre-tax basis to think about gain on sale, because I would have expected a little bit larger numbers there?

But maybe I'm missing something.

Yes, it is true that the market is very vibrant at the moment because of the high level of refinance.

And we try to provide a targeted unlevered return that was, let's say, more normal over a long period of time.

But it is the case that higher -- that one might look at this and see that the market is operated at higher levels of margin.

I think it's pretty -- it pretty much captures what long-term one would expect that market to operate in a normal market absent of the type of high volume of -- we'll call streamlined type re-finances coming out of the GSEs.

I preferred to not to go through where margins are at a specific point in time, albeit I do agree with you that they are higher.

This question is a little bit more high level -- back here, Stan.

I'm wondering what your thoughts are around possibly internalizing the servicer or the manager?

Obviously, there's been some conjecture about that in the market already.

I'm wondering if you have any thoughts that you could add to what the pro's and con's might be from your perspective and now thoughts towards moving that direction?

We actually thought someone might that question.

Look, I think what we want to accomplish today is for our investors to understand the strength of the activities and what the capital means for in the market and the position that PMT is taking in the market.

And we obviously want our PMT investors to understand the sophistication and development of the manager as well as the PennyMac loan services, the servicer and originator, because they are such a significant amount of value we think is there.

And we agree that there may be certain synergies that could occur in an internalization.

There's nothing that I have to, or that I'm capable of discussing on that topic, other than I think it's important for us that the very first thing is to understand what PMT is, and what the manager is, and sort of get beyond the point where we're thought of in the same context as two guys in a Bloomberg.

And so, I think when we get through this, I think probably your question will be even more burning.

But it is something that is worthy of further dialogue and to progress with as well.

So, thanks for the difficult question.

All right.

Can we -- we'll have plenty of time for follow on questions when you think of them at the end of each panel and at the end of the day.

So I'll call up our next panel and we'll get a little deeper into the distressed mortgage area.

I think there's a biological break going on as well.

There's bathrooms here and also towards the back as well.

(Break)

Okay, I think just about everyone's back.

So we'll begin again.

This panel makes up the distressed whole loan investment panel.

Again, what I'd like to have you take away from this is the intellect and the systems and the operations and the management devotion that we have committed to this area.

And we want you to have a full understanding of how this market works.

So we have a panel of the Company executives that are very involved in the progression of distressed mortgages.

Let me first introduce them.

And they'll be speaking to you from their roles as executives of the management company BCM or the servicer PLS.

So the first gentleman to my left is Andy Chang.

Andy heads up our business development activity.

He's actually been with me from the very beginning of PennyMac.

And he's responsible for sourcing investment opportunities and leading our corporate development activities.

Prior to joining PennyMac, Andy was a director at BlackRock and the leader in the advisory services practice, specializing in financial strategies and risk management for banks and mortgage companies.

So, a very significant Wall Street type experience.

Sitting next to him is Vandy Fartaj, who is a Chief Capital Markets Officer.

Vandy heads the Capital Markets Group, where he's responsible for all activities, including asset valuation, trading, hedging, and research as it relate to the acquisition new pools.

Prior to PennyMac, Vandy held a number of positions at Countrywide Securities Corporation, specializing in whole loan trading.

Vandy has completed hundreds of millions of dollars worth of loan trades in his career.

Brandon, who is next at the table, but not on my list, leads -- is the Managing Director of Portfolio Strategy.

Brandon leads our Portfolio Strategy and Marketing Group, a group which I consider highly specialized.

You're going to learn more about in this presentation, the very important part of our success in managing these complicated assets.

Brandon is responsible for the development of the models and strategy that drives decision making in loan resolution and the loan resolution process.

Brandon is a charter financial analyst, as well as a CPA.

Prior to joining PennyMac, he worked in gain on sale and hedging analytics for Countrywide secondary markets portfolio lending and Countrywide bank, and was prior to that, an auditor with Deloitte.

Sitting next to Brandon is Steve Bailey.

And Steve Bailey heads up our Servicing enterprise, and is responsible for directing PennyMac's loan servicing operations, including the implementation of methods and programs directed at improving the value of the loans that we've acquired.

Prior to joining PennyMac, Steve was the mortgage servicing director at Bank of America, where he was responsible for over 14 million loans valued at over $2 trillion and debt outstanding.

He is clearly the most experienced servicing person in the world.

Sitting at the far end of the table is our gregarious Dan Perotti, Managing Director of Financial Analysis and Valuation.

So, along with financial forecasting and budgeting, Dan is responsible for the valuation of loans and other financial instruments held in the portfolio and managed by PennyMac, as well as in charge of research of modeling and methods and historical mortgage performance.

Prior to joining PennyMac, Dan was a vice president as BlackRock and head of quantitative research team with BlackRock Solutions.

Though the illustrious panel will begin with Andy Chang, who will start with a primer on distressed home loans.

Thank you.

Thank you, Stan.

As we have touched on throughout the morning, and you have seen through PMT's investing activities, the opportunity in legacy mortgage assets is substantial.

There are more than $10 trillion in residential mortgages outstanding in the US.

The majority of these assets sit inside securitizations.

Although these legacy securitizations are not our focus, we're seeing situations where problem portfolios need to be moved, and there's some interesting opportunities to invest the mortgage servicing rights.

But PennyMac's predominant focus is whole loans.

As the pie chart on the left shows, nearly one-third of the mortgages outstanding are non-agency whole loans.

These loans today are mostly held by the banks on their balance sheets.

We estimate that there are $420 billion of these loan that are either delinquent or in foreclosure.

That is they are non-performing loans.

We believe this is an attractive investment opportunity because there is a very large supply of non-performing loans and, as Stan mentioned, high barriers to entry.

There are a limited number of firms who can properly manage these loans.

So, why are the banks selling non-performing loans?

If we turn to slide 33, in or discussions, we hear a number of motivations from the banks to sell non-performing loans, which we have detailed on the slide.

Some banks are selling because they need to free up capital.

Non-performing loans get a 100% risk weight in bank regulatory calculations -- regulatory capital calculations.

They receive other punitive treatment in those regulatory capital calculations.

And so, by selling NPLs, banks can free up a significant amount of that risk capital.

Some banks are selling legacy loans because they're just simply operationally overwhelmed.

You are no doubt aware of the robo-signing issues that emerged last year.

The consent order that some of the large servicers are operating under; these are just examples of the issues that many servicers are facing.

And many servicers are simply unable to absorb additional loans in default or REO inventory, so they're looking to lessen that burden by selling the loans.

And then, we see several of the banks selling to try to move past their legacy mortgage exposures and get their shareholders and the regulators to focus on the new business model.

Not all banks are selling for the same reasons, but you add this all together, and we see a significant motivation by the banks to continue selling non-performing loans.

So, as we turn to slide 34, this has resulted in a fairly regular flow of opportunities that we have seen that buy whole loans from the banks over the past couple years, and in 2011 in particular.

PCM, our manager, has on average reviewed over $1 billion of loans or approximately 5,000 loans each month.

We see some of these opportunities in an auction for a bid and comp type process.

We see others on an exclusive basis, as a result of the relationships that we have built with the banks and the reputation that we have developed for conducting clean transparent transactions.

There's a large flow of opportunities, but evaluating each of these whole loan pools requires significant expertise, systems and technical capabilities, which Vandy Fartaj will go over in much more detail.

The point is that as a manager, PCM, we have a unique ability to sift through all the opportunities that we see before we decide to pursue a pool that we may consider investing in.

So, what does one of these whole loan pools look like?

If you turn to slide 35, we have here a high level snapshot of one whole loan pool which we invested in last year.

We will be showing you this pool throughout the presentation as we go through all of functions of the investment management process.

You may have note some differences in the size of the pool, for example, as we take it through the due diligence process, or as we construct our pre-boarding plan for the final population that ultimately transfers to our services platform, but this is, I think, a good example of an investment that we've made that will take you through.

It's a pool of $445 million -- excuse me, 445 loans with an aggregate unpaid principal balance or face value of $107 million.

The aggregate of the properties at the time the loans were originated, which was about four or five years ago, was $141 million.

We estimate that the current value of the properties, which we established based on broker price opinions of quick sale values, which we then review and vet that the current value of the properties in aggregate is some $91 million.

And then for this pool, we purchased the pool at about $56 million.

That purchase price is a 52% -- reflects 52% of the unpaid principal balance.

You will see on the slide a few different percentage metrics for valuing the purchase price.

A lot of people ask us, how many cents on the dollar do you purchase the loan for?

We primarily focus on the 39% discount to the current quick sale value.

It's this discount that generates -- well it's this discount to our estimate of the current market value of the properties that generates the return on our investment.

If we sell the properties at the quick sale values, then, we will recoup that 39% discount minus the various costs that we incur, such as costs for fixing up the properties, taxes, and insurance on the property that we have to pay, realtor commissions, and so on.

If we think that it may take two or two and a half years on average to sell the properties in the pool, well then that gets us to an expected asset yield on an annualized basis in the teens.

So at a high level, that's a snapshot of one of these whole loan investment pools.

Turning to slide 36, one very attractive feature of an investment in a non-performing pool is that it generates a high level of cash flow.

This chart, it takes the profile of cash flows that we expect to receive over time on the $56 million investment in the pool.

Some of the loans are resolved in the first few months after we acquire the pool and that we transfer it to our servicing platform.

For example, through a negotiated short sale.

Some of the loan may take longer and may, for example, need to go through the foreclosure process before the property can be liquidated and sold.

The loans are at various stages in the process when we acquire them.

PennyMac works to steadily resolve all the loans in the pool at an appropriate investment return, and I think we talked a little bit about that earlier.

It is the focus of our Portfolio Strategy Group and our Servicing Group, which you'll here much more about from Brandon and Steve shortly, that's responsible for directing the strategy and executing on the resolution of each of these pools.

So that summarizes the whole loan strategy at a high level.

In order to execute on this strategy, we believe that there is only way to do it and deliver the appropriate results that you need.

If we turn to slide 37, you'll see how we approach this.

We think that you need to have and control a number of capabilities required in acquiring the loans, in managing the loan to their resolution and monetizing their value.

PennyMac is the only firm that possesses all of these capabilities that are required from end to end.

In each function, we have the management with the unique expertise and the right background to run these activities.

This approach is also incredibly resource intensive.

As Stan mentioned before, this is three guys in a Bloomberg terminal.

We have more than 350 employees today across the manager and servicer, and we are adding incremental staff all the time.

Our platform begins with our capital markets and due diligence groups.

Vandy leads a team of capital markets professionals with years of experience in analyzing and trading whole loan pools.

And we have systems and analytics that are specifically designed to value distressed portfolios like the ones we invest in at the loan level.

But the acquisition process doesn't stop with the capital markets analysis.

Unlike investing in mortgage-backed securities with whole loans, you have the ability to look at the individual loans and perform diligence on the loans.

We have an in-house due diligence group that reviews every pool of loans that we invest in.

They work with vendors and an in-house appraisal team that we have to establish the current value of the properties, which is critical in evaluating loans that were made in 2006 or 2007.

We vet the loan files and conduct thorough review of the loan files.

And we have the opportunity to kick out unacceptable loans out of the pool before we consummate an investment.

So, that's the loan acquisition process.

Once we acquire the loans, what do we do with them?

We have a Portfolio Strategy Group that is quite unique.

Portfolio strategy is a group that we built outside of the servicer.

It's headed by Brandon Ohnemus.

They're charged with using a quantitative approach to determine the highest value path for each loan, figuring out what's going to generate the highest investment return.

Portfolio Strategy is responsible for designing the programs that we employ, such as any loan modification programs that we have, our short sale and deed in lieu programs.

And Portfolio Strategy directs the activities of our servicing operation, which then implements and executes the strategy for each of the pools that we take on.

That Portfolio Strategy -- they work very closely with our servicing operation, PennyMac Loan Services, which is headed by Steve Bailey.

PennyMac Loan Services is a full scale mortgage loan servicer.

It conducts all the activities of primary servicing and special services for loan that are in default.

It is a high touch servicer.

We built it legacy free, especially designed for our investment vehicles as a dedicated platform built legacy free in 2008.

Beyond the servicing activities, one very unique feature is we are the only firm that has a loan origination group that we have built inside our servicer.

That is not typical for a mortgage company.

You're used to seeing a servicing operation that's built to support the origination function, but we've actually done it in reverse.

And we think that's critical to managing these types of distressed and troubled mortgage pools.

Why this is important?

Well, for many of our borrowers, we're able to refinance them into the expanded programs that are available through the GSEs or through the FHA.

That origination function is important for our modification and fulfillment activities.

We also have the opportunity to offer financing to facilitate the sale of REO Properties.

So, in all these ways, the origination capabilities are very important in managing distressed loans and are a unique complement to our servicing activities.

As I said, Steve will go into that in much more detail.

And, finally, on the slide we have are secondary marketing function.

Secondary marketing is responsible for the selling and securitizing of the newly originated loans.

Tom Rettinger, one of our managing directors that will go through that in greater detail later in the afternoon.

The point here is that we do not pursue liquidation for every loan.

We pursue multiple paths for each loan and have a considerable number of loans in these non-performing pools that we acquire, that we're able to rehabilitate and become re-performing.

Secondary marketing is a very critical function that allows us to provide an exit solution for these loans and have a monetization strategy for these loans.

So that's, again, an important capability that you may not think of in the distressed context, but it's critical to this end to end platform.

I hope that -- and so, this is just an over view of our operating platform.

As we proceed through the day, I hope you'll have an appreciation for the depth and the capabilities and the expertise and the uniqueness of the platform we have at PennyMac.

And with that, I will turn it over to Vandy, our Chief Capital Markets Officer of PCM to explain in greater detail how we acquire our whole loan investments.

Thank you, Andy, for highlighting the investment opportunity and legacy whole loan assets.

As Chief Capital Markets Officer of the Manager, I started in early 2008 near the founding of the Company.

Over the last four years, our organization has assembled a capital markets team of highly experienced professionals and trading sourcing and hedging of distressed and performing assets.

We're going to spend some time reviewing the loan acquisition process.

Before we get started, I want to reiterate that unlike bond trading activities, where you can bid assets off of readily available inventory lists that are shown out daily, the sourcing of whole loan portfolios is heavily dependent on important relationships that we have established with large money center banks and Wall Street institutions.

With our wealth of experience in working with many of these institutions, including our four years at PennyMac, and trading many billions of dollars on whole loans, we are able to experience preferential treatment with banks on Wall Street, and we see many unique investment opportunities.

There's a large barrier to entry and the distressed whole loan space.

And when we invest in whole loans, we have control over our assets.

Over the last two years, large sellers have gotten comfortable with the pricing of distressed whole loan assets.

Now instead of just selling to the highest bidder, sellers are carefully hand picking who they want to transact with.

PennyMac is one of the few institutions that has a clear long-term plan of operating in the mortgage space.

We are engaged in numerous activities with these institutions outside of trading distressed whole loans, including the use of a large financing facilities for both distressed loans and new origination agency government and jumbo loans.

We're also trading newly originated mortgages, and actively working to establish a securitization market for jumbo mortgages with these same institutions.

So, when these banks and Wall Street firms look to sell their distressed assets, they have a predisposition to transact with PennyMac, given the scope of activities that we have engaged with these institutions.

As Andy mentioned earlier, we are currently seeing approximately 1 billion to 2 billion in distressed whole loan opportunities every month, many of which are exclusive.

If you look at slide 38, you will see that the process starts with us receiving an offering memorandum and data tape that includes very specific information for every loan.

We spend about two to five days going through a very systematic and controlled process of cleaning up the data by obtaining missing information and running numerous data validations on the portfolio.

There is extensive communication with the selling entity to get the information that we need to review and ultimately value the portfolio in our model.

In addition to the loan data that is required to run our model, we also need to estimate the current home value for every loan utilizing broker price opinions and a review that is completed by licensed appraisers.

Lastly, we come up home price forecasts for the portfolio.

Once we have all the information to run our model, we do extensive analysis on the detailed cash flows that include pre-paid, default and loss information.

Once we have a clear picture of the portfolio and the value, the capital markets team determine that the portfolio meets the established risk and return requirement for our investment vehicles.

The attractive opportunities are presented to our investment committee, which includes Stan Kurland, David Spector, Dave Walker, Andy Chang, and myself.

The investment committee spends a tremendous amount of time reviewing the details of the portfolio, including loan information, valuation analysis, expected return on risk of the portfolio, and then establishes the terms of our bid for portfolios that the committee decides to pursue.

And this brings us to the next step of the process, which is transaction management.

Our pricing, due diligence, and transaction management process is very transparent and attractive for sellers.

We generally provide pricing on an individual loan basis at the time of the trade, and we conduct the transaction to the highest level of standard in our industry.

While many of our competitors are non-mortgage experts who do not typically offer transparency and consistency in the transaction process, we pride ourselves in our very professional process, knowing that this is as important of a consideration for the selling banks as pricing.

Generally speaking, we close transactions within 30 days, and we believe that we have some of the highest closing rates of the loan populations in the industry.

Let me emphasize a few things that our transaction management team does.

They're responsible for negotiating the representations and warranties and we receive from the seller, along with finalizing the purchase and sale, servicing, and bailment agreements.

In our due diligence process, we determine property values on every loan and validate loan information and review servicing comments for every loan.

We also remove the riskiest loans from our trades.

If you look at slide 39, you will see an example of an NPL investment pool summary.

This particular portfolio contained 445 loans or $107 million in assets by unpaid principal balance.

With the loans being four years seasoned, it would appear that they were the last Alt-A loans that were originated before the housing crisis.

Alt-A loans have some alternative form of documentation or credit layering.

You can see that the credit scored at origination was 676, so it is likely mostly Alt-A product.

We generally find it easier to work with Alt-A borrowers who are more credit savvy on our short sale strategies.

The weighted average loan to value for this pool at origination was 80%.

And now after a 35% decline in home prices, it is 130%.

If you look at the pie chart on the right, you will see that 35% of the loans are already in foreclosure with another 61% 90 days delinquent.

The chart below shows you that 76% of the borrowers are underwater on their mortgage.

Then, if we move to slide 40, you will see some additional loan attributes of the portfolio, including geography, property type, and original FICO scores.

Some of the attributes that we liked about this portfolio were the concentration of loan in California, Nevada, Florida and Arizona, where we have a consistent track record of liquidations and returns.

But since we do have a loan level model, we can price any loan to our required return regardless of the positive or negative attributes.

If you look at the pie chart below on the right, you will see that the portfolio had very little concentration of subprime loans, which were generally considered to have FICO scores of below 650.

And now, if you go to slide 41, you will see the results of our cash flow model analysis.

If you look at the upper left table, you will see that we looked at projected losses in various HPI scenarios that are primarily based on Mark Zandi's, Moody's, economy.com forecasts.

In our baseline scenario, we project 41% cumulative losses, 93% total defaults, and 44% severity for this portfolio.

In the table on the right, you will see prepayment projections, which include very little voluntary prepayment activity, 32% total CPR, and a two and a half year weighted average life.

The graphs below show you the distribution of speeds, loss severity, default, and loss over time.

And the table on the bottom of this page includes price given unlevered yield information.

In our baseline view, you will see that given our purchase price of 52% for this portfolio, we are projecting a 15% unlevered return to our model.

And when we stress our economic assumptions in home price forecasts to a severe recession scenario, you will see that the projected return to our model is still almost 10%, given our purchase price.

This scenario gives us the ability to have a very negative bias due to the uncertainty in the economy and housing in general.

On slide 42, we reference in greater detail the various economic scenarios.

Our extreme stress for our NPL investment opportunities consists of doubling our forecasted decline in home prices, and doubling the expected average life for the portfolio.

And generally speaking, the expected return to our model in this scenario is still positive.

Our trading desk reviews most investment opportunities in the mortgage space, including numerous mortgage bonds.

And we believe that NPLs consistently continued to represent the best unlevered investment opportunity in the mortgage space.

Next, if you move to slides 43 and 44, I will spend some time discussing our due diligence and closing process.

Once we win a pool, we have an extensive property value, compliance, collateral, fraud, servicing and credit review process.

We confirm estimated property values for every loan through reviewing broker price opinions, and having licensed appraisers review both a random and adverse sample selection of those BPOs.

We test all of our loans to make sure they comply with federal, state, and local laws.

We review notes, mortgages, assignment of mortgages, all associated riders and addendums and title insurance policies to ensure their enforceability.

All notes must be the original.

We review the assignment chain for every mortgage to ensure completeness.

In addition, we review collateral documents to ensure they are executed by the borrower.

An important aspect to analyzing NPLs is reviewing servicing comments to find information that could impede the resolution process.

If you can see the due diligence process for whole loans is very extensive, and in this regard, very different than bonds.

A lot of the work that we are doing is for Brandon to prepare for determining portfolio strategy, and Steve to prepare for the transfer of servicing.

If you move to slide 45, you will see that this is an extensive activity, and this does not include the ordering of BPOs, that is generally done by the seller from an improved BPO vendor.

In addition to the extensive due diligence work that we did in-house for this portfolio, we spent more than $75,000 in expenses for third party due diligence vendors.

And as a result of our due diligence work, we excluded approximately $10 million of risky loans from this portfolio prior to the settlement of the trade.

We acquire loans with certain assumptions for liquidations and performance without the benefit of a strategy for every loan and the value of our own captive servicer, that has the opportunity to enhance the returns of the portfolio by shortening timelines.

One of the benefits here at PennyMac is that we have a Portfolio Strategy Group that is responsible for all of the loan level quantitative analysis and best execution analysis for every loan.

This group is responsible for providing the tools that help drive our decision making process.

At this time, I would like to introduce to you Brandon Ohnemus, who is our Managing Director of Portfolio Strategy.

Thank you, Andy.

As Andy mentioned, my name is Brandon.

I manage the Portfolio Strategy and Marketing groups for PennyMac.

If you'll turn to slide 46, we have overview of our group.

So, PMT purchases many pools of loans that are comprised of borrowers who are troubled.

Each of them has a unique set of circumstances that has led them to their situation, and requires a flexible set of strategies to help them resolve their situation.

The purpose of my group is to create a bridge between Capital Markets and Servicing to ensure that the resolution strategy offered by Steve and the Servicing Group both provide meaningful solutions to borrowers, while at the same time, meeting the return objectives our investors and those projected by Vandy's group when pricing each pool.

To accomplish this, our group has developed a quantitative and structured framework that we use from making loan level decisions that help ensure that our investments are well managed.

So, how do we do it?

The foundation of our group's framework is a suite of models, programs, and marketing campaigns, that we developed that we intend to provide a path to resolution for each homeowner.

The resolution strategies that we developed are distributed to the operations of our company through proprietary technology that we have integrated into our core servicing and origination platforms.

We'll go into greater detail about this technology later in the presentation.

We work very closely with Steve Bailey and his loan servicing origination teams to both develop and administer this framework.

It's through this close relationship and collaboration with our in-house operations team that we can assure that our suite of programs offered are comprehensive, that they're put into effect efficiently and accurately, and that portfolio borrowers that we manage are provided a path of resolution in an expedient manner.

On the next slide, 47, we highlight one of the activities that provides a good example of how the operations of the Company, my strategy team, really comes together, and highlights some of the benefits of having both a strategy and a servicing team under one roof.

After we committed to purchase the pool but during the period of time before the pool actually boards our servicing system, my group undertakes an extensive amount of research to determine what activities have been attempted on the pool prior to the time that we begin servicing.

We use this research to assess exactly what activities have been attempted, potentially successfully or unsuccessfully to resolve the troubled loans.

And we use this research to create what we call a pre-boarding strategy.

The purpose of the pre-boarding strategy is to define an immediate course of action to all the loans, once they board our servicing platform.

For example, loans that have started a loss mitigation activity as the prior servicer but will transfer and process a not yet completed and move directly into our workflow pipelines.

In addition, these loans are flagged at our customer service software, so that at our initial point of contact with these borrowers, we have context.

When speaking with them, we can reassure them that the work they've done with their prior servicer will not be lost, and that we're aware that they are active in some sort of resolution.

In addition, we're able to avoid a lot of the rework that may come along with a servicing transfer.

For example, we do research to assess whether or not the requirements of HAMP have been satisfied prior to boarding, which eliminates us redoing this work, and is a substantial time savings.

By putting together this pre-boarding strategy, we are able to avoid many of the escalations and process interruptions and re-work that typically accompanies a servicing transfer.

It gives our servicing team a head start in managing the portfolio, and helps us reduce the overall time to resolution of the loans.

After each portfolio boards our system, it is in the hands of Steve's servicing team with the assistance of our distributed technology to work the portfolio and assign each a path of resolution.

The next slide outlines different areas of resolution and how our technology supports each one of these areas.

So it is at or during each of these activities that we resolve the loans in the portfolio management process that we have an opportunity to create value.

We make technology available to Steve's team at each one of these points to ensure that we maximize value at each opportunity.

The backbone of our technology is a system we call LENE, which stands for Loan Enhancement Normalization Engine.

LENE is a proprietary system rules engine and financial model that we use to apply our sets of rules and programs, and to calculate net present value for the many different alternatives we may offer.

LENE has the ability to incorporate information taken in many different parts of the Company, including home price forecasts, foreclosure timelines, property valuations, borrower financial information, prior servicing and HAMP activity, as well as the credit history of the borrower.

Where possible, these assumptions are aligned with those used in our pricing and our monthly valuation process to ensure consistency throughout the portfolio management process.

LENE applies all this information to our complex set of rules and investor guidelines to assign appropriate paths for each loan that takes into account the circumstances of the borrowers, as well as a return objective, and provides a customized solution to each borrower.

As you can see in the slide above, LENE then assigns each loan to one of many different paths.

Each of these paths is, again, supported by another piece of portfolio strategy technology that further assists each one of the groups whether it be modification, loan origination, or short sale in deed in lieu group, foreclosure, or REO and further specifying decisions and quantitatively driving the next step.

It's during, as I mentioned earlier, each one of these activities that we have the opportunity to either create or impair value.

So, these models have been integrated into the steps of each one of these processes to make sure that when we're evaluating borrowers for many of the different programs that may be eligible, looking at terms that may include debt forgiveness or rate reduction if it's a modification, relocation incentives in the instance of a short sale or deed in lieu, foreclosure bidding, cash for keys offers, or listing prices for REO, we're making all these decisions on a structured quantifiable, quantitative and value optimizing basis.

The next slide is an overview of our program waterfall.

This is a high level overview.

This is not a comprehensive list of all the solutions we make available, but what it is meant to display is that we have a variety of programs that span the type of borrowers that we deal with from non-performing to re-performing and performing.

The program set is designed to be complementary.

It provides meaningful solutions to borrowers, based on many different sets of circumstances and, again, are applied based on their ability to meet return objectives.

On the next slide, we go into a little more detail on some of our more recent and successful programs that we've implemented.

At the top is a program we call Realtor Assistance.

This is a program that we use to establish contacts with borrowers with whom we've not been able to reach using more traditional means of servicing, so direct mail or through phone solicitation campaigns.

This program has been used for the last 12 months.

It leverages a relationship with a national real estate broker.

We send agents to the homes of borrowers with packets of information from PennyMac.

And they're sent there to counsel them on their options for foreclosure avoidance.

In the last year, we've expanded the programs to include 17 states, which covers over 70% of our NPL portfolio.

And we've been able to reach out to and successfully re-engage 36%, and that number's growing each month, of borrowers who previously were not able to contact.

These are borrowers that were headed towards almost certain foreclosure.

We're now able to engage and sign up for some sort of loss mitigation activity that provides a better solution for the borrowers and better execution for PMT.

Another relative new program that's been referenced earlier is the FHA's negative equity refinance program.

This is one that we see will play a growing role of importance in the future, as both Vandy and David mentioned.

We are experiencing a much higher cure rate than we anticipated with our NPL portfolio, so that means that our pool of re-performing borrowers is growing.

The FHA negative equity program is a really lucrative solution for borrowers who are re-performing.

It allows them to refinance their homes at an LTV below 100, so they're able to reestablish a position of equity in the property.

It also gives them access to the current low rate environments at the same time.

This, while providing a great solution to borrowers, also creates a liquidation event for PMT.

So it's a very favorable outcome, much more so than a foreclosure, for example.

So, in sum, all of these strategies that the tools and models we've built, they are just one part of our portfolio management equation to complement the decision making tools, the infrastructure that my team's created.

Steve Bailey has built a very nimble and efficient loan servicing function.

It's through a joint vision that we share that we have designed a complete portfolio of management process.

And through our collaborations that the Operations and the Strategy groups have a very fluid and effective means of working together.

With that, I'll turn it over to Steve, who's going to run you through the loan origination servicing functions in more detail.

All right.

Thanks, Brandon.

So I want to take you through a few slides here that essentially gives you an overview of the servicing and retail operation, trying to give you a sense of a fully built out organization and various capabilities.

I want to expand on a few of those key capabilities, dive into a little bit of process detail on a couple of key areas, and share some of the successes we've been able to achieve along the way.

So on page 51, I'm going to describe a few of these unique capabilities and some of the unique programs.

First, there's a dedicated high touch operation.

So this is a specialty servicing operation.

It has experienced management and support teams designed to maximize the value of loans to investors.

I'll talk a little bit about the experience of the management team in-depth in just a minute.

We also, you should have picked up by now, we've mentioned it several times, we have this unique portfolio strategy function with proprietary technology at its core.

It's used to determine the best approach for each loan and sets the direction for the servicer's activities.

I'd like to view this as it's really a capital markets or an investor perspective that is input into the servicing team right at the desktop level to keep the balance between the activities that the servicers are driven, whether that's borrower influenced or compliance influenced balanced back with how did an investor view the best decision to be at this moment in time on this exact loan.

And as Brandon pointed out, we accomplish that through models that are in various places throughout the servicing process and programs that we've developed and in a lot of routines in partnership between the two teams.

The third point, we have integrated national lender, that's dedicated to the service needs of the portfolio.

I think Andy has spent some time on this.

This includes facilitating REO and short sale transactions as well as recapturing runoffs and refinancing troubled loans, especially through the negative equity program that Brandon just went through.

This is a very important distinction.

As Andy pointed out, most often you will see servicing teams that are set up to support an origination function.

And in this case, we've set it up in reverse, where you have a retail team that's dedicated to optimize these different opportunities.

I'll go through a little bit more of that in a minute, too.

And we also have a dedicated technology team that provides unique solutions.

Technology has always been important to servicing shops.

It is especially important today.

Part of that is around making sure there's consistency and preciseness in decisions.

If those are driven by technology, rather than manual processes, they're more likely to be accurate.

But also, to drive efficiency where that is a sensible thing to do.

Certainly things like printing out documents or in making decisions through models is more efficient than people using calculators or spreadsheets.

Some of the unique programs -- we use a strategic single point of contact that is a decision maker.

So in short sales, we'll use the negotiator as the single point of contact.

In modifications, we'll use the underwriter as a single point of contact.

This avoids a lot of the trouble that we see other servicers going through, where they have a less informed or a less trained or a less empowered person making contact with customers, leads to a lot of runaround on which document you're looking for, or whether or not an offer is an acceptable offer.

We find that this is a more efficient process as well as leading to better customer experience and a better investor execution.

We have a unique outreach program that Brandon went through, where we used these local trained realtors to make contact.

We've had fantastic success with that.

Brandon referenced the 36% contact.

I'll make clear that is on dead files deep in foreclosure with people who haven't responded to anything prior to this.

So you're getting nearly a third of those lifted up to make contact and actually walk through foreclosure alternatives with.

That is a key part of our process that actually leads us to what we think is a very impressive statistic that about 80% of the customers that are in foreclosure from these previously declared dead files, we actually make contact with, which is, again, very different from what we observe in other shops, where they'll see maybe a 50% contact rate.

We have distinctive programs that address borrowers' underlying ability or willingness to pay.

Brandon went through a lot of those programs already.

And it describes a few times, we have the integration of the portfolio strategy models into the desktop solutions.

I'll go through that a little bit more in detail in a few minutes.

On page 52, this is really just a functional organization picture that reflect the fully built out organization.

We have the loan resolution teams and the default in REO teams that report up through Mark Acosta.

And I'll show you an org chart in a minute.

The call center and non-default teams that report up through Tim Nicholson.

In the middle, we have an enterprise support team that is run by John Tone.

There is some uniqueness inside that enterprise support team that I'll go through in a minute.

Page 53 reflects the call center and non-default organization under Tim Nicholson.

The thing I wanted to point out on this page is the years of experience for these leaders.

And typically, in a company of our size, you won't find anything close to this level of experience.

And in each case, these leaders have spent not only a number of years of experience in their discipline, but also often across servicing in various disciplines.

And in each case, they spend a significant amount of time with growing organizations that service many, many more loans than what they're servicing now.

That gives us great confidence not only in their capability to do what's right, today and make good decisions today, but also to understand the right decisions that need to be made as you grow the portfolio to a significantly larger size.

In a lot of ways, we say, boy, if you went back to high school, would you do anything different?

In a lot of ways, if you had the knowledge you have now, you would.

In this case, a lot of these folks are going back in time in terms of the size that we are, they already understand good decisions and bad decisions that they made in the past related to growing a particular part of the servicing organization.

If you flip to page 54, you'll see Mark Acosta on this slide and his team, ranging from property resolution to REO and modification.

Again, significant experience in this space.

This is a place where it's especially important to have people who've been here before, who have relationships in the industry to make sure they're informed on best practices, to make sure they're informed on any kind of regulatory or investor changes that take place.

And we're very proud of this team that we have.

On page 55, this is John Tone's organization.

A couple of the things I want to point out under [Denise Sandoval] and [Jeanette Brodsky], we have very experienced people that are concerned with compliance implementation.

As much as we need to execute the plans that Brandon described are being laid out by the portfolio strategy function, it's critical that these things are done with full compliance in the process.

So the compliance activity that is happening at the moment involves significant amounts of change.

At the state level, at the federal level, you see Freddie and Fannie are constantly changing their process.

Now HAMP comes up with some kind of new change to their program or clarification to their program constantly.

It's critical that you maintain proper compliance on all these changes as you execute the results from the Portfolio Strategy team.

So we have these two teams that focus on implementing the various changes in that landscape.

And they worry about it every day.

We also have -- under Sandra, we have a dedicated policy and procedure function that is centralized.

It goes across the enterprise, also to make sure that as we make decisions and implement the various compliance changes, we might make strategic changes in our procedures, that those are well documented through technology at the desktop for all employees to make sure that they're following.

If you go to page 56, this is our retail production organization.

Scott Bridges leads this.

Again, the person with significant amount of experience, also experienced at scaling to a much larger potential.

You'll see the structure at basically a sales team and an operations team, again, the leaders here have significant amounts of experience.

On the left, you see under Ben, Grant and Matt, you see some dedicated teams to very specific programs that I'm going to go through here on the next page.

So if you turn to page 57, take you through how some of this all comes together.

If we look at the first function, the MSR portfolio refinancing, you go over to the integration area, this might start with the Portfolio Strategy Group looking at models and determining which loans would be right before refinance and would be a good execution to the customer and to the Company.

So they will run the models and plan the results into call center systems that then our customer service contacts team, when they receive a call, they will have embedded on their desktop a flag that says this particular loan is in the money for refinancing.

Then they can refer that through a special program over to our MSR portfolio refi team, who will take their best shot at trying to recap that rate.

And you can see our achievement, we're able to get around 35% recap of our pay ops through this teamwork, which is a very enviable number, I think, as far as the competition is concerned.

If you go down to the REO short sale purchase, you'll see the integration is even a little more complex and a little tired.

So I'll take the short sale portion of this.

So this would start with, again, the Portfolio Strategy team identifying an opportunity through the loan passing model that would place the fact that this loan is good for a short sale strategy and will indicate the incentive that we would offer to a customer to follow this.

The Portfolio Strategy team works with our marketing team to send out aggressive solicitation letters that actually indicate the amount that we're willing to pay, an amount that a customer service agent will also see.

So then a servicer might take that call.

They'll follow up specifically on the fact that that loan is eligible for a certain amount.

They'll follow scripting that we've built together to really clarify the opportunity that that person has.

They'll then send a lead over to our Retail group, if they should get an actual offer for our Retail group to pre-qualify a potential buyer.

That pre-qualification is of great value to the servicer, because we're determining which offer we might want to take.

And it leads us towards better offers or worse offers.

Then assuming that we make a connection, we can send a lead over to our Retail group to actually try to offer financing.

And we'll clarify the advantages should they choose financing.

One of the big advantages we see today is the speed in which our retail team is able to conclude that transaction.

That's critical both in REO and short sale transactions, because a lot of times, you'll see people are financing, they're doing it with a competitor who might be looking at two or three times the length of time or a lot of times those real estate agents, they'll have a lack of confidence in one of those lenders to close on time.

And they've built confidence in knowing that we will close on time.

So you can see how the pieces work together, integrated through the desktop and also through the design of these different programs.

On the negative equity piece, very similar, you'll have a lot of integration between the Port Strategy Group, the Servicing Group, and the Retail Group.

In this case, we'll work first likely on a modification using all these same tools to get a loan modified, but then after the modification, we'll use the engines again to clarify which of these modifications might lead to a good negative equity execution.

We'll start that discussion with the person actually while we're doing the modification and let them know of what the second step might be for them.

So if you put it together, you would have a modification involving a principle reduction through the PRA program, customer making on time payments being called and solicited to remind them of the importance of making on time payments to qualify for the negative equity refi, and then the execution of the negative equity refi on the end of that.

If you turn to page 58, I want to go into a little more detail on modifications.

First, I want to point out that modifications are a critical product to a servicer.

Number one, there's a lot of compliance surrounding the need to do appropriate modifications for appropriate customers.

It's critical that you meet all of your timelines and meet all of your obligations to review appropriately.

Second, though, beyond the modifications you're able to execute, it's important to come to specific conclusions in a timely manner so that you can set up follow on activities.

So for a customer who you're not able to give the modification to, you need to be able to document and clarify your decisions so that you can proceed in foreclosure in many cases.

A lot of times, foreclosures are contested and you find yourself in mediation.

If you have qualified, detailed documented decisions, you can communicate those to mediators.

And you have positive mediation results.

And the foreclosure process doesn't slow down as it might in other servicers.

Similar, it sets up a great conversation for you for people who are unable to achieve a modification.

It leads you to a more clear conversation with them about short sale and deeds in lieu, which we think we do very well.

On this page, it indicates some of the success we've had in modifications.

And the chart you see, it shows the percentage of time that PennyMac converts HAMP trials that are started into permanent modifications.

You can see that we stand out from the competition in the slide.

The second bullet on here indicates that the 60 day recidivism rate after six months is 7%.

That's well below the industry average.

I think some of that reflects the underwriting capabilities that we have.

You turn to page 59, it's a little bit more detail on modifications.

It shows how it flows essentially.

Some of the key things here to followers is the tight management we have tracking from all the lead sources to make sure you've optimized those lead sources into managing those that turn into actual templates.

And in modification processing, there's some key things here.

One of them I mentioned before, the single point of contact being an underwriter.

Our underwriters are very senior.

Most of them have origination experience, which we think is especially useful in some o f the cases that become more complicated.

We've developed an in-house modification tracking system that we think going forward will continue to help us as the rules change, and you need to quickly modify your process to maintain compliance and get good results.

A key thing that we find is trying to convert failed modifications into short sale successes.

Here, we think some of the keys are actively soliciting the fallout of modifications.

A lot of this comes from the models that Brandon's team puts together.

It's there at the desktop for us to discuss in detail.

We used some strong scripting that is very effective, targeted at people who believe they want a modification.

We've already gone through the process.

And if they stick with that perspective, they're likely to suffer foreclosure.

And use a very strong script to help them understand their exact situation.

And we find a lot of success in that script.

We do a lot of outbound solicitations for people in this situation.

And we have a strong incentive base.

Some of the successes on the modification process, I've already talked to some of these, I want to give you an idea.

There's 54% of our modifications involve some form of principle reduction.

It's very differentiating in the marketplace.

Also, it's key to point out we've had zero finding audits both from Fannie Mae and MHAC, the Treasury group that comes out.

And those are very rare for servicers to achieve.

If you go on to page 60, this details the process flow for short sales.

Again, very effective lead management is important.

Pointed out the realtor assistance program a few times on short sales and the processing.

Our dedicated single point of contact is the negotiator.

So similar to modifications.

You have a decision maker that's available that cuts through a lot of the borrower confusion and leads to a higher conversion rate.

We also have developed an in-house tracking system, as well as a web portal to facilitate the interaction with real estate agents and with customers.

When you have failure in short sales, it's also important to convert over to deeds in lieu.

And on the right side of this slide, we indicate some of the keys we think in that conversion.

In a lot of cases where you have somebody who's emotionally connected to putting their property up for sale, the gap between executing a short sale and a deed in lieu then for the customer is not very large, but it does take a dedicated person to explain to them the differences.

A lot of people aren't familiar with what a deed in lieu means.

It's important to have consistent communication.

The first bullet clarifies that we have the same person who they were walking through on the short sale walk them through the potential of a deed in lieu.

And in the second bullet, it indicates where we target them, especially where somebody's listed their property for sale, and either we've had no offer or we had an offer with a purchase that somehow fell out of escrow.

Those are ideal times to focus the same person that they're comfortable and familiar with into converting them into a deed in lieu to avoid the foreclosure with the extended timelines.

Some of the performance metrics here are listed.

The bottom two are key.

So the short sale deeds in lieu represent 53% of all of our default liquidations.

Deeds in lieu alone represent a quarter of the foreclosure alternatives that feature liquidation.

If you turn to page 61, this sums up to what we think is terrific performance.

In the bubble, you show the troubled loan resolutions that we've had for just the past six months.

And it shows that 70% of the time, we were able to resolve these troubled loans without involving an REO sale or a foreclosure sale -- a third party foreclosure sale.

And then, more than half of these foreclosure avoidance solutions keep borrowers in their home.

So, for a portfolio that's already been picked over by other servicers to the point that they deemed it dead and worthy to be sold at a discount, we think these are terrific results.

In the picture, you could say about a third of them go to REO sale, a third of them go to short sale, and a third of them are modified, which again, that means two-thirds of these are resolved without having to complete an REO sale, which we think is terrific.

We think we get to that solution is a blend of this unique ability to connect with people and find the customers, even though other people failed at that.

And then, the blend of all of these different programs, technology, leadership, the portfolio strategy, models, and intense measuring from an experienced management team.

With that, I'll turn it over to Dan for the next section.

Hi, everybody, I'm Dan Perotti.

As Stan mentioned a little while ago, I'm the Managing Director of Financial Analysis and Valuation here at PennyMac.

I've been at PennyMac for a little over three years.

And prior to that, worked at BlackRock Solutions with a particular focus on financial models and particularly mortgage models.

The financial analysis and valuation team consists of eight full time professionals, several with advanced degrees, and has two primary ongoing responsibilities.

The first is for corporate forecasting -- forecasting and budgeting.

And the second, which is more pertinent to the discussion today, is really the process and methodologies surrounding the valuation of financial instruments in our portfolios, as well as the projections and analysis of investment performance.

Just a couple of notes about the valuation team before I go into the process and governance of the valuation.

The valuation team is obviously independent from the Capital Markets Group.

So this is in correspondence with the best practices and governance and helps avoid any appearance of conflict that could occur with traders marking their own portfolios.

However, the valuation team works in close concert both and close physical, actual physical proximity with both the Capital Markets team and the Portfolio Strategy team.

And in order to ensure that the observations made by each team are shared amongst each other and help complete the feedback loop that will improve the performance of each of the groups.

So, for example, the analysis of the performance performed by the valuation team in my group allows capital markets to improve their assessments of investment opportunities and for Portfolio Strategy to improve their remediation strategy decisions, while market observations made and market color gathered by the capital markets team and information about the effectiveness of various strategies executed on the portfolio from Portfolio Strategy help to inform the projections and valuations that we perform.

The valuation process that we perform is expensive with various significant inputs that are updated on a monthly basis.

In addition to the updated data on each loan that we receive from the servicing group, current home prices, which can come either from direct observation such as brokerage price opinions or from indexing values, future home price projections, and interest rates are among the various variables that are used in the valuation and updated each month.

The continual update of these input variables in our fair value approach reduces the chance that reported performance is obscuring some kind of hidden tail risk in the investment portfolio, since all of the loans that have not yet been liquidated are marked based on their current attributes, including delinquency status and current and expected future values of the underlying properties.

Both the economic inputs, as well as the loan data inputs are validated extensively by my team for reasonableness and accuracy before running the valuation model in order to ensure the soundness of the results.

Once the data's been verified, the valuation team uses the same modeling tool as is used by capital markets in order to value our portfolios, and further utilizes that model and tool to decompose and attribute valuation changes to changes in each of the sets of input variables.

This additional analysis and surveillance provides explanatory information around the changes in valuation and is an important check on reasonableness, both for the valuation team and the group that governs the valuation process, and ultimately approves the valuations, the valuation committee.

I want to emphasize that the governance and controls around the valuations are expensive.

Both the valuation process itself and the governance, the associated governance process are subject to stocks, controls, and testing.

There are two monthly meetings of the valuation committee, which is regularly attended by everyone who's spoken thus far today, in addition to other people.

So Stan, David, Steve, Brandon, Vandy, the entire assortment of senior management with relation to the NPL portfolios.

At these meetings, the committee reviews all inputs and discusses any changes to the valuation model, and also reviews the valuation results and attribution before deciding whether to approve the valuation.

The valuation group also produces monthly reporting on all the surveillance and compares actual results to our model projections.

The valuation committee formally reviews the surveillance on a quarterly basis in order to ensure that the valuation and projection models are functioning correctly, and observe any changes in the model over the course of time.

So on the next slides, on slide 63, I will share with you a subset of these analyses that we do on a monthly basis, following the same NPL investment pool that both Vandy, Brandon, and Andy have reviewed prior to this.

Just as a point of clarity, the NPL portfolio that we're reviewing here was purchased across various of our investment vehicles, not exclusively in the REIT.

So this is just to clarify not exclusively at REIT investment.

So these graphs on page 63 show various cash flow and runoff metrics regarding the performance of the investment pool that we monitor on a monthly basis.

In this case, cumulative cash flows in the upper left, cumulative voluntary prepayments, cumulative defaults in loan sales, and cumulative losses.

You can see from these graphs the red bars represent our actual results.

The blue bars are the original model that we used at purchase.

The six month -- the purple bars, are the six month projection or prior projection -- the projection we had six months ago.

And then, the pink bars are what we are currently projecting as of August.

As you can see from these charts, from a cash flow and voluntary prepayment perspective, we've performed a bit better than we had originally projected, whereas defaults and cumulative losses up through August were slightly lower than what we had originally projected.

However, you'll also notice that in terms of the cumulative cash flows, and the defaults, the current projection over time becomes lower than what we had originally projected.

In order to explain why that's occurring for this pool, we'll move on to the next page, page 64, to examine some of the payoff metrics and portfolio performance metrics on a monthly basis.

Here, you can see the various prepayment rates and delinquency rates associated with the portfolio over time.

As you can see, the default rate for the portfolio has been slightly lower over the last couple months than we had originally projected, and is projected generally to be lower than our original projections over the short term future.

Part of the explanation of this is that the 60 plus delinquencies are significantly lower for this portfolio than we had originally projected, which speaking to the point that David made earlier in the day and several of Steve and Brandon, I think, have also pointed out, both from our collection activities with borrowers and modification activities, haven't been able to reduce the delinquency in this portfolio overall and create a larger chunk of performing loans than we had originally anticipated.

Moving on to page 65, to drill down a little bit further in terms of the performance of this pool and explain why this is occurring, you can see that our current to 30 roll rate, the rate at which loans go delinquent is significantly lower than what we had originally projected.

Similarly, the 30 to current roll rate loans curing back from being slightly delinquent is higher than what we'd originally projected, leading to a greater population of current loans.

On the other side of the spectrum in terms of deep delinquency, our 90 plus to foreclosure roll rate moving loans from deeply delinquent into the foreclosure process is fairly similar on average to what we had originally projected.

However, our foreclosure to REO roll rate is somewhat lower than what we had projected meeting, also contributing to the lower defaults.

The final page here on page -- the final slide on page 66 goes through some of how all of this plays out in terms of the financial performance.

So you can see for this pool of about $55.8 million in value, as we had originally purchased it, over the past year, has thrown off about $20 million in total cash flow net of servicing costs.

The bulk of that is from the liquidation proceeds, which is about $14.6 million.

However, moving to the box in the upper-right, which is a decomposition of the sources of profit on a monthly basis from the portfolio, you can see that the bulk of the profits here are in price returns.

This goes back to our fair value methodology, and some of the points that Anne had spoken about recently, where on a month to month basis, we are valuing the portfolio.

And as a loan moves through the liquidation process toward a final monetization event, its value will approach -- all other factors remaining constant, its value will approach what the actual monetization value ends up to be.

So overall, on a monthly basis, since the rest of these returns are measured as a change from whatever the prior month mark was, the bulk of -- you would expect the bulk of the returns to fall in terms of changes in price as loans move along toward towards liquidation and at the liquidation point only have a slight change from whatever the prior month mark was.

Similarly, for loans and going back to the loans that have re-performed and are current, which are significantly higher than what we had originally projected, given that those loans have become current and we would expect as they continue to perform, for those loans to eventually monetization at an our ability to recover a greater portion of the principal given the status of the loan, those loans will also increase in price, which will contribute to the overall return, price return of the portfolio.

That concludes the materials that I want to cover with you today.

Just to sum up a little bit our team is an independent valuation team.

So we operate separately from the capital markets team, and have extensive controls and governance around the entire valuation process.

But, a significant is part of a value that we add is feeding back these results and sharing these results with the rest of the professionals and groups who are involved in the NPL investment process in order to ensure that all of the findings that we have can contribute to better execution for each of these groups as we go on.

Okay.

Thank you, Dan.

Before we move on to question and answer period, I want to first emphasize for you the -- what you've seen in the management of distressed mortgage assets and how much capability and sophistication is involved from the initial understanding of the economics and the opportunity to how loans are sourced and how they're evaluated, valued in due diligenced for acquisition that we have a very unique, highly technical quantitative process for looking at what is the best path for a loan.

And that's provided in partnership with an excellent servicing operation that operationalizes the ability to go through these processes and to maximize the value and return from distressed mortgage assets.

Finally, we went through with Dan the valuation process.

And I think that we looked to provide as much clarity and understanding of our accounting process and talked about this earlier today that we believed at the beginning that fair market value methodology would produce the clearest result so that we could, as we were performing activities, that we're bringing loans closer to the liquidation event, we would be increasing the market value.

And that certainly how mortgages and large pools are valued.

Loans very close to liquidation obviously have a higher market value than a loan with the similar property value that might be several years from liquidation.

And so, the process of valuation and the independence and the governance over that initiative is critical so that we have meaningful financial statement and presentations, but it's also critical as Dan mentioned to provide a feedback loop to the entities that are using information about mortgages in our next investment or in how mortgages can be a better path through the process.

So, it is extensive.

It is an activity in the distressed mortgage deal that requires tremendous amount of expertise across all of these areas of mortgage banking and finance.

And I hope you have a sense of that.

And with that, I'll turn it to you all to ask any questions of the group.

Hi, Dan, I just wanted to ask on slide 66 -- when we look at that, so I guess the face value is 107 million and say we paid $56 million, so around $0.52 on the dollar.

Right.

And then where it says cash flows -- so, we got $20 million in cash flow and 50 million of liquidation proceeds.

I was just trying to understand of the 107 million of face, how much face would be represented in that -- in liquidated proceeds?

And then, just wondering, how does someone think about the mark on just sort of the rest of it?

Right.

So --

Even if it's more or less, I was just curious --

Yes, so I don't know offhand for this particular pool what the face exactly would be obviously.

So you would deduct out the principal payments at full liquidation proceeds.

And again, I don't specifically what the severity has been on this pool but --

Right.

-- I think on average, our pools have run somewhere around 40% to 50%.

So if you kind of -- around doubled that amount, I think from what the face reduction at this point would be something on the tune of $35 million.

So, you would have around $70 million left.

But again, I don't know offhand.

That would be my back of the envelope math.

Okay.

Okay, got it.

So it's like you paid sort of on a pro rata basis.

Like you paid 15 for the 30 at face, and you sort of got 20 out of it?

That might be the -- sort of the rough way to think of it?

15 for the 30 at face --

-- or sort of what you paid for it --

Yes, and -- you're saying at 52, and then you kind of --

Yes.

And then you sort of got 20 out of it in terms of total proceeds off the 15 of what you paid for it.

Could somewhat think of it that way?

I think that would be, right.

I think that would be pretty --

Like I know I'm just trying to --

Yes, yes.

I think that would be roughly back of the envelope.

Okay.

Questions for Vandy and Dan.

Vandy, could you talk a little bit about the dynamics of potential entry of large scale sellers?

There's a couple of big banks that haven't been large scale sellers yet.

Will we see that and what are the dynamics that will bring it about or not?

And, Dan, I'm curious about if we do see large scale selling commencing, and substantial addition of supply, to what extent will trade levels -- whole loan trade levels have an impact on your valuation models?

Sure.

Predominantly, the bulk of the products that we've seen over the last two years have been concentrated with two large money center banks selling their NPLs.

And, I think, going forward, there are particularly two institutions that are likely going to be very large sellers.

One of them has begun to start the process.

And I think they're probably closer to being more programmatic seller in the near future.

We've been having active discussions with them.

And the other entity is probably at least 90 days away.

And they're kind of laying the ground work for setting up their -- I guess you could call it NPL loan sale program.

Both institutions have a fairly large supply of distressed legacy loans on their balance sheet.

And I think they're both going to be pretty active participants in the space.

In terms of how that would impact the valuation, if there -- if there were a significant increase in supply and that did have the effect of driving down the prices that we see in the marketplace, that is a factor that we would take into account in the valuation.

As I mentioned, we, work closely with the capital markets team.

Part of that is observing the trades that are going on in the market to see if there's a significant shift in effectively the return or the pricing that's going on in the market for similar NPL assets.

So, to the extent that there was enough of an increase in supply to drive down prices that would result in -- that would flow into the valuation process and result in a decrease in prices in our portfolio.

Just to amplify a little bit on what Vandy was saying about a sellers, I think what we're seeing is that a lot of the banks are starting to just get to the realization of basically, the return on equity calculation for what does it mean for me to hold these assets.

You know, if they've marked them down, and they're looking at nonperforming loans touched on it a little bit with the higher risk weighting and again, you're looking at holding this asset very inefficiently at a high return.

And so, you kind of asked the question, I mean, why are they selling it to us at what's a double digit yield?

I think the different banks are at different points of that calculation.

And that's contributing in addition to some of the operational issues.

But we're seeing a broadening.

And I think the general theme is true that we're seeing a broadening of the universe of sellers.

And so, that gives us confidence around the -- sort of the pipeline of NPL opportunities that we see for a couple of years and potentially beyond.

In your NPL pool, for example, I think you have rejected 10 million face value of loans.

Could you talk about the process of rejecting those -- what the implications are for the purchase of a pool?

You know, if you let's say rejected 20 million face value, would that have jeopardize the deal, or does the seller end up holding on to those that you reject on an individual basis?

Or, do they sell them to someone else at a lower price?

How does that work?

Sure.

If you move to -- back to slides 43 and 44, you'll see some of the due diligence process that we perform.

It's around property value, compliance, collateral review, servicing record review, and credit review, and also fraud review.

The bulk of the loans that were excluded were likely as a result of collateral issues or compliance violations.

And sometimes, you do have certain loans that have properties that are just not --cannot be rehabbed, or may have environmental issues associated with them.

And we're very transparent in our process.

We are very clear in our communication with the selling entities as far as trade stipulations up front.

We disclose with them what we're going to be reviewing, what exactly our scope is, and the criteria for which we're going to be excluding loans.

So, we have yet to encounter a problem with regards to the selling entity being surprised about the loans that we're excluding from the trade.

Typically, I would say our experience has been a fallout rate of about anywhere between 5% and 15%.

And, generally speaking, seller completely agrees with our findings.

When you walk through that example, I think you said that the 15% return you came to was sort of before the value added of the servicing.

Can you talk about what type of extra return you get from the servicing value?

Sure.

So if you look at, let's see here, slide 41, you'll see that the projected weighted average life for this portfolio in our baseline scenario's about two and a half years.

And with some of the initiatives that both Brandon and Steve are a part of with regards to short sale, deed in lieu, or modification and refinance, you have the potential of shortening the timeline from two and a half years to maybe two years.

Sometimes if you're very successful, it could be a little bit inside that.

And, I think, the potential for pickup in projected return could be anywhere between 2% and 5%.

I just want to also emphasize that we can experience pickup in value, and at the same time, there may be negative influences on valuation that's coming from initiatives in the market, for example, foreclosure moratoriums that might otherwise be lengthening out timelines or HBI declining at a different rate than we had originally modeled.

So, I think it's fair to say that we can accelerate timelines and produce higher value.

There are also other things that occur in the economy that we're not in control of.

And so, it is good to have the potential for advancing or improving value.

And I think it's -- partly should be viewed as protective activity that we have available to us.

Hi.

The 26% of loans that you modify, what percentage of these do you ultimately retain?

What are the default rates that you're assuming?

And how does that compare to actual experience?

And then, on the 9% of loans that are just reinstated, what are you doing to get that number?

And again, are you retaining those loans?

And what kind of re-default rates do you expect out of that?

So in terms of the loans that are modified, they're all retained.

Brandon can speak better as to what the expected re-defaults rates are, but in terms of the actual re-default rates, they're better than what I would have expected.

If you look at especially the HAMP book, it's the one statistic that we pointed out, where the -- after six months we're at 7% in the industry is a little over 10%.

So those re-default rates are better than what we would have expected.

The majority of our modifications are in some -- one of the HAMP programs.

In terms of the loans that fully reinstate, a lot of that is, as we described, clarification with customers.

A lot of the customers we get from some institutions have been in some form of new modification inventory for an extremely extended period.

And so, they're not paying.

They're not cash flowing.

Some of them are making what they thought were trial payments, but they aren't realistic payments.

So bring that decision to conclusion, and to officially reject their modification, and clarify to them that their next best solution would be short sale, brings some of those issues to a boiling point.

And some of those customers then on their own will come current.

Other ones just in making contact, we have found in the realtor assistance program that we've described that having someone show up at their house, I want to clarify, it's a realtor.

So it's a very friendly face.

It's a person who's trying to build a relationship to the extent that if they are able to procure deed in lieu or a short sale that they might participate as the agent in that transaction.

So it's a very friendly connection, sometimes just the person showing up as the house has caused the person to fully cure.

So, in general, it's a combination of just activity on that loan.

So finding creative ways to make contact, being clear about what their options are, and actually completing modifications on a lot of these things are really the techniques that we're using to get these.

Yes.

Steve mentioned most of the modifications we complete at this point in time are done using the HAMP program.

So when using that program, the NPV engine that is used to evaluate the loans is one that's hosted by Fannie Mae.

So in performing those mods, we are essentially using the re-default assumptions that are embedded within the Fannie Mae model.

We, in addition to the standard HAMP program, we also offer the HAMP principal reduction program, which we implemented specifically because we expect lower recidivism rates to accompany the principal reduction in those particular mods.

With reference to the reinstatements, I can't say offhand what the re-default rate has been.

I expect it to be somewhat minimal in that we have -- we promote the FHA negative equity program very heavily during and after the reinstatement process, so the borrowers who are underwater are aware that they've got resolution available to them that will allow them to get out from underneath what is potentially an underwater loan.

So with kind of the aggressive use of that program, I think that re-performance rates for our reinstated loans will be fairly high.

So if I understand it right, if your actual re-default rates are much better, do you eventually factor that into your decision tree and path that you take these people down to generate the highest IRRs?

Absolutely, yes.

So when -- for example, when we evaluated whether or not to include HAMP's principal reduction program, a proprietary principal reduction program, or some of the in-house mods that we do that reinstate borrowers, those factors are taking into account the likelihood of a refinance.

Can you eventually get these loans off your books by selling them after a period time?

Can you --

Yes, no, absolutely, that's the, I think, again, beauty of the operations that we have two paths for loans.

One is ultimate resolution, which is going to deal with a short sale or deed in lieu or foreclosure and sale of the property, but where we're able to bring a borrower current, they're the perfect candidate for FHA negative equity loan.

And once that is accomplished, this is basically takes at least six months of nice current steady payments.

We can offer additional principal, forgiveness.

Remember, we purchased the loan at a significant discount.

Bring the borrower close to what is 100% LTV mortgage.

And then, those will -- they're securitized in Ginnie Mae pools.

And so, and so that is the liquidation event.

I think if we all had our choice, we would like every loan to go down that path, but there are just so many different circumstances that that doesn't happen.

But it is one of the potentials that we have.

And I believe that over the course of the next several years, that a lot of modified loans will -- or re-performing loans will actually be offered for sale to enterprises that can go through the type of refinance process.

Sticking with the HAMP refinance program, the recent announcement by the administration to broaden that program, earlier this week or last week, do you expect that to have a meaningful impact on your pool of borrowers?

So the programs that were HAFA related are four loans that exist in Fannie and Freddie pools.

So -- which is not a really a large part of what PMT is engaged in at the moment.

It does -- PMT does have the ability to buy Fannie Mae service and portfolios and to involve itself in the refinancing of loans that are in those pools.

So, that's potential opportunity.

In general, for the marketplace, I think there's -- I think it's a very positive development.

I think it's going to put tremendous pressure on the market capacity for doing refinances, which again, is valuable for -- as it relates to PMT, because we have our captive origination activity.

So, we won't get caught up in the slowdowns that would otherwise slow down our initiatives with our own portfolio.

It is probably going to -- because of the larger volume of activity in the market, and the anticipation that's going to widen out spreads on new loan originations.

And so, that is something that affects our correspondent lending activity, which we're going to get much more deeply into, but some of the loans coming through the HAFA refinance program will be available for sale through and purchased by our Correspondent Lending Group.

Sorry.

I just wanted to clarify that [is] the HARP program for Fannie Mae.

This morning's program has been very helpful to understand how complex this business is really is.

And to the degree that your intent was to differentiate yourself between two guys in Bloomberg, consider yourselves having a successful day.

I guess what I would really like you to address is that -- because this business is so specialist in nature in terms of doing it well, what's the competitive dynamic that you're witnessing today?

Are you seeing others that are becoming more active?

Can you give us some sense as to who some of the other competitors that you see coming through more frequently than others?

And can you give us a sense as to of those -- of the acquisitions that you're making today, how many of those are more relationship driven versus competitive bid situations, please?

Sure.

I think when we started out two years ago, you had a group of probably 20 to 25 buyers.

And you didn't really see the same consistent buyers emerge.

And generally, pools were trading to the best bid.

And what's developed over the last couple of years is -- as I was describing a little bit earlier, is this predisposition of these selling institutions to transact with entities that they have a broader relationship with, that are involved in other capital markets type activities.

And the environment today, while you still may have 20 bidders, the bulk of the pools that are being traded from the larger institutions are only being traded to anywhere between three and five institutions.

So it's really a handful that are dominating the market.

And, obviously, we're a part of that group.

I would say that even amongst that group of five, we are more unique, given that we have the wider array of businesses, including having our own servicer and originator and being approved with HAMP.

And I -- we've been able to enjoy a lot of the benefits associated with the relationship that we have with some of these larger institutions.

Yes, just to add to that a bit, I think Vandy brought this up earlier in his presentation, but the market has become a lot more mature since we started this two to three years ago.

And so, you have -- whether it's because of capital or whether it's because of the length of duration in this business, the group of three to five that Vandy speaks about, and like for example, (inaudible) is a big buyer.

But there's -- there's a group out that's managed to differentiate itself really to be able to buy product, to be able to close on that product.

And, I think, we each have little tweaks to the model.

I think as Vandy points out and as you pointed out, we feel ours is full end to end in the model.

But, I think, we continue to see the same people coming to the auctions.

Now we -- occasionally, we see some new bigger names try to come in, but we haven't really seen anybody kind of break into that 3% to 5% group.

I'd just add to that in terms of the ebb and flow of some of the people we see come and go.

You're right in saying that it's sort of centered around more specialist firms.

We have at different points seen some of the big private equity managers try to come in and use some of their dry powder to go after this space, but largely, we've seen that kind of come and go and go away.

I think it really speaks to the uniqueness of this.

And around some of what Vandy described around the transaction process and being transparent and not throwing a bit out there, and then trying to take out a bunch of loans, and sort of re-trade at settlement.

Some of that activity with the non specialist institutions sort of led those institutions to go away.

And it's sort of clustered around more specialist firms.

So, that's sort of reduced that type of a competition.

The other point I'd like to make is that, the types of opportunities similar to the example pool that we went through here, they tend to be larger portfolios call it in the hundreds of millions of dollars in face value.

Those are -- these are the types of opportunities that we seek to participate in.

There's a fair amount of activity that goes in smaller pools where we'll see more participants and where there's a lot more kind of competitive auction type activity that we tend not to focus as much on.

So, we think we have our strategy focused on these larger pools based on relationships with institutions where we've developed the relationships and reputation over time, that that is one that's proving to be successful for us.

You talked a lot about your capacity being well beyond where you are today, in terms of purchase power, in terms of servicing capabilities on the back end.

So, that would suggest that you're operating at a higher unit cost than you would expect to ultimately be your cost of operations as you grow.

Could you talk around that issue of costs?

That's a good point, [Fred].

We have developed a company that is for more than one season and we intend to grow.

And the manager has deployed significant resources and expense at building a team which is -- and can handle much greater quantity of activity.

So we are hoping as we distinguish ourselves and as more capital comes to the market, whether in the form of equity or debt that we can participate.

We are -- I think, our expenses are appropriate and in line with our activities.

There's no doubt that there's greater synergies by being larger.

But that is something that is, I think, a great value to PMT is that the manager is absorbing most of that kind of excess expense.

And that isn't to say that there isn't significant synergy benefits of growth that are also potentials at PMT directly.

I would add just a little bit on the servicing platform side, so some of our capacity to grow is borne out of our ability to staff quickly.

A lot of that comes from the fact that we have people that are senior managers that had broad staffs previously, that are very loyal to those individuals.

So, we're not paying extra for that capability of opening up opportunities for new employees that we could very quickly fill because of those past relationships.

So, there's actually no cost that we're bearing today that gives us that advantage.

Also on technology, we have either attached to technology solutions externally or internally that we've built that have been built for scale.

And, again, they're either already fully costed and paid for and already in the solution, or we're paying an appropriate amount for the deployment that we have today that actually lowers in cost over time, but we don't have to come up with brand new technology solutions.

So two of the key cost components aren't actually bearing costs for the potential capacity.

We just have the potential for it sitting there today.

Okay, we're doing pretty well on time.

Maybe if there's one more question, we'll take that, otherwise -- okay, one last question.

And then, we're going to -- we'll be going to lunch.

And I think you can -- there's an elevator to my left, and there's stairs to my right, but we're going down to the bottom level.

Generally speaking, what's the mix between exclusive and (inaudible) opportunities?

And has that trended over time?

And I guess a related question, it looks like back of the envelope, you guys purchased about 5% of what you reviewed?

Is that a fair hit rate?

You know, when we first started off two years ago, there really weren't very many exclusive opportunities -- it really varies month to month.

You know, there's some months where we don't see anything on an exclusive basis.

And there's some months where 50% of what we trade was -- or what we traded was we saw in an exclusive basis and accounted for 50% of the volume that was offered that month.

I would say right now, probably at least 25% of what we're purchasing is on an exclusive basis and, at times, it's been as high as 50%.

Not all of the pools that are presented actually trade.

That's right.

To an earlier point, well many are testing the market.

They don't like actual levels and don't trade the pools.

With that, we have people who are on the webcast.

We'll be rejoining you at about one o' clock.

Thank you.

(Break)

Well, welcome back from lunch.

We'll get started again.

I hope everybody enjoyed the Penny Pantry and the excellent lunch that was served.

So the next part of our day is going to be going through correspondent lending panel.

And, again, before I introduce the group, I want to go through with you what is it -- what are the requirements necessary to be a successful correspondent lender.

And so, I want you to know we've checked off these items.

First of all, you need an elite management team, highly experienced.

I'll be introducing that group to you in a few minutes.

You need a full scale technology platform.

As I mentioned, the manager, PCM, has spent a good part of this year and last year building core functionality to run a correspondent division.

You -- may not be obvious, but there are no off the shelf programs where you just decide you're going in to be a correspondent, and you can pick a system, you have to develop that system.

You have to have excellent product administration, top credit, and quality controls in place.

You're going to need an excellent and experienced secondary marketing group.

You have to have the appropriate relationships in the market with the GSEs, investors, bankers, that are going to support your operations.

And you have to have relationships and reputations with customers that will use our services as a correspondent.

We have checked off these items because we've put them together.

And we do have all of the pieces that are necessary to have begun the correspondent lending activities, as well as to ramp up those activities.

With me and on this panel today, I want to go through introductions.

Again, the individuals I'll be introducing are speaking on behalf of PCM and PLS, who provides the management and fulfillment services for PMT.

So Doug Jones to my left is our Chief Correspondent Lending Officer.

Doug leads our Correspondent Lending Group, and is responsible for all aspects of our correspondent lending activities, including production, operations, and counterparty management.

Prior to joining PennyMac, Doug served as the head of retail sales and institutional mortgage services for Bank of America.

And prior to that, we worked together for many years as he led the correspondent lending division at Countrywide.

Sitting next to Doug is Paul Szymanski, Managing Director of Warehouse Lending.

Paul heads the build out of our warehouse lending capabilities, as well as helps to manage the Company's correspondent customer relationships.

Prior to PennyMac, Paul worked with Doug at Bank of America, where he was the Senior Vice President of Warehouse Lending at BofA.

And I also know him from his Countrywide days.

To the left of Paul is Dave Walker, our Chief Credit Officer.

Dave is one of the original PennyMac'ers if you will, and came on -- as we started PennyMac.

He is responsible for credit and portfolio management activities, including due diligence, loan underwriting, and modification standards, and overseeing representation and warranty claims.

Prior to coming to PennyMac, Dave also worked with me and he was the Chief Lending Officer for Countrywide Bank.

And, finally, at the end of the table, is Tom Rettinger, who heads our secondary marketing activities, which includes trading, risk management, and pricing.

Prior to joining PennyMac, Tom owned a risk advisory firm focusing on mortgage risk management and valuation.

Prior to that, he was a Managing Director at Countrywide responsible for servicing valuations, hedging, pipeline risk management, and valuation of retained interests.

So, I've also worked with him for many years as well.

So a very distinguished, a very experienced team.

I'll turn it over to Doug.

Okay.

Thank you, Stan, and it's certainly a privilege to be here to present today at our investor day.

And before I get into the model itself in terms of CLG, as we call it, Correspondent Lending Group, I want to take just a couple slides and talk about the market and talk about just sort of the process of the market, so that we try to get everyone, I think, on common ground.

Some of you may know this, some of you may not.

So if we can go to slide 69, please?

Next slide.

The process that's currently in the market is you'll have mortgage banks ranging of all sizes, small, medium, large, capital bases, volume, et cetera, community banks, regional banks, builder, national builder subs, all originating mortgages.

And they will deal directly with the consumer.

They'll take the application.

They'll process the loan.

They'll underwrite the loan.

They'll get the appraisal.

They'll do all of the compliance and either approve and close, or deny credit.

So, that's kind of the origination process.

Then they have a need for an aggregator, correspondent lender for a variety of reasons.

First and foremost, is interest rate risk.

Most everyone on the left side does not want to take interest rate risk.

And at some point during the application process or pre-sale process, they will either pass that interest rate on to the aggregator in terms of locks and a variety of ways.

And Tom will talk about that in detail later in our presentation.

liquidity and capital.

So how do they replenish liquidity?

They sell the asset.

And most of them aren't set up, nor are they capitalized to retain servicing.

So thus, you have the relationship between the mortgage lender, the originator, and then the correspondent lender or/aggregator.

As a correspondent lender, we will take that interest rate risk.

We do have a desire for servicing, and we have ample liquidity to handle that process.

We might acquire a single loan at a time.

We might acquire in some kind of a structured, sometimes referred to as a bulk transaction, where we look at it in terms of how we will bid the product.

But the one thing that I think is important, every loan goes through loan level due diligence.

So the process around our due diligence, while I'll get in later in our presentation, is done at a loan level basis.

After we acquire the loan, Tom's group and others at PennyMac will pool and aggregate those loans, and he'll talk more in detail about that.

We then will securitize, sell to GSEs, or do some whole loan sales in the non-agency product.

And at some point, we believe securitization will come back in that market.

We then take the servicing out, retain that servicing.

And it goes into Steve Bailey's area.

So that's just a little bit of a layout of how the process currently works.

If we go to then to the next slide, page 70, this is just a little bit of current data on the correspondent market.

So historically, the correspondent market has been approximately 29%, 30%, 31%, 32% of the total origination market.

To the left of the slide is first half '10, first half of 2011.

And it just gives you relative size of the top five aggregators, which in those two years, were Bank of America, Wells Fargo, Citi, GMAC, or Allied Bank and JPMorgan Chase.

A couple things of note, as we look into 2012 is that there had been some migration in terms of the non, shall we say, money center banks plus Allied in terms of aggregation.

And then, with Bank America's recent announcement of a few weeks ago, where they will exit the correspondent channel, if you take the share that the bank had at that point in time, and apply it to what we believe if we use Fannie Mae's announcement of around $958 billion market for '12, 278, almost $300 billion of the correspondent.

So, that pushes about 67 billion into the marketplace.

Those numbers are also pre-HAMP announcement that came out about a week ago.

So we might be looking at a market size larger than the previously estimated 958 billion from Fannie Mae.

So, if you fundamentally look at that opportunity, that's what we see.

And, as David said, our current run rate's 140 million.

And we believe we can get to 1 billion a month sometime in '12.

You know, that's the pool that we're looking at.

So large markets, large opportunity.

And I think, growth and opportunity that's within reason, but clearly, we don't believe over the top.

So, we've defined the market now.

And let's talk about how we execute into that market.

I think you got a feel from the prior panel and hopefully we'll get the same feel from this panel that the mortgage process, if you will, very complex, fast paced, changing environment.

So when you look at the ability to execute, experience really important.

Discipline really important.

The ability to have done things in scale before we believe important.

And you can go through, and I'll go through just briefly, Patty Shumate, she was one of the original PennyMac'ers.

She spent time before at Freddie Mac.

Brings a great background to us.

And she has a lot of technical knowledge around the build out of the system of the process, and that a critical foundation for us.

Mike Quinn has run secondary before, and was with us at Countrywide Bank of America.

And he will run our products and pricing.

Jim Follette and Paul Szymanski both, I think, important.

To note, CPA backgrounds.

And, I think, one of the things that you learn in working with CPAs is they have a very disciplined, detailed thought process.

Really important around the marketplace today in terms of the demands on accuracy, process, and execution.

Jim runs all the fulfillment side, works very closely with Dave Walker's team in terms of the credit group.

Paul Szymanski handles the counterparty management for us, as well as the warehouse build out.

Sales is run by Kim Nichols in the west and then Abbie Tidmore in the east.

Both have in terms of MI background and/or warehouse commercial credit background, as well as many years experience in the industry.

So the fundamental model is to really build a process that protects and rewards the shareholder and the investor, and can motivate the customer at the same time.

You know, really important that our group understands that.

And we believe they do.

And it is that constant balance between shareholder needs, investor needs, and customer needs.

So if we go to page 72, I want to talk more about our model.

Just spent a fair amount of time on the management team.

And I think, again, in summary, having technical knowledge really important.

We work on that every day.

Knowledge is really important.

Being an expert in a complex process, really important.

And we hold the group to high expectations, and they've done a good job with that.

In translating that expertise around the complex, that's how we drive our model into sales in terms of relationships.

So if you look from the standpoint, I'm an independent mortgage bank.

I'm a community bank, a regional bank, builder owned sub, I'm pretty good at originating the mortgage, but I lack a lot of technical expertise.

They don't have the Dave Walkers, the Paul Szymanskis, the Tom Rettingers, et cetera.

They'll have good people, but they won't have someone generally at that level.

How we extract that expertise and plug it in to customers, we find that there's great value, and that when you can be consistent, and you can be transparent, and you can be a trusted, if we go back to that first slide, they originate and they need an aggregator to take that interest rate risk to take the asset out, to take the servicing out, and pay them a fair value for that transaction.

And when there is trust and technical knowledge built into that process, it really becomes less and less of a price driven process.

And we just -- we don't believe in letting it become that price driven process that you add value.

You give a competitive price.

Our customers need to make money.

We have certain return hurdles that we have to make.

And you drive that through that kind of a structure.

Client selection, probably one of the biggest demands of the marketplace today.

There's roughly 900 active correspondents in the market.

Today, we have around 70 approved -- we have no vision of approving 900.

So if we look in the sense of what kind of client profile are we looking at today?

One size, scope, capability.

It's hard, okay, when you're a small company to have proficiency expertise at all of these demands that the marketplace has upon the mortgage industry.

So you have to have some scale.

You have to be of some size to hire that type of expertise.

When we look at from the standpoint of going through, then that size of company.

So a little bit larger company to large companies.

Now what do we overlay?

First thing that we really look at, manufacturing quality.

And we define manufacturing quality is it -- how good are they at creating this 500 page document?

So, that's really what the average is.

So every mortgage loan that comes through has 500 pages.

And there's a lot of -- there's data, there's credit, there's appraisal, there's a compliance, there's collateral, a lot of information.

And it has to all comply to a variety of processes.

So how good are they at that?

And we measure that.

We monitor that, between Paul's group and Dave Walker's group.

And that's an important component of us being able to do business.

Profitable.

You know, you just -- you have to make money.

Okay, you have to be able to operate a company in a fashion that you can be successful.

Liquidity doesn't stay in today's market if customers lose money.

We can't stay in with customers if they lose money.

So, being able to run a successful operation, we have to make a profit.

Our customer has to make a profit in terms of return hurdles.

Management capabilities, how good are they?

You know, the disciplines around work flow, the disciplines around process, the disciplines around system, has very little to do with the historical mortgage industry.

It has a lot to do with how well you run a company.

So an important part of that process.

Responsible lending, responsible lending really is what is their business model?

Are they lending to consumers who can have the ability and the capacity to repay the debt.

Did they play, if you will, in the mainstream of Fannie, Freddie, FHA, jumbo guidelines and underwriting?

Or, are they fringe players?

Okay.

No appetite for the fringe.

Okay?

We want guys straight down the middle, that operate well within the boundaries.

Financial ability, not only just profitable, but do they have enough liquidity?

Do they have enough capital?

You know, running it on a shoe string doesn't work.

The other thing that's really important is they have a great CFO.

How good are -- what's the quality of their financial statements?

So, important part of it.

Compliance, things around loan officer licenses, loan officer comps, state licensing, Reg X, et cetera.

There's a lot of changes that over the last two to three years that have come in to the industry, and are they implementing those?

So as we get then down to the bottom, we believe our competitive advantage really sits in this kind of complex environment, having great technical knowledge.

Building a true relationship with our customer base, knowing the customer, really important.

Who are they?

How good are they?

How well do they operate?

You know, we're mortgage bankers, just like they are.

And we live the mortgage 24/7.

It's how we make our returns for our investors.

So, I think having that focus on the mortgage really important.

Another, I think, go forward important process is that we're a non bank.

Many community banks think about this, your community bank, regional bank, whatever.

Probably it's not in your best interest to potentially sell to money center banks so they can dive bomb your customer and cross sell them on products continuously.

So we know we'll get some lift in terms of we will buy servicing.

And we won't cross it all.

Credit cards, checking accounts, auto loans, et cetera.

So, that's another -- and it's just -- it's an ongoing model that puts the customer and the shareholder in common ground.

Okay?

So if we go then to page 73, we'll just walk through at a high level just sort of the process of how a loan goes through and some of the disciplines around our acquisition process.

So as I mentioned in earlier slide, we correspondent lenders will, our customers will, process, underwrite, close the loan.

They will at some point during that process price and lock the loan with PennyMac for delivery.

We take that loan, run it through our rules engines, to make sure that it meets our pricing and guideline structure, so that we don't have any loans that are out of sync or priced incorrectly.

It then comes in.

And we either upload the file, or we in some cases with certain customers today still will have to manually input that.

So, we have the loan in the system.

Then if you go across the kind of bottom blue line, it really falls into we segment work flow.

And the reason is that each one of these tend to be a specialty.

So when you're running work flows, and you're running several units through, whether you're doing $100 million or $1 billion, you have a lot of units coming through.

So, you want technical experts at what we call loan auditing, which is like 26 worksheets that go through and check a variety of issues on data, data integrity within the file.

Credit risk review, underwriting, appraisal review.

That gets segment out into Walker's world.

And we want experts on that segment of it.

The loan purchasing and compliance, again, if you do that every day in your process.

You're very, very good at it.

So the days of maybe where someone would do two or three or four of those functions.

That just isn't our model.

How this happens is just constant evolution of systems.

Systems are really important.

We have a very good baseline system.

We work every day to enhance improve that system as the market changes, as we find things, as we also want to change.

Once we've done our compliance and work on a file and diligence, we then get conditions in from customers if potentially they have to clear those loans.

We then wire and fund.

There's then a post purchase group that will take -- okay, thank you.

Sorry about that.

There's a post purchase group that will deal with follow up documents, and Dan, obviously, and then Dave Walker will be able to talk about quality control.

Okay?

Moving then to slide 74, please.

Just in kind of a full service partner in terms of the marketplace.

Here's our -- I'll say, our product offering.

It's pretty generic in a pretty generic marketplace.

We have conventional, which PMT is a Fannie Mae servicer.

PMT retains an investment in the MSR jumbo.

We are currently selling whole loans to third party buyers.

As securitization market returns, that clearly is in our plan to invest in the sub bonds, and then the MSRs,

On the [Govies], PMT currently earns a sourcing fee, and interest rev from that.

And then our final product, which will roll out in 2012, is warehouse lending.

The importance of warehouse lending really is kind of two-fold.

As we saw earlier, as a standalone business, it has very attractive returns.

It also has a very accretive process into of course planned lending group.

When you finance someone, and you buy from someone, by definition, you become a more important partner.

Secondly, you get a much cleaner credit perspective with that customer.

You just know more about them.

You're more engaged with them.

So from a -- kind of an earnings return standpoint, a credit standpoint, they're very, very good businesses and very synergistic in terms of correspondent marketplace.

So with that, I want to go into more detail around our developing warehouse lending business.

And I'm going to turn it over to Paul Szymanski.

Thanks, Doug.

As Doug mentioned, we are in the process of building out our warehouse lending business for PMT.

And Doug, one thing I would like to leave this group with, because we are in the future, and we are building is why is that important to our clients?

What are they advantages it is to us?

And then, also, where is our experience in that as well?

And then leave you with a little bit of our core credit principles as it relates around warehouse lending.

As Doug mentioned, correspondent are the warehouse lending business is a very important piece to our clients and correspondent.

It provides a source of liquidity, so they can close and fund that loan.

I think if you look at Doug's chart, it is that first piece of the puzzle in our clients.

They need to have a stable, reliable, and consistent source of liquidity.

Our client's value, once again, that stable reliability and consistent source of that liquidity.

Doug also talked about the unique opportunity facing correspondent today with some of the announcements of the large aggregators.

It is a unique opportunity wherein warehouse, we will be one of the only participants that have a warehouse lending business coupled with the correspondent aggregator.

And Doug mentioned again to have the importance of that, and I'll talk a little bit more about that.

On the experience front, PennyMac and the manager have created a very experienced team that has a proven track record in creating a large scale lending operation.

Not only creating it, but maintaining and operating that lending structure that really has gone and, I guess, the test of time.

The last 10 years -- particularly, the last three or four years have put a lot of stress on our industry and on our space.

And a lot of our experience and a lot of the principles that we have developed over the years as a management team, I guess, they have tested out and proved -- and proved out the proof of concept that we've been working on for quite some time.

Once again, we created experienced management team.

Also, Doug mentioned, we come with long, strong relationships with clients.

We wear long tenured relationships with clients.

Client selection, Doug talked about that.

And that really is very key to a very -- to a successful correspondent lending business, as well as a very successful warehouse lending business.

Client selection is absolutely key to the process.

And partnering with clients that Doug mentioned share all of our core values, once again, very important.

Also, Doug also touched upon this one as well.

We are mortgage bankers.

Each one of us at this table, each one of us in our teams are mortgage lenders.

We understand the origination process from the beginning.

A lot of us have been there and operated as clients.

We understand it.

Therefore, we can leverage that knowledge to the warehouse lending business, but also leverage that knowledge to the correspondent lending business.

So why is warehouse lending -- what are the advantages to PMT?

Well, first off, it does as Stan had a slide up earlier today, it does produce standalone economics of warehouse lending produce a favorable return.

The difference between what we can collect from our clients, and what we have to pay to our -- or what our cost of funds are does create a favorable return.

Secondarily, it is a safe and sound investment.

If we follow and rip through to some of our core principles that I'll talk to in a second, it has proven out to be a safe and sound investment.

Doug also mentioned when you couple that with the correspondent lending business, it's even better.

It's even safer.

It's even sounder.

Not only do we partner with that lender, but from a risk perspective, having knowledge into how that client originates a loan, we in essence are completing due diligence on our clients every day, transaction by transaction.

Very key to its safe and sound business.

The last thing, and this is where the third thing that Doug talks about, that synergy of the warehouse lending business and correspondent creates a very sticky relationship.

Not only do we have a better relationship with that client, where we may buy more loans, we know more about that client.

If we aren't buying loans from that client, we will ask ourselves why.

Why is that?

Where are we not aligning with that client?

Maybe we are not aligned.

So it does provide a nice insight into -- and that cohesive sticky relationship.

And then, lastly, it's an attractive REIT asset.

It represents lines of credit that is secured by mortgages, which are secured by real estate.

So it does provide a nice vehicle for PMT.

The next slide, just want to go through, once again, some of the overriding lending principles that we are using as we go through the build out.

It is a relationship model.

These principles all do follow a lot of the things that Doug talked about from the CLG relationship model perspective.

All these things also do support the safety and soundness that we talked about earlier.

Some people talk about the three C's of lending.

We have the five C's.

It's client selection, it's collateral, it's controlling the cash, the controls being systematic, and then all the covenant compliance features.

Once again, talked a lot about client selection.

That is, of all of them, the key attribute.

You do business with the right people, you're going to have a successful business.

Asset based lending, collateral lending, we get repaid from the liquidation of the collateral.

The more we know about the collateral, the more we have knowledge into that collateral, the more we protect that collateral against our advances.

Once again, the safer and soundness of that investment.

A core principle is which is a differentiator is we maintain a minimum cash reserve balance in addition to the normal haircuts.

Traditional warehouse facilities take a two, three, four five, point hair count at the loan level.

We'll do that, but in addition to that, we're going to require that each client maintain a minimum cash reserve balance at all times.

So as you wind out of the transaction, you're going to lose -- if there's risk, the riskiest loans will have the most amount of money attached to those loans.

Once, again, that's proven out.

And that proof of concept has been proven out as we've gone through the recent market disruptions.

Also, systematic curtailments or step-downs is you start with a 95 or 98 advance rate, that loan stays on the books for 30 days, 40 days.

Age usually means that's not good, something's wrong with that wound.

So we will take an automatic, systematic curtailment against that loan directly from that minimum cash reserve account.

I think Steve mentioned earlier about some of the things we've learned.

He went all the way back to high school.

I won't go back that far.

About 10 years when we started the warehouse lending business, one of the things, and I was working with Doug on this, that we were continually worrying about every day, did we have our people take that curtailment with our clients?

It was a worry that we had.

And every day, we would find our clients did a really good job of negotiating, installing with our -- so we built a system to take that automatic haircut, and then we'll call the clients.

Then we'll hear the story and make a business decision.

Once, again, proof of concept.

I see [Bruce] shaking his head over there.

That's for our clients, Bruce.

That wouldn't be for Bruce.

Wouldn't be for Bruce over there.

Once again, key piece and core principle of making this investment safe and sound.

Another core principle is around controlling the cash, controlling the cash at a loan level, not a borrowing base, at a loan level from when we wire the money out, to when we collect that money back from who's ever buying that loan.

Hopefully, it's Fannie Mac.

If it isn't, we're going to control and reconcile the cash from the outbound wire to the inbound wire at that loan level.

Once, again, a key control to make sure that the loans are matching up, and we're getting repaid from that in particular loan.

Talked about the systematic controls, once again, key component, Stan mentioned that there is not an off the shelf correspondent lending system.

That is true.

There happens to be a couple warehouse lending off the shelf systems.

However, they don't do all the things that we see here in some of our core principles.

So we are looking to build out and add to some of those off the shelf systems.

And lastly, yes, covenants do matter.

Compliance and covenants do matter.

And it's all around no surprises.

We set the covenants, set the triggers, so we can understand the parameters that each client should be operating in as it relates to their net worth, to their liquidity.

And then, once if they get close to tripping those triggers or covenants, we would really like communication as key.

So once again, no surprises.

I think Doug mentioned it as well.

We're in the process of building it out.

We hope and we'll have this go live by the middle of next year.

In addition, I do want to touch upon, and we talked a lot about Doug line of business activities that go on in correspondent lending, the activities that we'll go on in warehouse lending, all of those activities revolve and operate within a credit and risk framework that has been developed and is governed by a risk and credit group outside of the line of business.

Those activities and that credit group outside of the line of business, Dave Walker oversees that group.

And I think he's going to take it from here and describe our governance and risk culture at PennyMac.

Thanks, Paul, I appreciate that.

I want to take a few minutes to describe for you those key controls that we've built over the course of the last year, that ensure that the loans we do purchase through the correspondent channel meet the standards that PMT has established from the credit and operational perspective.

However, before I start with those controls, I want to -- I think it makes to review a couple of key controls that benefit all of the business activities at PMT.

First, we have a governance process.

It's comprised of a number of regularly scheduled meetings.

Two of those were mentioned this morning.

Vandy talked about the investment committee.

Dan talked about the valuation committee.

Those were the little bit heavier focus on the correspondent lending include the credit committee, the correspondent seller approval committee, and our compliance committees.

As you might imagine, these committees serve in a typical function, providing direction, help with prioritization.

And importantly, ensure that initiatives progress in a coordinated and organized manner.

The second general control that I want to talk about briefly is our internal audit process.

The internal audit process and plan for 2011 was based on a series of risk assessments that we completed across 42 different functional areas.

And in our nine different business areas, there were extensive interviews with senior managers to help scope the program, as well as results that we got back from [SOCs], USPAP and other external audits that were performed during the prior years.

The plan document described all of the audits that are scheduled for 2011 through 2013, as well as providing a history on those audits completed during the prior couple of years.

In terms of activities for 2011, with respect to our investment operations, we've got audits scheduled for the due diligence area underwriting, secondary marketing.

For the loan servicing and portfolio management activities, escrow administration, investor accounting, loan modifications, default management, and portfolio strategy, we'll have our first in the origination area, audit of correspondent lending this year, as well as mortgage compliance.

Okay, now for some of the controls specific to correspondent lending, the first control, which was on the top of page 77 is our seller approval process.

Both Doug and Paul talked about the importance of knowing who you're doing business with.

That's the exact purpose of this activity.

We want to know who the managers are, what their experience is.

We want to know about their controls around the manufacturing process.

We want to know about their financial strength in the event they are called on to repurchase a loan.

The first bullet point emphasizes some of the separation between the two areas.

I basically specify the requirements that Paul administers on a day to day basis.

And so, all the criteria come away from the division.

Paul administers.

He's been delegated authority to approve sellers with -- that meet all of our policy criteria.

If there's more than a single exception to policy, he discusses the approval with me.

In terms of the documentation that's available to the company, as well as to Paul and I, the third and fourth bullet points really talk about what that entails.

We require a seller approval form, which is essentially a bullet point summary of each of the key aspects of understanding the company.

It goes into the management, their experience.

It talks about their legal structure.

It talks about financial results, operational controls.

We summarize the results from their different reporting mechanisms, whether it's a mortgage score card that they've received from other approved lenders, whether it's their financial results, or their delinquency results either provided directly to us, or that we pick up through the HUD and FHA websites.

Finally, the last bullet point under seller approval gives you a flavor for the financial strength we're looking for at a minimum from our sellers.

It's generally around 2.5 million in net worth, leveraged less than 10 to one.

And liquidity, cash and other liquid assets, at about 30% of equity or tangible net work.

The second control is our loan purchase agreement.

This is the contractions documents, the contractual relationship that we have with each of the sellers.

From an organizational perspective, the contracts all have the same base form.

Any change that we might have to the base form is documented in an addendum.

This is a great simplifying structure with regard to quickly knowing your exact deal with a seller.

I should say that very few of the sellers that have been approved did have any exception to the standard form agreement.

One of the other aspects of the LPA that's quite valuable is that they've shortened up over the years.

And so, ours is about seven or eight pages.

It references the seller guide and which is quite extensive in terms of our rules and requirements.

What this does is it provides us some pretty handy mechanism for updating our relationship with sellers in response to make market changes, investor changes, or our own policy changes.

So we like that feature of the LPA quite a bit.

The LPA also makes it clear to people from the onset.

What -- the consequences of inappropriate conduct are.

So we -- it's clear to them violation of rep.

and warranty is going to result in repurchase.

Any material violation of the guide, we lay out the fact that if one of the first payments goes down three payments, or to a 90 day delinquency, that they'll be repurchasing the loan.

There's also protections around premium in there.

So to the extent any loan pays off in the first 120 days, we recapture our premium.

On the top of page 78, we talk about our product menu.

One of the benefits that we have at this point is a fairly limited product menu.

We offer agency fixed.

We offer 5/1 ARMs, the core FHA program, and a jumbo program.

You know, if you think about products in terms of investor amortization type term, we're probably around 15 products at this point.

By way of comparison and to provide you with some context, if you were to go back five, six years, major banks may have been offering well into the hundreds of products.

What these --you want to avoid an overly complex product menu.

You certainly want to meet the needs of the market, but excess complexity weakens controls at each stage of the origination or purchase process.

The next control that I think about is our underwriting guidelines.

They are generally very much consistent with those of Fannie and FHA.

There are certain restrictions or limitations we've imposed.

We think we've hit the sweet spot in terms of those restrictions, where there's some meaningful impact on forecast delinquency rates, and yet, not a punitive impact on volume.

I'll go through some of them that are up on this slide that are specific restrictions that we put in place.

And the first one deals with our approach to underwriting.

We only take into position loans that have cleared the automated underwriting processes that Fannie, FHA have put in place.

So there's no manual underwriting that we do here at PennyMac.

The next point that I'll talk about is we want to make sure borrowers can truly afford their payments.

We impose a cap on BTIs, both for conventional and FHA product for the conventional that caps at 50%.

For the FHA, it's at 55%.

And the DTI really refers, for those who may not know, to the relationship between total obligations, some mortgage installment revolving over adjustable gross income.

Another thing that we've done to I think prudently limit credit exposure is skinnied down the eligible property types.

We'll certainly do all of the main spring property types, single family attached, single family detached, condos, two to four units.

We're not doing the off (inaudible) run properties, condo hotels, working farms, things with acreage.

These are hard to appraise and will give rise to higher levels of delinquencies and potential repurchase requests.

To further reinforce the independence of underwriting and appraisal and Paul and Doug both mentioned, we've taken those and located the reporting relationship outside of the division.

The chief underwriter reports directly to me.

And from a staffing perspective, I think we're somewhat unique in that we've got an underwriting staff that has deep experience.

They basically all cut their teeth in a time period when everyone was underwriting full documentation loans.

So there's 15-plus years of experience with each of our underwriters.

Another thing that's a little bit unique about our staffing, when it comes to an appraisal review, we've got licensed appraisers as opposed to technicians or underwriters going over the appraisals.

On the top of page 79, it's one of our more important controls with respect to understanding each of the correspondent lenders.

We re-underwrite the first 20 loans delivered by each seller.

This review is a standard underwrite, which includes recalculation of income, obligations.

There's checks with regard to occupancy, employment.

We're, of course, reviewing the credit report completely.

Title's reviewed for appropriate vesting, lien position.

And I can't emphasize how important this is, because we don't necessarily know the sellers at every point in time in their history.

This gives us a complete view of what they're doing right now as they're beginning their relationship with us.

Once the first 20 loan sample is completed, we sit down as a group.

And that group would include myself, Doug, Paul, our head underwriter also.

And we discuss what we've seen with respect to the first 20 files.

And based on that discussion and review, we attach the individual sellers to an underwriting sample.

And that could range anywhere from 5%, 10%, 15%, 30% of the loans that we purchase go through a full underwrite, much like the one I described for the initial process.

The specific tier that they could attach to heavily influenced by the results of those first 20, also the seller's financial wherewithal.

I don't want to leave you with an impression that on the remainder of the loans, we're not doing a considerable amount of work to look at the loan files.

We are.

That's part of our pre-purchase review process.

And Doug mentioned that it's comprehensive process involving multiple checklists.

And it's -- doesn't maybe require the same judgment as an underwriting review, but it is very effective in terms of identifying inconsistencies in the loan file, whether the loans just don't meet eligibility requirements, or if the file's missing important information.

Some of these checks include the -- in a NAUS validation.

We require these on all -- we want to make sure that the information in the loan file is what got fed into the AUS, so that we've got a valid answer.

There's appraisal checks that get done on every loan.

We're running AVMs.

We're administering checklists.

Any failure in that process results in the loan going to the licensed appraiser to go through the appraisal in complete detail.

There are compliance checks that we run, state, local, federal, as well as the government high cost tests.

The last three bullet points on the page talk a little bit more about our ongoing monitoring activities of sellers.

One of the requirements that we've imposed is the sellers deliver a minimum 20 loans to us each quarter.

This gives us a constant read on what their origination quality is and ensures that there hasn't been a deterioration of in quality since we last saw them.

In addition, we maintain a watch list.

You know, the sellers are laced on the watch list at the discretion of the chief underwriter.

This is largely in the case of the single loan being identified as not meeting investor standards.

Once seller's on a watch list, the sample jumps to 100%.

If they're clean over the first 10, we'll reinstate a normal sample.

If they're not, we'll perhaps look at another 10, depending on what we see.

But in either case, by the time we're done with 20 loan files, we've got to sell her on the path.

They're either on a normal underwriting sample, there's a specific corrective action underway, or they're no longer with us.

Finally, we have a quality control process that I'm quite proud of.

The QC individuals are looking to ensure that the functions that are administered in the division, as well as by the underwriters in my area, are doing their job according to our standards.

They base their judgments on a sample of 10% of all loans that we purchase.

Those samples can be supplemented by requests from the division, as well as anything I may see or other members of senior management might see.

So at this point of the presentation, I'd like to turn things over to Tom.

Tom's responsible for many of the risk management activities completed by our secondary marketing group.

Thanks, Dave.

I'd just like to -- Stan indicated earlier and Dave just indicated I'm responsible for the pricing managing activity for PCM, which includes primarily the secondary marketing activity.

And also, the acquisition of mortgage servicing rights or MSRs.

Now over the past two years, we've been building out the framework for the secondary marketing group.

You know, it started with building pricing models, developing the risk framework to basically effectively manage the risk position as the loan transitions through from commitment to closed loans, then out to its ultimate exit.

But, as I'm sitting here kind of looking out here a year ago we put in our first trading floor at PennyMac.

So, quite proud of that.

And I'm sitting here looking at the number of people at -- in this trading floor.

And I look back to that day that we put the other one in.

And when they told me they were building a nine row, 72 seat trading floor, I'm like gosh, we're never going to fill this thing that quickly.

And sure enough, Stan and David pretty much, again, beat my expectation.

So, it's been a pleasure coming this far with these guys.

And -- but flipping to page 80, I did want to highlight that in order to be engaged in the secondary activity, it does take a high degree of skill and initiative to be successful.

And the core responsibilities of secondary marketing include, which are kind of highlighted on page 80, the providing the loan pricing for the Correspondent Lending Group, as Dave talked about 125 products, currently were 15, it does seem like there's more that are monitoring than 15, but we also do the bidding and purchasing of mortgage loans.

We determine the execution strategy and the hedging for the loans in the pipeline.

We optimize that execution, whether it's through MBS or cash deliveries.

We manage the relationships with the Street, with the broker-dealers and the investors on the loans.

We also manage the warehouse line facilities.

These are our own warehouse line facilities.

As you'll see on page 81 PennyMac's team, secondary marketing team, is deep in experience.

The leadership has over 68 years of experience.

And interaction, communication across the team is continual and provides cross leadership to the group.

You know, again, looking back a year ago, we were starting -- actually, it's almost two years ago when we were starting this now, there was three of us that started out on this adventure.

And if you can kind of appreciate the organization chart that we have here, that granted our volume is much more consistent today and much deeper than it was a year ago, but the framework that was built and now to have these individuals with such discipline and experience has been a tremendous growth.

Turning on to page 82, PennyMac's strategy to provide consistent loan pricing on a daily basis.

We utilize the formulaic and disciplined approach to developing our pricing.

Pricing includes all values and costs needed to meet the targeted return.

We could do -- continually monitor the markets in just pricing, if [it moves] to ensure that we're consistently priced to that margin.

You know, today, was a prime example with mortgages started out fairly off a little, and then ending the date down three-quarters of a point.

So price change during the day was much needed, so we can make sure that we're not adversely selected.

But let me walk you through some of the drivers that are considered as we develop our pricing.

And this is highlighted on page 83.

First, I just want to make a statement that we only price loans for markets exist for them -- getting back to the underwritten 125 products, we're only pricing about 15.

So clearly, 110 products no longer exist.

We need to make sure that we have an exit before we provide a price, otherwise we have obviously inventory that we can't sell.

And that's something that we do monitor very actively.

We have an age report that we monitor to make sure that we're getting our inventory turned appropriately and it's finding its liquidated home.

But starting with the revenue, we compare multiple execution strategies on the left side when determining the exit strategy for the loan.

This would include the standard MBS execution, where we retain more than the base in the form of excess servicing.

And, finally, we consider selling loans to Fannie Mae directly for cash.

And then, we would retain the servicing in all of those.

Another component of income would come from the spread or the net interest income earned between the funding and settlement dates of the loans that we acquire.

The net interest income would be impacted primarily by the note rate of the loan, the margin on the facility we have the loan on, and the level of one month LIBOR, which is typically the basis for the facility.

The final piece of revenue would be the value of the MSR that would be retained.

MSR values move inverse to mortgage prices.

And probably not a surprise to some of you.

But MSR values are impacted primarily by what the loan interest rate is, and how it relates to the current market.

The size of the loan, if we have a $50,000 loan, it's going to have a much different value than if we had a $200,000 loan primarily because when you're looking at servicing costs, relative to loan size, if you have a fixed servicing cost, the lower loan is going to have a higher relative cost than the higher loan value.

Also, consider geography.

Some states have a lower barrier to refinance than others, and have a population that's more apt to refi, just given their knowledge base or their availability of lenders in the area.

And then we also look at the credit profile, LTV, FICO, et cetera.

So just to give an example of the range of the servicing prices for a current coupon 30 year fixed mortgage, typically, the mortgage servicing strip is 25 basis points or a quarter point.

That value would range from anywhere from one to one and a half points.

And if you consider what the -- how it is expressed in the MSR world, that would be four to six mults.

So four mult to a six mult.

A mult or a multiple is calculated by taking the price divided by the servicing fee.

Turning now to the expense side, we'll start with the operating expense.

As you think about operating expense, there are three main drivers, First, operational capacity.

This addresses the scale and efficiency of a processing and purchasing the loans.

This is what Doug and Paul were talking about earlier and how they're building out their corresponding group.

At the operation is that the proper scale will lead to more efficiency.

The next is complexity of products.

Whether it's guidelines, investor requirements, or regulatory requirements, this is the 500 page loan document that Doug was talking about.

That's going to influence your cost on how you're going to go through underwriting and doing the compliance work around making sure it's good for -- good loan and it's saleable.

Finally, delivery options.

As loans take longer in the process, we look for opportunities to try and minimize delays through available execution and minimize the impact of settlement and timeliness.

So a time when volumes are higher, we may see some increased low cost, I'm using secondary language meaning that our trades are getting settlement maybe a couple days later than we would expect.

Next we'll move on to the hedge costs, which is measuring the option the borrower has to optimally close their loan.

I could probably spend about 20 minutes talking about what's optimal for a borrower and what -- how to calculate hedge costs.

But basically, if the borrower exercised their option correctly, when interest rates increase, the opposing percentage is at its highest.

And when interest rates fall, it would be at its lowest.

So and then we want to talk about margin.

You know, as Stan indicated earlier, the margin can range from about 12 basis points or 35 basis points, depending on market conditions.

And that's basically also influenced by supply and demand that we see in the market and liquidity for that particular loan product.

So using these revenues, expenses, margins, we arrive at the price that we'll pay for the loan.

As you purchase loans, we sell forward into the MBS market as a hedge.

So moving on to page 84, you could see that PCM has deep experience in executing trades and hedge strategies.

PennyMac executes primarily with dealers, such as Credit Suisse, Barclays Capital, Citibank, Bank of America, Merrill Lynch, Cantor Fitzgerald, and we also with Bank of New York Mellon.

Senior management's consistent review of the net hedge position leads to agreement on the trading strategy.

Strategies are based on market movements and require the continual discipline monitoring of markets and the level of new loan activity.

PennyMac uses a sophisticated model to develop its risk profile, which incorporates changes in closing ratios and market prices.

Models and market based assumptions are monitored and updated on a regular basis.

To expand further on the hedge position, let's turn to page 85.

As I stated earlier, the committed pipeline is primarily impacted by the value of the borrower's option to close the loan.

Hence, the name best efforts.

The value of the closed loan varies directly with the movement of mortgage prices and available delivery options for specified delivery.

So the only risk that we have on the closed loan side is really is just that.

It's just the interest rate risk and the timing to delivery.

We currently utilize forward mortgage TBA sales and options on TBAs.

The options on mortgage TBAs are used to essentially buy back the option that we provided the borrower to close their loan.

The option book would directly correlate to the level of hedge costs considered in the pricing build out.

So we're tying back to that when we built the price, we actually charge a hedge cost for giving that option to the borrower to basically have the option to close or not close.

Now if we look at the type of transaction, whether it's a purchase loan or a refinance activity, the purchase loan, the option, has a lower value for the borrower, given if they're within two week of closing or a week of closing, their ability to efficiently exercise that option goes down because now they have a commitment to purchase that's on the other side of that purchase the house.

Whereas the refi activity, you would have a higher hedge cost than you would for purchase, just given that it is more of an optional closing, given the movement in rates.

So finally, on page 86, secondary manages the warehouse lines, which are in the form of whole loan repurchase agreements.

We communicate daily with our Treasury Department on the funding schedule and why are transfer needs for the loan purchase activity?

Maurice Watkins leads this process for us at PennyMac.

It's a very disciplined and defined process that he follows.

PMT currently has a facility with Credit Suisse, and is in the process of closing another facility with another Wall Street dealer.

So as you can see, a successful secondary marketing operation manages not only interest rate risk, but is very operationally intensive.

The team we have in place, the experience required to serve the growing needs of the Correspondent Lending Group.

You know, at this point, I'd like to turn the presentation back over to Stan, so he can provide any closing remarks.

Thanks.

Okay.

Thanks, guys.

So you have a, I hope, a little bit greater knowledge of the correspondent lending practice from we coordinate with customers to the activities of ultimately providing warehouse alliance facilities to create that sticky relationship with our customers and really another lever in terms of the returns from engaging in the activities with these correspondent lenders.

I hope you have a sense of the quality of commitment that we have to control and governance and process and systems that are involved and the kind of background and experience that we have in the overall arena or mortgage banking that makes it appropriate for us to lead in this area for PMT.

Finally, as it relates to secondary, the marketing activities, it's another complexity and barrier to being able to operate in this business and to operate in scale.

Again, not only great leadership here in terms of --Tom and his area and Vandy who are managing the interest rate risk profile, and making sure we have best execution on securitization.

It is an area where David Spector has spent a good deal of his career leading major efforts in secondary marketing.

So we are very comfortable and we're very excited about the build out of the Correspondent Lending Group.

And it is as we talked about earlier, those activities are ramping up very nicely.

With that, I'd like to open up Q&A for the correspondent lending panel.

After that, we'll take some time for more corporate wide Q&A.

I'll ask my colleagues to come up and join, so that they can answer the difficult questions.

And then, after that, we're going to do a tour.

And we will after the Q&A session say goodbye to those who manage to stay on the webcast this long.

So questions for the panel?

Thanks.

Good afternoon.

You know, I'm struck by the similarity of this correspondent motto with some of the legacy models that I've seen out there with some nice enhancements.

Obviously, you've got a depth of management that's probably second to none out there, even at some of the bigger banks.

So you put together a very nice organization from that perspective.

I guess if I think historically through this business, it's always been about product, price and service.

And in today's market, it probably is quite a bit easier to sell on any one of those points, just because there are big banks retrenching and the like.

But I'd like to know how you think about this being sustained over a longer period of time, when competition may come back in, how you think about really kind of levering your particular expertise to win in the marketplace?

Doug, yes.

Yes, I think we -- when you look at the future, it's hard to see any of the demands around the process quality, data, all the things that I think you heard probably a pretty common theme on any of that changing.

So I think, if you look at what creates that technical expertise systems process, discipline.

And, I'm pretty comfortable we're going to be very competitive in that arena.

I'd let Stan, if he wants to talk to capital or anything to that degree, but I think in terms of the process and how we deliver it, and how we execute it.

You know, and I think a big advantage that we have is that we do this 24/7.

It isn't just a product that sits in a big bank that is part of some -- and so there's just a difference when you live something every day 24/7.

And I like our chances to compete very, very well in that market.

You know, just from a broader perspective in the marketplace, you talked earlier about the fact that the market is highly concentrated in the five mega banks.

And they have reasons for exiting or de-emphasizing their positions.

And I think from a general economic perspective for the US, the mortgage markets are too over concentrated.

And so, there needs to be not just PennyMac entering into the market but there needs to be other intermediaries as well.

I think we lead that group, frankly.

I think we have, again, as you mentioned really the best in class in terms of management and experience.

But I would say there should be competition.

And there should be many players in the marketplace.

The benefit of the correspondent activity is, first, there are significant barriers to entry.

You have to have this level of expertise.

And you have to have systems.

And people may say they want to enter the market, but it takes quite a bit of time to amass the systems and process and technology and warehouse lenders, who help support our business are going to be very careful in terms of who they're willing to support and partner with.

So, I feel confident that we're in a very desirable position.

Volume shifts in mortgage banking are probably really the more significant issue in terms of how you succeed as a correspondent lender that you have the disciplines around pricing and around expense management, such that you're not exposed to ballooning costs of operations or that you're not disciplined enough about your pricing to make sure that you're always operating at profitable levels.

I think we have the experience and knowledge how to run the correspondent business.

I do think from just an overall perspective in the economy today, we should all welcome more entries into this market.

And I think that there are going to be many that are non bank mortgage companies.

Could you talk a little bit about the return of the secondary market, which has been very slow, I think, slower than most expected would be the case.

And why kind of deals are getting done and when do you expect more welcoming marketplace?

I assume you're talking about really jumbo products and prime product.

And PMT is out there, we're out there with a jumbo offering, along with many others.

And I think what we're seeing is we're seeing a market that's been shut down now for probably almost four years.

And there's a lot of work that's still left to be done before you see a return to securitization.

We're just getting through the Dodd Frank work that's underway to determine what it's mean to co-invest?

The SEC is doing their work in terms of what's going to be required in terms of documentation and disclosures.

I think the Street's trying to understand where they fit in a securitization model, whether it's as an aggregator or as the underwriter of bonds.

And I think that finally, when you have rates as low as they are, originators are really focused on refinancing conforming government product as opposed to doing the work to get a jumbo loan done.

When you look at the jumbo loan guidelines out in the market today, we -- talk internally there.

You know, they're almost guidelines that are set up for people who almost don't need loans.

And so, you have people who are coming in, and trying to get loans.

And we're starting to see buyers of whole loans.

And so, the way I kind of look at it is that you need an active whole loan market to understand what the new jumbo product looks like and has investors in bonds see how that product performs.

Then you'll start to get more confident in terms of what is you're buying.

And so, I think, the return of securitization is I'm more in the camp and longer than shorter.

But I think that it'll happen like it happened the last go around, where you saw an act of whole loan market, buyers of whole loans, people understanding the performance of the whole loans.

And then, you see the return to securitization.

I think PMT is -- can participate in all the forms of the execution.

I think, as a buyer of whole loans and as a seller of the whole loans and the servicer of those whole loans, they can invest in the MSR.

And then, as we see a return to securitization, we'll have more opportunities for PMT to invest in the capital structure of the securitization.

In addition, I thought maybe we just touch a little bit on the uniqueness of the structure that we've developed for the non-agency prime market, which it does set us apart.

The market, I agree with Dave, is going to just probably take years to ultimately develop, but a couple of -- one very important attribute of that market is transparency.

The other is consistency in the product.

And so, we set up a non-agency methodology, which maybe Dave, you want to talk about how we're set up to do those sort of very -- it's not subtle, it is a significant difference in how we process and how we set the standards for and sort of -- I like to call it co-underwrite -- the loan.

So, maybe to just talk a little bit about --

Yes, sure.

I mean, I think there's a hesitancy on the part of sellers to kind of venture into this path that really isn't well established.

And so, what has developed is a process where they will, as they understand our jumbo guidelines, attempt to originate those.

They'll move the loans through to the point where they process them, and have made a determination to the best of their ability as to how they'd like to move forward with the loan.

The loan would then come to us to validate from an investment eligibility perspective whether we see it the same way that they do.

They get a positive response back from us, and then they'll move forward with the loan.

There's varying degrees of issues that we deal with with our investors.

Those have streamlined considerably over the course of the last couple of months, but that market, too, is evolving.

And we're kind of finding ourselves.

But in the primary market, most of them want us to take a look in advance of actually funding the loan.

Any additional?

I have a couple.

I might just keep this mike.

The first question I have is as it relates to warehouse lending, are these relationships with bankers or brokers or something in between?

Can you give us a better sense as to who you're targeting, because although the criteria for correspondent lending seems to suggest more of your classic correspondent is going to sell you closed loans, obviously, warehouse lending gets into a little of a bit gray area.

So I'm just interested in who your target client is, if it's a migration strategy, and any additional information you can give on that?

Sure.

From a -- the clients that we're going to target are really going to be a subset of the clients of correspondent lending.

So really, from a migration perspective, we're not targeting a broker to banker, not that type of business model.

So really, we're going to start with clients that we are comfortable in acquiring their loans.

I'm not going to require them to sell us the loans, but we're going to be comfortable with that client segment base.

Well, if I can, I think one of the key tenets that Paul talked about earlier that we like from a credit perspective is when you lend and you buy, you have a lot of knowledge.

It takes a slightly different credit profile if you lend and don't buy.

So, that's why we'll stay on that subset category.

And as we think about one of the classic real criticisms of the correspondent over time has been that there's been a -- the balance of economic benefits has been historically provided primarily to the originator, not as much retained by the correspondent lending entity.

How do you think that -- what do you think that balance is today?

How do you think that plays out over time?

Well, good question.

I actually think the balance in equity wasn't necessarily to the correspondent.

It was to the loan officer.

I mean, if you really tracked and followed revenue, there was a -- it was a little bit of a disproportionate share of revenue going to the originator, i.e.

the loan officer.

That's in the process of correction.

Capital has an amazing way of making that happen.

Returns, credit adjusted returns, better models today.

So another really important aspect that was dropped in April 1 was regulation around loan officer compensation.

So it really gave power to the mortgage bank and banks to reign in compensation structures that everyone probably has a view on it.

But clearly, was a contributor to some of the challenges that we've been working ourselves out of for the last three, four years.

So absolutely.

And I think -- something Stan said and others have said, we have very, very good disciplines around returns.

And if we get returns we like, we're very interested.

If we can't get returns we like, we can't just deal with that customer.

So, that's a discipline in terms of revenue and expense and controls and modeling that I think you'll find us to be very good at.

And, lastly, and I'll turn it back over to somebody else, but obviously, there's a effort to change the servicer compensation model.

And without having much clarity on that, I'm hoping you might be able to provide any sense as to how you think about the sustainability of -- and effectively, an MSR manufacturing business when the compensation model is possibly going to change dramatically in the future?

So I'm always happy to talk about mortgage servicing rights and the fee structure.

I kind of led the charge for about 25 years to get the minimum servicing fee reduced, because it is inordinately high and forces a servicer to invest in an IO strip.

And that IO strip investment has certain -- a risk profile that deserves a return on equity.

And it is one of the reasons I believe why servicing is so highly concentrated in the major banks, because it requires too much capital.

To invest, the regulations in terms of capital required by banks is changing.

And I think that's also having -- finally, an influence on reducing the minimum service fee.

Now, again, people need to comprehend that it's a minimum servicing fee.

If you're a servicer, and you want to invest in more servicing fee, that's an individual choice.

But it's better in my opinion for the servicing fee to be lower at an appropriate level.

It's my recommendation on it is to, and has been for many years is to reduce the minimum service fee from the 25 basis points to 12.5 basis points.

I hope it happens.

It will be all that much better for our business model for mortgage servicing rights to have an appropriate fee structure.

So everybody understands the correspondent lending business.

That's good.

Now we'll -- maybe we'll turn Q&A over to any follow on corporate level Q&A questions.

Just if you could talk about how you're thinking about the capital allocation between the nonperforming loans and the correspondent lending?

So we look at -- in the long term, that the distressed lending activity will come down to a trickle, that we are probably years away from that, but as that occurs, we look for the -- for our capital to be redeployed to the correspondent activities, which will be a combination of supporting our warehouse lending initiative, supporting the mortgage servicing rights that are acquired, as well as supporting the subordinate interest in private equity securities.

So from today, where most of our capital is devoted to the distressed market, over time, it will really be mostly invested in the normal mortgage market.

I can't really predict timing.

I think there's several years left in distress, and that you'll see our capital converge to the normal markets over the next several years.

You're growing in many ways like a weed.

Maybe you could address the capital raising that is going to be required in order to facilitate that growth?

You know, we're, I think, first of all, trying to have investors understand the value and the benefit and the growth prospects that we have.

We have capital in place to operate today.

We don't have it -- at this time any particular initiative to raise significant capital.

As the opportunity presents itself, and as we're growing, we'll keep the -- our investors informed about our need for capital.

But I think it will be obvious and driven by the opportunities to produce accretive activities for our shareholders.

Okay, well, I'm going to call it a day on Q&A then.

Thank those that were part of the webcast for sticking with us, and we'll be saying good-bye.

And the next part of the day is to stretch and get to see the mortgage operations.

I think we have a couple of tour or one tour group.

We have two groups going.

And feel free to ask questions along the way.

Thank you.