Q3 2023 PennyMac Financial Services Inc Earnings Call
Good afternoon, and welcome to Pennymac Financial Services, Inc. 's third quarter 2023 earnings call additional earnings materials, including presentation slides that will be referred to in this call are available on Pennymac Financial's website at E. S. S. I thought penny Mac Dot com.
Speaker 1: transcript
Speaker 1: Good afternoon and welcome to Penny Mac Financial Services Inc. 3rd quarter 2023 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, are available on Penny Mac Financial's website at pfsi.pennemac.com.
Speaker 1: transcript
Speaker 1: Before we begin, let me remind you that this call may contain four looking statements that are subject to certain risks identified on slide two of the earnings presentation that could cause the company's actual results to differ materially as well as non- GAAP measures that have been reconciled to their gap equivalent in the earnings material.
Before we begin let me remind you that this call may contain forward looking statements that are subject to certain risks identified on slide two of the earnings presentation that could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings material.
Speaker 1: transcript
Speaker 1: I would like to remind everyone, we will only take questions related to Penny Mac Financial Services Inc. or PFSI. We also ask that you please keep your questions limited to one preliminary question and one follow-up question. As we'd like to ensure that we can answer as many questions as possible. Now, I'd like to introduce David Specter, Penny Mac Financial's Chairman and Chief Executive Officer and Dan Perotti, Penny Mac Financial's Chief Financial Officer.
Like to remind everyone. We will only take questions related to Pennymac financial services, It services, Inc, or <unk>.
<unk> also asks that you. Please keep your questions limited to one preliminary question and one follow up question as we'd like to ensure that we can answer as many questions as possible now I'd like to introduce David Spector, Pennymac Financial's, Chairman and Chief Executive Officer, and Dan Karate, Pennymac Financial's Chief Financial Officer.
Thank you operator, Pennymac financial produced outstanding results in the third quarter, returning to a double digit annualized return on equity while average mortgage rates were up 50 basis points from the prior quarter, we demonstrated the earnings power of our balanced.
Speaker 2: transcript
Speaker 2: Thank you operator. Penny Mac Financial produced outstanding results in the third quarter, returning to a double digit annualized return on equity. While average mortgage rates were 50 basis points in the prior quarter, we demonstrated the earning power of our balanced business model with exceptionally strong operating income from our large and growing servicing business combined with continued profitability and production.
Is this model with exceptionally strong operating income from our large and growing servicing business combined with continued profitability in production.
Speaker 2: transcript
Speaker 2: As a result, book value per share grew 3% from the prior quarter.
As a result book value per share grew 3% from the prior quarter.
Speaker 2: transcript
Speaker 2: As you can see on slide four of the presentation, more rates have continued to increase from record lows in recent years, and are now near 8%.
As you can see on slide four of the presentation mortgage rates have continued to increase from record lows in recent years and are now near 8% as.
Speaker 2: transcript
Speaker 2: As a result, many borrowers who locked in a low fixed rate mortgage have been incentivized to stay in their homes given their low mortgage payment.
As a result, many borrowers who locked in a low fixed rate mortgage had been incentivized to stay in their homes given their low mortgage payments.
Speaker 2: transcript
Speaker 2: This resulted in an extremely low inventory of homes for sale, driving expectations for the lowest unit origination volume since 1990.
This has resulted in an extremely low inventory of homes for sale driving expectations for the lowest unit origination volume since 1990.
Speaker 2: transcript
Speaker 2: Additionally, we believe quarterly run rate origination volumes are trending lower than the average 1.6 trillion dollar estimates from third parties for this year.
Additionally, we believe quarterly run rate origination volumes are trending lower than the average 1.6 trillion dollar estimates from third parties for this year.
Speaker 2: transcript
Speaker 2: Though the current origination market remains constrained, mortgage banking companies with large servicing portfolios are better positioned to offset the decline in profitability that has resulted from these low origination volumes.
Though the current origination market remains constrained mortgage banking companies with large servicing portfolios are better positioned to offset the decline in profitability is as resulted from these low origination volumes.
Speaker 2: transcript
Speaker 2: Looking at page five of our presentation, our balanced business model as a top five servicer and a top two producer of mortgage loans, is a key differentiator that enables Penny Mac Financial to profitably maneuver through varying interest rates cycles.
Looking at page five of our presentation, our balanced business model as a top five servicer and a top two producer of mortgage loans is a key differentiator that enables pennymac financial to profitably maneuver through various interest rate cycles.
Speaker 2: transcript
Speaker 2: Our servicing portfolio has steadily grown to nearly $600 billion in unpaid principal balance and 2.4 million customers.
Our servicing portfolio has steadily grown to nearly $600 billion in unpaid principal balance and $2 4 million customers.
Operator: Good afternoon, and welcome to PennyMac Financial Services Inc's third quarter 2023 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call are available on PennyMac Financial's website at pfsi.pennyMac.com Before we begin, let me remind you that this call may contain four looking statements that are subject to certain risks identified on slide two of the earnings presentation that could cause the company's actual results two different materially as well as non-gap measures that have been reconciled to their gap equivalent in the earnings material. I would like to remind everyone we will only take questions related to PennyMac Financial Services Inc or pfsi.
Operator: We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure that we can answer as many questions as possible.
Speaker 2: transcript
Speaker 2: This consistent growth is driven by our ability to organically grow the portfolio through our strength as a leading producer of mortgages.
This consistent growth is driven by our ability to organically grow the portfolio through our strength as a leading producer of mortgage loans.
Speaker 2: transcript
Speaker 2: The servicing segment drives the majority of our earnings in a higher rate environment. A large portion of which is cash earnings in the form of servicing fees and placement fee income on custodial balances and deposits.
The servicing segment drives the majority of our earnings at a higher rate environment.
Large portion of which is cash earnings in the form of servicing fees and placement fee income on custodial balances in deposits.
Our multichannel approach to production enables consistent access to the origination market in.
Speaker 2: Our multi-channel approach to production enables consistent access to the origination work.
Speaker 2: transcript
Speaker 2: In the current highway environment, our co-respondent and broker direct channels of production provide strong access to the purchase more.
In the current high rate environment, our correspondent and broker direct channels of production provides strong access to the purchase market.
Speaker 2: transcript
Speaker 2: As we add these higher note rate mortgages to our portfolio, we are creating additional opportunities for our consumer direct business to offer our customers a new lower rate mortgage when interest rates decline.
As we add these higher note rate mortgages to our portfolio, we are creating additional opportunities for our consumer direct business to offer our customers a new lower rate mortgage when interest rates decline.
David Spector: Now, I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer and Dan Perotti, PennyMac Financial's Chief Financial Officer. Thank you, Operator. PennyMac Financial produced outstanding results in the third quarter, returning to a double digit annualized return on equity. While average mortgage rates were 50 basis points in the prior quarter, we demonstrate the earning power of our balanced business model with exceptionally strong operating income from our large and growing servicing business combined with continued profitability.
Speaker 2: transcript
Speaker 2: As of September 30th, nearly 20% of our servicing portfolio consists of mortgages with no rates and excess of 5%.
As of September 30th nearly 20% of our servicing portfolio consisted of mortgages with note rates in excess of 5%.
Speaker 2: Turning to slide 6, revenue from servicing and placement fees has increased significantly in recent years due to growth in the portfolio and increasing short-term interest rates.
Turning to slide six revenue from servicing and placement fees has increased significantly in recent years due to growth in the portfolio and increasing short term interest rates at.
Speaker 2: transcript
Speaker 2: At the same time, operating expenses as a percentage of total servicing portfolio UPD continue to decrease, demonstrating the operational scale and efficiency gains we have achieved.
At the same time operating expenses as a percentage of total servicing portfolio U P. B continue to decrease demonstrating the operational scale and efficiency gains we have achieved.
The substantial accumulation of home equity in recent years across the country has driven a large opportunity in the closed end second lien product, enabling borrowers to tap the equity they've built up in their homes without relinquishing their low rate first lien mortgage.
Speaker 2: transcript
Speaker 2: The substantial accumulation of home equity in recent years across the country has driven a large opportunity in the closed and second-leamed product. Enabling borrowers to tap the equity they have built up in their homes without relinquishing their low rate first-leamed mortgage.
David Spector: As a result, book value per share grew 3% from the prior quarter. As you can see on slide four of the presentation, mortgage rates have continued to increase from record lows in recent years and are now near 8%. As a result, many borrowers who locked in a low fixed rate mortgage have been incentivized to stay in their homes given their low mortgage payments. This is resulted in an extremely low inventory of homes for sale, driving expectations for the lowest unit origination volume since 1990.
Speaker 2: transcript
Speaker 2: The 2.4 million customers we have active servicing relationships with represent cost effective leads for our consumer direct channel and we've been actively marketing to those who would benefit from a closed end second product.
The $2 4 million customers, we have active servicing relationships with represent cost effective leads for our consumer direct channel and we've been actively marketing to those who would benefit from our closed end second product.
Speaker 2: transcript
Speaker 2: Since the launch of our closed-end second-line product last year to our servicing portfolio customers, we have originated first sale into the secondary market approximately $450 million and unpaid principal balance, including approximately $200 million in the third quarter.
Since the launch of our closed end second lien product last year to our servicing portfolio customers. We've originated for sale into the secondary market approximately $450 million in unpaid principal balance, including approximately $200 million in the third quarter.
David Spector: Additionally, we believe quarterly run rate origination volumes are trending lower than the average $1.6 trillion estimates from third parties for this year. Though the current origination market remains constrained, mortgage banking companies with large servicing portfolios are better positioned to offset the decline in profitability that has resulted from these low origination volumes. Looking at page 5 of our presentation, our balanced business model as a top 5 servicer and a top 2 producer of mortgage loans is a key differentiator that enables penny-mac financial to profitably maneuver through varying interest rate cycles.
Speaker 2: transcript
Speaker 2: I'm excited to announce that in the fourth quarter, we will be launching a marketing campaign to non-portfolio customers representing a significant opportunity for our consumer direct group to attract additional customers, given we currently service only about 4% of total US mortgage debt outstanding.
I'm excited to announce that in the fourth quarter, we will be launching a marketing campaign to non portfolio customers, representing a significant opportunity for a consumer direct group to attract additional customers. Given we currently service only about 4% of total U S mortgage debt outstanding.
Speaker 2: transcript
Speaker 2: Petty Mac Financial continues to lead the industry with strong financial performance, given its large and balanced business model.
Pennymac financial continues to lead the industry with strong financial performance, given its large and balanced business model.
Speaker 2: transcript
Speaker 2: I'm extraordinarily proud of this management team's ability to successfully navigate the challenging mortgage landscape while also positioning the company to generate increasingly stronger returns over time.
I'm extraordinarily proud of this management team's ability to successfully navigate the challenging mortgage landscape, while also positioning the company to generate increasingly stronger returns overtime.
David Spector: Our servicing portfolio has steadily grown to nearly $600 billion in unpaid principal balance and 2.4 million customers. This consistent growth is driven by our ability to organically grow the portfolio through our strength as a leading producer of mortgage loans. The servicing segment drives the majority of our earnings in a higher rate environment, a large portion of which is cash earnings in the form of servicing fees and placement fee income on custodial balances and deposits.
Speaker 2: transcript
Speaker 2: I will now turn it over to Dan who will review the drivers of PFS size their quarter financial performance.
I will now turn it over to Dan who will review the drivers of PFS size third quarter financial performance. Thank.
Speaker 3: transcript
Speaker 3: Thank you, David. PFSI reported net income of $93 million in the third quarter, or $1.77 in earnings per share, for an annualized return on equity of 11%.
Thank you David <unk> reported net income of $93 million in the third quarter were $1 77 in earnings per share for an annualized return on equity of 11% book value per share was up 3% from the prior quarter to $71 56.
Speaker 3: transcript
Speaker 3: Book value per share was up 3% from the prior quarter to $71.56.
Speaker 3: transcript
Speaker 3: PFSI's Board of Directors also declared a third quarter cash dividend of 20 cents per share. Production segment
<unk> Board of Directors also declared a third quarter cash dividend of <unk> 20 per share.
David Spector: Our multi-channel approach to production enables consistent access to the origination market. In the current high rate environment, our correspondent and broker direct channels of production provide strong access to the purchase market. As we add these higher note rate mortgages to our portfolio, we are creating additional opportunities for our consumer direct business to offer our customers a new lower rate mortgage when interest rates decline. As of September 30, nearly 20% of our servicing portfolio consists of mortgages with note rates in excess of 5%.
Production segment pretax income was $25 million in the quarter.
Speaker 3: transcript
Speaker 3: Total acquisition and origination volume were $25.1 billion in unpaid principal balance, up from the prior quarter despite the continuation of a challenging origination.
Total acquisition and origination volume were $25 1 billion in unpaid principal balance up from the prior quarter. Despite the continuation of a challenging origination market.
Speaker 3: transcript
Speaker 3: $22.3 billion was for PFSI's own account, and $2.8 billion was fee-based fulfillment activity for PMF.
$22 3 billion was for PFS is one account and $2 8 billion was fee based fulfillment activity for PMT.
Speaker 3: transcript
Speaker 3: As you can see on slide 10, PennyMAC maintained its dominant position in correspondent lending with total acquisitions of $21.5 billion, with margins in the channel unchanged from the prior...
As you can see on slide 10, Pennymac maintained its dominant position in correspondent lending with total acquisitions of $21 5 billion.
With margins in the channel unchanged from the prior quarter.
Speaker 3: transcript
Speaker 3: Notably, the number of correspondence sellers we maintain relationships with increased to 829 from 800 at June 30.
Notably the number of correspondent sellers, we maintain relationships with increased to 829 from 800 at June 30.
David Spector: Turning to slide 6, revenue from servicing and placement fees has increased significantly in recent years due to growth in the portfolio and increasing short term interest rates. At the same time, operating expenses as a percentage of total servicing portfolio UPB continue to decrease, demonstrating the operational scale and efficiency gains we have achieved. The substantial accumulation of home equity in recent years across the country has driven a large opportunity in the closed and second lean product.
Speaker 3: transcript
Speaker 3: October volumes continued to be strong and correspondent with $8.9 billion in acquisitions and $9.4 billion in loss.
October volumes continued to be strong and correspondent with $8 9 billion in acquisitions and $9 $4 billion a box.
And broker direct we continue to see strong trends as volumes margins market share and the number of brokers approved to do business with us all increased from the prior quarter.
Speaker 3: transcript
Speaker 3: In BrokerDirect, we continue to see strong trends as volumes, margins, market share, and the number of brokers approved to do business with us all increased from the prior quarter.
Speaker 3: transcript
Speaker 3: Lock volumes were up 6% from the prior quarter, despite a smaller origination market, and we expect to continue gaining market share as the top brokers increasingly see PennyMac as a strong alternative to the two top channel lenders.
Block volumes were up 6% from the prior quarter. Despite a smaller origination market and we expect to continue gaining market share as the top brokers increasingly see pennymac as a strong alternative to the two top channel lenders.
David Spector: Enabling borrowers to tap the equity they have built up in their homes without relinquishing their low rate first lean mortgage. The 2.4 million customers we have active servicing relationships with represent cost effective leads for our consumer direct channel and we've been actively marketing to those who would benefit from a closed end second product. Since the launch of our closed end second lean product last year to our servicing portfolio customers, we've originated for sale into the secondary market approximately $450 million an unpaid principal balance including approximately $200 million in the third quarter.
Speaker 3: transcript
Speaker 3: October volumes in BrokerDirect were $0.8 billion in originations and $1 billion in loss.
October volumes and broker direct were <unk> 8 billion in originations and $1 billion and locks in.
Speaker 3: transcript
Speaker 3: In consumer direct, volumes remain low, but margins increased meaningfully from the prior quarter due to a greater proportion of closed-end second liens, which have lower average value.
Consumer direct volumes remained low but margins increased meaningfully from the prior quarter due to a greater proportion of closed end second liens, which have lower average balances.
Speaker 3: transcript
Speaker 3: Production expenses, net of loan origination expense, were up slightly due to the overall increase in volume.
Production expenses net of loan origination expense were up slightly due to the overall increase in volumes.
Speaker 3: transcript
Speaker 3: Turning to page 14, the surfacing segment performed very well in the third quarter with a contribution of $101 million to pre-tax income, up from $47 million in the prior quarter.
Turning to page 14, the servicing segment performed very well in the third quarter with the contribution of $101 million to pre tax income up from $47 million in the prior quarter the.
Speaker 3: transcript
Speaker 3: The increase was primarily driven by strong operating results and lower net valuation release.
The increase was primarily driven by strong operating results and lower net valuation related changes.
David Spector: I'm excited to announce that in the fourth quarter we will be launching a marketing campaign to non portfolio customers representing a significant opportunity for our consumer direct group to attract additional customers given we currently service only about 4% of total US mortgage debt outstanding. Petty Mac financial continuously lead the industry with strong financial performance given its large and balanced business model. I'm extraordinarily proud of this management team's ability to successfully navigate the challenging mortgage landscape while also positioning the company to generate increasingly stronger returns over time.
Excluding valuation related changes servicing pretax income was $120 million or $8 two basis points of average servicing portfolio <unk> up from $75 million or five three basis points in the prior quarter.
Speaker 3: transcript
Speaker 3: Including valuation-related changes, servicing pre-tax income was $120 million, or 8.2 basis points of average servicing portfolio UPV, up from $75 million, or 5.3 basis points, in the prior quarter.
Speaker 3: transcript
Speaker 3: Loan servicing fees were up from the prior quarter, primarily due to growth in PFSI's own portfolio, as PFSI has been acquiring a larger portion of the conventional correspondent production in recent periods.
Loan servicing fees were up from the prior quarter, primarily due to growth in <unk> own portfolio as <unk> been acquiring a larger portion of the conventional correspondent production in recent periods.
Speaker 3: transcript
Speaker 3: EBO income increased $9 million from the prior quarter, driven by re-deliveries of re-performing loans for certain EBO investors.
<unk> income increased $9 million from the prior quarter driven by re deliveries of re performing loans for certain <unk> investors.
Speaker 3: transcript
Speaker 3: We continue to expect the contribution from EBO to remain low for the next few quarters.
We continue to expect the contribution from <unk> to remain low for the next few quarters.
Dan Perotti: I will now turn it over to Dan who will review the drivers of PFS size their quarter financial performance. Thank you David. PFSI reported net income of $93 million in the third quarter or $1.77 in earnings per share for an annualized return on equity of 11%. Book value per share was up 3% from the prior quarter to $71.56.
Interest income for the quarter was up primarily from increased placement fee income on custodial balances due to higher short term interest rates, while interest expense was down due to lower average balances of secured debt outstanding.
Speaker 3: transcript
Speaker 3: Interest income for the quarter was up primarily from increased placement fee income on custodial balances due to higher short-term interest.
Speaker 3: transcript
Speaker 3: while interest expense was down due to lower average balances of secured debt.
Speaker 3: transcript
Speaker 3: Operating expenses increased slightly from the prior quarter, but remain low as a percentage of average servicing portfolio UPB.
Operating expenses increased slightly from the prior quarter, but remained low as a percentage of average servicing portfolio UBB.
Speaker 3: transcript
Speaker 3: The fair value of PFSI's MSR, before realization of cash flows, increased by $399 million during the.
The fair value of <unk> MSR before realization of cash flows increased by $399 million during the quarter driven by higher market interest rates, which resulted in projections for decrease in prepayments and an increased contribution from placement fees on custodial balances.
Dan Perotti: PFSI's board of directors also declared a third quarter cash dividend of $0.20 per share. Production segment pre-tax income was $25 million in the quarter. Total acquisition and origination volume were $25.1 billion in unpaid principal balance up from the prior quarter despite the continuation of a challenging origination market. $22.3 billion was for PFSI's own account and $2.8 billion was fee-based fulfillment activity for PN. Ltd. As you can see on slide 10, PennyMac maintained its dominant position in correspondent lending, with total acquisitions of $21.5 billion, with margins in the channel unchanged from the prior quarter.
Speaker 3: transcript
Speaker 3: driven by higher market interest rates, which resulted in projections for decreasing prepayments and an increased contribution from placement fees on custodial balance.
Hedging losses were $424 million also driven by higher market interest rates.
Speaker 3: transcript
Speaker 3: Hedging losses were $424 million, also driven by higher market interest.
Speaker 3: transcript
Speaker 3: The net impact of MSR and hedge fare value changes on PFSI's pre-tax income was negative $25 million, and the impact on earnings per share was negative $34 million.
The net impact of MSR and hedge fair value changes on PFS is pre tax income was negative $25 million and the impact on earnings per share was negative <unk> 34.
Speaker 3: transcript
Speaker 3: And finally, the investment management segment contributed $400,000 to pre-tax income during the quarter. Assets under management increased slightly from the prior quarter due to PMT's strong third-quarter revenue.
And finally, the investment management segment contributed $400000 to pre tax income during the quarter assets under management increased slightly from the prior quarter due to Pmt's strong third quarter results.
Dan Perotti: Notably, the number of correspondence sellers we maintain relationships with increase to 829 from 800 at June 30. October volumes continued to be strong and correspondent with $8.9 billion in acquisitions and $9.4 billion in locks. In broker direct, we continue to see strong trends as volumes, margins, market share, and the number of brokers approved to do business with us, all increased from the prior quarter. Lock volumes were up 6% from the prior quarter, despite a smaller origination market, and we expect to continue gaining market share as the top brokers increasingly see PennyMac as a strong alternative to the two top channel lenders.
Speaker 3: transcript
Speaker 3: This quarter demonstrates our ability to drive improvement in ROE, now back to the double
This quarter demonstrates our ability to drive improvement in ROE now back to the double digits, while we expect normal seasonality and a higher rate environment to have some impact in the next couple of quarters, we expect our strategic position and the strength of our model to continue to drive our returns higher over time.
Speaker 3: transcript
Speaker 3: While we expect normal seasonality and a higher rate environment to have some impact in the next couple of quarters, we expect our strategic position and the strength of our model to continue to drive our returns higher over time. We'll now open it up for questions.
We will now open it up for questions operator.
Thank you if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again it is star one.
Speaker 1: transcript
Speaker 1: Thank you. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, it's star one.
Speaker 1: transcript
Speaker 1: We'll now take your first question from Kevin Barker of Piper Chandler, your line is open.
We will now take your first question.
From Kevin Barker of Piper Sandler Your line is open.
Dan Perotti: October volumes in broker direct were $0.8 billion in originations, and $1 billion in locks. In consumer direct, volumes remain low, but margins increased meaningfully from the prior quarter due to a greater proportion of closed end second lanes, which have lower average balances. Production expenses, net of loan origination expense, were up slightly due to the overall increase in volumes.
Speaker 4: transcript
Speaker 4: Great, thanks for taking my questions. Congrats on a good quarter. Just wanted to follow up on some of the margins and the growth in the origination side. It seems like correspondent was fairly strong with margins flat. We've seen one of your competitors mention that there's been a pickup in competition despite the pullback from several large banks. What are you seeing in that market and you feel like the competitive environment is?
Great. Thanks for taking my questions Congrats on a good quarter.
Just wanted to follow up on some of the margins and the growth in the origination side it.
It seems like correspondent was fairly strong with margins flat. We've seen one of your competitors mentioned that theres been a pickup in competition. Despite the pullback from several large banks.
What are you seeing in that market and you feel like the competitive environment is.
Dan Perotti: Turning to page 14, the surfacing segment performed very well in the third quarter, with a contribution of $101 million to pre-tax income, up from $47 million in the prior quarter. The increase was primarily driven by strong operating results and lower net valuation-related changes. Excluding valuation related changes, servicing pre-tax income was $120 million, or 8.2 basis points of average servicing portfolio UPB, up from $75 million or 5.3 basis points in the prior quarter.
Speaker 4: transcript
Speaker 4: you know, increasing or fairly stable. Thank you.
Increasing or fairly stable. Thank you.
Hey, Kevin how are you.
Okay, I think I think in correspondent.
Speaker 2: transcript
Speaker 2: So I think in correspondence, we had a really strong quarter in correspondence. And I think it's really for a couple of reasons. One.
Really strong quarter in course on it and I think I think it's really for a couple of reasons one.
Speaker 2: transcript
Speaker 2: You know, clearly, we're seeing the bank stepping back. We saw that really started in the second quarter. It's continuing as as a lot of banks are looking at the basil, the battle issues that they're facing. And I think that, you know, you're going to see more that this is in correspondence. You know, it's kind of moved out of the banks, but it's going to continue to stay out of the bank.
Clearly, we're seeing the banks stepping back we saw that really started in the second quarter. It's continuing as is a lot of banks are looking at the Basel.
Right.
All issues that they're facing and I think that.
Dan Perotti: Loan servicing fees were up from the prior quarter primarily due to growth and PFASI's own portfolio, as PFASI has been acquiring a larger portion of the conventional correspondent production in recent periods. EBO income increased $9 million from the prior quarter, driven by re-deliveries of re-performing loans for certain EBO investors. We continue to expect the contribution from EBO to remain low for the next few quarters. Interest income for the quarter was up primarily from increased placement fee income on custodial balances due to higher short-term interest rates, while interest expense was down due to lower average balances of secured debt outstanding.
Youre going to see more of that business in correspondent.
It's kind of moved out of the bank, but it is going to continue to.
To stay out of the banks I think.
Speaker 2: transcript
Speaker 2: I think that another reason correspondence so strong is the fact that sellers are not really retaining service.
Another reason correspond so strong is the fact that sellers are not really retaining servicing.
Speaker 2: transcript
Speaker 2: And so, if you recall, during, during meatier times of margins, sellers would, would retain servicing because margins were at kind of the higher levels. And they can retain that servicing. But right now, we're seeing many sellers not retaining the servicing. And so, they're selling the whole loans to correspondent aggregators versus selling to, for example, the GSEs where they would, they could retain the servicing. From, from my.
So if you recall during during meteor type of margins sellers would would retain servicing because margins were at kind of the higher levels.
And they can maintain that servicing but right now we're seeing many sellers not retaining the servicing until they are signed the whole loans to correspondent aggregators versus selling to for example, the gse's where they would retain.
Dan Perotti: Operating expenses increased slightly from the prior quarter, but remained low as a percentage of average servicing portfolio UPB. The fair value of PFASI's MSR, before realization of cash lows, increased by $399 million during the quarter, driven by higher market interest rates which resulted in projections for decreasing prepayments and an increased contribution from placement fees on custodial balances. Hedging losses were $424 million, also driven by higher market interest rates. The net impact of MSR and hedge fair value changes on PFASI's pre-tax income was negative $25 million, and the impact on earnings per share was negative $0.34.
Pertaining to certain thing from my perspective.
Speaker 2: transcript
Speaker 2: as it pertains to Penny Mac, I think we're seeing a flight to quality from the point of view that we're the leading course on an aggregator and we're seeing many, many of our customers continuing to deliver product to us.
As it pertains to Penny Mac I think we're seeing a flight to quality.
Point of view that we are the leading correspondent aggregator and were seeing many many of our customers continuing to deliver product to us.
Speaker 2: transcript
Speaker 2: and perhaps not delivering as much to some of the lower market share participants in the market.
And perhaps not delivering as much to that.
Some of the lower market share participants in the market.
Speaker 2: transcript
Speaker 2: I was generally, you know, I was very pleased with the increase in cellars and while the cellars themselves are smaller, so it's not meaningful to the UPB. I think it just
Generally.
Very pleased with the increase in sellers and while the sellers and sales are smaller so it's not meaningful to the <unk> I think it is.
Dan Perotti: And finally, the investment management segment contributed $400,000 to pre-tax income during the quarter, assets under management increased slightly from the prior quarter due to PMT's strong third quarter results. This quarter demonstrates our ability to drive improvement in ROE now back to the double digits. While we expect normal seasonality and a higher rate environment to have some impact in the next couple of quarters, we expect our strategic position and the strength of our model to continue to drive our returns higher over for Time.
Speaker 2: transcript
Speaker 2: It kind of talks to this fight to quality issue. I mean, for us to add, you know, almost 30 sellers in a quarter is a pretty big number.
It kind of talks to this flight to quality as Jimmy breath to add.
Almost 30 sellers in a quarter is a pretty it's a pretty big number.
Speaker 2: transcript
Speaker 2: And so I think that, you know, it's all adds up to a really good quarter from a production standpoint, from a share perspective, and also from a margin perspective. And I believe that, you know, the margin story should hang in there in Q4, and that's what we're seeing to date. And, you know, I think from a correspondent perspective, we're in a very good place.
And so I think that it's all adds up to a really good quarter from a production standpoint from a share perspective, and also from a margin perspective.
And I believe that.
The margin story should should hang in there in the in Q4, and that's what we're seeing to date and.
Operator: We'll now open it up for questions. Operator? Thank you. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. And if you'd like to withdraw your question, again, it's star one.
I think from a corresponding perspective, we're in a we're.
We're in a very good we're in a very good place.
Speaker 4: transcript
Speaker 4: Great. Thank you. And then just follow up on, you know, the broker channel as well, you know, seeing an increase in fallout locks.
Great. Thank you and then just a follow up on.
The broker channel as well.
<unk> seen an increase in fallout locks.
Speaker 4: transcript
Speaker 4: and then an increase in margin as well. Obviously, there's been quite a bit of attrition within that channel over the last year. Just love to hear a little bit more about what you're seeing from a competitive standpoint within the broker channel. Thank you.
And then on the increase in margin as well.
Kevin Barker: We'll now take your first question from Kevin Barker of Piper Chandler. Your line is open. Great. Thanks for thinking my questions.
Obviously, there's been quite a bit of.
Attrition within that channel.
Kevin Barker: Congrats on a good quarter. Just wanted to follow up on some of the margins and the growth in the origination side. It seems like correspondent was fairly strong with margins flat. We've seen one of your competitors mentioned that there's been a pick up in competition despite the pullback from several large banks. What are you seeing in that market and you feel like the competitive environment is increasing or fairly stable? Thank you.
Over the last year.
To hear a little bit more about what youre seeing from a competitive standpoint within the broker channel. Thank you.
Speaker 2: transcript
Speaker 2: Yeah, so on the on the broker side, you know, we're we're seeing some very good traction being made in, you know, in the especially with top brokers as they themselves are getting concerned with with the, you know, with the share of the top two participants.
Yes, so on the on the broker side.
We're seeing some very good traction being made in it.
Especially with top brokers as data were getting concerned with with.
The share of the top two participants and so there they are in need of a strong alternative and so we're positioning ourselves as a strong alternative then we're really between between that and the technology that we've spent a long time.
Speaker 2: transcript
Speaker 2: And so they're in need of a strong alternative. And so we're positioning ourselves as that strong alternative. And we're really, between that and the technology that we've spent a long time creating to really in working with brokers to address their needs, we're seeing very good feedback on the technology. And so I'm really happy to see that it's
David Spector: Kevin, how are you? I think in correspondent, we had a really strong quarter in correspondent. I think it's really for a couple of reasons. One, clearly we're seeing the bank stepping back. We saw that really started in the second quarter and continuing. It has a lot of banks are looking at the basil, the basil issues that they're seeing. I think that you're going to see more net business in correspondent. It's kind of moved out of the banks, but it's going to continue to stay out of the banks.
Creating.
Really.
Working with brokers to address their needs, we're seeing very good feedback on the technology and so on.
I'm really happy to see that.
As we saw margin that we saw share growth last quarter, we saw margin growth out some of that margin growth has to do with some execution enhancements after pricing.
Speaker 2: transcript
Speaker 2: that we saw margin, that we saw share growth last quarter, we saw margin growth. Now, some of that margin growth has to do with some execution enhancements after pricing.
David Spector: I think that another reason correspondent is so strong is the fact that sellers are not really maintaining services. If you recall, during media times of margins, sellers would retain service saying, because margins were at the higher levels and they can maintain that servicing, but right now we're seeing many sellers not retaining the servicing until they're selling the whole on two correspondent aggregators versus selling to, for example, the GSEs where they could retain the servicing.
Speaker 2: transcript
Speaker 2: And so I think that the margins that we saw this quarter were very good, but I continue, I would expect them to continue to stay at the high end. And like in all three production divisions, we're seeing pricing stay rational.
And so I think that.
Yes.
The margins that we saw this quarter were very good but I continue I would expect them to continue to stay at the high end and alike.
In all three production divisions, we're seeing pricing stay rational.
Speaker 2: transcript
Speaker 2: And I think that that's a, I don't see that, I don't see that changing. And I think if anything, you know, over the next couple of quarters, if you do see consolidation, that could provide some additional margin opportunity, margin expansion opportunity for us.
And I think that that's a.
I don't see that I don't see that changing.
I think if anything over the next couple of quarters, we do see consolidation that.
To provide some additional margin opportunity margin expansion opportunity for us.
David Spector: From my perspective, as it pertains to Penny Mac, I think we're seeing a flight to quality from the point of view that we're the leading correspondent aggregator and we're seeing many of our customers continuing to deliver product to us and perhaps not delivering as much to some of the lower market share participants in the market. I was generally, you know, I was very pleased with the increase in sellers and while the sellers themselves are smaller, so it's not meaningful to the UPB.
Great David Thank you for all the detail very helpful.
Speaker 4: transcript
Speaker 4: Great, David, thank you for all the detail. Very helpful. Thanks, Kevin.
Thanks, Kevin.
Your next question comes from the line of Bose George of <unk>. Your line is open.
Speaker 1: transcript
Speaker 1: Your next question comes from the line of Bost George of KBW, your line is open.
Speaker 2: transcript
Speaker 2: Hey everyone, good afternoon. I wanted to ask first, your servicing fee increased. It's 26.7, so it's up 1.7 basis points. I mean, could we see that go down if you do excess transactions, or should we see the servicing fee kind of stay in this level going forward?
Hey, everyone. Good afternoon.
At first just servicing fee increase.
Six 7% was up one seven basis points.
Could we see that go down if you do excess transactions or should we see the servicing fee kind of stay in this level going forward.
David Spector: I think it just, it kind of talks to this flight to quality issue. I mean, for us to add, you know, almost 30 sellers in a quarter is a pretty big number. And so I think that, you know, it's all adds up to a really good quarter from a production standpoint from a share perspective and also from a margin perspective. And I believe that, you know, the margin story should, should hang in there in Q4 and that's what we're seeing to date. And I'm, you know, I think from a correspondent perspective, we're in a, we're in a very good, we're in a very good place.
Speaker 3: transcript
Speaker 3: This is Dan Hippo. We generally
This is Dan Hey, Bose.
Kevin Barker: Great. Thank you.
We.
We generally.
Alright, expecting the servicing fee most likely to go up over in basis points to go over the next few quarters.
Speaker 3: transcript
Speaker 3: All right, expecting the servicing fee, most likely to go up over, in basis points, to go up over the next few quarters. We could see some impacts from sales of excess, but overall given the servicing that we're bringing on, the fact that the...
We could see some.
Some impacts from sales of excess.
But overall given the the servicing that we are bringing on the fact that the the.
Speaker 3: transcript
Speaker 3: the significant bulk of the overall servicing that we're generating.
Significant bulk of the overall servicing that we're generating.
Since.
Speaker 3: transcript
Speaker 3: since the conventional corresponded volumes are now going through to PFSI and they're retaining those, as MSR, the bulk of those rather than P and P retaining it over the last couple of quarters. That's contributed to the increase in the, the basis points of servicing fee. You know, we do evaluate sales of excess.
Kevin Barker: And then just follow up on, you know, the broker channel as well, you know, seen an increase in fallout locks. And then, you know, an increase in margin as well.
Conventional correspondent volumes are now going through to <unk> on an air retaining those as MSR. The bulk of those are rather than TMT retaining it over the last couple of quarters. That's contributed to the increase in the in the basis points of servicing fee.
Kevin Barker: Obviously, there's been quite a bit of a, um, attrition within that channel over the last year. So I'd love to hear a little bit more about, you know, what you're seeing from a competitive standpoint within the broker channel. Thank you.
We do evaluate sales of excess.
Speaker 3: transcript
Speaker 3: Uh, but, you know, those we would only, uh.
But those we would only.
David Spector: Yeah, so on the broker side, we're seeing some very good traction being made, especially with top brokers, as they themselves are getting concerned with the share of the top two participants, and so they're in need of a strong alternative. And so we're positioning ourselves as that strong alternative, and we're really between that and the technology that we've spent a long time creating to really, in working with brokers to address their needs, we're seeing very good feedback on the technology.
Okay.
Speaker 3: transcript
Speaker 3: We only we would only engage in those the extent that we see that as a you know as a benefit in terms of our, you know, our deployment of capital and so our, our overall lean I would expect over the next few quarters as we're bringing on additional servicing some of it at, you know, higher servicing fee levels would be to see that servicing fee and basis points go up over the next couple of quarters.
We only we would only engage in those to the extent that we see that as a as a benefit in terms of our.
Our deployment of capital.
And so our overall being I would expect over the next few quarters as we're bringing on additional servicing some of it at higher servicing fee levels would be do you see that servicing fee in basis points go up over the next couple of quarters.
Speaker 2: transcript
Speaker 2: Okay. Okay, great. Thanks. And then actually going back to the gain on sale margin, you know, in that slide 11.
Okay, great. Thanks, and then actually going back to the gain on sale margin.
And that slide 11.
Speaker 2: transcript
Speaker 2: The gain on sale margin by channel has gone up the last, you know, over the last quarter, last year, but then there's that other line item that kind of offsets that. So if I look at the total gain on sale margin, it, you know, actually went down a little bit, quarter over quarter. So I was just curious, like, what that line is, and also should we look at.
The gain on sale margin by channel has gone up the last over the last quarter last year, and but then there's that other line item that kind of offsets that so if I look at the total gain on sale margin. It actually went down a little bit quarter over quarter. So just curious like what that line is and also should we look at this on kind of at that bottom.
David Spector: And so I'm really happy to see that we saw margin, that we saw share growth last quarter, we saw margin growth now. Some of that margin growth has to do with some execution enhancement after placing. And so I think the margins that we saw this quarter were very good, but I would expect them to continue to stay at the high end. And like, you know, in all three production divisions, we're seeing pricing stay rational. And I think that that's a, I don't see that, I don't see that changing.
Speaker 2: transcript
Speaker 2: This one kind of a, at that bottom line basis, or should we look at the, you know, the line-eye.
Nine basis or should we look at the line items.
Yes.
Sure generally speaking I would say you should look at the line items in that.
Speaker 3: transcript
Speaker 3: Sure, generally speaking, I would say you should look at the line items and that.
Speaker 3: transcript
Speaker 3: you know, that will generally tell you how the margins are performing on a.
That will generally tell you.
Margins are performing on a Ah.
Speaker 3: transcript
Speaker 3: a channel-by-channel basis. The shift in the overall margin quarter-over-quarter was really based primarily on the mix of volume. So we had a greater proportion of correspondent loans coming through in the third quarter as opposed to some of the earlier quarters. I mean, those are overall, you know, if you look at the Blend A.
Channel by channel basis, the shift in the overall margin quarter over quarter was really based primarily on the mix of volume. So we had greater a greater proportion of correspondent loans coming through in the third quarter as opposed to some of the earlier quarters and those are overall.
Kevin Barker: And I think if anything, you know, over the next couple of quarters, if you do see consolidation, that could provide some additional margin opportunity, margin expansion opportunity for us. Great. David, thank you for all the detail. Very helpful. Thanks, Kevin.
If you look at the blend.
Speaker 3: transcript
Speaker 3: you know, a lower margin for that volume. And so that overall is what, you know, is driving down the basis points on an aggregate basis quarter over quarter.
A lower lower margin for that volume and so that overall is what is driving down the basis points on an aggregate basis quarter over quarter.
Bose George: Your next question comes from line of both George of KBW. Your line is open.
Speaker 3: transcript
Speaker 3: Okay, and that other line is that sort of is that hedging or what what kind of flows through there. The other line has a couple of components. The first is really just You know, time it really some timing elements when we're looking at
And then other line is that sort of is that hedging or what kind of flows through there.
Dan Perotti: Everyone good afternoon. I can't wait to ask first your servicing fee increased. It's 26.7. So it's up 1.7 basis points. I mean, could we see that go down if you do excess transactions or should we see the servicing fee kind of stay in this level going forward? This is Dan. We generally are expecting the servicing fee, most likely to go up over in basis points to go up over the next few quarters.
Other line has a couple of components. The first is really just.
Timing really some timing elements when we're looking at.
Speaker 3: transcript
Speaker 3: you know, when we're looking at locks and these are.
When we're looking at locks and these are.
Speaker 3: transcript
Speaker 3: income associated with locks, there are certain elements from an accounting point of view where we only earn the income at time of funding so those could get shifted to a different period, but in order to track what we're expecting to, what we see as the margin in that channel, we're really looking at what our expectation is for the lock gain in that period.
This income associated with locks there are certain elements from an accounting point of view, where we only earn the income at the time of funding so those could get shifted to.
A different period, but in order to track what we're expecting to what we see is the margin in that channel. We're really looking at what our expectation is for the.
Dan Perotti: You know, we could see some, you know, some impacts from sales of excess, but overall given the servicing that we're bringing on the fact that the significant bulk of the overall servicing that we're generating. Since the conventional corresponded volumes are now going through to PSI and they're retaining those as MSR the bulk of those rather than P and P retaining it over the last couple of quarters. That's contributed to the increase in the, you know, the basis points of servicing fee.
The loss gain in that period.
Speaker 3: transcript
Speaker 3: And so, if we have a timing difference that could shift, and then if we do have to your point, any sort of hedging gain loss or other elements of that nature that can also enter into that line. Okay. Okay, great.
And so if we had a timing difference that could shift and then if we do have to your point any sort of hedging gain loss.
Or other elements of that nature that can also.
Enter into that line.
Okay, great. Thanks, a lot.
Speaker 1: transcript
Speaker 1: Your next question comes from the line of Michael K. of Wells Fargo. Your line is open.
Your next question comes from the line of Michael Kaye of Wells Fargo. Your line is open.
Speaker 5: transcript
Speaker 5: Hi, good evening. On the production segment, do you think you can keep the profitability at these levels? Just given, you know, we're entering the slower seasonal winter months, plus mortgage rates are much higher than that potentially swing back to losses?
Hi, good evening.
On the production segment do you think you can keep the profitability at these levels given we're entering the slower.
Dan Perotti: You know, we do evaluate sales of excess, but, you know, those we would only, we only, we would only engage in those the extent that we see that as a, you know, as a benefit in terms of our, you know, our deployment of capital. And so our, our overall being I would expect over the next few quarters as we're bringing on additional servicing some of it at, you know, higher servicing fee levels would be to see that servicing fee and basis points go up over the next couple, of course.
Winter months.
Mortgage rates are much higher can that potentially swing back to losses.
Well.
Speaker 5: transcript
Speaker 5: Well, look, I think under the things we can control and and clearly from what we're seeing in October , I would expect you for to be profitable and product.
Look I think I think under the under the things we can control and clearly from what we're seeing in October I would expect Q4 to be profitable on production.
Speaker 5: transcript
Speaker 5: You know, we've got an industry leading correspondent franchise that continues to operate at the level that you know you saw in the third quarter. You know, we have rational pricing taking place in the market.
We've got we've got an industry, leading correspondent franchise that it continues to operate at the levels.
You saw in the third quarter.
We have rational pricing.
Dan Perotti: Okay, great. Thanks. And then actually going back to the game on sale margin, you know, in that slide 11, the game on sale margin by channel has gone up to last, you know, over last quarter last year. And but then there's that other line item that kind of offsets that. So if I look at the total game on sale margin, it, you know, actually went down a little bit quarter of a quarter of a quarter.
<unk> in the market.
Speaker 5: transcript
Speaker 5: And so I don't see the margins really, really coming under severe pressure to swing it to be on profitable size.
And so I don't see I don't see the margins really really coming under severe pressure.
Swing it profitable side.
Speaker 5: transcript
Speaker 5: And the similar story can be said on brokers as well. I mean, it works for, you know, when we're making inroads in roads and broker. And while the current run rate of production is closer to a $1.2, $1.3 million market, it's still, you know, more than enough to, you know, to keep us operating profitably. I'll tell you, I think the really, in the consumer direct channel, the product that I'm really enthusiastic about is close-to-ense.
And a similar story can be set up.
As well.
And we're making inroads in roads and broker in and while the current run rate of production is closer to a one.
Dan Perotti: So it's just curious, like what that line is and also should be look at this on kind of a, at that bottom line basis. So should we look at the, you know, the line items? Sure, generally speaking, I would say you should look at the line items and that, you know, that will generally tell you how the margins are performing on a channel by channel basis. The shift in the overall margin quarter of a quarter was really based primarily on the mix of volume.
One three trillion dollar market.
It's still more than enough to.
Keep us operating profitably.
I will tell you I think you can I think really in the <unk>.
Consumer direct channel.
The product that I'm really enthusiastic about is closed end seconds, we had a very good quarter and closed end seconds, where we originated $200 million in the third quarter alone we originated $450 million to date.
Speaker 5: transcript
Speaker 5: We had a very good quarter in close 10 seconds where we originated 200 million in the third quarter along with originated 450 million today.
Speaker 5: transcript
Speaker 5: You know, and the margins are very nice. It's a profitable product for us. We sell them all into the secondary market, so we're not retaining them. We do retain the servicing on them as we currently service the first on these loans as well. And one of the real added benefits is that it keeps capacity.
Dan Perotti: So we had greater, a greater proportion of course audit loans coming through in the third quarter as opposed to some of the earlier quarters. I mean, those are overall, you know, if you look at the blend, a, you know, a lower, lower margin for that volume. And so that overall is what, you know, is driving down the basis points on the aggregate basis quarter of a quarter. Okay. And that other line is that sort of is that hedging or what, what kind of flows through there?
And the margins are the margins are very nice profitable profitable product for us and we sell them all into the secondary market. So there isn't we're not we're not retaining them, we do retain the servicing on them as we currently service. The first on these loans as well and and I'm wondering what are the real added benefits.
To keep the capacity in place for our consumer direct channel and similarly, we will see a great decline in that and having that capacity in place will be very important for us to be able to seize on the opportunity to to refinance borrowers and higher rate mortgages and so.
Speaker 5: transcript
Speaker 5: for our consumer direction. And ultimately, we will see a great decline. And having that capacity in place will be very important for us to be able to see something opportunity to refinance borrowers and hire rate mortgages. And so I'm enthusiastic about what we're seeing in Q4 and I think that we're setting ourselves up.
Dan Perotti: The other line has a couple of components. The first is really just, you know, time really, some timing elements when we're looking at, you know, when we're looking at locks and these are income associated with locks, there are certain elements from an accounting point of view where, you know, we only earn the income at time of funding. So those could get shifted to a different period. But in order to track what we're expecting to, you know, what we see as the margin in that channel, we're really looking at what our expectation is for the, you know, the lock gain in that period.
Dan Perotti: And so if we have a timing difference that could shift. And then if we do have to your point, any sort of hedging gain loss or other, you know, elements of that nature that I can also, you know, enter into that line.
I'm enthusiastic about what we are.
So in Q4 and.
I think that we're setting ourselves up continue to continue to grow Roe.
Speaker 5: transcript
Dan Perotti: Okay. Great. Thanks for that.
In an environment, that's higher for longer or in an environment where rates are declining.
Alright.
Speaker 6: transcript
Speaker 6: That's 50 Yeah. Just on inexpensive
For the year.
Just on expenses.
Speaker 6: transcript
Speaker 6: I know you took a lot out your early, but I don't think anyone was thinking, or anyone was planning for more of a great city where they are now. Are you positioned okay?
I know you took a lot out your early.
But I don't think anyone was thinking go either one of those planning for mortgage rates to be where they are now I mean are you positioning okay.
On on it.
Speaker 6: transcript
Speaker 6: on expenses in production or do you think that could be potentially more trimming just given the environment is probably worth than most of us were expecting?
Expenses in production or.
Michael Kaye: Your next question comes from line of Michael Kay of Wells Fargo. Your line is open. Hi. Good evening. On the production segment, do you think you could keep the profitability at these levels? Just given, you know, we're entering the slower seasonal winter months, plus mortgage rates are much higher. Can that potentially swing back to losses?
Thank you Rebecca.
Lastly, more screaming.
The environment is.
David Spector: Well, you know, look, I think, I think under the, under the things we can control and clearly from what we're seeing in October, I would expect you for to be profitable in production. You know, we've got, we've got an industry leading correspondent franchise that that continues to operate at the level that, you know, you saw in the third quarter. You know, we have rational pricing taking place in the market. And so I don't see, I don't see the margins really, really, you know, coming under severe pressure to swing it to be on profitable side.
Probably worse than most of us were expecting.
Speaker 5: transcript
Speaker 5: So I think on the production service inside.
Well I think on the I think on the production services side.
Speaker 5: transcript
Speaker 5: You know, we are very good at being able to, you know, to bring up staffing or take down staffing based on the gearing ratios that we see for the market world.
We are very good at being able to bring up staffing or take down staffing based on the gearing ratios that we see for the market we're in.
Speaker 5: transcript
Speaker 5: I think that there is, from my perspective, in the rest of the organization, we're running a core functionality. And we're not, you know, we're pulling up size for a $1.2 trillion market, nor are we gonna put ourselves in that position.
I think that there is good there is a.
From my perspective, and the rest of the organization, where we're running a core functionality.
And we're not.
We're calling out size for a $1 two trillion dollar market nor are we going to put ourselves in that position.
Speaker 5: transcript
Speaker 5: Having said that, we're doing some things like looking at our technology, infrastructure, and I suspect we're gonna be looking to reduce expenses there. We're doing things like, if there's a trition, we make our management team jump through hoops.
Having said that we're doing we're doing some things like looking at looking at our technology infrastructure and I suspect we're going to be we're going to be looking to reduce expenses. There were doing things like you know.
If there is if there is attrition we will make our management team Dr.
David Spector: And the similar story can be said on broker as well. I mean, you know, we're, you know, when we're making inroads in roads and broker and, and while the current run rate of production is closer to a $1.2 each dollar market, it's still, it's still, you know, more than enough to, you know, to keep us operating profitably.
Speaker 5: transcript
Speaker 5: before we hired or placed that, but by and large to your point, we did, we took our medicine early, we knew we needed to do. We did it, I think three or four times and 22 alone.
Before we before we hired to replace that but but.
And large to your point, we did we took our medicine earlier, we knew we needed to do we did I think three or four times in 'twenty two alone but.
Speaker 5: transcript
Speaker 5: But you know, having said that, it's given us the opportunity to focus on growing our lead, which we did this quarter, getting it backed up into the double digits. Yeah, let's go.
Having said that it's given us the opportunity to focus on growing ROE, which we did this quarter getting it back up into the double digits.
David Spector: I'll tell you, I think that I think the really, in the consumer direct channel, the, the product that I'm really enthusiastic about is closed in seconds. We had a very good quarter and closed in seconds where we originated 200 million in the third quarter alone. We've originated 450 million today. You know, and the margins are, the margins are very nice. It's a profitable, profitable product for us. We sell them all into the secondary market so there isn't, you know, we're not, we're not retaining them.
Yeah, that's great. Thank you so much for answering my questions.
Speaker 1: transcript
Speaker 1: Your next question comes from the line of Eric Hagen of BTOG. Your line is up.
Your next question comes from the line of Eric Hagen of <unk>.
<unk> Your line is open.
Speaker 7: transcript
Speaker 7: Hey, good afternoon, how are we doing, guys? First question here, can you talk about how you're maybe adjusting or pricing for different bar or credit characteristics, any changes to the credit box? Even more generally, his rates have moved up to high. Like whether you're...
Hey, good afternoon, how are you doing guys.
First question here I mean can you talk about how you may be adjusting our pricing for different borrower credit characteristics any changes to the credit box, even more generally as rates have moved up to as high like whether you are.
Speaker 7: transcript
Speaker 7: you know intentionally targeting higher quality loans because rates are high and affordability is, you know, at this constraint. Thank you.
Intentionally targeting higher quality loans because rates are high and affordability is this constraint. Thank you.
David Spector: We do retain the servicing on them as we currently service the first on these loans as well. And, and one of one of the real added benefits is that it keeps coming happening, for Consumer Direct Channel. And ultimately, we will see a great decline. And having that capacity in place will be very important for us to be able to see on the opportunity to refinance borrowers and hire rate mortgages. And so I'm enthusiastic about what we're seeing Q4 and I think that we're setting ourselves up, continue to continue to grow ROE's in an environment that's higher for longer, or in an environment where rates are decline.
Speaker 5: transcript
Speaker 5: Yes, hair. Well, look, I think that, you know, if you, if the way we think about pricing mortgages is number one, we only buy loans that are saleable to the GSEs or that meets FHA VAR, USDA, mind verify my
Yes.
Look I think that.
The way, we think about pricing mortgages is number one we only buy the loans that are scalable to the GSE.
That meet.
Year USDA guidelines.
Speaker 5: transcript
Speaker 5: Having said that, I would say, in the third quarter of last year alone, we made some conscious decisions in terms of pricing risk attributes to take into account higher rates.
Having said that.
I would say in late in the third quarter last year alone. We made some conscious decisions in terms of pricing risk attributes that take into account higher rates.
Speaker 5: transcript
Speaker 5: And so along those lines, a lot of the lower FICO FHA loans and VA and USDA loans we believe, and we're going to require, I would say, a higher return in the investment for servicing, given that in higher rate environment, typically you see the linkancy increase.
So along those lines a lot of the lower FICO, FHA loans, and SBA and USDA loans, we believe.
We're going to require.
Unknown Attendee: It's good to be here.
I would say a higher return than the investments they are servicing given that in higher rate environments. Typically you see delinquencies increase.
Unknown Attendee: Just on expenses. I know you took a lot out your early, but I don't think anyone was thinking there are anyone planning for more regrets to be where they are now. Are you positioned okay on expenses in production?
Speaker 5: transcript
Speaker 5: You see correspondant solar stretching and while we get in while we diligence loans and we underwrite loans
You see correspondent sellers stretching and while we began while we diligence loans that we underwrite loan and inevitably you do you do start to see delinquencies go up I think I think it's yes, I think this move will give us a little bit a little bit.
Speaker 5: transcript
Speaker 5: And inevitably you do start to see your liquid sees go off.
Speaker 5: transcript
Speaker 5: I think it's, I think it's, I think it's smooth while again, it's a little bit, you know, a little bit on the early side. I gotta be early than late, because you can well imagine. And I think it's bearing out. If you look at, you know, the FICO's and the LTV's of our production versus the rest of the market.
David Spector: Or do you think that could be potentially more trimming just given the environment is probably worse than most of us were expecting? So I think on the production service inside, we are very good at being able to bring up staffing or take down staffing based on the hearing ratios that we see for the market where it is. I think that there is that there's a, you know, from my perspective, in the rest of the organization, we're running a core functionality. And we're not, you know, we're pulling up size for a $1.2 trillion market, nor are we going to put ourselves in that position.
On the early side I'd, rather be early than late you can well imagine and I think its bearing out if you look at the <unk> and the Ltvs of our production versus the rest of the market.
Speaker 5: transcript
Speaker 5: You know, it's I think I think it's I think it's meaningful. There's something that you know the management team looks at looks at on a regular basis.
I think I think it's.
I think it's I think it's meaningful it's something that the management team looks at let's say.
Regular basis.
Speaker 5: transcript
Speaker 5: But I don't I don't see it as you know, we're not we're not arbitrarily making making making changes to the credit box
We're not we're not arbitrarily, making making making changes to the credit box.
You'll see Eric if you look on page 33 of the deck.
Speaker 3: transcript
Speaker 3: And you can see Eric, if you look on page 33 of the deck, are the characteristics of the loans that we're acquiring, especially through correspondence over time, the FICO has increased significantly. And a lot of that is in response to some of the factors that David was talking about and some of the changes that we made going back to the third quarter of last year.
Are the characteristics of the loans that were acquiring especially through correspondent overtime to FICO has increased significantly.
David Spector: Having said that, you know, we're doing, we're doing some things like, you know, looking at, looking at our technology infrastructure and I suspect, you know, we're going to be, we're going to be looking to reduce expenses there. We're doing things like, you know, if there's, if there's a trition, we make our management team jump through hoops before we, before we hired to replace that. But, but, you know, by and large, to your point, we did, we, you know, we took our medicine earlier, we knew we needed to do.
<unk> a lot of that is in response to some of the factors that that David was talking about in some of the changes that we made.
Going back to the third quarter of last year.
Yes, no thats helpful, Hey, with the hedging results in the period.
Speaker 7: transcript
Speaker 7: Yep, not that helpful. Hey, with the hedging results in the period, would you say that's a function of the level of rates or is it interest rate volatility? Is there sort of like an ideal environment you feel like for hedging the MSR and maybe even kind of teasing apart and talking through the hedging results in the quarter would be helpful? And any hedging through October as well, thanks. Okay.
Would you say, that's a function of the level of rates or is it interest rate volatility is there sort of like an ideal environment you feel like for hedging the MSR and maybe even kind of teasing apart and talking through the hedging results in the quarter would be helpful.
David Spector: We did it, I think three or four times in 22 alone. But, you know, having said that, it's given us the opportunity to focus on growing our lead, which we did this quarter, getting it back up into the double digits.
Unknown Attendee: Yeah, that's great.
Any hedging through October.
Well thanks, guys.
Speaker 3: transcript
Speaker 3: Sure. So, you know, we talked a little bit last quarter about the elevated hedging costs that we were seeing from volatility being very high and some of the, you know, impacts of the inverted yield curve as a lot of that abated.
Sure so.
Talk a little bit last quarter about the elevated hedging costs that we're seeing from volatility being very high and some of the impacts of the inverted yield curve as a lot of that abating.
Unknown Attendee: Thank you so much for answering my questions.
Eric Hagen: Your next question comes from the line of Eric Hagen of BTIG. Your line is open. Hey, good afternoon, how are we doing, guys? First question here, I mean, can you talk about how you're maybe adjusting or pricing for different borrow or credit characteristics, any changes to the credit box? Even more generally, his rates have moved up to high. Like, whether you're, you know, intentionally targeting, you know, higher quality loans because rates are high and affordability is, you know, at this constraint. Thank you.
Speaker 3: transcript
Speaker 3: here in the third quarter, we saw pretty meaningful version of the curve as well as the ball come down. We saw our hedge costs decline.
Here in the third quarter, we saw pretty meaningful.
The inversion of the curve as well as all come down and we saw our hedge costs decline means.
Speaker 3: transcript
Speaker 3: meaningfully, our overall profile and our strategy at this point is really given how high interest rates are typically, you know, typically when rates were lower or more balanced, I would say, in terms of the the money-ness of our servicing portfolio, you know, we targeted a hedge ratio that was less than 100%.
Meaningfully.
Our overall profile and our strategy at this point is really.
Given how high interest rates are typically.
David Spector: Yeah, hey, well, look, I think that, you know, if you, the way we think about pricing mortgages is because number one, we only buy loans that are saleable to the GSEs or that meets FHA VA or USDA guidelines. Having said that, I would say in late in the third quarter last year alone, we made some conscious decisions in terms of pricing risk attributes to take into account higher rates, and so along those lines a lot of the lower FICO FHA loans and VA and USDA loans we believe and we're going to require I would say a higher return in the investments for servicing given that in a higher rate environment.
Typically when rates were lower more balanced I would say in terms of the.
<unk> of our servicing portfolio.
We targeted our hedge ratio that was less less than 100%.
<unk> said that we would allow for gains in a sell off because the origination volume would decline and for potential losses.
Speaker 3: transcript
Speaker 3: so that we would allow for gains in a sell-off because origination volume would decline. And for potential losses, you know, limited losses in a rally because we would see it enough take in origination in a race, origination income. With rates at this level, where so much of the servicing portfolio is, you know, meaningfully out of the money, we've really flattened that hedge profile and are targeting a profile that's fairly close to 100%.
Limited losses in a rally because we would see an uptick in origination.
And our ratio of origination income.
At with rates at this level, where so much of the servicing portfolio is meaningfully out of the money. We have really flattened that hedge profile and are targeting a profile thats fairly close to a 100%.
Speaker 3: transcript
Speaker 3: So when we take, you know, we take out the cost of servicing, I mean, the cost of hedging rather, and then, you know, look at what our hedge ratio was compared to the change in value. We actually come up to pretty close to 100% given the, given the change in value that we saw during the quarter. So overall, you know, overall, there was relatively...
David Spector: Typically you see the link and see increase. I think it's, yeah, I think this move while again is a little bit, you know, a little bit on the early side, I rather be early than late as well as you can well imagine and I think it's bearing out if you look at, you know, the FICO's the Neil TV's of our production versus the rest of the market, you know, with it's I think I think it's I think it's meaningful is something that you know the management team looks at looks at on a regular basis.
So when we take.
We take out the cost of servicing the.
The cost of hedging rather and then.
Look at what our hedge ratio was compared to the change in value, we actually come up to pretty close to a 100% given the given the change in value that we saw during the quarter.
So overall.
Overall, there was relatively.
Speaker 3: transcript
Speaker 3: from our perspective, little leakage given the size of the servicing portfolio and the MSR asset and the change in interest rates that we saw during the quarter. To your point, and given how...
From our perspective, a little leakage given the size of the servicing portfolio in the MSR asset.
The change in interest rates that we saw during the quarter.
To your point.
Given how.
David Spector: But I don't I don't see it, you know, we're not we're not arbitrarily making making making changes to the credit box. And you can see Eric, if you look on page 33 of the deck are the characteristics of the loans that we're acquiring, especially through correspondence over time the FICO has increased significantly and a lot of that is in response to some of the factors that that you know David was talking about and some of the changes that we made. You know, going back to the third quarter last year. Yep, no, that's helpful.
Speaker 3: transcript
Speaker 3: Given where we are in race and the fact that so much of our service in Portfolio is out of the money, we would expect that this targeting of the hedge ratio closer to 100% is where we'd be probably at least for the next few periods, barring a meaningful interest rate rally.
Given where we are in rates and the fact that so much of our servicing portfolio is out of the money, we would expect that the.
That this targeting of the hedge ratio closer to 100% is where we'd be probably at least for the next few periods.
Barring a meaningful interest rate rally.
Speaker 3: transcript
Speaker 3: I think that sort of covers where, hopefully what we saw during the quarter here as well is what you might expect to see going towards.
Yes, I think that that sort of covers where.
Hopefully what we saw during the quarter here as well as what you might expect to see going forward.
Got it okay. So end of October there hasnt been a lot of slippage it sounds like.
Speaker 7: transcript
Speaker 7: Got it. Okay, so in New October there hasn't been a lot of slippage. It sounds like um
Dan Perotti: Hey, with the hedging results in the period, it would you say that the function of the level of rates or is it interest rate volatility is there sort of like an ideal environment you feel like for hedging the MSR and maybe even kind of teasing apart and talking through the hedging results in the quarter would be helpful and any any hedging through October as well. Sure. So, you know, we talked a little bit last quarter about the elevated hedging costs that we were seeing from volatility being very high and some of the impacts of the inverted yield curve as a lot of that updated here in the third quarter.
Speaker 3: transcript
Speaker 3: October's been pretty contained as well. Okay. Great.
October October has been pretty pretty contained as well.
Okay, great. Thank you guys very much.
Okay.
Speaker 1: transcript
Speaker 1: Your next question comes from a line of Kyle Joseph of Jeffries, your line is up.
Your next question comes from the line of Kyle Joseph of Jefferies. Your line is open.
Speaker 8: transcript
Speaker 8: Hey, good morning guys. Oh, sorry, good afternoon. A lot of my questions have been answered, but I just want to answer a walk through the second lean product. I know you emphasize it's really been, you know, catch a ground and whatnot. But just walk us through the kind of impacts on the P&L and the balance sheet specifically. And what it, in terms of volumes and margins and whatnot, and whether you'd expect that to continue.
Hey, good morning, guys.
Good afternoon.
Dan Perotti: We saw, you know, pretty meaningful, you know, the inversion of the curve as well as all come down and we saw our hedge costs, you know, decline meaningfully. Our overall profile and our strategy at this point is really given how high interest rates are typically, you know, typically when rates were lower or more balanced, I would say in terms of the the moneyness of our servicing portfolio. You know, we targeted a hedge ratio that was less, you know, less than 100%.
My questions have been been answered.
As far as the opportunity the second lien product and I know him.
Emphasizes its really been in yet.
Ketchikan and whatnot and just walk us through the kind of the impacts on the P&L and the balance sheet, specifically and you know what.
Well in terms of volumes and margins and whatnot.
Whether you expect that to continue.
So the second lien product overall as David mentioned, we originated about $200 million a bit during the quarter.
Speaker 3: transcript
Speaker 3: So the second lean product overall, as David mentioned, we originated about 200 million of it during the quarter. You know what I think we mentioned in our...
I think we mentioned in our.
Speaker 3: transcript
Speaker 3: we mentioned in the presentation that we are also looking at opening that
We mentioned in the presentation that we are also looking at opening that up to beyond our <unk>.
Speaker 3: transcript
Speaker 3: to beyond our just originating for our servicing portfolio to market to the market at large, which is obviously a even greater opportunity than what we have in our servicing portfolio. So we could, we do expect that to continue to increase, it's been increasing over the past.
Originating for our servicing portfolio to.
The market to the mark to the market at large.
Dan Perotti: So that we would allow for gains in a sell off because of origination volume, you know, would decline and for potential losses, you know, limited losses in a rally because we would see an uptake and origination and a race origination income. At with rates at this level where so much of the servicing portfolio is, you know, meaningfully out of the money, we've really flattened that hedge profile and are targeting it profile that's fairly close to 100%.
Which is obviously, an even greater opportunity than what we have in our servicing portfolio. So we could we do expect that that continue to increase its been increasing over the past.
Speaker 3: transcript
Speaker 3: over the past few quarters. If you look at the margin trends that we've seen in...
Over the past few quarters.
If you look at the margin trends that we've seen in.
And consumer direct which is the channel in which we're originating these loans.
Speaker 3: transcript
Speaker 3: in consumer direct, which is the channel in which we're originating these loans. You know, that's been increasing pretty meaningfully on a basis point, basis over the past few, over the past few quarters.
That's been increasing pretty meaningfully on a basis points basis over the past few over the past few quarters.
Dan Perotti: So when we take, you know, we take out the cost of servicing, I mean the cost of hedging rather and then, you know, look at what our hedge ratio was compared to the the change in value, we actually come up to pretty close to 100% given the given the change in value that we saw during the quarter. So overall, you know, overall, there was relatively, you know, from our perspective, little leakage given the size of the servicing portfolio and the MSR asset and the change in interest rates that we saw during the quarter.
Speaker 3: transcript
Speaker 3: So a lot of that is due to the blend of the, you know, the second lean product versus, you know, versus the first lean because we are originating a greater proportion of second lean. And so given the smaller balance of the second lean product, you know, we have a higher basis point target in terms of our...
No.
A lot of that is due to the blend of the the second lien product.
<unk> versus <unk> versus the first liens, because we're originating a greater portion of second liens and so given the smaller balance of the second lien product.
We have a higher basis point target in terms of our.
Speaker 3: transcript
Speaker 3: Um, you know, in terms of our gross margin there, uh, so.
In terms of our gross margin there.
So.
Speaker 3: transcript
Speaker 3: given the blend, it's a bit above what the blend was here. So up into the five or 600 basis points in terms of margin on a UPD basis where the overall UPDs of these loans can be 75 to potentially $100,000. And so that's, you know,
Given the blend it's a bit above what the blend was here so up into the <unk>.
Dan Perotti: To your point and given how, you know, given where we are in raise and the fact that so much of our servicing portfolio is out of the money, we would expect that the, you know, that this targeting of the hedge ratio closer to 100% is where we'd be probably at least for the next few periods. Boring a meaningful interest rate rally. I think that sort of covers where, hopefully, what we saw during the quarter here as well as what you might expect to see going forward.
Five or 600 basis points.
In terms of margin on a on a.
On a <unk> basis.
Whereas the overall <unk> of these of these loans can be 75 to potentially $100000.
Sure.
And so that's that's really.
Speaker 3: transcript
Speaker 3: The revenue side on the, you know, on the production side, they it's pretty similar expense wise to what we see for a normal consumer direct loan, you know, so a.
On the revenue side on the on the production side.
It's pretty similar.
Spence wise to what we see.
For a normal consumer direct loan.
Yes.
Dan Perotti: Got it. Okay, so into October, there hasn't been a lot of slippage. It sounds like October's been pretty contained as well. Okay, great.
Okay.
Speaker 3: transcript
Speaker 3: on a normal scale, you know, a little bit, a little bit under in terms of basis points, what you would see, you know, in terms of what we collect in terms of the revenue. So we have a, it's a profitable contribution.
On a on a normal scale.
A little bit a little bit under.
In terms of basis points, what you would see.
Unknown Attendee: Thank you guys very much.
In terms of what we collect in terms of the revenue. So we have it is a profitable contribution.
Kyle Joseph: Your next question comes from line of Kyle Joseph of Jeffries. Your line is open. Hey, good morning. Sorry, good afternoon. A lot of my questions have been answered, but I just wanted to walk through the second lean product.
Speaker 3: transcript
Speaker 3: to the overall production business, but not as significantly profitable as if we were refinancing loans in a rally. But to David's point, if we do see an interest rate rally, one of the benefits of the second main product or production is that we're able to keep the.
To be overall production business.
Not.
Not as significantly profitable as if we were refinancing loans in a rally but to David's point, if we do see an interest rate rally one of the benefits of the second lien product or production is that we're able to keep.
Dan Perotti: I know you emphasize it's really been, you know, you know, catching around and whatnot, but just walk us through the kind of impacts on the, on the P&L and the balance sheet specifically and, you know, what it will, in terms of volumes and margins and whatnot and, you know, whether you expect that to continue. So, the second lean product overall, as David mentioned, we originated about 200 million of it during the quarter, you know, I think we mentioned in our, we mentioned in the presentation that we are also looking at opening that up to beyond our, you know, just originating for our servicing portfolio to market to the market at large.
Yes.
The staff on hand, and a profitable enterprise and then when we do see the interest rate rally will be able to shift those resources over to refinancing loans into first liens.
Speaker 3: transcript
Speaker 3: You know, the staff on hand in a profitable enterprise. And then when we do see the interest rate rally, we'll be able to shift those resources over to refinancing loans, you know, into first leans from the higher note rate balances that we've added over the past couple of quarters through course audit.
The.
The higher note rate balances that we've added over the past couple of quarters through correspondent.
Got it very helpful. Thanks for answering my question.
Yeah.
Your next question comes from the line of Jay Mccanless of.
Speaker 1: transcript
Speaker 1: Your next question comes from the line of Jay McCandless of Woodbush, your line is open.
Bush your line is open.
Speaker 9: transcript
Speaker 9: Hey, good afternoon everyone. Two questions for me, I guess if you take...
Hey, good afternoon, everyone two questions for me I guess.
You take.
Speaker 9: transcript
Speaker 9: the second lien loans that you're originating outside of your channel. I mean, what's what's kind of the annual market size or market opportunity you think could be out there?
The second lien loans that youre originating outside of your channel I mean, what's what's kind of the annual market size or market opportunity you think could be out there.
Dan Perotti: You know, which is obviously a, even greater opportunity than what we have in our servicing portfolio. So, you know, we could, we do expect that to continue to increase, it's been increasing over the past, over the past few quarters. If, if you look at the margin trends that we've seen in consumer direct, which is the channel in which we're originating these loans. You know, that's been increasing pretty meaningfully on a basis points basis over the past few, over the past few quarters.
Okay.
Speaker 5: transcript
Speaker 5: Look, I think that clearly, and we've got to, if you go to slide eight, you can see the opportunity for second lien expansion. I think that, you know, I would be disappointed if we didn't see production volumes grow in the second lien space. We did 200 million last quarter. We have a very big servicing portfolio with a lot of tackleable equity on its own.
Okay.
Yes.
Look I think I think that clearly if.
If you go to slide eight you can you can see the opportunity for second lien expansion.
I think I think that I would.
I'd be disappointed if we didn't see production volumes grow.
In the second lien space.
We did $200 million last quarter, we have a very big servicing portfolio with a lot of capital equity on its own.
Dan Perotti: So, a lot of that is due to the blend of the, you know, the second lean product versus, you know, versus the first lean because we are originating a greater proportion of second lean. And so, given the smaller balance of the second lean product, you know, we have a higher basis point target in terms of our. You know, in terms of our gross margin there. So, you know, just given the blend it's, you know, a bit above what the blend was here so up into the five or 600 basis points in terms of margin on a, on a.
Speaker 5: transcript
Speaker 5: You know, we have 60% of the borrowers in the United States have a mortgage loan with a no rate of 4% or lower.
<unk>.
We have 60% of the borrowers in the United States have a mortgage loan with an overweight of 4% or lower.
Speaker 5: transcript
Speaker 5: And I think that one of the things in my years of experience is products as people get, as people understand products more and get more generally accepted in the marketplace, you just see demand for them go up. And you're seeing more and more people taking.
And I think that one of the things in my years of experience as products as people get.
People understand products more than getting more generally accepted in the marketplace. You just see demand for them go up.
And youre seeing more and more people taking out second liens and this is one of the reasons why we are introducing it in our consumer direct channel for non portfolio of customers.
Speaker 5: transcript
Speaker 5: transcript
Speaker 5: We are going to test it out in broker.
Dan Perotti: On a UPB basis, where the, the overall UPBs of these of these loans can be, you know, 75 to potentially $100,000. And so that that's, you know, that's really the revenue side on the, you know, on the production side they it's pretty similar expense wise to what we see for a normal consumer direct loan. You know, so a on a, on a normal scale, you know, a little bit, a little bit under in terms of basis points what you would see, you know, in terms of what we collect in terms of the revenues.
We are going to test it out and brokerage.
Speaker 5: transcript
Speaker 5: And I would expect that to be sometime late Q4, early Q1. But I think suffice it to say, the product that's here to stay, given the fact that we do have so many mortgage loans below 4% and people have a lot of equity in their properties.
But I would expect that to be sometime.
<unk> Q2 late Q4 early early Q1.
But I think suffice it to say, it's a product that's here to stay given the fact that we do have so many mortgage loans below 4% and people had a lot of equity in their properties.
Speaker 5: transcript
Speaker 5: And so it's something that they're going to want to, you know, life events are going to take place that they're going to want to tap the equity. I think that as we stay higher for longer, you know, obviously you'll see more and more second liens being done. But I think that, you know, I think it's just, it's a product that's necessary, really, really given what's taken place the last three or four years where people just refinance into low rate mortgages.
I think as we stay higher for longer.
But I think that.
I think I think it's just it's just it's a product that's necessary.
Really really given given what's taken place the last the last three or four years, where people this refinance into low rate low rate mortgages.
Dan Perotti: So, we have a, is a profitable contribution to the overall production business, but not not as significantly profitable as if we were, you know, refinancing loans in a rally. But to David's point, if we do see an interest rate rally, one of the benefits of the second main product or production is that we're able to keep the, you know, the staff on hand in a profitable enterprise. And then when we do see the interest rate rally will be able to shift those resources over to refinancing loans, you know, into first lanes from the, you know, the higher note rate balances that we've added over the past couple of quarters through court.
That's great. Thank you for the detail I guess, the other question share repurchase any thought to doing that at these levels.
Speaker 9: transcript
Speaker 9: Thank you for the detail. I guess the other question, share, repurchase any thought to doing that at these levels.
Speaker 3: transcript
Speaker 3: Sherry purchase, it's obviously something that we've slowed down on from from the levels that we had been at previously with that, you know, that we haven't done any Sherry purchases this quarter, something that we continue to look at. But a couple of factors that we take into account.
Share repurchase.
And that's obviously something that we've slowed down on.
From from the levels that we had been at previously with that that we haven't done any share repurchases this quarter.
Something that we continue to look at but a couple of factors that we take into account.
Speaker 3: transcript
Speaker 3: You know, one is our overall, you know, our overall leverage ratio. So we are, you know, targeting to be, if we look at our nonfunding debt, you know, we're at 1.2 times leverage ratio this quarter.
One.
<unk> is our overall.
Kyle Joseph: We got a very helpful thanks for answering my question.
Overall leverage ratio. So we are targeting to be at if we look at our non funding debt were at one two times leverage ratio this quarter.
Jay Mccanless: Your next question comes from line of Jay McCanless of Woodbush, your line is open. Hey, good afternoon, everyone. Two questions for me. I guess if you take the secondly loans that you're originating outside of your channel, I mean, what's kind of the annual market size or market opportunity you think could be out there. So, Jay, look, I think that clearly is if you go to slide eight, you can see the opportunity for second-line expansion.
Speaker 3: transcript
Speaker 3: We've been in this area slightly above one times, and we're very cognizant that we want to, you know, maintain that leverage ratio below one and a half times.
We've been in this area slightly above one times and we're very cognizant that we want to maintain that leverage ratio below one five times.
Speaker 3: transcript
Speaker 3: as we look out into the next few periods.
As we look out into the next few periods.
And ensure.
Speaker 3: transcript
Speaker 3: I'm sure that our leverage ratio is in a good position to be able to facilitate.
To ensure that our leverage ratios in a good position to be able to facilitate.
Speaker 3: transcript
Speaker 3: any unsecured debt opportunities that we might see or might want to engage in.
Any unsecured debt.
Opportunities that we might see or might want to engage in.
Speaker 3: transcript
Speaker 3: So while certainly where the stock price has been recently, it's a more attractive proposition. It's something that we're weighing against.
So while while certainly at where the stock price has been.
Jay Mccanless: I think that I would be disappointed if we didn't see production volumes grow in the second-line space. We did 200 million last quarter. We have a very big servicing portfolio with a lot of tapable equity on its own. You know, we have 60% of the borrowers in the United States have a motor zone with a no rate of 4% or lower. And I think that one of the things in my years of experience is products, as people understand products more generally except in the marketplace, you just see demand for them go up.
Recently, ASI, a more attractive proposition, it's something that we're weighing against.
Speaker 3: transcript
Speaker 3: You know, maintaining our leverage ratio in in the area, you know, that it that it currently is as well as, you know, other potential, you know, capital deployment, whether it's in the twenty five billion dollars of correspondence.
Maintaining our leverage ratio.
In the area.
That it currently is as well as.
Other potential.
Capital deployment, whether it's in the $25 billion of correspondent surface.
That we're that we're adding a quarter.
Speaker 3: transcript
Speaker 3: that we're, you know, that we're adding a quarter, you know, or any other potential opportunities that might arise.
Any other potential opportunities that might arise.
Okay that sounds great. Thanks for taking our questions.
Okay.
Speaker 1: transcript
Speaker 1: Your next question comes from the line of Priyo Rangarajan of RBC Capital Markets. Your line is open.
Your next question comes from the line of <unk> <unk> of RBC capital markets. Your line is open.
Jay Mccanless: And you're seeing more and more people taking out second loans. And this is one of the reasons why we are introducing it in our consumer direct channel for not portfolio customers. We are going to test it out in broker directs. I would expect that to be sometime late Q4 or early Q1, but I think the advice is to say, if the product that's here to stay, given the fact that we do have so many more zones below 4%, people have a lot of equity in their properties.
Hey, guys. Thank you so much for the call.
Speaker 10: transcript
Speaker 10: Hey, guys, thank you so much for the call on the 2nd, mean program that you have. Are you seeing a consumer behavior difference between, you know, a cash out 3, 5 versus the 2nd, mean product? Are they like, you know, going 1 for the, like, do they have a preference in terms of which product they choose?
On the second lien program that you have are you seeing any consumer behavior Gibson.
Okay.
Second lien product.
Going once.
Did you have a preference in terms of mix productivity tool.
Speaker 5: transcript
Speaker 5: Well, one of the reasons I'd created one of the reasons we came out with the product is I didn't like what I was seeing in the market, the people who were starting to refi out of low rate first lane.
Well one of the reasons Ive creates David one of the reasons, we came out with a product providing like what I'm seeing in the market with people who are starting to refi out of low rate first liens.
Speaker 5: transcript
Speaker 5: And so, you know, from my perspective, we needed the product to give borrowers the ability to tap their equity without getting out of first lien mortgages.
And so from my perspective, we needed the product to give borrowers the ability to tap their equity.
Jay Mccanless: And so it's something that they're going to want to, your life events are going to take place if they're going to want to tap the equity. I think that as we stay higher for longer, obviously, you'll see more and more second loans being done. But I think that, you know, I think it's just it's a product that's necessary, really, really given, given what's taken place the last three or four years with people of this refinance and to lower rate, lower rate mortgages.
I was getting out of first lien mortgages.
David Spector: That's great. Thank you for the detail.
Speaker 5: transcript
Speaker 5: From, you know, when a borrower calls in for a cash out refinance, we expose them and offer them the second product.
All of our calls in for a cash out refinance we we we expose them and offer them the second new product.
Speaker 5: transcript
Speaker 5: as a viable product. We don't, we pay the loan officer the same amount. So there's no incentive for them to do a cash out refi versus a second lien mortgage. We want to really be focused on the compliance aspect of this product. And I think it's meaningful in terms of, and I think it speaks to why we're doing so many second liens versus cash out refinances. I, you know, for the, you know, there are life events that you require cash out refinances or refinances to take place.
As a viable product we don't we pay the loan officer. The same amount. So there's no incentive for them to do a cash out refi versus the second lien mortgage we want to we want to really be focused on the compliance aspect of this product and I think it's I think it's meaningful in terms of and I think it speaks to why we're doing some of that in second liens versus cash are we.
Dan Perotti: I guess the other question, Sherry purchased any thought to doing that at these levels? Sherry purchased, that's obviously something that we've slowed down on from the levels that we had been at previously with that, you know, that we haven't done any Sherry purchases this quarter. Something that we continue to look at, but a couple of factors that we take into account, you know, one is our overall, you know, our overall leverage ratio.
Finances.
There are life events.
<unk> cash on cash.
Cash out refinances of refinances will take place, but I generally I'm of the view that if borrowers want to tap their equity.
Speaker 5: transcript
Speaker 5: But I generally am of the view that if borrowers want to tap their equity, the second lean product is the place for them to go. Now, we do have minimum FICO's on the product. So, you know, for the lower FICO product, if you see.
The second lien product is the place for them to go now we do have minimum FICO on the product. So the lower FICO product that you see cash out refinances in the marketplace, probably the reason why.
Speaker 5: transcript
Speaker 5: cash out refinances in the marketplace, that's probably the reason why. But generally speaking, given the high credit quality of our servicing portfolio, second lien is the product that I really want to see our borrowers using to tap the equity.
Dan Perotti: So we are, you know, targeting to be if we look at our non-funding debt, you know, we're at 1.2 times leverage ratio this quarter. We've been in this area slightly above one times and we're very cognizant that we want to, you know, maintain that leverage ratio below one and a half times as we look out into the next few periods and ensure that our leverage ratio is in a good position to be able to facilitate any unsecured debt, that opportunities that we might see or might want to engage in.
Generally speaking given the high credit quality of our servicing portfolio. Secondly is the product that I really want to see our borrowers using to tap the equity.
Speaker 10: transcript
Speaker 10: That's a very helpful color. Secondly, on the origination side, as you look into 2024, to the extent that the market don't change so much from an existing house market, how are you thinking about gain on sale margins? Do you think that the industry has rationalized enough that you should see stable margins or can gain on sale actually go higher as there is more consolidation?
That's very helpful color.
On the what do you think.
As you look into 2024 to the extent that the market.
Thanks, so much.
An existing Sam.
This market.
How are you thinking about gain on sale margin do you think that the industry is asking that.
You should see stable margins and gain on sale actually go higher.
Dan Perotti: So while, while certainly where the stock price has been recently, it's a more attractive proposition is something that we're weighing against, you know, maintaining our leverage ratio in the area, you know, that it that it currently is, as well as, you know, other potential, you know, capital deployment, whether it's in the $25 billion of correspondence services that we're, you know, that we're adding a quarter, you know, or any other potential opportunities that might arrive. Good. That sounds great. Thanks for taking our questions.
There is more consolidation.
Well look I think I didn't again on sale margins are for this year.
Speaker 5: transcript
Speaker 5: Well, look, I think I didn't again on sale margins through this year remain, you know, remain relatively stable. There's some ebbs and flows that take place during a month or so. But I think generally speaking, we are seeing, you know, sale margins stabilized. And as I said, as I mentioned earlier, I think in correspondent, you know, we're starting to see a little bit of opportunity with the bank stepping back.
Remained relatively stable, there's some ebbs and flows that take place during a month or so but I think generally speaking we are seeing gain on sale margins.
Stabilized and as I say as I mentioned earlier I think in correspondent, we're starting to see a little bit of opportunity with the banks stepping back.
Speaker 5: transcript
Speaker 5: you know, for us to increase margin. I think that, look, from a mortgage size perspective, mortgage market size, given where the application index is showing, you know, right now we're probably, you know, running at a 1.2, 1.3 trillion dollar run rate. Given the average balance, we're at a unit run rate that we haven't seen since 1990.
For us to increase margin.
Look from a mortgage size perspective mortgage market size, given where the application indexes is showing.
Priya Rangarajan: Your next question comes from the line of Priya Rangarajan of RBC Capital Markets. Your line is open. Hey guys, thank you so much for the call. On the second lean program that you have, are you seeing any consumer behavior difference between, you know, a casual three, five versus a second lean product? Are they, like, you know, going one for the other, like, do they have a preference in terms of which product is the truth?
Right now, we're probably running at a one to $1 three trillion dollars run rate.
Given the average balance were at a unit run rate that we haven't seen since 1990.
Speaker 5: transcript
Speaker 5: I generally think, you know, we will see, you know, rates come down when I don't, you know, I'm not in the, you know, I'm not in the prediction business, but I think, you know, when you look at the market as a whole, it's generally thought in the second half of next year, you'll start to see some, you know, some, you know, pressure come off a rate.
I generally say.
We'll see.
It's come down when I don't Im not in the prolonged I'm not in the prediction business, but I think.
But when you look at the market as a whole is generally thought of in the second half of next year, you'll start to see some some pressure come off of rates.
Priya Rangarajan: Well, one of the reasons I pre-estated one of the reasons we came out with the product is I didn't like what I was seeing in the market, the people who were starting to re-fi out of low rate first lane. And so, you know, from my perspective, we needed the product to give followers the ability to tap their equity without getting out of first lean mortgages. From, you know, when we're called in for cash out refinance, we, we, we expose them and offer them the second lean product as a viable product.
Speaker 5: transcript
Speaker 5: Having said that, I'm generally, I'm very pleased with the margins are, there's rational pricing taking place in all three channels. And I suspect that in Q4 and a little bit in Q1, given the high level of rates, you're gonna start to see some more consolidation taking place, which will only lend itself to margins at a minimum. Combine because from Q5 I, drag the frills in through BJO.
Having said that as I said I'm generally I'm very pleased with where margins are there is rational pricing taking place in all three channels.
And I suspect that in Q4, and a little bit in Q1, given the high level of rates youre going to start to see some more consolidation taking place, which will only lend itself to margins at a minimum staying stable.
Priya Rangarajan: We don't, we pay the loan officer the same amount. So there's no incentive for them to do a cash out re-fi versus a second lean mortgage. We want to, we want to really be focused on the compliance aspect of this product. And I think it's, I think it's meaningful in terms of, and I think it speaks to why we're doing someone in second lean versus cash out refinances. I, you know, for the, you know, there are life advances that you require cash out, or cash out refinances or refinances to take place.
Got it and then finally from a credit perspective, you guys. Obviously did not do a dividend this quarter given they are.
Speaker 10: transcript
Speaker 10: And then finally from a credit perspective, you guys obviously did not do a dividend this quarter given where your debt trades have you guys thought about you know doing open market purchases, tender like your 25 refinancing anything would be really helpful color. Thank you so much.
Have you guys talked about you know doing open market purchases like.
<unk> five refinancing anything would be helpful color. Thank you so much.
Alright.
Okay.
Speaker 3: transcript
Speaker 3: So we did we did do a dividend this quarter, just to be clear, because I misheard you. So we did issue a quarterly dividend, but.
So we did we did do a dividend this quarter just to be clear.
I misheard you so we did.
At issue.
Priya Rangarajan: But I generally, in my view, that if followers want to tap their equity, the second lean product is, is the place for them to go. Now, we do have minimal FICO's on the product. So, you know, for the lower FICO product, if you see cash out refinances in the marketplace, that's probably the reason why. But generally speaking, given the high credit quality of our servicing portfolio, second lean is, is the product that I really want to see our borrowers using to tap the equity.
The dividend but.
Speaker 3: transcript
Speaker 3: You know, we're not currently, you know, we're not currently, as I mentioned, we are looking at potential opportunities in the, you know, in the unsecured debt space or in the high yield space, you know, have not seized upon that yet. We've additionally been raising, we've increased some of our
We're not currently.
Currently as I mentioned, we are looking at potential opportunities in the.
Unsecured debt space or in the high yield space.
Not seized upon that yet.
Additionally been raising.
Increased.
Some of our.
Sure.
Speaker 3: transcript
Speaker 3: in the process of looking at potential opportunities on the secured side to replace or move out some of our debt maturities there. Unless we, or to the extent that we see an opportunity that makes sense for us in the high yield market, we potentially would look at if there's, you know,
Yeah.
David Spector: That's a very helpful color. Secondly, on the original side, as you look into 2024, to the extent that the market don't change so much from, you know, an existing sales of house market. How are you thinking about gain on sale margins? Do you think that the industry has rationalized enough that you should see stable margins, or can gain on sale higher as there is more consolidation? Well, look, I think, I think the gain on sale margins for this year may, you know, remain relatively stable.
Process of looking at potential opportunities on the on the secured side.
Throughput place or move out some of our debt maturities there.
The.
Unless we start to the extent that we see an opportunity that makes sense for us in the high yield market, we potentially would look at if there is.
David Spector: There's some abs and flow to take place during a month or so. But I think, generally speaking, we are seeing gain on sale margins stabilized. And as I mentioned earlier, I think in correspondent, you know, we're starting to see a little bit of opportunity with the banks stepping back, you know, for us to increase margin. I think that looks from a mortgage size perspective, mortgage market size, given where the application index is showing, you know, right now, we're probably, you know, running at a $1.2, $1.3 trillion run rate, giving the average balance where it's a unit run rate that we haven't seen since 1990.
Speaker 3: transcript
Speaker 3: how to address our maturity for our unsecured debt that's coming up not till later in 2025, but that still is a bit off. And we think that there's a pretty large window of opportunity here between here and when that maturity comes. And so we don't necessarily expect anything in the near term.
How to address our maturity for our unsecured debt that's coming up not until later in 2025.
But that still is a bit off and we think that there is a pretty large window of opportunity here between here and.
When that maturity comes in so we're not we don't necessarily expect anything in the near term.
Thank you and I have been killed by back site. Thank you.
And your last question comes from the line of Kevin Barker of Piper Sandler Your line is open.
Speaker 1: transcript
Speaker 1: And your last question comes from the line of Kevin Barker of Piper Sandler. Your line is open.
Speaker 4: transcript
Speaker 4: Thank you. I just wanted to follow up on the interest income, which has been fairly strong. Obviously, you have some.
Thank you just wanted to follow up on the interest income which has been fairly strong.
Obviously you have some.
Speaker 4: transcript
Speaker 4: different moving parts with higher interest rates, higher custodial balances, and then some seasonality associated with it, combined with some decline in debt. So maybe could you just provide us a little bit more color on what do you expect from the direction of interest income, just given higher custodial balances, and then interest expense on the other side, given lower origination volume, just seasonally.
Different moving parts with higher interest rates higher custodial balances.
And then some seasonality associated with it.
David Spector: I generally say, you know, we will see, you know, rates come down when I don't, you know, I'm not in the production business, but I think, you know, when you look at the market as a whole, it's generally thought of in the second half of next year, you'll start to see some, you know, pressure come off of rates. Having said that, as I said, I'm generally, I'm very pleased with where margins are.
Combined with some decline.
The decline in debt.
Maybe could you just provide us a little bit more color on what do you expect from the direction of interest income just given higher custodial balances and then interest expense on the other side.
Given lower origination volume seasonally.
Yes.
Speaker 3: transcript
Speaker 3: Overall, when we look at the interest in come to your point, there's a number of different moving pieces. So we tend to look at it on, you know.
So overall.
David Spector: There's rational pricing taking place in all three channels. And I suspect that in Q4 and a little bit in Q1, given the high level of rates, you're going to start to see some more consolidation taking place, which will only lend itself to, you know, margins at a minimum. Staying stable. And then finally from a credit perspective, you guys obviously did not do a dividend this quarter, given where your debt trades have you guys thought about, you know, doing open market purchases tender like your 25 refinancing anything would be really helpful color.
When we look at the.
The interest income to your point there is.
A number of different moving pieces. So we tend to look at it on.
The interest income related to production and then the interest income related to servicing.
Speaker 3: transcript
Speaker 3: the interest income related to production and then the interest income related to servicing. The interest income related to production given some of the changes in the yield curve.
Interest income related to production given some of the changes in the.
In the yield curve.
Towards the end of last quarter at the beginning of this quarter would tend to push up.
Speaker 3: transcript
Speaker 3: toward the end of last quarter, at the beginning of this quarter, would tend to push up the note rate of mortgage rates versus the short-term rates of state relatively stable. So we'd expect that relationship between our financing lines and the note rates on the loans that are coming in to increase that interest spread so that would generally move the interest income on the production side in a positive direction.
Note rate of mortgage rates versus the short term rates have stayed relatively stable. So we would expect that relationship between our financing lines and the note rates on the <unk> on the loans that are coming in.
David Spector: Thank you so much. Sorry, we did, we did do a dividend this quarter just to be clear in case I misheard you, so we did, you know, the issue is quarterly dividend, but, you know, we're not currently, you know, we're not currently, as I mentioned, we are looking at potential opportunities in the, you know, unsecured debt space or in the high yield space. You know, have not seized upon that yet, we've additionally been raising, we've increased some of our, or in the process of looking at potential opportunities on the, on the secured side.
To increase that that that interest spread.
So that would generally move the interest income on the production side in a positive direction.
Speaker 3: transcript
Speaker 3: On the servicing side, a couple of factors. So one, you know, as we noted in our servicing income.
On the servicing side a couple of factors so one.
As we noted in our servicing income.
Speaker 3: transcript
Speaker 3: sort of disclosure or servicing profitability slide, slide 14, this, you know, in the slide deck. We did see interest expense decline quarter over quarter due to a lower draw on our, you know, on our servicing, our servicing financing lines. We are keeping somewhat less cash. You may have seen the cash balance in our.
Sort of disclosure our servicing profitability slide.
Slide 14 this.
The slide deck.
We did see interest expense declined quarter over quarter due to a lower draw on our.
On our servicing or.
Our servicing financing lines.
We are keeping somewhat less cash than we have seen the cash balance and our.
David Spector: For place to move out some of our debt maturities there, the, you know, unless we are to the extent that we see an opportunity that makes sense for us in the in the high yield market, we potentially would look at if there's, you know, how to address our, you know, maturity for unsecured debt that's coming up not till later in 2025. But that still is a bit off and we think that there's a, you know, a pretty large window of opportunity here between here and, you know, when that maturity comes and so we're not, we don't necessarily expect anything in the near term.
The cash balance on our balance sheet declined somewhat so we have begun to reduce.
Speaker 3: transcript
Speaker 3: you know, the cash balance on our balance sheet decline somewhat. So we have begun to reduce the overall cash that we're holding on the balance sheet. We've had been holding somewhat elevated levels.
The overall cash that we're holding on the balance sheet, we had been holding somewhat elevated levels due to the.
Speaker 3: transcript
Speaker 3: due to the, you know, some of the markets are well that we saw earlier in the year. So we've begun to reduce that, that really, you know, reduces some of the interest expense that we're seeing on the financing lines.
Some of the market turmoil that we saw earlier in the year. So we've begun to reduce that that really reduces the interest expense that we're seeing on the financing lines.
Speaker 3: transcript
Speaker 3: would also reduce somewhat the interest income that we're earning on that cash. But overall, since we're paying a spread of three to 400 basis points on the servicing lines, you know, would bring down that interest expense and create an overall positive benefit.
It also reduced somewhat.
The interest income that we're earning on that cash, but overall since we are paying a spread of 300 to 400 basis points on the servicing lines.
Would bring down that interest expense and created overall positive benefit.
Speaker 3: transcript
Speaker 3: On the interest on the custodials, we do expect that to probably come down a little bit quarter over quarter, just as to your point, the overall custodial balances or the escrow account balances tend to come down in the fourth quarter and be a little bit lower in the fourth quarter and first quarter due to
Unknown Attendee: Thank you, and I mentioned my back, sorry, thank you.
On the interest on the custodial.
We do expect that to probably come down a little bit quarter over quarter, just as to your point, the overall custodial balances or the escrow account.
Kevin Barker: And your last question comes from line of Kevin Barker of Piper Sandler, your line is open. Thank you. I just wanted to follow up on the interesting come, which has been fairly strong. Obviously you have some different moving parts with higher interest rates, higher custodial balances, and then some seasonality associated with it combined with some decline in debt. So maybe could you just provide us a little bit more color on what you expect from the direction of interest income, just given higher custodial balances, and then interest expense on the other side, given lower origination volume just seasonally.
Kevin Barker: So overall, you know, when we, when we look at the, you know, the interest income to your point, there's a number of different moving pieces. So we tend to look at it on, you know, the interest income related to production and then the interest income relates to servicing interest income related to production given some of the changes in the, you know, in the yield curve. You know, toward the end of last quarter, the beginning of this quarter would tend to push up, you know, the note rate of mortgage rates versus the short term rates have stayed relatively stable.
Account balances tend to come down in the fourth quarter and be a little bit lower in the fourth quarter and first quarter.
Speaker 3: transcript
Speaker 3: seasonal tax payments that typically occur toward the end of the year or very beginning of the year.
Seasonal tax payments that typically occur towards the end of the year or very beginning of the year.
So.
Hopefully I know that was a lot.
Speaker 3: transcript
Speaker 3: Hopefully, I know that was a lot of different components, but a couple of different countervailing effects. But overall, I would say, you know, probably interest income ends up in a pretty similar place with all those effects is what we saw in this quarter. If we're looking out into the next quarter.
Different components, but.
And a couple of different countervailing effects, but overall I would say probably interest income ends up in a pretty similar place with all of those effects as what we saw in this quarter. If we're looking out into the next quarter.
Speaker 4: transcript
Speaker 4: Yes, that's very helpful. Just, you know, from a seasonality perspective, what percent of the Castillo-DeBalance would you expect to decline in the fourth quarter and then in the first quarter just due to seasonality?
Yes, that's very helpful.
From a seasonality perspective.
What percent of the cost to yield the balance would you expect to decline in the fourth quarter and then in the first quarter just due to seasonality.
Yes typically.
Speaker 3: transcript
Speaker 3: Yeah, typically, typically the average is lowest in the first quarter.
Typical average is lowest in the first quarter.
Because.
Speaker 3: transcript
Speaker 3: because the tax payments happen through the fourth quarter. So I think compared to the third quarter, you know, I don't know the percentages off the top of my head, but I think roughly, you know, in the fourth quarter, down 10 to 15%, and then in the first quarter, you know, a bit higher than that, probably down 20% or a little bit more. Okay.
The tax payments happen through through the through the fourth quarter, So I think compared to the third quarter.
I don't I don't know the.
Percentages off the top of my head.
But I think roughly.
Kevin Barker: So we'd expect, you know, that relationship between our financing lines and the note rates on the, on the loans that are coming in to increase that, you know, that interest spread. So that, you know, would generally move the interest income on the production side and a positive direction on the servicing side, a couple of factors. So one, you know, as we noted in our, in our servicing income, sort of disclosure, our servicing profitability slide, slide 14, this, you know, in the slide deck.
In the fourth quarter down 10% to 15% and then in the first quarter.
A bit higher than that probably down 20.
20% or a little bit more.
Okay. Thanks for taking my questions Dan.
Yes.
We have no further questions at this time I will now turn it back to Mr. Specter for closing remarks.
Speaker 1: transcript
Speaker 1: We have no further questions at this time. I'll now turn it back to Mr Spector for closing remarks.
Speaker 5: transcript
Speaker 5: Well, thank you. Thank you, everyone, for joining today. We appreciate the time and the thoughtful questions. And if you have any additional questions, please don't hesitate to reach out to our IR team. And, you know, I look forward to speaking to all of you real soon. Take care.
Well. Thank you. Thank you everyone for joining today.
Appreciate the time and the thoughtful questions and.
If you have any additional questions. Please don't hesitate to reach out to.
Our IR team and I.
Kevin Barker: We did see interest expense decline quarter over quarter due to a lower draw on our, you know, on our servicing, our servicing financing lines. We are keeping somewhat less cash may have seen the cash balance in our, you know, the cash balance on our balance sheet decline somewhat so we have begun to reduce the overall cash that we're holding on the balance sheet we've had been holding somewhat elevated levels due to the, you know, some of the market turmoil that we saw earlier in the year so we've begun to reduce that that really, you know, reduce some of the interest expense that we're seeing on the financing lines.
I look forward to speaking to all of you will soon take care.
Speaker 1: transcript
Speaker 1: This concludes today's conference call. You may now disconnect.
This concludes today's conference call you may now disconnect.
Yeah.
Okay.
And to all of you will soon take care.
Kevin Barker: Would also reduce somewhat the interest income that we're earning on that cash, but overall since we're paying a spread of three to 400 basis points on the servicing lines, you know, would bring down that interest expense and create an overall positive benefit on the interest on the custodials. You know, we do expect that to probably come down a little bit quarter over quarter just as to your point the overall custodial balances are the escrow account balances tend to come down in the fourth quarter and be a little bit lower in the fourth quarter and first quarter due to seasonal tax payments that typically occur toward the end of the year or very beginning of the year.
Kevin Barker: So hopefully I know that was a lot of different components but in a couple of different counter bailing effects but overall I would say, you know, probably interest income ends up in a pretty similar place with all those effects is what we saw on this quarter if we're looking out into the next quarter.
Yes, that's very helpful. Just, you know, from a seasonality perspective, what percent of the custodial the balance, would you expect to decline in the fourth quarter and then in the first quarter just due to seasonally. Yes, typically, typically the average is lowest in the first quarter because they the tax payments happen through through the through the fourth quarter. So I think compared to the third quarter, you know, I don't I don't know the percentages off the top of my head.
But I think roughly, you know, in the fourth quarter down 10 to 15% and then in the first quarter, you know, a bit higher than that, probably down 20 20% or a little bit more. Okay. Thanks for taking my question, Stan. We have no further questions at this time.
I'll turn it back to Mr. Specter for closing remarks. It will thank you. Thank you everyone for joining today. We appreciate the time and the thoughtful questions and if you have any additional questions, please don't hesitate to reach out to to our IR team and, you know, look forward to speaking to all of you go soon. Take care.
This concludes today's conference call. You may know disconnect. All of you go soon.
Take care.