Q4 2023 PennyMac Financial Services Inc Earnings Call

Operator: Good afternoon, and welcome to PennyMac Financial Services Inc.'s fourth quarter and full year 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 forward-looking statements that are subject to certain risks identified on slide 2 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. I'd now like to introduce David Spector, PennyMac Financials Chairman and Chief Executive Officer, and Dan Perotti. PennyMac Financial's Chief Financial Officer. Gentlemen, I'll turn the call over to you.

Good afternoon, and welcome to Pennymac Financial Services, Inc. 's fourth quarter and full year 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 P. S. S I.

Dot Penny Mac Dot com.

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.

Yes.

I would now like to introduce David Spector, Pennymac, Financial's, Chairman and Chief Executive Officer, and Dan <unk>.

<unk> Financial's, Chief Financial Officer, gentlemen, I'll turn the call over to you. Thank you operator, good afternoon, and thank you to everyone for participating in our fourth quarter earnings call.

David Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our fourth quarter earnings. PFSI reported a net loss of $37 million and an annualized return on equity of negative 4% in the fourth quarter.

<unk> reported a net loss of $37 million in an annualized return on equity of negative 4% in the fourth quarter.

David Spector: These results included a non-recurring accrual of $158 million relating to our longstanding arbitration with BlackKnight and $76 million of net fair value declines on MSRs and hedges, given significant interest rate volatility during the quarter. Excluding the impact of these items, performance was very strong, with an annualized operating return on equity of 15%, marking the culmination of another outstanding year for the company and highlighting the strength of our balanced business model. 2023 was one of the more challenging origination markets in recent history, with industry volumes down approximately 40% from 2022 and unit originations at their lowest level since 1990. However, PennyMac, through its multi-channel production platform, generated $69 million of production pre-tax income and produced nearly $100 billion in UPB of mortgage loans, down only 9% from 2022.

These results included a non recurring accrual of $158 million relating to our longstanding arbitration with black Knight.

And $76 million of net fair value declines on Msr's in hedges given significant interest rate volatility during the quarter.

Excluding the impact of these items performance was very strong with an annualized operating return on equity of 15%, marking the culmination of another outstanding year for the company and highlighting the strength of our balanced business model.

2023 was one of the more challenging origination markets in recent history with industry volumes down approximately 40% from 2022 and needed originations at their lowest level since 1990.

However, pennymac due its multichannel production platform generated $69 million of production pre tax income and produced nearly $100 billion in <unk> of mortgage loans.

Only 9% from 2022.

David Spector: This demonstrates both our strong access to the purchase market and our ability to profitably support our customers and business partners. These production volumes continue to drive the organic growth of our servicing portfolio, which ended the year with more than 2.4 million customers and over $600 billion in UPB, up 10% from the end of last year. Our servicing business generated $268 million in pre-tax income, excluding the Black Knight accrual. As the second largest producer of mortgage loans in the country and the fifth largest servicer, we have achieved significant scale in our mortgage banking platform, with the capacity for continued growth and profitability in the years to come. This management team's ability to effectively manage capital has always been a competitive advantage for PFSI, and I am extraordinarily proud of the work we accomplished in 2023

This demonstrates both our strong access to the purchase market and our ability to profitably support our customers and business partners. These.

These production volumes continued to drive the organic growth of our servicing portfolio, which ended the year with more than $2 4 million customers and over $600 billion of new PV 10.

10% from the end of last year.

Our servicing business generated $268 million in pre tax income, excluding the black Knight accrual.

Has the second largest producer of mortgage loans in the country and the fifth largest servicer, we have achieved significant scale in our mortgage banking platform with the capacity for continued growth and profitability in the years to come.

This management team's ability to effectively manage capital has always been a competitive advantage for PFS Si and I'm extraordinarily proud of the work we accomplished in 2023.

David Spector: Not only did we return more than $110 million to stockholders through share repurchases and dividends, but we took meaningful steps to further strengthen the balance, issuing more than 1.5 billion dollars in new long-term debt at attractive terms and redeeming 875 million dollars in debt with upcoming maturity. I would like to provide a brief update on our long-standing litigation with Black Knight as outlined on slide 5 of our earnings presentation. In January, the arbitrator issued a final award of $150 million plus interest to Black Knight, down from the interim award determined in November.

Not only do we return more than $110 million to stockholders through share repurchases and dividends, we took meaningful steps to further strengthen the balance sheet issuing more than $1.5 billion in new long term debt at attractive terms and redeeming $875 million in debt with upcoming maturities.

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I would like to provide a brief update on our long standing litigation with Black Knight has outlined on slide five of our earnings presentation.

In January the arbitrator issued a final award of $150 million plus interest to Black Knight down from the interim reward determined in November PFS.

David Spector: PFSI recorded the related expense accrual in the fourth quarter, as previously noted. While we disagree with the ruling, we are very pleased with the arbitrator's affirmation that SSC remains our own proprietary technology as well as PennyMac's ability to utilize it as we see fit to benefit our customers and stakeholders. Since we launched the system in 2019, it has performed extremely well, meaningfully enhancing our capabilities while helping to drive down costs. With this technology now free and clear of any restrictions on use or development, we believe there is potential for additional opportunities for the company and stakeholders over time. Turning now to the origination market, we believe the overall market dropped in 2023 as mortgage rates declined from their recent highs, and anticipated future rate cuts have increased third-party estimates for industry originations in 2024 to approximately $2 trillion. Much of this anticipated growth is based on expectations for interest rate reductions later in the year, and we expect volume in the loan origination market to remain seasonally low in the first quarter of 2024 before moving into the spring and summer home buying seasons.

<unk> recorded the related expense accrual in the fourth quarter as previously noted.

While we disagree with the ruling we are very pleased with the arbitrators affirmation that SSE remains our own proprietary technology as well as providing <unk> the ability to utilize it as we see fit to benefit our customers and stakeholders.

Since we launched this system in 2019, it has performed extremely well meaningfully enhancing our capabilities, while helping to drive down costs.

With this technology now free and clear of any restrictions on use or development. We believe there is potential for additional opportunities for the company and stakeholders over time.

Turning now to the origination market, we believe the overall market trough in 2023 has mortgage rates have declined from their recent highs and anticipated future rate cuts have increased third party estimates for industry originations in 2024 to approximately two trillion dollars.

Much of this anticipated growth is based on expectations for interest rate reductions later on in the year and we expect volume in the loan origination market to remain seasonally low in the first quarter of 2024 before moving into the spring and summer home buying season.

David Spector: With a balanced business model and scale in both production and servicing, we remain very well positioned if interest rates remain high or decline further. As you can see on slide 7 of the earnings presentation, operating returns on equity have increased throughout 2023. Returning to the double digits and consistent with our goals at the beginning of the year, the servicing segment continues to drive earnings, and operating pre-tax income has improved in recent quarters due to the growth in the size of PFSI's own portfolio and increased earnings from placement fees on custodial balances due to higher short-term rates. Operating expenses remain low given our growing operational scale and continued low delinquency.

With a balanced business model and scale in both production and servicing will remain very well positioned if interest rates remain high or decline further.

As you can see on slide seven of the earnings presentation operating returns on equity have increased throughout 2023.

Returning to the double digits and consistent with our goals at the beginning of the year.

The servicing segment continues to drive earnings and operating pre tax income has improved in recent quarters due to the growth in the size of PFS size owned portfolio and increased earnings from placement fees and custodial balances due to higher short term rates.

Operating expenses remained low given our growing operational scale and continued low delinquencies.

David Spector: In production, while the market is expected to remain competitive, margins are expected to improve over the course of 2023, and we estimate we have gained a considerable amount of market share, especially in the correspondent and broker direct channels, which provides strong access to the purchase mark. 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 do decline. At year-end, 22% of our servicing portfolio consisted of mortgages with note rates in excess of 5%. In the fourth quarter, production pre-tax income was $39 million.

In production, while the market is expected to remain competitive margins have improved over the course of 2023, and we estimate we have gained a considerable amount of market share, especially in the correspondent and broker direct channels, which provides 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 do decline.

At year end, 22% of our servicing portfolio consisted of mortgages with note rates in excess of 5%.

In the fourth quarter production pre tax income was $39 million and while we expect some seasonality in the first quarter, we expect to build on this profitability in future quarters as the origination market improves.

David Spector: And while we expect some seasonality in the first quarter, we expect to build on this profitability in future quarters as the origination market improves. As I said earlier, I am extraordinarily proud of what we accomplished in 2023, and I am even more excited about PennyMac Financial's future. Our long track record of strong operational and financial performance is unique in the mortgage industry and has been driven by the resilience of our balanced business model, with industry-leading positions in both production and services, as well as our strong capital and risk management discipline. I believe we are the best-positioned company in the industry with a fully scaled balanced business model, proprietary industry-leading technology, a strong balance sheet, and a growing number of servicing customers that stand to benefit from the products and services we offer to fulfill their home ownership needs.

As I said earlier I am extraordinarily proud of what we accomplished in 2023 and I'm, even more excited about Pennymac Financial's feature.

Our long track record of strong operational and financial performance is unique in the mortgage industry and has been driven by the resilience of our balanced business model with industry, leading positions in both production and servicing as.

As well as our strong capital and risk management disciplines.

I believe we are the best positioned company in the industry with a fully scaled balanced business model.

Brian Terry industry, leading technology, a strong balance sheet and a growing number of servicing customers that stand the benefit from the products and services, we offer to fulfill their homeownership needs.

David Spector: I will now turn it over to Dan, who will review the drivers of PFSI's fourth quarter financial performance. Thank you, David. PFSI reported a net loss of $37 million in the fourth quarter, or negative $0.74 in earnings per share for an annualized ROE of negative four percent. As David mentioned, these results include a non-recurring expense accrual of $158 million before income tax, or $2.20 per diluted share after income taxes related to the final award of our longstanding arbitration with BlackBerry. PFSI's Board of Directors also declared a fourth quarter cash dividend of 20 cents. Book value per share was $70.52, down from the end of the prior quarter, primarily due to the net loss.

I will now turn it over to Dan who will review the drivers of PFS <unk> fourth quarter financial performance.

Thank you David PFS I reported a net loss of $37 million in the fourth quarter or negative <unk> 74 in earnings per share for an annualized Roe of negative 4%.

As David mentioned these results include a nonrecurring expense accrual of $158 million before income taxes were $2 20 per diluted share after income taxes related to the final award of our long standing arbitration with Black Knight.

<unk> Board of Directors also declared a fourth quarter cash dividend of <unk> 20 per share.

Book value per share was $70 52 down from the end of the prior quarter, primarily due to the net loss.

Dan Perotti: Turning to our production segment, pre-tax income was $39 million, up from $25 million in the prior quarter. Total acquisition and origination volume was $26.7 billion in unpaid principal balance, up 6% from the prior quarter, despite a decrease of more than 20% in the size of the origination market from the prior quarter. $24.2 billion was for PFSI's own account, and $2.5 billion was fee-based fulfillment activity for PFSI. PennyMac maintained its dominant position in correspondent lending, with total acquisitions of $23.6 billion in the fourth quarter and margins similar to levels reported last quarter.

Turning to our production segment pretax income was $39 million.

Up from $25 million in the prior quarter.

Total acquisition and origination volume were $26 7 billion in unpaid principal balance up 6% from the prior quarter. Despite a decrease of more than 20% and the size of the origination market from the prior quarter.

$24 2 billion was for PFS is one account and $2 $5 billion was fee based fulfillment activity for PMT.

Any Mac maintained its dominant position in correspondent lending with total acquisitions of $23 6 billion in the fourth quarter and margin similar to levels reported last quarter.

David Spector: We estimate that in 2023, PennyMac will represent more than 22% of the market share in correspondent lending, up from 15% in 2022. We attribute this market share growth not only to the retreat of certain market participants but also to our consistency in execution and industry-leading technology. Acquisitions in January are expected to total approximately $6.6 billion, and locks are expected to total $6.9 billion.

We estimate that in 2023, Penny Mac represented more than 22% market share in correspondent lending up from 15% in 2022.

We attribute this market share growth not only to the retreat of certain market participants, but also to our consistency and execution and industry, leading technology acquisitions. In January are expected to total approximately $6 6 billion and locks are expected to total $6 9 billion.

And broker direct we see strong trends and continued growth in market share as we position <unk> as a strong alternative to the channel leaders.

Dan Perotti: In BrokerDirect, we see strong trends and continued growth in market share as we position PennyMac as a strong alternative to the channel lead. Both locks and fundings for the quarter were down in single-digit percentages from last, must end the overall market, and margins were down due to higher levels of fallout as mortgage interest rates declined. The number of approved brokers at year-end was over 3,800, up 42% from the end of the prior year, and we estimate that we represented approximately 3.6% of originations in the channel in 2020. In January, broker-direct originations were $600 million, and locks were $1 billion. In ConsumerDirect, volumes remain low, but as David talked about, we remain well-positioned given the number of customers we have added to the portfolio with higher mortgages. Production expenses, net of loan origination expense, were 8% lower than the prior quarter, primarily due to lower compensation accruals related to finance. Turning to servicing, the servicing segment recorded a pre-tax loss of $96 million, primarily driven by the non-recurring expense accrual mentioned earlier.

Both locks and fundings for the quarter were down in the single digit percentages from last quarter, mostly.

Less than the overall market and margins were down due to higher levels of fallout as mortgage interest rates declined.

The number of approved brokers at year end was over 3800 up 42% from the end of the prior year and we estimate that we represented approximately three 6% of originations in the channel in 2023 and.

In January broker direct originations were $600 million and locks were $1 billion.

And consumer direct volumes remained low, but as David talked about we remain well positioned given the number of customers. We have added to the portfolio with higher mortgage rates.

<unk> expenses net of loan origination expense were 8% lower than the prior quarter, primarily due to lower compensation accruals related to financial performance.

Turning to servicing the servicing segment recorded a pretax loss of $96 million.

Primarily driven by the nonrecurring expense accrual I mentioned earlier.

Dan Perotti: Excluding the accrual, Servicing contributed $63 million to pre-tax income, down from $101 million in the prior quarter, primarily due to higher-net MSR valuation-related, excluding valuation-related changes and non-recurring items. Servicing had very strong results with a pre-tax contribution of $144 million, or 9.6 basis points of Average Servicing Portfolio UPB, up from $120 million or 8.6 basis points in the prior quarter. Loan servicing fees were up from the prior quarter, primarily due to growth in PFSI's owned portfolio, as PFSI has been acquiring a larger portion of the conventional correspondent production in recent periods. Operating expenses declined, also due to lower compensation accruals related to PFSI's financial performance. As expected, earnings on custodial balances and deposits and other income decreased $10 million from the prior quarter as balances declined due to seasonal property tax payments.

Excluding the accrual servicing contributed $63 million to pretax income down from $101 million in the prior quarter, primarily due to higher net MSR valuation related declines.

Excluding valuation related changes and nonrecurring items servicing had very strong results with pre tax contribution of $144 million.

Nine six basis points of average servicing portfolio <unk> up from $120 million or eight six basis points in the prior quarter.

Loan servicing fees were up from the prior quarter, primarily due to growth in <unk> owned portfolio <unk> has been acquiring a larger portion of the conventional correspondent production in recent periods.

Operating expenses declined also due to lower compensation accruals related to <unk> financial performance.

As.

<unk> earnings are custodial balances in deposits and other income decreased $10 million from the prior quarter as balances declined due to seasonal property tax payments.

Dan Perotti: Realization of MSR cash flows decreased $14 million from the prior quarter due to higher average interest rates for the majority of investors. EBO income remained relatively unchanged, and we continue to expect its contribution will remain low for the next few quarters, while interest expense increased from the prior quarter due to higher average balances of debt outside. The fair value of PFSI's MSR decreased by $371 million during the quarter, driven by a decline in mortgage rates, which drove expectations for increased prepayment activity in the future. However, hedging gains were $295 million, offsetting 80% of the decline in the MSR fair value. The net impact of MSR and hedge fair value changes on PFSI's pre-tax income was negative $76 million, and the impact on earnings per share was negative $1.05. The investment management segment contributed $1.9 million to pre-tax income during the quarter, and assets under management were unchanged from the end of the prior period.

Realization of MSR cash flows decreased $14 million from the prior quarter due to higher average interest rates for the majority of the quarter.

<unk> income remained relatively unchanged and we continue to expect its contribution will remain low for the next few quarters, while interest expense increased from the prior quarter due to higher average balances of debt outstanding.

The fair value of <unk> MSR decreased by $371 million during the quarter driven by a decline in mortgage rates, which drove expectations for increased prepayment activity in the future.

Hedging gains were $295 million offsetting 80% of the decline in the MSR fair values.

The net impact of MSR and hedge fair value changes on <unk> pre tax income was negative $76 million and the impact on earnings per share was negative $1 five.

The investment management segment contributed $1 9 million to pre tax income during the quarter and assets under management were unchanged from the end of the prior quarter.

Finally on capital last quarter, we noted the October issuance of a five year $125 million term loan secured by Ginnie Mae MSR and servicing advances.

In December we successfully raised $750 million in six year unsecured senior notes and subsequently retired $875 million of secured term notes due in 2025, we.

Dan Perotti: Finally, on capital, last quarter we noted the October issuance of a five-year, $125 million term loan secured by Ginnie Mae MSRs and servicing. In December, we successfully raised $750 million in six-year unsecured senior notes and subsequently retired $875 million of secured term notes due in 2020. We'll now open it up for questions. Operator?

We will now open it up for questions operator.

Thank you, ladies and gentlemen, I would like to remind everybody that we will only take questions related to Pennymac financial services, Inc, or PFS shy and 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 we can answer as many questions as possible today.

Operator: Ladies and gentlemen, I would like to remind everybody that we will only take questions related to PennyMac Financial Services, Inc. or PFSI. Also, we would ask that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure we can answer as many questions as possible today. If you would like to ask a question at this time, simply press star followed by the number one on your touch-tone keypad, and if you'd like to withdraw your question again, it's star followed by the number one.

Would like to ask a question at this time simply press star followed by the number one on your Touchtone keypad and if you'd like to withdraw your question again its star followed by the number one.

We'll take our first question today from the line of Kevin Barker with Piper Sandler.

Your line is live.

Good afternoon, Thanks for taking my questions.

I just wanted to follow up on your comments about assets and.

With the technology being free and clear from any restrictions on you all.

Okay.

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Operator: We'll take our first question today from the line of Kevin Barker with Piper Sandler. Your line is live. Good afternoon, Ben.

I believe there is a potential for additional opportunities and benefits for the company.

Could you maybe expand upon what you can do with this technology, whether it's utilize it.

David Spector: Thanks for taking my questions. I just wanted to follow up on your comments about SSE and, you know, the technology being free and clear from any restrictions. You also made the quote, and believe there's a potential for additional opportunities and benefits for the company. Could you maybe expand upon what you can do with this technology, whether it's utilize it within PennyMac or maybe expand upon the use of that technology within PennyMac or outside of PennyMac? Thank you. Sure, Kevin.

Within Fannie Mac or maybe expand upon the use of that technology within Fannie Mac or outside of any back. Thank you.

Sure Kevin.

Sure Kevin.

So first of all SSE has been a great system for us as a servicer.

We adopted at the end of 2019 were tested Barry that tested, but we put it to use with Covid and 2020 and it performed very very well.

In terms of being able to meet the needs of our borrowers and offering forbearance citizen modifications.

And it's a system that we believe gives us a tremendous amount of competitive advantage, it's cloud based.

With full integration from front end back end and middleware component.

David Spector: First of all, SSE has been a great system for us as a servicer. You know, we adopted it at the end of 2019. We were not tested very, not tested, but we put it to use with COVID in 2020, and it performed very, very well in terms of being able to meet the needs of our borrowers and offering forbearances and modifications. And it's a system that we believe gives us a tremendous amount of competitive advantage. It's cloud-based, and it's in it with full integration of front-end, back-end, and middleware components.

Customers are able to access our advanced web.

Mobile and IV, our solutions easily with high satisfaction rates.

<unk> unique workflow attached to it.

State of the art technology.

And look I think it gives us a competitive advantage.

In the marketplace and so as itself is something that I think we continue to see our servicing expenses get driven down since we adopted it and it's something that has been meaningful to us in our evolution as a top five servicer.

As it pertains to the unfortunate litigation look we're very happy for the lawsuit to be in the rearview mirror.

And while I disagree with the final ruling.

But to say the ruling clearly add more positive or negative.

David Spector: Customers are able to access our advanced web, mobile, and IVR solutions easily with high satisfaction rates. It's got unique workflow attached to it with state-of-the-art technology, and look, I think it gives us a competitive advantage in the marketplace. And so, in and of itself, it's something that I think, you know, we continue to see our servicing expenses get driven down since we adopted it, and it's something that has been meaningful to us in our evolution as a top five service. As it pertains to the unfortunate litigation, look, we're very happy for the lawsuit to be in the rearview mirror. And while I disagree with the final ruling, suffice it to say, you know, the ruling clearly had more positive than negative aspects.

We're happy to retain ownership of our servicing system.

FSC free and clear to us though.

We see fit in.

In terms of other opportunity it's been 60 days since the ruling came out and we've been working to get.

Get really get this behind it.

<unk> been very encouraged by opportunities that presented themselves.

People approaching us and we're beginning the exploration and evaluation process and we don't feel any in a hurry to do something we want to do something that's best for all stakeholders, but suffice it to say, it's something that is very unique in the industry and gives us a real advantage.

And thank you for those comments and then.

You produced a 15% operating return on equity this quarter.

It seems like you have quite a bit of momentum going into 2024.

Not only within the origination channel, but also on the servicing side.

David Spector: We're happy to retain ownership of our servicing system. We own SSE free and clear to use as we see fit. In terms of other opportunities, it's been 60 days since the ruling came out, and we've been working to get this, to really get this behind it. I've been very encouraged by the opportunities that have presented themselves and the people approaching us. And we're beginning the exploration and evaluation. We don't feel any hurry to do anything.

Do you feel that the 15% Roe.

Is the run rate now and there is potential for significant upside in 'twenty four, particularly if we were to see picker bigger origination market.

Well look I think that as you pointed out the operating ROE was 15% in the fourth quarter, which is up 13% from the third quarter.

I'm expecting us to continue to build on the on the call with Q4 results Theres, maybe some seasonality in the first quarter, but.

David Spector: We want to do something that's best for all stakeholders. But suffice it to say, it's something that is very unique in the industry and gives us a real advantage. And thank you for those comments.

The servicing has just been unbelievable for us.

Profitability is continuing to remain strong in this high interest rate environment.

David Spector: You produced a 15% operating return on equity this quarter. It seems like you have quite a bit of momentum going into 2024, not only within the origination channel but also on the servicing side. Do you feel that the 15% ROE is the norm right now and there's potential for significant upside in 2024, particularly if we were to see a bigger origination market? So, look, I think that, as you point out, the operating ROE was 15% in the fourth quarter, which is up 13% from the third quarter. I'm expecting us to continue to build on the core Q4 results. There's going to be some seasonality in the first quarter. But, you know, the servicing has just been unbelievable.

Consumer is continuing to perform in and stay current.

We are continuing higher servicing fees from the growth in our own portfolio and look on the production side, we're very profitable in 'twenty. Three is I think we're more profitable in 'twenty three than we were in 'twenty two on the production side and given given the trends I'm seeing in margins first and foremost, but then also.

Trends that we're seeing in correspondent broker direct I'm really encouraged that if we do see rate declines, especially in the back half of the year is as the markets are projecting and we can see.

Our our production business grow its profitability.

Yes, just to add onto that a little bit.

To Echo what David said, we saw we saw those ROE operating ROE increased through 2023.

David Spector: Profitability is continuing to remain strong in this high interest rate environment. The consumer is continuing to perform and stay current. You know, we have continued higher servicing fees from the growth in our own portfolio. And look, on the production side, you know, we were very profitable in 23. As a matter of fact, we were more profitable in 23 than we were in 22 on the production side.

Move upwards consistent with how what we had hoped for put forth.

At the beginning of the year, where we really did see Q1 of last year as that sort of trough.

Not necessarily going to be in a totally straight line. There is some seasonality to this business. If we're looking at Q1, although we do think there is there is upside.

Dan Perotti: And given the trends I'm seeing in margins, first and foremost, but also the trends that we're seeing in Correspondent Broker Direct, I'm really encouraged that if we do see rate declines, especially in the back half of the year as the markets are projecting, and we can see our production business grow its profitability. Just to add to that a little bit, I, you know, to echo what David said, we saw those ROEs, operating ROEs increase through 2023 move upwards consistent with how, you know, what we had hoped for, put forth at the beginning of the year, where we really did PQ1 of last year as a sort of trough. It's not necessarily going to be in a totally straight line. There is some seasonality to this business that we're looking at in Q1, but we do think there is, you know, there is upside potential from that 15% ROE in 2024 overall, especially, as you noted, if the, as people expect, the market becomes larger, the mortgage market. Thank you, David. Thank you, Dan.

Upside potential from that 15% Roe.

In 2024 overall, especially as you noted.

If and as people expect the market becomes larger.

The mortgage market.

Okay.

Thank you David Thank you Dan.

Thanks, Kevin questions.

Our next question comes from the line of Michael Kaye with Wells Fargo.

Your line is live.

Hi.

That's a 2021 investor day.

20% ROE and a more of a normalized environment just wondering what's been some of the pluses and minuses that analysis back then.

You bought back a lot of stock during the pandemic period, it looks like 20% of your share count.

Responded and broker direct our lightweight ahead of planned servicing is doing great too, but consumer direct probably pushed out that opportunity a little bit, but I'm trying to figure out is 20% or so is that still the right.

Goalpost, considering you just did 15% in a very challenging mortgage market.

Well I think the.

That still is the goalposts that we have obviously, we're generally striving to do 28% plus part of David David's mantra and that's what we have our focus on but we do think.

Operator: Thank you, Kevin. Our next question comes from the line of Michael Kay with Wells Fargo. Your line is live. Hi.

Operator: You know, at 2021 Investor Day, you said, you know, 20% ROE in more of a normalized environment. Just wondering what's been some of the pluses and minuses since that analysis back then. I know you bought back a lot of stock during the pandemic period. It was like 20% of your share count.

We certainly think that 20% is achievable in a more normalized market.

If we're looking at 2024 and specific.

It's probably still under what we would consider a totally normalize market to your point, if we're looking at sort of the positives.

Dan Perotti: Correspondence Broker Direct is likely ahead of plan servicing doing great too, but Consumer Direct probably pushed that opportunity a little bit. What I'm trying to figure out is, you know, 20% is still, is that still the right goal post considering you just did 15% in a very challenging mortgage market? I think that that still is the goalpost that we have. Obviously, we're generally striving to do 20 percent plus. That's part of David's David's mantra.

What's changed since that since that projection.

Yes.

We probably outperformed even what we expected and correspond and especially given the market size.

<unk>.

But in terms of some of the growth of the servicing portfolio over that period of time.

Over the total period of time.

It's probably a little bit lighter than what we had expected just because the market's been smaller and then on.

Dan Perotti: It's what we have our focus on. But we do think, you know, we certainly think that 20 percent is achievable in a more normalized market. But if we're looking at 2024 in specific, it's probably still under what we would consider a totally normalized market.

The growth of the direct lending channels is just then.

Bit more constrained because of the overall the overall size of the market and especially the refi market in terms of consumer direct.

Dan Perotti: To your point, if we're looking at sort of the positives, you know, what's changed since that projection? You know, we probably outperformed even what we expected in correspondent, especially given the market size. And but in terms of some of the growth of the servicing portfolio over that period of time, you know, over the total period of time, it's probably a little bit lighter than we had expected, just because the market's been smaller. And then on, you know, the growth of the direct lending channels, it's just been a bit more constrained because of the overall, the overall size of the market, and especially the refi market in terms of consumer We still, you know, we still think 20% is a reasonable goal.

So.

Still.

We still think 20% is a is a reasonable goal and achievable goal, we still have our balanced business model, where we have servicing is sort of the core and in production on top of that which helps drive up those those overall Roe.

But.

Yes.

<unk>.

Okay.

Think that the overall balanced business model is what led us to that 15% ROE here in the fourth quarter.

We think we can continue to build on that but 20% is still our target.

Okay.

I wanted to talk about the competitive landscape in corresponding.

It looks like things slowed down a little bit in January and I've been hearing some other large non bank like create I'm talking about getting more competitive that's away from the large amounts of corporate debt.

David Spector: And it's an achievable goal; we still have our balanced business model where we have servicing as sort of the core and production on top of that, which helps drive up those, you know, those overall ROEs. But that's, we think that the overall balanced business model is what led us to that 15% ROE here in the fourth quarter. We think we can continue to build on that, but 20% is still sort of our target. I want to talk about the competitive landscape in Correspondent.

Looking for an update on what's happening correspondent so far this year.

Yeah look I think that look we have a we have a dominant position in correspondence.

We have very deep relationships and I and I would start off by saying that the market in January is going to be smaller.

Then then.

Even India and I think that where we're seeing good activity in correspondent specifically with builders on a lot of our share growth.

That in the latter part of the year is because of the activity coming out of builders, where we have very deep relationships and thats something that really helped drove a lot of the share growth.

David Spector: Looks like things slowed down a little bit in January, and I've been hearing some of the large non-banks like Freedom talking about getting more competitive after raising a large amount of corporate debt. We're just looking for an update on what's happening so far this year. Look, I think that we have a we have a dominant position in the course.

As you know banks have been stepping back in.

About at the point, where it can get worse.

I'm going to not be able to say that because theyre going to be out.

Sellers are not retaining servicing and one of the things that we're also witnessing a theres a flight to quality and we're seeing more and more sellers delivering a disproportionate amount of their loans.

David Spector: We have very deep relationships, and I would start off by saying that the market in January is going to be smaller than even in Dec. And I think that we're seeing good activity and correspondence, specifically with builders. A lot of our share growth in the latter part of the year is because of the activity coming out of builders, where we have very deep relationships. And that's something that really helped drive a lot of the share growth. As you know, banks have been stepping back, and, you know, we're just about at the point where I'm going to not be able to say that because they're going to be out. You know, sellers are not retaining service.

To us.

Interesting enough in correspondent we saw a decrease in the number of sellers.

It is down to 812 from 830, and so we're seeing a little bit of consolidation taking place, but we I.

I think I think I think that our value proposition.

It's pretty tried and true we're in the market every day, we get value for that.

I think when when others are in and then thereafter and they're in and they're out that that that creates some consternation with sellers and so this is why I continue.

David Spector: And one of the things that we're also witnessing is a flight to quality, and we're seeing more and more sellers delivering a disproportionate amount of their loans to us. Interestingly enough, in correspondence, we saw a decrease in the number of sellers. It's, you know, it's down to 812 from 830.

We saw some really good margin growth in correspondent we were at 21 basis points in the fourth quarter of 'twenty. Two we were at 34 basis points from the fourth quarter of 'twenty three.

It's a combination of increasing pricing power, but also we were able to find executions away from the GSC.

David Spector: And so, you know, we're seeing a little bit of consolidation taking place. But, you know, we, I think that, you know, our value proposition is pretty tried and true. We're in the market every day.

That provided some additional margin, but I think I think that I would like I like the correspondent.

David Spector: We get value for that. I think when others are in and then they're out, and then they're in and then they're out, that creates some consternation with sellers. And so, this is why, you know, I continue, we saw some really good margin growth in correspondence. We were at 21 basis points in the fourth quarter of 22, and we were at 34 basis points in the fourth quarter of 23.

Corresponding is so core to our franchise.

Something that I continue to expect to expect it to be.

But yes people raise more capital to get more aggressive on the margin you may have someone sell loans to them because they are a little better bid.

But where we are the industry leader for a reasonable and will continue to be there.

Okay. Thank you.

Thanks for your question.

David Spector: And it's a combination of increasing pricing power, but also, you know, we were able to find executions away from the GSEs that provided some additional margin. But I think that, you know, I like the correspondence. It's so core to our franchise, and it's something that I continue to expect it to be. But yeah, and as people raise more capital, they get more aggressive, and on the margin, you may have someone sell loans to them because they have a little better bid. But, you know, we're the industry leader for a reason, and we'll continue to be there. Okay, thank you for your question. Our next question comes from the line of Eric Hagen with BTIG. Your line is live. Hey, hey, thanks.

Our next question comes from the line of Eric Hagen with <unk>.

Your line is live.

Hey, thanks.

You guys are well thought.

The hedging results were good but what do you feel like maybe prevented you from hedging even more of our fair value marks during the quarter and is there a sense maybe for how much sensitivity you feel like there is to call. The next 50 basis points lower than in mortgage rates with respect to the fair value Mark Thanks, guys.

Sure so.

We're pretty pleased with our our hedging performance in the fourth quarter.

Operator: Hope you guys are well. Yeah, I thought the hedging results were good. But what do you feel maybe prevented you from hedging, you know, even more of the fair value mark during the quarter? And is there a sense maybe for how much sensitivity you feel there is to, you know, call the next 50 basis points lower in mortgage rates with respect to the fair value mark? Thanks, guys.

Interest rates were all over the map in the fourth quarter. We were up the tenure was up as high or a little bit over 5% and down below 4%. So.

Pretty significant.

Pretty significant swing in terms of the directions and the direction that Morgan that interest rates and mortgage rates went through the quarter and we were.

Dan Perotti: So we're pretty pleased with our hedging performance in the fourth quarter. As you know, interest rates were all over the map in the fourth quarter. We were up, the 10-year was up as high as or a little bit over 5 percent, and down below 4 percent.

We're able to cover 80% of the of the move and that included the cost of debt that we have to hedge.

Which which add up a little bit as well.

We have been in this.

Dan Perotti: So really, you know, pretty significant swing in terms of the direction that interest rates and mortgage rates went through the quarter. We were able to cover 80% of the move, and that included the costs that we have to hedge, which ate up a little bit as well. You know, we have been in this environment targeting, you know, a tighter hedge ratio than we have historically, but overall, you know, overall, given, like I said, the volatility of interest rates, we're pretty pleased with the performance. To your point, as we move, or as interest rates, or if interest rates move down further, you know, we have, the asset has increasing sensitivity. You know, part of that is also because we've been adding a fair amount of loans at those higher interest rates.

In this environment targeting.

A tighter hedge ratio than we have historically.

But overall overall.

Overall, given the volatility of interest rates were pretty pleased with the performance to your point as we move.

As interest rates or if interest rates move down further.

We have the asset has increasing sensitivity.

Part of that is also because we've been adding a fair amount of.

Loans at those higher interest rates, that's been part of our strategy so that those loans.

We have a greater portfolio of loans that could move into refinance the whole territory.

When interest rates do decline.

So the sensitivity of the servicing asset has increased a bit as we've moved lower and interest rates.

Dan Perotti: That's been part of our strategy so that we have a greater portfolio of loans that could move into refinanceable territory if and when interest rates do decline. And so, you know, the sensitivity of the servicing asset has increased a bit as we've moved lower in interest rates. And we've continued to, you know, we continue to hedge that. But what we've also seen consistent with our strategy is an uptick in refinances here. You know, here in the first quarter, you can see that in terms of some of our, you know, our January locks in the, in our consumer direct channel, for example, were pretty meaningfully different from the run rate that we had in Q4. And, you know, we've just taken another sort of leg lower here in interest rates, which really, again, gets back to the, you know, the balanced business model and how, to the extent that we see potential Yeah, no, that's helpful.

We've continued to we continue to hedge that but what we've also seen consistent with our strategy as an uptick in refinances here here in the first quarter you can see that in terms of some of our.

Our January locks in the.

Our.

Consumer direct channel for example were up pretty meaningfully from the run rate that we had in Q4 and.

We've just taken another sort of leg lower here in interest rates that really again gets back to the balanced business model.

And how to the extent that we see potential slightly faster prepayment speeds on the servicing side.

With our hedge and with the.

The refinance ability of the court that.

Serves to offset that.

Yes, no that's helpful. Thank you.

So how are you guys and a separate question here I mean, how are you guys thinking about the secured financing for MSR is versus maybe replacing some of that balance with with unsecured debt and do you see any risk that banks could pullback from supporting the market for MSR funding and does that in any way to kind of drive your appetite for unsecured.

So.

Dan Perotti: Thank you. So, how are you guys in a separate question here? I mean, how are you guys thinking about this secured financing for MSRs versus maybe replacing some of that balance with unsecured debt? And you know, do you see any risk that banks, you know, could pull back from supporting the market for MSR funding? And does that in any way kind of drive your appetite for unsecured debt?

So we've.

We've talked about it in the past that really our strategy generally is to move more toward unsecured financing our issuance in Q4 $750 million of unsecured debt, we used to pay off some of our <unk>.

Our secured financing on our MSR financing, although really are really term notes there as opposed to bilateral from banks.

Overall, we expect to continue to move more towards the unsecured financing.

Dan Perotti: So we've, I mean, we've talked about it in the past that really our strategy generally is to move more toward unsecured financing. Our issuance in Q4 of $750 million of unsecured debt we used to pay off some of our secured financing, our MSR financing, although really term notes there as opposed to bilateral from banks. Overall, we expect to continue to move more toward unsecured financing. The reasons for that, other than, you know, continuing to sort of bolster our credit position and, you know, move toward a more favorable position with the rating agencies where, you know, that unsecured debt is sort of more stable and isn't subject to margin calls if we have a significant interest rate rally, for example. So it has some benefits on that side.

Really.

The reasons for that other than.

But continuing to sort of bolster our credit position.

<unk>.

Move toward a more favorable position with the rating agencies, where that unsecured debt is sort of more stable has been subject to margin call.

Margin calls if we have a significant interest rate rally for example.

So it has some benefits on that side, we think we can drive down the costs over time as we move more toward towards unsecured.

That has a more favorable sort of ratings and.

Capital profile.

Stability.

In terms of the flipping to the other side on the secured we have not seen a pullback in MSR financing from banks in fact, it's really been the opposite we've seen more banks.

Really willing to lend on.

Dan Perotti: We think we can drive down the cost, you know, over time as we move more toward unsecured financing since it has a more favorable sort of ratings and capital profile of stability. In terms of the, you know, flipping to the other side on the secured side, we have not seen a pullback in MSR financing from banks. In fact, it's really been the opposite.

On Msr's and in different MSR structures, so and we've been over time, adding banks two to our MSR facilities and so we don't see that we don't see that as an issue we want to continue to diversify.

Dan Perotti: We've seen more banks really willing to lend on MSRs and in different MSR structures. So, and we've been, over time, adding banks to our MSR facilities. And so we don't see that as an issue. We want to continue to diversify the number of banks that we have that are financing our MSRs, just, you know, for risk management purposes. But we, you know, we don't see a pullback there, and that's really not the case.

The number of banks that we have that are that are that are financing. Our MSR is just for risk management purposes.

But we don't see a pullback there and thats really not.

That's not really a major driver of our move toward unsecured debt. It's really all of the other motivations that I discussed previously.

Yes, that's really helpful. Thank you guys very much.

Yeah.

Dan Perotti: That's not really a major driver of our move toward unsecured debt. It's really all of the other motivations that I discussed previously. Yeah, that's really helpful. Thank you guys very much. Our next question is from the line of Boze George with KBW. Your line is live. Hey guys, good afternoon.

Our next question is from the line of Bose George with K VW. Your line is live.

Hey, guys. Good afternoon can you give us just your updated guide on share buybacks just given the current valuation.

Sure. So in terms of share repurchases, we didn't have any share repurchases.

Dan Perotti: Can you give us just your updated thoughts on share buybacks, you know, just given the current valuation? Sure. So in terms of share repurchases, you know, we didn't have any share repurchases in the fourth quarter. The share prices have moved up pretty significantly from, you know, from a few quarters ago, as I'm sure you're aware. And so anytime we're looking at our capital deployment, we're looking at what the relative return and relative value is in deploying it in shares versus really back into our business and continuing And so we really see that as the, you know, sort of the optimal path currently.

In the fourth quarter.

The share prices has moved up pretty significantly.

From.

From a few quarters ago.

Sure you are aware and so anytime we're looking at.

At our capital deployment, we're looking at what the relative.

With that return and relative value is in deploying it in shares versus <unk>.

It really back into our business and continuing to.

To acquire MSR is through correspondence.

And add to add to the servicing portfolio and so we really see that as the sort of the optimal path currently.

And the other piece that plays into this is our overall management of the leverage ratio of the company.

Dan Perotti: And, you know, the other piece that plays into this is our overall management of, you know, the leverage ratio of the company. And so continuing to manage our leverage ratio and that, you know, a bit above one point or one times in terms of our non-funding debt to equity, is, you know, where we've been. We're looking to manage in that, you know, in a similar range there.

And so continuing to.

To manage our leverage ratio a.

That above one.

One times in terms of our non funding debt.

The equity is.

<unk> is where we've been we're looking to manage in that in a similar range there and so.

So obviously share repurchases.

It's a little bit of pressure on that.

Dan Perotti: And so, obviously, share repurchases, you know, puts a little bit of pressure on that. So, those are the factors that we're balancing, but in the current environment, certainly in the fourth quarter and given how everything is currently situated, we'd expect to continue with our capital deployment really back into the business and MSRs as opposed to share repurchase. Okay, great. Thanks.

So those are those are the factors that we're balancing but in the current environment certainly in the fourth quarter and <unk>.

Given how everything.

It is currently situated we would expect to continue with our capital deployment really into back into the business and msr's as opposed to share repurchases. Okay. Great. Thanks makes sense and then actually just switching over a follow up on the <unk>.

<unk> hedging question.

Earlier.

You noted that you're going to run a tighter hedge ratio I think you said, 100% last quarter on the call if volatility abates I mean, it should be.

Dan Perotti: Makes sense. And then actually, just switching over to a follow-up on the MSR hedging question from earlier, you noted that you're going to run a tighter hedge ratio. I think you said 100% last quarter on the call. If volatility abates, I mean, should we have a, you know, sort of a more matched sort of hedge result, assuming, you know, we don't see sort of a big pickup in prepayments? So in...

Sort of.

A more match sort of hedge result, assuming we don't see sort of a big pickup in prepayments.

Okay.

So in.

In the in the first quarter. So I said, we are we are seeking to manage to a bit of a tighter hedge ratio what we've seen so far in the first quarter again, a fair amount of volatility.

Dan Perotti: In the first quarter, as I said, we are, you know, seeking to manage to a bit of a tighter hedge ratio. What we've seen so far in the first quarter is, again, a fair amount of volatility and an inverted yield curve, both of which are negative in terms of our hedge costs. And as we continue to get further down into, you know, lower territory with a higher percentage of our portfolio in higher and higher mortgage rates, we won't necessarily be hedging quite as close to 100 percent. In the fourth quarter, we were at, you know, 80 percent.

And.

And an inverted yield curve, both of which are negative in terms of our hedge costs.

And as we continue to get further down in Q.

The lower territory with a higher percentage of our portfolio in.

In higher and higher mortgage rates won't necessarily be hedging quite as close to two 100%.

In the fourth quarter, we were at.

At 80%.

Dan Perotti: So I think you could expect us to be, you know, we won't necessarily be, you know, right at 100 percent in terms of our hedge ratio, but still, you know, higher than we've been historically. But, you know, but in terms of the cost and and and where the portfolio is positioned, you know, a little bit of potential for some differences between the MSR and hedge in the first quarter. Okay, makes sense. Thanks for your question. Our next question comes from the line of Mark DeVries with Deutsche Bank. Your line is live.

So I think you could expect us to be.

We won't necessarily be right at 100% in terms of our hedge ratio still higher than we've been historically, but.

Hi.

But in terms of the cost and.

And.

And where the portfolio is positioned.

A little bit a little bit of potential for.

<unk>.

First some differences between the MSR hedge in the first quarter.

Makes sense. Thanks.

Thanks for your question. Our next question comes from the line of Mark Devries with Deutsche Bank.

Your line is live.

Thank you.

Dan Perotti: Thank you. First, a question for Dan on the margin. I heard you comment on the quarter decline and margin in broker direct being attributable to the fallout effect. I didn't hear whether you commented on the decline in consumer direct. Was it the same fallout effect, or is there something else that pushed against that lower margin in consumer direct? Sure.

First.

A question for Dan on the margin I heard your comment.

The quarter over quarter decline in margin in broker direct being attributable to fallout effect didn't hear whether you commented on the decline in consumer direct was at the same followed effect or is there something else that that pushed again sell over in consumer direct.

Share in consumer direct or really what was influencing the margin there is.

Dan Perotti: In ConsumerDirect, really what was influencing the margin there was a shift toward more refinances as opposed to second lien originations. So second lien originations have a smaller balance. And so on a per unit basis, although the dollars of revenue per loan for a refinance are higher, the basis points are lower because the loan size is larger.

A shift toward more refinances as opposed to second lien origination so second lien originations.

Have a smaller balance and so on a per unit basis.

Although the.

Dollar debt.

If revenue per loan for a refinance is higher the basis points are lower because the loan size is larger.

Dan Perotti: So it really, you know, that's really what's driving the margin decline in basis points from Q3 to Q4 given the interest rate rally that we saw toward the end of Q4. We started seeing a pickup in refinances. And we've seen that continue in the first quarter with the further decline in interest rates. But it's really, you know, on a unit basis, actually, we're seeing the revenue per unit go up. But on a basis points basis, we're seeing those. Okay, got it. And then, then a follow up for David on, you know, the new opportunities around your servicing platform. How do you think about the trade-offs between, you know, potentially sharing a source of competitive advantage with competitors versus the incremental revenue that you might be able to generate off of that?

So it really that's really what's driving the margin decline in.

In basis points from Q3 to Q4.

The interest rate rally that we saw towards the end of Q4, we started seeing a pickup of reef.

And we've seen that continue in the <unk>.

Here in the first quarter with a further decline in interest rates, but it's really on a unit basis actually we're seeing the revenue per unit go up but on a basis points basis, we're seeing those clients.

Okay got it and then and then a.

Follow up for David.

Yes.

The new opportunities around your servicing platform.

Think about the tradeoffs between.

Potentially sharing a source of competitive advantage with <unk>.

With competitors versus.

The incremental revenue that you might be able to generate off of that.

David Spector: Look, I think, you know, look, from our perspective, these are all the questions we're asking ourselves as we come out of the litigation. I think that, you know, there is demand in the marketplace for more competition. You know, it's not good or healthy for the industry to have reliance on any one person, and given the market share of the leader out there, you know, there are many in the industry who share my point of view.

Look I think I think you.

But from our perspective. These are all the questions we're asking ourselves.

As we come out of the litigation.

I think that there is there is demand in the marketplace for more competition.

It's not good or healthy for the industry to have reliance on any one person and given the market share of the leader out there.

There are many in the industry, who share my point of view.

David Spector: I think from our perspective, we have to answer that question from an economic value. You know, are we best served by continuing to maintain the competitive advantage that we're seeing in our servicing platform and in terms of driving down costs and increasing productivity versus what we can get by, you know, other means? But, you know, as I said earlier, this is very early on in the whole process.

Think from our perspective, we have to answer that question from an economic value.

Best served by continuing to maintain the competitive advantage that we're seeing in our servicing platform and in terms of driving down costs and increasing productivity versus where we can get by.

Other means.

But as I said earlier. This is this is very early on in the in the whole process and this is something that.

David Spector: And this is something that, you know, we're going to, you know, we're already working on it. And this is something that we're just going to continue to work on. And as we always do, we're going to get to the right place. Okay, that makes sense. Thank you for your question. Our next question comes from the line of Kyle Joseph with Jeffries. Your line is live. Yeah, hey, good afternoon guys.

We're going to.

We're working.

Already on it and this is something that we're just going to continue to work on and as we always do we're going to get to the right place.

Okay makes sense. Thank you.

Thanks for your question. Our next question comes from the line of Kyle Joseph with Jefferies. Your line is live.

Yeah, Hey, good afternoon, guys. Thanks for.

David Spector: Thanks for taking my questions. I just want to pick your brain a little bit more on the correspondent channel. So the number of sellers obviously went down, but what do you see that doing to margins over time? Obviously, that impacts supply, not necessarily demand, but I was just curious to get your thoughts on how that impacts your margins and that. Yeah, I don't think it has, you know, really any impact on margins that, you know, it's really just sellers who weren't selling us a lot of loans and who weren't active in, you know, the marketplace. I think, I think margins have been pretty stable over the past couple quarters and even in January with volumes down, you know, we're seeing margins stable, albeit they're up very nicely from where they were a year ago.

Taking my questions just wanted to thank you ran a little bit more on the correspondent channel.

So the number of sellers, obviously went down but what do you see that doing to margins over time, obviously that impacts supply not necessarily demand but.

I was just curious to get your thoughts on how that impacts your margins in that segment.

Yes, I don't think I don't think it hasnt really any impact on margins.

Really it's really sellers, who werent filling up a lot of a lot of loans and we weren't active in the marketplace.

I think I think margins are margins have been pretty stable over the over the past couple of quarters and even in January with volumes down we're seeing margins stable.

Albeit they were up very nicely from where they were a year ago.

David Spector: Look, I think that, of course, we always like higher margins and we're always reminding people to get more margins, but I think, you know, Doug and Abby and the team do, you know, just a phenomenal job at continuing to support the operation in terms of the value propositions they provide to our correspondent sellers. And look where bond or loan prices are today; sellers can't really, can't afford to keep services. And so a lot of the alternative execution over the years has been to the GSE's cash window, where they would either retain the servicing for a lengthy period of time or ultimately sell it. And so I think we're getting more loans coming in through the whole loan channel.

Look I think that of course, we always like higher margins and will always reminding people to get more margin, but I think it I think that.

Doug and Abbvie and the team.

Two.

Just a phenomenal job.

Continuing to.

To support the operation in terms of the value proposition that they provide to our correspondent sellers and look where.

One where loan prices are today sellers can't really can't afford to keep servicing and so a lot of the alternative execution over the years has been to the gse's cash window, where they would either retain the servicing for a lengthy period of time or ultimately sell it.

And so I think we're getting more loans coming in through the whole loan channel and as I said there is just a natural flight to quality when you see.

David Spector: And as I said, there's just a natural flight to quality when you see a marketplace where there are people going in and out, and you have people getting out of the business. And, you know, we've been at this every day since we got into it, you know, almost 15 years ago. And it's something that gives us a, you know, halo effect in correspondence. And it allows us to maintain, you know, both margin and share. I got it.

Our marketplace, where there is we have people going in and out and get people getting out of the business.

And we've been asked this every day since we got into it almost 15 years ago.

And it's it's something that that gives us a halo effect in correspondent.

And it allows us to maintain.

Both margin and share.

Okay.

Dan Perotti: Very helpful. And then on just expenses, the outlook for 24, you know, obviously you guys are doing a good job of getting more efficient in a tough market, but you know, would you expect those to kind of stay in parallel with volumes, or you know how much variability is there in that line item, particularly on production.

Got it very helpful and then.

Then on just expenses.

The outlook for 'twenty four obviously, you guys have been doing a good job of getting more efficient in a tough market but.

Would you expect those to kind of.

In parallel it with volumes or how much variability is there in that line item sorry, particularly on the production segment.

On the production segments dose here to your point we.

Dan Perotti: On the production segment, so to your point, we did a lot of our work, even going back to 22 in terms of bringing down the expense base that served us really well in 23, as David noted on the production side, we actually had higher pre-tax income in the production segment in 23 than we did in 22, and that was really due to getting our expense base right sized. As we, in most of the rest of the business, if we're talking about sort of the core functionality, you know, the corporate and shared services, as well as the, you know, the servicing side, we expect those to be fairly stable as the servicing portfolio grows. There'll be some additional expense, but to the extent that we see, you know, the sort of soft landing and not significant increases in delinquencies, we expect those, you know, those to grow relatively slightly given some of the efficiencies that we have in that business and on the corporate side to be, you know, very contained.

Did a lot of our or even going back to 'twenty two in terms of bringing down the expense base that served us really well.

In 2003 as David noted on the production side, we actually had higher pre tax income in the production segment in 'twenty three than we did in 2002 and that was really due to getting our expense base right sized.

As we.

And most of the rest of the business, if we're talking about sort of the core functionality.

The corporate and shared services as well as the.

The servicing side.

We expect those to be fairly stable as the servicing portfolio grows there'll be some additional expense.

To the extent that we see.

The sort of soft landing and not significant increases in delinquencies.

We expect those.

Those to grow really.

Relatively slightly given some of the efficiencies that we have in that business and on the corporate side to be very contained and then on the production side to the extent that we see an uptick in production there will be some uptick in the production expenses that goes along with that and that will really be determined by the size of the market and.

Dan Perotti: And then on the production side, to the extent that we see an uptick in production, there will be, you know, some uptick in production expenses that goes along with that. And that will really be determined by, you know, the size of the market. And in particular, as interest rates decline on the refinance side, and if that expands, that would necessitate some additional growth in those.

In particular in the.

Interest rates decline on the refinance side and if that expands that wood.

Necessitate some additional growth in those expenses.

Dan Perotti: Very helpful. Thanks for answering my question. Yeah. Okay, our next question is from the line of Trevor Cranston with JMP Securities. Your line is live.

Yes.

Got it very helpful. Thanks for answering my questions.

Sure.

Yeah.

Okay. Our next question is from the line of Trevor Cranston with.

<unk> Securities Your line is live.

Dan Perotti: Hey, thanks. One more question on the hedging of the servicing side of things. You know, the earnings on the custodial balances have obviously become pretty significant over the last several quarters. Can you talk about any hedges you guys have put in place to sort of protect that earnings stream? You know, as Fed Funds potentially starts to move lower, and also just talk in general about how we should sort of think about the impact of lower Fed funds on the economics of the service. Sure.

Okay. Thanks.

One more question on the hedging of the servicing side of things.

The earnings on the custodial balances, obviously become pretty significant over the last several quarters.

Can you talk about any hedges you guys have put in place to sort of protect that earnings stream.

As fed funds potentially starts to move lower.

Also just talk in general about how we should sort of think about the impact of lower fed funds on the economics of the servicing business. Thanks.

Dan Perotti: So are the The custodial balance, the earnings on the custodial balances on our servicing portfolio are projected to really follow the forward curve, so to the extent that rates today are projecting a decline in short-term interest rates, which they are. Our projection for those cash flows that's embedded in our MSR value reflects, you know, lower earnings on those custodial balances as we move forward in time. And those changes since the, you know, the forward curve would change if you shock interest rates up or down.

Sure.

So are we.

Okay.

The custodial balance the earnings on the custodial balances on our servicing portfolio are projected to really follow the forward curve so to the extent that Ken.

Rates today are projecting a decline in short term interest rates, which which they are our projection for those cash flows thats embedded in our MSR value reflects lower earnings on those custodial balances as we move forward as we move forward in time and that's that those changes since then.

The forward curve.

Forward curve would change.

Shock interest rates up or down those changes in the earnings on the custodial balances are also incorporated into it.

Dan Perotti: Those changes in the earnings on the custodial balances are also incorporated into our hedge. You know, that's part of what we see changing in the value of servicing. If we were to see, you know, an interest rate shock down, and that's part of what we're, what we're hedging for, hedging against.

Into our hedge.

That's part of what we see changing in the value of servicing if we were to see it.

Interest rate shock down and Thats part of what we're that's what we're hedging our hedging for hedging against.

Dan Perotti: If you look at and, you know, we've sort of, I think put that out there in our earnings materials that are our custodial balances, our earnings on custodial balances are generally tied to short-term interest rates or Fed funds. To the extent that we see Fed funds go down, we expect the rate that we're earning on those custodial balances to, you know, follow to some extent, to follow relatively closely the same way that it followed as interest rates increased. You know we'll also see some of our financing costs decrease as the portion of our portfolio, the portion of our financing, that's really secured by MSRs is generally floating rate, and so you have you know a bit of an offset there as well in terms of that revenue versus the expense, but on the hedging side, that's part of what we are hedging against for a decline in interest rates is the decline in that earnings on cu Okay, I appreciate it. Thank you.

If you look at.

We've sort of put that put out there in our in our earnings materials that are our custodial balances our earnings our custodial balances are generally tied to short term interest rates or fed funds to the extent that we see fed funds go down we would expect that the rate that we're earning on those custodial balances too.

To follow to some extent.

To follow relatively closely the same way that it followed as interest rates increased.

We will also see some of our financing cost decreased as the portion of our portfolio.

The portion of our financing.

That's really secured by MSR is generally floating rate and so you have a bit of an offset there as well in terms of the.

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That revenue versus the expense but.

The hedging side, so those will be somewhat offsetting but on the hedging side.

As part of what we.

Our hedging against for a decline in interest rates as the decline in that in those earnings on custodial balances.

Okay I appreciate it thank you.

Dan Perotti: Thanks for your question. Our next question is from the line of Shanna Chow with Bank of America. Your line is live.

Okay.

Thanks for your question.

Our next question is from the line of China Chow with Bank of America.

Operator: Good afternoon, guys. Thanks for taking my questions. Previously on the call, you mentioned the margin calls on your secured debt. I guess, like, how should we think about how much rates need to decline before you see any impact of margin calls on your secured facilities? We're pretty over-collateralized at the moment, so, you know, currently, at the end of Q4, we had a little under a billion dollars of cash on the balance sheet. We had the ability to draw against our secured facilities for around $2 billion of additional value.

Your line is live.

Hey, good afternoon, guys. Thanks for taking my questions.

Usually on the call you mentioned the margin calls on your secured debt.

How should we think about how much rate to decline before <unk> and ICANN margin calls on your secured facility.

We're pretty over collateralized at the moment so.

We're currently at the end of Q4, we had a little under $1 billion of cash on the balance sheet.

Has the ability to draw against our secured facilities for around $2 billion of additional value and as I mentioned, we paid down some of our secured facilities during.

Dan Perotti: And as I mentioned, we paid down some of our secured facilities during the quarter with our unsecured debt issuance. So we really have a pretty significant, it would have to be a pretty significant reduction in value to get to a point where we would have, you know, a margin call on our unsecured debt. Additionally, you know, the hedges that we have in place if we have a decline in interest rates generate cash. And that cash can then, you know, can then be used to pay off any margin calls that we might have. And so we're really, you know, both from an over-collateralization point of view as well as from sort of the performance of the hedges, pretty significantly covered off against the risk of a margin call. Great, that's helpful.

During the quarter with our.

With our unsecured debt issuance, so we really have.

Pretty significant it would have to be a pretty significant reduction in value to get to a point, where we would have a margin call on our unsecured debt. Additionally.

The hedges that we have in place if we have a decline in interest rates generate cash.

That cash can then.

<unk> can then be used to pay off any margin calls that we might have and so we're really both from an overcollateralization point of view as well as from sort of the performance of the hedges were.

Pretty significantly covered off against the risk of the margin.

Okay, Great. That's helpful. And then I think we've heard from.

Dan Perotti: And then I think we've heard from, you know, some third parties that even in first season books, there were delinquencies for certain pools and Ginnie Mae over 10%. It looks like the 60-day delinquency rate, you know, increased 45th sequentially for the USDA, but still relatively low at 5.2%. Can you just comment on, you know, what you're seeing in the Ginnie Mae delinquencies and expectations going forward? Overall, we've seen our Ginnie Mae delinquency rates fairly stable. You know, there's always some amount of seasonality as you're going through the fourth quarter, especially in the Ginnie Mae book, where you have an uptick toward December and usually there's a pretty meaningful downtick in February and March as folks receive their income tax refunds. And so, you know, we saw a bit of that overall on the portfolio. You know, overall on the portfolio, though, delinquencies have been pretty contained. They work through the whole year.

Yes, and third party Si E. Then turns came from blocks <unk>.

Delinquency for certain calling from Ginnie Mae.

One of our tanker side looks like the 60 day delinquency.

Increased 40% sequentially from the USDA.

Eloquently about five 2% can you just comment on.

What you're seeing and then Ginnie Mae delinquencies and expectations going forward.

Yeah.

Overall, we've seen our Ginnie Mae delinquency, it's fairly stable.

As always some amount of seasonality as youre going through the fourth quarter on especially in the Ginnie Mae book, where you have an uptick toward December unusually theirs.

Any meaningful downtick in.

In February and March as folks receive there.

Income tax refunds.

And so we saw a bit of that overall on the portfolio.

They're all in the portfolio delinquencies have been pretty contained they worked through the through the whole year publish our overall delinquency profile for the MSR in the in the deck were up slightly from the prior year in terms of delinquencies overall delinquencies.

Dan Perotti: We publish our overall delinquency profile for the MSR in the deck. We're up slightly from, you know, from the prior year in terms of delinquencies, overall delinquencies. So it's not something that we see as a significant issue.

Not something.

That we see as a significant issue agree that in certain pockets. There has been there has been some pressure and we have seen.

Dan Perotti: I agree that in certain pockets there has been, you know, some pressure, and we have seen, you know, some in certain areas, some delinquencies uptick. Similarly, you know, we've seen probably better than expected performance in others. The other piece that I mentioned, which is the way that delinquencies impact us, you may have seen that our servicing advances increased quarter over quarter. But really, that was not driven very significantly by delinquencies.

Some in certain areas some delinquencies uptick similarly.

We've seen probably better than expected performance in others.

Okay.

<unk>.

The other piece that I'd mention.

Which is.

That delinquencies impact us may have seen that our servicing advances increased.

Quarter over quarter really that was not driven.

Very significantly by delinquencies.

Dan Perotti: That was really driven by seasonal property tax payments. A lot of that increase was really from current borrowers, where property values have appreciated pretty significantly over the past few years. However, property tax amounts change.

That was really driven by.

Seasonal property tax payments a lot of that increase was really from current borrowers were just property property values have appreciated pretty significantly over the past few years property tax amounts change that impacts the amount that's being escrowed and there may be a shortage for.

Dan Perotti: That impacts the amount that's being escrowed, and there may be a shortage for a payment or two while the escrow analysis is redone and the borrower's escrow account catches up. If you actually look at our servicing advances year over year, they went down slightly year over year in terms of looking at Q4 to Q4. The summary of all that is just that delinquencies; we have not seen a significant shift in terms of how it impacts us on a cash basis. It's been very contained and very similar to last year.

A payment or two while the escrow analysis is redone and the borrower.

Borrowers.

As for account sort of catches up.

If you actually look at our servicing advances year over year.

They went.

Down slightly year over year.

In terms of looking at Q4 to Q4 so.

Yes.

The summary of all of that is just that.

Delinquencies, we have not seen a significant shift and.

In terms of how it impacts us on a cash basis has been very contained and very similar to last year.

Alright, Thank you Guy.

Dan Perotti: Okay, thank you guys. Thank you. We have a final question today from the line of Kevin Barker with Piper Sandler. Your line is live.

Thank you we have a final question today from the line of Kevin Barker with Piper Sandler.

Kevin James Barker: Great, thank you. I just wanted to follow up on the amortization, the realization of cash flows line, which came down pretty meaningfully. And we also saw prepay speeds drop quite a bit this quarter. Now, obviously, seasonality played a big part in that, but do you feel that the realization of cash flows will remain fairly low as we go through the first half of 2024, given the portfolio is producing very low prepay speeds at this time? Well, I'm To your point, the realization of cash flow has declined a bit going from Q3 to Q4 as interest rates were high for most of the fourth quarter.

Your line is live.

Great. Thank you.

And to follow up on the.

The amortization the realization of cash flows mined.

Came down.

Pretty meaningfully and we also saw prepay speeds dropped.

A bit this quarter, obviously seasonality played a big part in that but yes.

Do you feel that the realization of cash flows will remain.

Fairly low as we would go through.

First half of 2024.

Given the portfolio is producing very low prepay speeds at this time.

Yeah.

To your point.

The realization of cash flows declined a bit from Q3 to Q4.

As interest rates were higher for most of the fourth quarter.

Dan Perotti: We have seen a decent interest rate decline as we go into Q1, as I mentioned there. We have seen some uptick in refinances that will flow through to some uptick in prepayment fees. And so I think we do expect some uptick in the realization of cash flows as we go into the first quarter, given those dynamics. But overall, we expect that the portfolio and servicing profitability will still be significant and meaningful as we go through the next year. Great

We have seen.

A decent interest rate decline as we go into Q as we go into Q1 as I mentioned, there we have been seeing.

Seeing an uptick some uptick in refinances that will flow through to some uptick in in prepayment speeds and so I think we do expect some.

Some uptick in the realization of cash flows as we're going into the as we're going into the first quarter given those dynamics.

But overall.

Overall, we expect that there is.

The servicing portfolio and servicing profitability will still be significant and meaningful as we're going through through the next year.

Sure.

David Spector: And then could you just, you know, provide maybe a little bit more depth on the demand for refinances versus closed-end seconds? Now, I realize the demand's very low relative to the overall market, as compared to what it has been in the past, but, you know, just given your customer base in the servicing portfolio, are you seeing your customers start to lean more towards refinances in the last month or two, or are you seeing the close-in seconds still starting to garner more attention? Look, as rates decline, we do see more customers leaning in on closed-end seconds, primarily on the servicing that we added in 2023, and that's, excuse me, pre-2023 for closed-end seconds. On cash-outs, you know, I think, look, I think, I think that as rates, as rates decline, you'll see more borrowers lean in to cash-outs versus closed-end seconds.

Okay, Great and then could you just.

Provide maybe a little bit more depth on.

The demand for refinances versus closed end seconds now I realize that the demand is very low relative to the overall market and what it has been in the past but.

Just given your customer base in the servicing portfolio are you seeing your customers start to lean in more towards refinances and.

Yes.

Or two.

Or are you seeing the closed end second store.

Starting to garner more attention.

Look as rates decline.

We do see more customer lean in on close and second is primarily on the servicing that we that we added in 2023 and Thats and Thats excuse me pre 2023 for for closed end seconds on cash.

I think look I think I think that as rates as rates decline youll see more borrowers lead in to cash outs versus closing seconds and as rates stay higher theyre going to be.

David Spector: And as rates stay higher, they're going to be leaning into closed-end seconds. It's, for us, it's a product, it's the appropriate product mix that we have as, you know, it gives borrowers the opportunity to take cash out of their property, take equity out of their property, typically to pay down lower-cost debt. But we're in a position right now where, you know, the rallies in the marketplace still have, you know, a not as meaningful effect as the majority of the mortgage market is, as you know, in kind of three and four percent mortgages.

Leaning into closed end seconds, it's for us it's a product it's the appropriate product mix that we have as you know it gives borrowers the opportunity to take cash out of their proper take equity out of their property.

Typically to pay down lower cost debt.

But we're in a position right now where the rallies in the marketplace still have.

Not as meaningful effect.

The majority of the mortgage market as you know in kind of 3% and 4% mortgages.

David Spector: So I think that, you know, you will see an increased amount of rates; you'll see an increased amount of refis as rates do decline. But look, the closed-end second product for us has been great for consumer direct in terms of maintaining capacity in place. We've launched it to our non-port customers, which, you know, allows us to do profitable closed-end seconds and maintain capacity in place for when we do see a significant decline in rates in consumer direct. We've also introduced it in broker direct, and I think that that's something that I'm encouraged by. And look, the brokers have the need to maintain capacity just like we do in consumer direct, and it's a product that besters their customers. It also adds to the broker direct value proposition that we have.

So I think that you will see an increased amount of rates you will see an increase amount of refis as rates do decline, but look the closed end second product for us has been great for consumer direct in terms of maintaining capacity in place.

We've launched it to our non port customers.

It allows us to to do profitable closed end seconds and maintain capacity in place for when we do see a significant decline in rates and consumer direct we've also introduced it in broker direct and.

And I think that that's something that I'm encouraged and look the brokers have the need to maintain capacity just like we do in consumer direct.

It's a product that best serves their customers. It also adds to the broker direct value proposition that we haven't.

David Spector: And, you know, I'd be remiss if I didn't bring up that, you know, look, we're continuing to attract sharebrokers, and I think we're starting to see more and more brokers think PennyMac is a strong alternative to the top two participants. And, in addition, we know we've invested a lot in technology to support the brokers. And so I think that, you know, we like what we're seeing in broker direct, and, you know, margins are maintaining their levels. And so, you know, this is closed in second versus cash out refi versus rate and term refi. You know, we've got to cover it in our in our production divisions.

Remiss, if they bring up the local continuing to gain share in brokerage.

And I think we're starting to see more and more brokers team Pennymac has a strong alternative top two participants.

In addition, we've invested a lot in technology to support the brokers and so I think that.

We like what we're seeing in broker direct and margins are are maintaining their levels and so.

This is closed end second versus cash out refi versus rate term refi.

We've got it covered in our in our production divisions, and we're going to participate.

Dan Perotti: And we're going to participate, you know, no matter what the, you know, what the rate environment is. Just to add to or to what David said and to address one part of your question, so the refinances that we're seeing in that shift that I've talked about are really shifting our resources to addressing rate and term refinances primarily at the end of Q4 and Q1 as opposed to second liens because that is really a more profitable product for us and also something that isn't necessarily persistent depending on what happens to interest rates. And so to David's point, to the extent interest rates go up, we have the second lien product and an expanding breadth of that to be able to move into to the extent interest rates decline, we have the ability, you know, more loans will be refinanceable. It wasn't; it isn't a shift. I want to make sure that I didn't get the impression that we were shifting from doing second liens to doing cash-out refis. We didn't kind of cross that threshold.

No matter, what the what the what the rate environment is.

Just to add on or.

What David said and to address last part of your question. So the refinances that we're seeing in that shift.

And that I have talked about is really.

Shifting our really our resources to addressing rate and term refinance is primarily an kick in at the end of Q4 and Q1 as opposed to as opposed to the second liens.

Does that is really a more.

A more profitable product for us and also on <unk>.

Something that isn't necessarily persistent depending on what happens to interest rates.

So to Davids point to the extent interest rates go up we have the second lien product.

And <unk>.

Expanding breadth of that to be able to move into.

Extent interest rates decline, we have the ability.

The loans will be refinanced, but it wasn't it isn't a shift I want to make sure that I do.

Didn't give the impression that we were shifting from second doing second liens to doing cash out refis, we didn't kind of crossover that threshold, it's really right in term refinances or where we saw the uptick.

Dan Perotti: It's really rate and term refinances that we saw the uptick in Q4 and now in Q1. Thanks again for taking my questions. Thanks Kevin for your questions. We have no further questions at this time. I'll now turn it back over to Mr. Spector for his closing remarks. Thank you. I want to thank everyone for joining us this afternoon. We went over a lot of good information, and we had what I thought was a really outstanding quarter. I want to thank everyone for the thoughtful questions. If anyone has any additional questions, feel free to reach out to our investor relations team by email or phone. And again, thank you all for joining the call.

In Q4 and now in Q1.

Okay.

Thanks again for taking my questions.

Thanks, Kevin with your questions.

We have no for no further questions at this time I'll now turn it back over to Mr. Specter for closing remarks.

Thank you.

Thank you everyone for joining us. This afternoon, we went over a lot of good information and we had we had what I thought was.

A really outstanding quarter.

I want to thank everyone for the thoughtful questions. If anyone has and if anyone has any additional questions.

Free to reach out to our Investor relations team by email or phone and.

And again, thank you all for joining the call.

Okay.

Okay.

Yeah.

Yeah.