Q1 2024 PennyMac Financial Services Inc Earnings Call
Operator: Good afternoon, and welcome to PennyMac Financial Services Inc.'s first quarter 2024 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, are available on PennyMac's financial 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 two of the earnings presentation that could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings material. Now, I'd like to introduce David Spector, PennyMac Financial Chairman and Chief Executive Officer, and Don Perotti, PennyMac Financial Chief Please go ahead.
Good afternoon, and welcome to Pennymac Financial Services, Inc. 's first quarter 'twenty 'twenty four earnings call additional earnings materials, including presentation slides that will be referred to in this call are available on Pennymac Financial's website at E. S. S I thought pennymac.
Speaker Change: 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 written.
Speaker Change: Siloed to their GAAP equivalent in the earnings materials.
Speaker Change: Now I'd like to introduce David Spector, Pennymac, Financial's, Chairman and Chief Executive Officer, and Don Karate Pennymac Financial's Chief Financial Officer. Please go ahead.
David A. Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter earnings PFSI reported net income of $39 million and an annualized return on equity of 4% in the first quarter. These results include $125 million of fair value declines on mortgage servicing rights net of hedges and $2 million of a non-recurring legal accrual. Excluding the impact of these items, our results were very strong.
David A. Spector: Thank you operator.
David A. Spector: Good afternoon, and thank you to everyone for participating in our first quarter earnings call.
David A. Spector: <unk> reported net income $39 million in an annualized return on equity of 4% in the first quarter.
David A. Spector: These results include $125 million of fair value declines on mortgage servicing rights net of hedges and $2 million of a nonrecurring legal accrual.
David A. Spector: Excluding the impact of these items our results were very strong.
David A. Spector: PFSI's annualized operating ROE was 15% as we continue to demonstrate the resilience and strength of our balanced business model. Our production segment remained profitable, contributing $36 million to pre-tax income driven by higher volumes in the direct lending channel, and our large and growing servicing portfolio continues to anchor our financial performance, with pre-tax income of $125 million excluding market-driven value impacts and non-recurring items. Total loan acquisitions and originations in the first quarter were $22 billion in unpaid principal balance, driving continued growth in our servicing portfolio to nearly $620 billion with 2.5 million customers.
David A. Spector: <unk> annualized operating ROE was 15% as we continue to demonstrate the resilience and strength of our balanced business model.
David A. Spector: Production segment remained profitable contributing $36 million to pre tax income driven by higher volumes in the direct lending channels.
David A. Spector: In our large and growing servicing portfolio continues to anchor our financial performance with pre tax income of $125 million, excluding market driven value impacts and non recurring items.
David A. Spector: Total loan acquisition and origination in the first quarter were $22 billion in unpaid principal balance.
David A. Spector: Given continued growth in our servicing portfolio to nearly $620 billion with $2 5 million customers.
David A. Spector: Turning to the origination market, current third-party estimates for total originations in 2024 average $1.8 trillion, reflecting growth from an estimated $1.5 trillion in 2023. However, we believe these estimates to be optimistic, dependent upon multiple interest rate cuts from the Federal Reserve in the second half of the year. With current expectations for market interest rates to remain higher for longer and mortgage rates back up into the 7% range, we expect these third-party estimates will decline further from their current level. Though the origination mark remains constrained currently, we believe it is beginning to recede.
David A. Spector: Turning to the origination market current third party estimates for total originations in 2024 average one eight trillion dollars, reflecting growth from an estimated $1 five trillion in 2023.
However, we believe these estimates to be optimistic and dependent upon multiple interest rate cuts from the federal reserve in the second half of the year.
David A. Spector: With current expectations for market interest rates to remain higher for longer and mortgage rates back up into the 7% range. We expect these third party estimates will decline further from their current levels.
David A. Spector: So the origination market remains constrained currently we believe it is beginning to reset.
David A. Spector: In the last two years, we estimate approximately $3 trillion of mortgages were originated with a note rate of 5% or higher. In a higher for longer environment, this group of borrowers is expected to continue growing, supported by a purchase market with strong pent-up demand from key home-buying demographics. It is our expectation that when interest rates do decline, many of these borrowers will undoubtedly look to lower their mortgage, driving refinance volumes higher and total originations up to more normalized levels.
David A. Spector: In the last two years, we estimate approximately three trillion dollars of mortgages were originated with a note rate of 5% or higher.
David A. Spector: Higher for longer environment. This group of borrowers is expected to continue growing supported by a purchase market with strong pent up demand from key home buying demographics.
David A. Spector: It is our expectation that when interest rates do decline. Many of these borrowers will undoubtedly look to lower their mortgage rates.
David A. Spector: Driving refinance volumes higher and total originations up to more normalized levels.
David A. Spector: As I will discuss, we are very well positioned to capitalize on increased volumes of refinance loans when rates do decline. However, in the current market environment, we remain focused on adding new originations to our growing servicing portfolio, and we are also actively exploring a continuum of potential opportunities related to our proprietary servicing system. These opportunities will allow us to leverage what we have built to unlock additional value for many of our customers and for our many stakeholders.
David A. Spector: I will discuss we are very well positioned to capitalize on increased volumes of refinanced loans when rates do decor. However.
David A. Spector: However in the current market environment, we remain focused on adding new originations to our growing servicing portfolio and we are also actively exploring a continuum of potential opportunities related to our proprietary servicing system.
David A. Spector: These opportunities will allow us to leverage what we've built to unlock additional value for many of our.
David A. Spector: For our many stakeholders.
David A. Spector: SSE is a proven servicing system and it's helped to drive excellent customer service for our large and growing base of borrowers. Since its launch in 2019, our servicing costs per loan are down more than 30%, and the results of multiple industry surveys have confirmed our position as one of the lowest cost servicers in the industry, do in large part to our utilization of, Not only does our servicing system provide our associates with a friendly and intuitive user interface, but it's increased flexibility versus other systems was highlighted during the pandemic, when we were able to seamlessly implement system changes to quickly accommodate regulatory changes, which allowed many of our borrowers to enter and exit forbearance programs by a self-service and automated channel.
David A. Spector: SSE has a proven servicing system and has helped to drive excellent customer service for our large and growing base of borrowers.
David A. Spector: Since its launch in 2019, our servicing cost per loan are down more than 30% and the result of multiple industry surveys have confirmed our position as one of the lowest cost servicers in the industry due in large part to our utilization of FSC.
David A. Spector: Not only does our servicing system provide our associates with a friendly and intuitive user interface, but it's increased flexibility versus other systems was highlighted during the pandemic.
David A. Spector: We were able to seamlessly implement system changes to quickly accommodate regulatory changes, which allowed many of our borrowers to enter and exit forbearance programs by its self service and automated channels.
David A. Spector: One opportunity we are looking at is expanding our subservicing business beyond P&P, potentially beginning with some of the larger correspondence sellers we already work with who maintain smaller servicing portfolios. Additionally, we've been approached by numerous innovative technologists in the industry looking to partner with us, leveraging SSE alongside other mortgage technology to create a comprehensive marketplace of next-generation mortgage banking technology. While a meaningful upfront investment and a longer timeline would be required, we could potentially commercialize SSE into a multi-tenant, industry-leading servicing software platform, licensing our technology to other servicers in the industry.
David A. Spector: One opportunity we're looking at includes expanding our sub servicing business beyond PMT potentially beginning with some of the larger correspondent sellers, we already work with who maintain smaller servicing portfolios.
David A. Spector: Additionally, we have been approached by numerous innovative technologists in the industry looking to partner with us leveraging SSC alongside other mortgage technology to create a comprehensive marketplace of next generation mortgage banking technology.
David A. Spector: While a meaningful upfront investment and a longer timeline would be required. We could also look to potentially commercialize SFC into a multi tenant industry, leading servicing software platform.
David A. Spector: Licensing our technology to other servicers in the industry.
David A. Spector: We believe SSE's competitive advantages versus other servicing systems in the marketplace are meaningful, and we are encouraged by the opportunities that we've explored thus far. However, we will be thoughtful in further monetizing SSE, and we remain committed to doing the right thing for our customers and other stakeholders.
David A. Spector: We believe sse's competitive advantages versus other servicing systems in the marketplace are meaningful.
David A. Spector: And we are encouraged by the opportunities that we have explored thus far how.
David A. Spector: However, we will be thoughtful and further monetizing SFC and we remain committed to doing the right thing for our customers and other stakeholders.
David A. Spector: As I mentioned earlier, our first quarter annualized operating ROE was 15%, a significant increase from the first quarter of last year and highlighting our ability to generate strong results in what we expect is one of the smallest quarterly origination markets in this interest rate cycle. As we look to build on these results in 2024, servicing income is expected to continue driving the majority of our operating earnings, particularly in a scenario where interest rates remain elevated.
As I mentioned earlier, our first quarter annualized operating ROE was 15%.
David A. Spector: Significant increase in the first quarter of last year, and highlighting our ability to generate strong results and what we expect is one of the smallest quarterly origination markets in this interest rate cycle.
David A. Spector: As we look to build on these results in 2020 for servicing income is expected to continue driving the majority of our operating earnings, particularly in a scenario where interest rates remain elevated.
David A. Spector: The majority of our servicing portfolio continues to be comprised of borrowers that have locked in very low interest rates, which we expect to provide a base level of earnings that persist for an extended period of time supporting our continued profitability. Additionally, delinquencies remain low due to the overall strength of the consumer, as well as the substantial accumulation of home equity in recent years due to continued home price appreciation. Our multifaceted approach to mortgage production and position as one of the largest producers in the country provide us with unique access to originate and acquire new mortgages in the current market.
David A. Spector: The majority of our servicing portfolio continues to be comprised of borrowers that have locked in very low interest rates, which we expect to provide a base level of earnings that persists for an extended period of time supporting our continued profitability.
David A. Spector: Additionally, delinquencies remained low due to the overall strength of the consumer as well as the substantial accumulation of home equity in recent years due to continued home price appreciation.
David A. Spector: Our multifaceted approach to mortgage production and position as one of the largest producers in the country provides us with unique access to originate and acquire newly originated mortgages in the current market.
David A. Spector: In recent periods, we've added a meaningful volume of mortgages with rates of 5% or higher to our portfolio, and we expect this population of borrowers to provide strong leads for our consumer direct division when rates do decline. As rates remain higher for longer, this population of borrowers is expected to grow, driving an even larger opportunity in the future. As of March 31st, roughly 25% or more than $150 billion in UPB of mortgage loans in our servicing portfolio are at these higher rates, driving our expectations for additional upside potential in our production segment when the origination market improves. I will now turn it over to Dan, who will review the drivers of PFSI's first quarter financial performance.
David A. Spector: In recent periods, we have added a meaningful volume of mortgages with no rates of 5% or higher to our portfolio.
David A. Spector: And we expect this population of borrowers to provide strong leads for our consumer direct division when rates do decline.
As rates remain higher for longer this population of borrowers is expected to grow.
David A. Spector: Driving an even larger opportunity in the future.
David A. Spector: As of March 31, roughly 25% or more than $115 billion in <unk> mortgage loans that are servicing portfolio were at these higher rates driving our expectations for additional upside potential in our production segment when the origination market improves.
David A. Spector: I will now turn it over to Dan who will review the drivers of <unk> first quarter financial performance. Thank.
Dan: Thank you David.
Daniel Stanley Perotti: PFSI reported net income of $39 million in the first quarter, or $0.74 in earnings per share for an annualized ROE of $4. As David mentioned, these results included $125 million of net fair value declines on MSRs and hedges, and $2 million of accrued interest related to the final Black Knight arbitration. The impact of these items on diluted earnings per share was negative $1 and 74 cents. PSSI's Board of Directors also declared a first quarter cash dividend of 20 cents per share.
Dan: <unk> reported net income of $39 million in the first quarter or <unk> 74 in earnings per share for an annualized Roe of 4%.
Dan: As David mentioned these results included a $125 million of net fair value declines on MSR and hedges and $2 million of accrued interest related to the final Black Knight arbitration result.
Dan: The impact of these items on diluted earnings per share was negative $1 74.
Dan: <unk> Board of Directors also declared a first quarter cash dividend of <unk> 20 per share.
Daniel Stanley Perotti: Book value per share was $70.13, down slightly from the prior quarter end, primarily due to the annual issuance of additional common stock related to our equity compensation awards program, which more than offset growth in retainer. Turning to our production segment, pre-tax income was $36 million, down slightly from $39 million in the prior quarter. Total acquisition and origination volumes were $22 billion in unpaid principal balance, down 19% from the prior quarter. $20 billion was for PFSI's own account, and $2 billion was fee-based fulfillment activity for PMSI.
Dan: Book value per share was $70 13 down slightly from the prior quarter end, primarily due to the annual issuance of additional common stock related to our equity compensation Awards program, which more than offset growth in retained earnings.
Dan: Turning to our production segment pretax income was $36 million down.
Dan: Down slightly from $39 million in the prior quarter.
Dan: Total acquisition and origination volumes were $22 billion in unpaid principal balance down 19% from the prior quarter.
Dan: <unk> 20 billion was for PFS is on account and $2 billion was fee based fulfillment activity for PMT.
Daniel Stanley Perotti: PennyMac maintained its dominant position in correspondent lending in the first quarter with total acquisitions of $18 billion, down from $24 billion in the fourth quarter of 2020. The decline from the prior quarter was driven by our focus on profitability overall. Our correspondent margin in the first quarter was 35 basis points, up slightly from 34 basis points in the prior quarter. Acquisitions in April are expected to total approximately $7.5 billion, and locks are expected to total $8.1 billion.
Dan: Pennymac maintained its dominant position in correspondent lending in the first quarter with total acquisitions of $18 billion.
Dan: From $24 billion in the fourth quarter of 2023.
Dan: The decline from the prior quarter was driven by our focus on profitability over volume.
Our correspondent margin in the first quarter was 35 basis points up slightly from 34 basis points in the prior quarter acquisitions.
Acquisitions in April are expected to total approximately $7 5 billion and locks are expected to total $8 1 billion.
Daniel Stanley Perotti: In BrokerDirect, we continue to see strong trends and continued growth in market share as we position PennyMac as a strong alternative to Channel Leader. Despite a smaller overall market, locks in the channel were up 20% from last quarter, and fundings were essentially, We reported broker channel margins of 103 basis points up from 79 basis points last quarter, which included the impact of higher levels of fallout during that time. The number of brokers approved to do business with us at quarter end was over 4000, up 36% from the same time last year, and we expect this number to continue growing as top brokers increasingly look for a strong second option.
Dan: And broker direct we continued to see strong trends and continued growth in market share as we position <unk> as a strong alternative to channel leaders.
Dan: <unk> a smaller overall market locks in the channel were up 20% from last quarter and fundings were essentially unchanged.
Dan: We reported broker channel margins of 103 basis points up from 79 basis points last quarter, which included the impact of higher levels of fallout during that quarter.
Dan: The number of brokers approved to do business with us at quarter end with over 4000 up 36% from the same time last year and we expect this number to continue growing as top brokers increasingly increasingly look for a strong second option.
Operator: In Consumer Direct, lock volume was up 35% from the prior quarter, and originations were up 62%. Higher volumes in the channel were driven primarily by an increase in streamlined refinances of government loans as mortgage rates declined from their recent high, providing us with an opportunity to lower mortgage payments for borrowers who previously locked in higher rates. Production expenses and net of loan origination expense were 7% higher than the prior quarter, primarily due to increased volumes in direct lending.
Dan: And consumer direct lock volume was up 35% from the prior quarter and originations were up 62%.
Dan: Higher volumes in the channel were driven primarily by an increase in streamlined refinances of government loans as mortgage rates declined from their recent highs, providing us with an opportunity to lower mortgage payments for borrowers who previously locked in higher rates.
Dan: Production expenses and net of loan origination expense were 7% higher than the prior quarter, primarily due to increased volumes in the direct lending channels.
Operator: Turning to servicing, the servicing segment recorded pre-tax income of $5 million. Excluding valuation-related changes and non-recurring items, pre-tax income was $125 million, or 8.1 basis points of the average servicing portfolio in the UK. Loan servicing fees were up from the prior quarter primarily due to growth in PFSI's own portfolio as PFSI has been acquiring a larger portion of the conventional correspondent production from PMT in recent periods. However, operating expenses have increased recently. Earnings on custodial balances and deposits and other income decreased slightly due to smaller average balances during the quarter as a result of seasonal tax payments at the end of 2020.
Dan: Turning to servicing the servicing segment recorded pretax income of $5 million, excluding valuation related changes and nonrecurring items pre tax income was $125 million.
Dan: Or eight one basis points of average servicing portfolio <unk>.
Dan: Loan servicing fees were up from the prior quarter, primarily due to growth in <unk> owned portfolio as <unk> has been acquiring a larger portion of the conventional correspondent production from PMT in recent periods.
Operating expenses increased slightly.
Dan: Earnings on custodial balances in deposits and other income decreased slightly due to a smaller due to smaller average balances during the quarter as a result of seasonal tax payments at the end of 2023.
Operator: However, custodial funds managed for PFSI's own portfolio totaled $5.4 billion at March 31, up from $3.7 billion at year end. Realization of MSR cash flows increased $34 million from the prior quarter due to lower average yields during. EVO income was down slightly, and we expect its contribution to remain low for the next few quarters. Fair Value of PSSI's MSR increased by $170 million, driven by higher mortgage rates at the end of the quarter, which drove expectations for lower prepayment activity and higher earnings on custodial balances in the. Hedging losses were $295 million.
Dan: However, custodial funds managed for PFS size on portfolio totaled $5 4 billion at March 31 up from $3 7 billion at year end.
Dan: Realization of MSR cash flows increased $34 million from the prior quarter due to lower average yields during the quarter.
Dan: <unk> income was down slightly and we expect its contribution to remain low for the next few quarters.
Dan: The fair value of <unk> MSR increased by $170 million driven by higher mortgage rates at the end of the quarter, which drove expectations for lower.
For lower prepayment activity and higher earnings on custodial balances in the future.
Dan: Hedging losses were $295 million, our hedges were positioned with increased net exposure to interest rate volatility during the quarter to limit elevated hedge costs.
Operator: Our hedges were positioned with increased net exposure to interest rate volatility during the quarter to limit elevated hedging. The investment management segment contributed $3 million to pre-tax income during the quarter, and assets under management were unchanged from the end of the prior quarter. Provision for income tax expense was $4.6 million, resulting in an effective tax rate of 10.4% due to the vesting of certain stock-based compensation awards, which positively impacted PFSI's tax liability.
The investment management segment contributed $3 million to pre tax income during the quarter and assets under management were unchanged from the end of the prior quarter.
Provision for income tax expense was $4 $6 million, resulting in an effective tax rate of 10, 4% due to the vesting of certain stock based compensation awards, which positively impacted <unk> tax liability.
Operator: Finally, on capital, in February, we issued a new five-year $425 million term note secured by Ginnie Mae MSRs and servicing, and subsequently retired $425 million of secured term notes due to mature in August of 2025. We'll now open it up for questions. Operator?
Dan: Finally on capital in February we issued a new five year $425 million term note secured by Ginnie Mae MSR and servicing advances and subsequently retired $425 million of secured term notes due to mature in August of 2025.
Speaker Change: We'll now open it up for questions operator.
Operator: Thank you. I would like to remind everyone, we will only take questions related to PennyMac Financial Services Inc. or PFSI. We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure we can answer as many questions as possible. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, again, it's star number one. The first question is from Bose George with KBW. Your line is now open.
Speaker Change: Thank you I would like to remind everyone. We will only take questions related to Pennymac Financial services, Inc. RPF ESI.
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.
Speaker Change: If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Speaker Change: And if you'd like to withdraw your question again, it's far one.
Speaker Change: The first question.
Speaker Change: Is from Bose George with <unk>. Your line is now open.
Bose Thomas George: Hey, everyone. Good afternoon. I wanted to ask first just about the hedging this quarter. I guess, could you just kind of walk through a little bit about what drove some of the hedge ineffectiveness this quarter?
Bose Thomas George: Hey, everyone. Good afternoon.
Wanted to ask first just about the hedging this quarter.
Bose Thomas George: I guess could you just kind of walk through a little bit about what drove some of the hedge ineffectiveness this quarter.
Daniel Stanley Perotti: Yeah, hi Bose. Thanks. This is Dan. So, as I mentioned in the remarks, during the quarter, we were positioned with an increased exposure to interest rate volatility overall, meaning that if interest rates were a bit more volatile, then that would lead to greater loss exposure in the MSR. You know, either way, the reason that we, you know, whichever direction rates moved, the reason that we were positioned that way was, as I had mentioned, due to, you know, the elevated cost of hedging during the quarter, given the inverted shape.
Bose Thomas George: Yeah, Hi, Bob Thanks.
Bose Thomas George: So.
Bob: As I mentioned in the remarks during the quarter we were positioned.
Bob: With an increased exposure to really interest rate volatility overall.
Bob: That if interest rates were a bit more volatile than that would lead to a greater loss exposure in the in the MSR either way the reason that we whichever direction rates moved.
Bob: The reason that we were positioned that way.
Bob: As I had mentioned due to.
Bob: The elevated cost of hedging during the quarter given the inverted shape.
Daniel Stanley Perotti: significantly inverted shape of the yield curve during most of the first quarter and at the onset of the quarter. As well as the elevated levels of implied volatility and options, we were seeing a pretty significant potential cost for maintaining our typical hedge position. And so, you know, needed to identify if we needed, if we wanted to, you know, take, sort of accept those hedge costs, which would be, you know, money that would be guaranteed to be lost on the hedge or open up certain exposures.
Bob: Significantly inverted shape of the yield curve during most of the first quarter and at the onset of the quarter.
Bob: As well as the elevated levels of implied volatility and options and we are seeing a pretty significant potential cost for maintaining our typical hedge position and so on.
Bob: Needed to identify if we needed if we wanted to take.
Bob: Take sort of accept those hedge costs.
Bob: <unk> would be.
Bob: Ensured that money that would be ensured to be lost on the hedge or open up certain exposures and so we elected to open up certain exposures as you know interest rates were significantly.
Daniel Stanley Perotti: And so we elected to open up certain exposures; as you know, interest rates were significantly volatile in the first, you know, in the first quarter. And that led to the, you know, the hedging, the hedging loss that you see. As we're moving into the second quarter, you know, we've repositioned our hedge. We have really two factors that have changed. One is that the hedge, you know, the shape of the yield curve has changed, and overall levels of volatility have also changed, implied volatility in the options market.
Bob: Significantly volatile in the first.
Bob: In the first quarter and that led to the.
The hedging the hedging loss that you see.
Bob: We're moving into the second quarter, we've repositioned our hedge we have really two factors that have changed.
Bob: One is that the hedge.
Bob: The yield curve has changed overall levels of volatility have also changed.
Bob: Implied volatility in the options market and so that has improved the <unk>.
Daniel Stanley Perotti: And so that has improved the cost outlook of hedging. And we've also repositioned our hedge to what I would call sort of a more traditional profile, where we would expect gains in a sell-off and losses in a rally. And so, as we go forward, we don't expect the same type of recurrence of the same type of results.
Bob: Cost outlook of hedging.
Bob: And we've also repositioned our hedge to what I would call sort of a more a more traditional profile.
Bob: Where we would expect gains in a sell off and.
Bob: And losses in a rally.
So we don't expect as we go forward the same type of a recurrence of the same type of a result.
David A. Spector: Unknown Speaker Okay, that's helpful. Thank you. And then I wanted to ask, you know, the VA announced that the VASB program, where they purchase loans that are otherwise going to foreclosure, do you think this could remove a lot of the tail risk from VA servicing and, in turn, improve valuations, especially for the, you know, the VA exposure that you guys have in the MSR?
Okay. That's helpful. Thank you.
And then I wanted to ask the <unk> announced that the VSP program.
Bob: Where they purchase loans otherwise go into foreclosure do you think this could remove a lot of the tail risks from VA servicing.
Bob: In turn improve valuations, especially for the VA.
Bob: VA exposure that you guys have in the MSR.
David A. Spector: Yeah, so look, I think that, as it pertains to the program, I think it's a really good program for existing customers that are delinquent because it, you know, removes the tail risk of taking those loans down to foreclosure and stop advances. And, you know, so it's a value to us.
Speaker Change: Yes, so look I think I'll leave it pertains to the program I think it's a really good program for existing customers that are delinquent.
Speaker Change: Yes.
Speaker Change: Remove the tail risk of taking those loans down a foreclosure stop advances.
It's a value to us it's a little bit concerning because there is some moral hazard around the program.
David A. Spector: It's a little bit concerning because there is some moral hazard around the program that I'm concerned about, at least at some level of strategic defaults. And I continue to hope the VA will recognize this and put some controls in place around it. I think there's also a phenomenon in the marketplace because interest rates have increased meaningfully so quickly. There's kind of a tale of two cities that pertains to VA loans, where many of the borrowers already have really low rates.
Speaker Change: I'm concerned that lead to some level of strategic defaults.
Speaker Change: A continuing of the VA will recognize this and put some controls in place.
Speaker Change: Around that.
Speaker Change: I think there is also a phenomenon in the marketplace because interest rates have increased meaningfully. So quickly there is kind of a tale of two city as it pertains to VA loans.
Speaker Change: Many of the borrowers already have really low rates.
David A. Spector: And I don't see them really engaging in strategic default or really being in this position. And the ones with the higher rates that I'm really concerned about. But suffice it to say, I think the devil's going to be in the details as the VA discloses more. Dan can go over kind of where the portfolio sits today because we've done a lot of great work on that.
Speaker Change: And I don't see them really engaging strategic defaults are really being in the physicians the ones with the higher rates that im really concerned about.
Speaker Change: But suffice it to say I think the Devil is going to be in the details of the VA discloses more Dan can go over kind of where the portfolio sits today, because we've got a lot of great work on that.
Daniel Stanley Perotti: Sure. As we look at our servicing portfolio today and what loans might be eligible for VASP under the guidelines that we've seen, you know, we think it's about 4,700 loans or, you know, $1.2 billion of UPB of outstanding VA loans that would be in that deep delinquency position where they don't have an alternative, you know, elsewhere in the VA waterfall that would help serve their loss mitigation needs. And so, you know, overall versus our total portfolio, you know, a small portion today in terms of the go forward implications for VA servicing and the valuation of VA servicing.
Speaker Change: Sure as we look at our servicing portfolio today.
And what loans might be eligible for vast under the guidelines that we've seen.
We we think it's about 4700 loans or $1 $2 billion of PPA of outstanding VA loans that would be in that deep delinquency position, where they don't have an alternative.
Speaker Change: We're in the VA waterfall that would you would help serve their loss mitigation needs.
Speaker Change: And so overall versus our total portfolio a small small portion today.
In terms of the.
Speaker Change: The go forward.
The go forward implications for VA servicing in the valuation of VA servicing.
Daniel Stanley Perotti: As I mentioned, it could be somewhat beneficial in terms of our current portfolio looking at the delinquencies, certainly helps remove some of the delinquency risk and downside around VA loans in more extreme cases. But as David mentioned, where we have potential concern today is around the moral hazard and how that could eventually play out and if we and others would sort of get comfortable with that. So I think it's a little bit early to say whether it would have a net benefit or negative impact in terms of servicing value. Okay, great. Thanks.
Speaker Change: As I mentioned it could be somewhat beneficial in terms of our current portfolio looking at the delinquencies certainly helps remove some of the.
Speaker Change: The delinquency risk and downside around VA loans.
Speaker Change: And more extreme cases, but as David mentioned were.
Speaker Change: Where we have potential concern today is around the the moral hazard and how that could eventually play out in <unk>.
Speaker Change: If we and others would sort of get comfortable with that so I think it's a little bit early to say, whether it would have a net.
Benefit or negative impact in terms of the servicing value.
Speaker Change: Okay, great. Thanks for that.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the line of Doug Harter with UBS. Your line is now open.
Operator: Okay, great. Thanks for that. Your next question comes from the line of Doug Harter with UBS.
Douglas Michael Harter: Thanks can you talk about the.
Douglas Michael Harter: The market for originating second second liens, how that was in the quarter and how you would view Freddie Mac's new announcements.
Operator: Your next question comes from the line of Doug Harter with UBS. Your line is now open.
David A. Spector: Yeah, hey, Doug, how are you today? Look, I think that Look, we are very supportive of the GSEs getting into second lien originations. They, by the sheer fact they offer cash-out refinances, they kind of already are in that market. And I think that, you know, where we see issues in the marketplace, we see cash-out refinances being done on low-rate mortgages, which I think is not a great place for, you know, anyone to be in.
Douglas Michael Harter: Yeah, Hey, Doug how are you today.
Speaker Change: Look I think that.
Speaker Change: But we are very supportive of the GSE.
Speaker Change: Getting into second lien originations.
The sheer fact, they offer cash out refinances.
Speaker Change: Already here are in that market and I think that.
Speaker Change: We see it.
Speaker Change: Issues in the marketplaces, we see cash out refinances being done on low rate mortgages, which I think is not a great place for.
David A. Spector: And that's why we came out with the second lien program. We, I think that, you know, and, you know, with Freddie's announcement, I would expect that, you know, Fannie will follow suit on their portfolio. I think it's going to, I think it's an important tool for borrowers who need or want to tap their equity. It creates some standardization in the industry. And I think it's something that, you know, will, will be, could be, could be very meaningful.
Speaker Change: We want to be in and that's why we came out with the second lien program.
Speaker Change: We I think that.
Speaker Change: Friday's announcement I would expect that Fannie will follow suit in their portfolio I think it's going to I think it is an important tool for borrowers, who who need or want to tap their equity.
It creates some standardization in the industry.
Speaker Change: And I think it's something that.
Speaker Change: Will will be could be it could be very meaningful.
David A. Spector: From our perspective, you know, we're, we're, you know, originating north of a hundred million close end seconds a month. It's a, it's a product that's a key component of our, of our, of our product offerings to, to our, to our customers. But I'm, I'm really excited about it, and I know that there are some issues around, you know, concerns around, you know, private capital getting crowded out.
Speaker Change: From our perspective, we're where we're.
Speaker Change: <unk> north of $100 million a month of closed end seconds is that it's a product that's a key component of our of our of our product offerings to two or to our customers, but I'm really excited about it and I know that there is.
Speaker Change: Theres some theres some issues around concerns around.
Speaker Change: Private capital getting crowded out, but I think it's I think the fact that people have to get some borrowers who are taking cash out refinances.
David A. Spector: But I think it's, I think the fact that people are, you know, you have some borrowers who are taking cash out refinances and paying off low-rate mortgages is a very important issue that is going to get addressed by the offering of this.
Speaker Change: And paying off low rate mortgage is a very important issue that is going to get addressed by the offering of the second lien.
Speaker Change: Yes.
Operator: Thank you.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Speaker Change: Okay.
Operator: Your next question comes from Christine Love with Piper Sandler. Your line is now open.
Speaker Change: Your next question comes from Crispin Love with Piper Sandler Your line is now open.
Christine Love: Thanks, I appreciate you taking my questions. Just based on some of your comments, it seems that servicing will be the key driver of operating results, just given the current rate environment and rate cuts being pushed out. Given this, do you have a target in mind for servicing portfolio growth as you move through 2024? And also, just what's your appetite for acquiring MSR?
Crispin Love: Thanks, I appreciate you taking my questions.
Crispin Love: Just based on some of your comments it seems that servicing will be key driver of operating results just given the current rate environment rate cuts being pushed out given this do you have a target in mind on servicing portfolio growth as you move through 2024 and also just whats your appetite for acquiring msr's.
Crispin Love: Look we have.
David A. Spector: Look, we have built a really great model in terms of growing the servicing portfolio as a byproduct of our organic growth strategy. And as we continue to lead in the correspondence space and continue to grow our presence in the broker-direct space, I expect that our servicing will continue to grow at probably even a little faster clip. I don't we don't have, you know; we don't have service-size goals in the company.
Crispin Love: Built in.
Crispin Love: Really great model in terms of growing the servicing portfolio.
Crispin Love: As a byproduct of our organic our organic growth strategy and as we continue to lead in the correspondence space and continue to grow our presence in the broker direct space I expect that our servicing.
Crispin Love: Continue to grow at probably even a little faster clip.
Speaker Change: I don't we don't have we don't have servicing size goals in the company.
David A. Spector: You know, we could go out and buy a big blob of servicing and get really big, really fast. But what I'm really focused on is the organic growth of the portfolio. And I think that, you know, we've done a great job in the 17 years that we built this company to build this balanced business model with a flywheel so that when rates do decline, we can offer refinances to our borrowers, and we have a strong consumer direct channel to meet that challenge.
Speaker Change: We could go out and buy a big.
Speaker Change: <unk> servicing and get really big really fast what I'm really focused on is the organic growth of the portfolio and I think that we've done a great job in 17 years that we built this company to build this this balanced business model with a flywheel that when rates do decline, we can offer refinances to our borrowers and we have a.
Speaker Change: Strong consumer direct channel to meet that challenge.
David A. Spector: And so I would expect the port to continue to grow. And, you know, I think that, as we see that growth take place, we're going to, we're going to continue to be on the right side of that growth such that I don't see a melting ice cube scenario anytime, anytime in the future.
Speaker Change: And so I would expect the support to continue to grow and I think that.
Speaker Change: As we see that growth takes place we're going to we're going to continue to be on the right side of that growth such that I'm not I don't see a melting ice cube scenario.
Speaker Change: Anytime anytime in the future.
Daniel Stanley Perotti: Yeah, just to give a little bit more definition to that, if you look at our pace of origination slash acquisition through our, you know, our direct lending and correspondent channels, we've typically been adding 20 to $25 billion of servicing overall to the platform per, you know, per quarter. We have some runoff against that; I think we're around $10 billion this quarter. So, you can sort of do the math there overall, adding 10 to $15 billion a quarter is, is, you know, around the pace that we'd expect to see most likely through the rest of the year.
Speaker Change: Yeah, just to give a little bit more definition to that if you look at what our pace of origination slash acquisition through our.
Speaker Change: Our <unk>.
Speaker Change: Direct lending and correspondent channels, we've typically been adding $20 billion to $25 billion of servicing overall to the platform per.
Speaker Change: Per quarter, we have some runoff against that I think we're around $10 billion this quarter so that.
Speaker Change: You can sort of do the math, there overall, adding $10 billion to $15 billion a quarter is around the pace that we would expect to see most likely through through.
Speaker Change: Through the rest of the year.
Daniel Stanley Perotti: And we do, you know, we do look at, at servicing portfolios, in terms of the acquisitions; we do review the portfolios that come out onto the market. But as David mentioned, we are focused on adding to, you know, PFSI's portfolio, generally at higher note rates. There are a few more of those types of portfolios that have come out recently, but there are also still a preponderance of lower note rates, mortgage servicing portfolios, which, you know, may be attractive as a PMT investment more so for PFSI.
Speaker Change: And we do we do look at that servicing portfolios in terms of the acquisitions, we do review the portfolios that come out onto the market.
Speaker Change: But as David mentioned, we are focused on adding to <unk> portfolio and.
Speaker Change: Generally at the.
Speaker Change: The higher note rates.
Speaker Change: There are a few more of those types of portfolios that have come out recently, but there are also still a preponderance of lower note rates mortgage servicing portfolios.
Speaker Change: Which may be attractive as the PMT more as the PMT investment, but less so for PFS Si.
Daniel Stanley Perotti: And although we look at those portfolios, generally speaking, you know, the return, we've not seen any that sort of meet our return hurdle as well as the portfolio characteristics that we would want to add to our portfolio. You know, we have significant control over the characteristics of the loans that we add to our portfolio through our, you know, through our production channels and, specifically, in correspondent. We are able to shape the type of loans or the characteristics of the loans that we're bringing on to be able to limit the downside, and you have less control of that if you're buying sort of blocks of servicing, bulk servicing.
Speaker Change: And although we look at those portfolios generally speaking.
Speaker Change: The return we've not seen any of that sort of meet our return hurdle as well as the portfolio characteristics that we would want to add to our portfolio.
Speaker Change: We have significant control over the characteristics of the loans that we add to our portfolio through our.
Speaker Change: Through our production channels.
And specifically in correspondent able to shape the type of loans or the characteristics of the loans that we're bringing on to be able to limit. The downside and you have less control of that if you are buying sort of blocks of servicing bulk servicing.
David A. Spector: Great, thank you. I appreciate that. And just one last one for me. The gain on sale margin increase in the quarter looks to be mostly driven by broker direct. Can you just discuss some of the dynamics there and what drove the margins higher and then just competition in broker direct broadly with you being a top three player in the channel?
Speaker Change: Great. Thank you I appreciate that.
Speaker Change: One last one for me.
Speaker Change: On some marginal increase in the quarter it looks to be mostly driven by broker direct can you just discuss some of the dynamics of Aramark drove margins higher and then just competition on broker direct broadly with you being our top clients top three player in the channel.
David A. Spector: Look, I think that, you know, the BrokerDirect story in Q1 is really something everyone in the organization is incredibly proud of, continuing to gain share in BrokerDirect. And I think it's really a byproduct of that, you know, top brokers see PennyMac as a strong alternative to the top two participants. We've got great technology supporting our brokers, and they need a strong second option.
Speaker Change: Look I think that.
Speaker Change: The broker direct store in Q and Q1 is really something everyone. In the organization is incredibly proud of.
Speaker Change: Continuing to gain share in both the direct.
Speaker Change: And I think it's really a byproduct in that top brokers see penny Mac as a strong alternative to the top two participants.
Speaker Change: We've got great Tech supporting our brokers and brokers need a strong second option.
David A. Spector: I would say as it pertains to gain on sale margins, look, there was a period of time, you know, a year or two back when there was irrational pricing taking place in this part of the market. And I think we've seen a kind of a return to more rational pricing. And, you know, it's, it's, margins continue to remain, you know, good. And, and I think that, you know, it's, it's, it's something that, you know, I foresee continuing in Q2 and beyond.
Speaker Change: I would say as it pertains to gain on sale margins look we there was a period of time.
Speaker Change: Year or two back when there was irrational pricing taking place in this part of the market and I think we've seen a kind of a return to more rational pricing and.
Speaker Change: It's zero margins are continued to remain.
Speaker Change: Good and I think that.
Speaker Change: It's something that.
Speaker Change: I foresee continuing in.
Speaker Change: In Q2 and beyond.
David A. Spector: But it's, it's just, there's just a lot of good things coming out of BrokerDirect, you know, just from broker feedback and, and, you know, we're seeing an increased amount of jumbo activity out of BrokerDirect. And it's just a, it's a, it's a very meaningful shift quarter over quarter.
Speaker Change: But it's just it's.
Speaker Change: Theres just a lot of a lot of good things coming out of broker direct.
Speaker Change: Just from broker feedback and we are seeing.
Speaker Change: The increase amount of jumbo activity at a broker direct and it's just.
Speaker Change: It's a very meaningful shift quarter over quarter.
Speaker Change: The one other neither note that the.
Daniel Stanley Perotti: The one other note that I'd have on the broker margins, too, is that if you look back to the fourth quarter, the broker margins were impacted by some fallout in excess of our model that we experienced in the fourth quarter as we had that sharp interest rate rally, and that did not recur in the first quarter. And so we view the first quarter as a bit more normalized for the current environment and in line with our expectations, you know, barring some significant change as we go forward in terms of the broker margins specifically.
Speaker Change: One other note that I would have on the on the broker margins too is that if you look back to the fourth quarter.
Speaker Change: Sure.
Speaker Change: Broker margins were impacted by some.
Speaker Change: Fallout and in <unk>.
Speaker Change: <unk> of our model that we experienced in the fourth quarter as we had that sharp interest rate rally and that did not recur in the first quarter and so.
Speaker Change: We view the first quarter is a bit more normalized for the current environment.
Speaker Change: In line with our expectations.
Speaker Change: Barring some significant change as we're going forward in terms of the.
Speaker Change: The broker margin specifically.
Operator: Thanks for all that. Thank you for taking my question.
Speaker Change: Alright, Thanks, Robert Thank you for taking my questions.
Speaker Change: Okay.
Operator: The next question comes from the line of Kyle Joseph with Jeffries. Please ask your question.
Speaker Change: The next question comes from the line of Kyle Joseph with Jefferies. Please ask your question.
Kyle Joseph: Hey, good afternoon. Thanks for taking my questions. A lot of them have been asked. I just wanted to hone in on slide six regarding technology and post-unlock. You know, you laid out four strategies. Is it going to be a four-pronged approach? Do you anticipate, you know, focusing on one of these more than the others and give us a sense for the timeframe for the layout.
Kyle Joseph: Hey, good afternoon. Thanks for taking my questions a lot of them have been asked I just wanted to hone in on slide six regarding.
Kyle Joseph: Technology and post unlock.
Kyle Joseph: Yes.
Kyle Joseph: Out four strategies isn't going to be a.
Kyle Joseph: A four pronged approach do you anticipate.
Kyle Joseph: Focusing on one of these more than the others and give us a sense of the timeframe for the lay out of this.
David A. Spector: Yeah, look, I think it's, it's, it's not, it's not a linear approach we're taking. We're exploring all options as it pertains to SSE, and I'm really encouraged by the opportunities that have presented themselves. I mean, clearly, we have the most advanced system in the marketplace.
Speaker Change: Yeah look I think it's.
Kyle Joseph: It's not it's not a linear approach we're taking.
Kyle Joseph: We're exploring all options as it pertains to SSC.
Kyle Joseph: I'm really encouraged with the opportunities that.
Kyle Joseph: Presented themselves I mean, clearly we have the most advanced system in the marketplace.
David A. Spector: And as you can see from earlier slides, just, just what we've done, or later slides, what we've done to drive down servicing costs is really, is really remarkable. And that, and that's a testament to the system that we have. We continue to identify efficiencies. And I, you know, I look, I look at, you know, the opportunities in there, and they're, they're plentiful.
Kyle Joseph: As you can see from the earlier slides that just the just what we've done.
Kyle Joseph: Later side, what we've done to drive down servicing cost is really is really remarkable in that and Thats a testament to the system that we have.
Kyle Joseph: We continue to identify efficiencies.
Kyle Joseph: I look I look at the opportunities in there and they are plentiful I think first and foremost we need to focus on continuing to drive down the costs and we need to continue to optimize.
David A. Spector: I think, first and foremost, we need to focus on continuing to drive down costs. And we need to continue to optimize our investment in servicing. Furthermore, I think then, you know, you know, with that, we have a competitive advantage, and it'll allow us to, you know, increase our production capabilities in the organization. And that, and that will be vitally important.
Kyle Joseph: <unk> our investment servicing.
Kyle Joseph: Furthermore, I think then.
Kyle Joseph: With that we have a competitive advantage and that will allow us to.
Kyle Joseph: Increase our production capabilities.
Kyle Joseph: In the organization and that and that will be vital and important but I think as it pertains to us to see the next logical step is subservicing and we need to expand beyond PMT.
David A. Spector: But I think as it pertains to SSE, the next logical step is subservice, and we need to expand beyond PMT. And there are some real opportunities there for soliciting correspondent sellers who maintain smaller servicing portfolios. You know, I think that there are banks and other large servicers who perhaps want to get out of servicing, but clearly, our success on SSE compared to other offerings in the marketplace is being noted.
Kyle Joseph: There is some real opportunities there and solicit correspondent sellers, who maintain smaller servicing portfolios.
Kyle Joseph: I think that there are there are banks and other large servicers, who perhaps want to get out of servicing but clearly.
Kyle Joseph: Our success on SSC compare to other offerings in the marketplace is being noticed and I think that thats a thats a very I think that's that's a great selling point for US. We're also having good conversations with technologists and other innovative parties in the industry interesting and building on our technology and working with us.
David A. Spector: And I think that that's a very, you know, I think that's a great selling point for us. We're also, you know, having good conversations with technologists and other innovative parties in the industry interested in building on our technology and working with us to get the technology out into the marketplace. And I think that's, you know, the next final step, which is probably the option that's furthest away is just commercialization of the technology.
Kyle Joseph: Just to get the technology out into the marketplace.
Kyle Joseph: And I think that the.
Kyle Joseph: Next final step, which is which is probably the option that's furthest away just commercialization of the technology.
David A. Spector: And that would require some investment to allow for multi-tenancy on the platform. But I think that, you know, as I said, we, you know, I, you know, there's a lot of talk about AI in the marketplace, and I look at what we've done on the system. And, you know, many, many in the industry, I'm hearing, want to get to 60, 70% self-serve using AI. You know, we're at 95% self-serve on our system.
Kyle Joseph: That would require some investments.
Kyle Joseph: Now for multi tenancy on.
Kyle Joseph: On the platform, but I think that as I said we.
Kyle Joseph: Yes.
Kyle Joseph: There's a lot of talk about AI in the marketplace and I look at what we've done on the system and.
I know many many in the industry I'm hearing one I guess, a 60, 70% self serve using AI, we're at 95% self serve on our system.
David A. Spector: And I think a lot of the AI discussions that are taking place in the marketplace are really yesterday's automation. And we built this system really to be robust and to really allow borrowers to, you know, be served. And I think that, you know, we've had a lot of great AI development here in the organization. You know, on the production side, we have, you know, deployed AI to read documents from clients and brokers, which helps in the classification of documents and extraction of data.
Kyle Joseph: And I think a lot of the AI discussions that are taking place in the marketplace. So really yesterday's automation discussions.
Kyle Joseph: And we built this system really to be to be robust and to really allow borrowers to two.
Kyle Joseph: Really.
We serve and I think that we're we've got a lot of great AI development here in the organization.
Kyle Joseph: On the production side, we have we've we've deployed AI to read documents from clients and brokers, which helps in the classification of documents and extraction of data.
David A. Spector: On the servicing side, you know, we can route all documents to the area that is affected or needs to address documents coming in. We have a lot of great voice AI tools that we're using. The most exciting one is that, you know, we can record all customer conversations to drive better business outcomes, but also be able to see all customer complaints, which allows us to reduce those complaints and continue to reduce costs.
Kyle Joseph: On the servicing side, we can we can route all documents to the area that is affecting.
Kyle Joseph: <unk>.
Kyle Joseph: Needs to address documents coming in we have a lot of great voice AI tools that we're using.
Kyle Joseph: Most exciting one is the one that.
Kyle Joseph: We can we can record all customer conversations to drive better business outcomes, but also be able to see our customer complaints, which allows us to reduce the complaints to continue to reduce costs.
David A. Spector: And so I think that, you know, this system is going to continue to shine and is one that is going to be really meaningful, first and foremost for us, but we also think it's important for the industry. And I'm excited about seeing others reap the benefits as well.
Kyle Joseph: And so I think that this system is going to continue to out shine and is one that is going to be really meaningful first and foremost for us, but we also think it's important for the industry and I'm excited about seeing.
Kyle Joseph: Seeing others reap the benefits as well.
Operator: Got it. Very helpful. Thanks for answering my questions.
Speaker Change: Got it very helpful. Thanks for answering my questions.
Operator: The next question comes from the line of Terry Ma with Barclays. Please ask your question.
Speaker Change: The next question comes from the line of Terry MA with Barclays. Please ask your question.
Terry MA: Hey, thanks. Good afternoon.
Terry MA: Hey, Thanks, good afternoon.
Daniel Stanley Perotti: So I think last quarter you guys spoke about a seasonal decline in ROE in the first quarter, but you should expect to continue to kind of build on that throughout this year. And obviously, you guys printed 15% operating ROE this quarter. So maybe can you just speak to your confidence level that you can continue to build on top of that 15% going forward despite the new, I guess, higher for longer rate outlook?
So I think last quarter, you guys spoke about a seasonal decline in ROE in the first quarter, but you should expect to continue to kind of build on.
Terry MA: On that throughout this year, and obviously you guys printed 15% operating ROE. This quarter. So maybe can you just speak to your confidence level that you can continue to build on top of that 15% going forward. Despite the new.
I guess higher for longer rate outlook.
Daniel Stanley Perotti: Yeah, I think looking at the higher for longer rate outlook, we would expect our ROEs to generally be our operating ROEs, I should say to generally be in that sort of mid teen, potentially moving up to high teen ROE levels as we move through the year, depending on the size of the, you know, the overall size of the mortgage market, as David noted in his remark. You know, despite the fact that we are higher for longer, there are more and more mortgages that exist at these higher rates.
Speaker Change: Yes, I think.
Speaker Change: Looking at the higher for longer rate outlook, we would expect our ROE.
Speaker Change: To generally be our operating ROE as I should say to generally be in that sort of mid teen.
Speaker Change: Potentially moving up to high teen.
Speaker Change: ROE level as we move through the year, depending on the size of the overall size of the mortgage market as David noted in his remarks.
Speaker Change: Despite the fact that we are higher for longer there are more and more mortgages that exist at these higher rates and so and a bit of interest rate volatility leads to greater and greater.
Daniel Stanley Perotti: And so any bit of interest rate volatility leads to greater and greater refinance opportunities or opportunities for the market to become that incrementally larger and sort of feed the flywheel in terms of our refinance business and boost our other channels. You know, so we do expect a general increase from these levels of ROE, but probably remaining in the mid to high teens for this year.
Refinance opportunities or opportunities for the market to become that incrementally larger.
Speaker Change: And sort of feed the flywheel in terms of our refinance business and boost our other channels and so.
Speaker Change: So we do expect to a.
General increase from from these levels of ROE, but probably remaining in the mid two.
Speaker Change: In the mid to high teens for this year.
Daniel Stanley Perotti: Got it. That's helpful.
Speaker Change: Got it that's helpful and then.
Daniel Stanley Perotti: And then I just wanted to follow up on the hedging. If I interpreted your comments correctly, you guys were initially positioned for more rate fall in the first quarter that did not materialize. So therefore, there were some hedging inaccuracies, but you guys have since adjusted. Is it possible to kind of give a mark to market on how those hedges have performed quarter to date?
Speaker Change: And then.
Speaker Change: I just wanted to follow up on the hedging if I interpreted your comments correctly.
Speaker Change: You guys were initially positioned for more rainfall in the first quarter that did not materialize.
Speaker Change: So therefore, there was some hedging in accuracies, but you guys have since adjusted.
Speaker Change: Is it possible to kind of give a mark to market on how those hedges have performed quarter to date.
Daniel Stanley Perotti: Um, so, you know, we don't typically give the sort of inter-quarter, you know, updates, and everything changes a little bit on a day to day basis, but we are tracking, you know, adjusted for costs, much closer to our 90 to 100% hedge ratio this quarter than we saw last quarter. Great, that's.
Speaker Change: So we don't typically give that sort of inter quarter.
Speaker Change: Davidson everything changes a little bit on on a day to day basis, but we are tracking.
Speaker Change: Adjusted for cost much closer to our 90% to 100% hedge ratio this quarter then.
Speaker Change: Then what we saw last quarter.
Daniel Stanley Perotti: Okay, great. That's helpful. Thank you.
Okay, Great. That's helpful. Thank you.
Operator: We will take the final question from the line of Eric Hagen from BTIG. Your line is open.
We will take the final question from the line of Eric Hagen from <unk>. Your line is open.
Eric J. Hagen: Hey, thanks. How are we doing? Looking at Jenny's correspondent, I mean, how sustainable do you think those margins are at these rates? And how do you weigh the option to either, you know, cut your margin or expand the credit box to win more business when rates are at these levels versus maybe rates being lower? How would you maybe change your risk or return hurdles if rates were, in fact, lower?
Eric J. Hagen: Hey, Thanks, how are we doing looking at Ginnie correspondent I mean, how sustainable do you think those margins are at these rate levels and how do you weigh the option to either cut your margin or expand the credit box to win more business when rates are at these levels versus maybe rates being lower.
Eric J. Hagen: Would you maybe change your risk or return hurdles.
David A. Spector: Yeah, look, I think as it pertains to listen, we're not the organization that's going to be going down the credit box to get more production. Um, you know, we're always focused on margins, return, and profitability. I will tell you that in the first quarter, we saw some, some, some kind of weird activity; we had a market participant who raised a bunch of capital that was just being overly aggressive.
Eric J. Hagen: Rates are lower.
Eric J. Hagen: Yes look I think as it pertains to listen we're not the organization thats going to be going down the credit box to get more production.
Eric J. Hagen: We're always focused on margins return and profitability.
Eric J. Hagen: I'll tell you that in the first quarter we saw.
Eric J. Hagen: We saw some some kind of weird activity, we had a market participants raised a bunch of capital that was just being overly aggressive.
David A. Spector: I will tell you that, you know, there's still share to be gained, we had a good quarter, we had over, you know, we're going to finish the quarter over 20% market share, and we're still the dominant player on the government correspondent side. I will tell you that I expect margins, you know, to continue to, you know, kind of run where they are today. I don't, I don't, you know, we'll kind of stay in a holding steady state here.
Eric J. Hagen: I will tell you that.
Eric J. Hagen: There is there are still share to be gained we had a good quarter. We had over we're going to finish the quarter over 20% market market share. We are still the dominant player on the government correspondent side.
Eric J. Hagen: I will tell you that I expect margins to continue to kind of run where they are today I don't I don't we're kind of.
Eric J. Hagen: On a holding steady state here.
David A. Spector: And we're getting, you know, that pertains to correspondent, we're getting increased gain on sale activity from good whole on executions away from the GFC. And so I think that that's important as well. But I don't, you know, I think we've gone off to a nice start in April, and I would expect that to continue through the quarter.
Eric J. Hagen: And we're getting as it pertains to correspondent we're getting increased gain on sale activity from good whole loan execution is away from the GSC.
Eric J. Hagen: And so I think that that's that thats important as well.
But I don't.
Eric J. Hagen: I think we've got off to a nice start in April and I would expect that to continue through the quarter.
Eric J. Hagen: Yep, okay, that's helpful. I'm looking at slide 23 and looking at the Tangible net worth to assets. I mean, is there a target range for your leverage? You know, at these rates? I mean, you guys are doing a 15% pre-tax ROE. I mean, how does that compare to your cost of capital? And how do you see that maybe changing at, you know, different levels of leverage?
Speaker Change: Okay. That's helpful I'm looking at slide 23, and looking at the.
Speaker Change: Tangible net worth assets I mean is there a target range for leverage.
These rate levels I mean, you guys are doing a 15%.
Speaker Change: Pretax ROE I mean, how does that compare to your cost of capital and how do you see that may be changing it.
Speaker Change: Different levels of leverage.
Daniel Stanley Perotti: So, you know, overall, in terms of our total debt to equity, as we've noted on the page, we typically targeted around three and a half. We've been below three and a half, given the lower, you know, the lower rate environment recently. We continue to add to our servicing portfolio. You know, as we move through time, and that has, you know, driven up a bit our non-funding debt to equity ratio, which we target, roughly in the, you know, in the range that we're in now, between one to one and a half.
Speaker Change: So.
Speaker Change: Overall in terms of our total debt to equity as we got noted on the.
Speaker Change: On the page, we typically targeted around three five we've been below three and a half given the lower.
Speaker Change: The lower rate environment recently.
Speaker Change: We continue to add to our servicing portfolio.
Speaker Change: As we as we move through time and that has.
Speaker Change: Has driven up a bit our non funding debt to equity ratio.
Speaker Change: Which we target.
Roughly in the range that we're in now between one to one and a half.
Daniel Stanley Perotti: So, you know, overall, I think we're in, in terms of the non-funding debt to equity ratio, in the range we would expect the total debt to equity ratio to be higher, but that's really driven by overall production volumes primarily, which, you know, will be a function of the market more than anything. And so, you know, we don't expect to dramatically change our, you know, our leverage profile in a meaningful way as we're moving forward; we think we're managing to a prudent level there. And as I discussed before, we think that in the current environment, that really results in a mid teen, mid to high teen operating system.
Speaker Change: So overall I think we're in.
Speaker Change: In terms of the non funded debt to equity ratio in the in sort of a range. We would expect in terms of the total debt to equity ratio could be higher, but thats really driven by.
Speaker Change: Overall production volumes primarily.
Speaker Change: Which.
Speaker Change: It will be a function of the market.
Speaker Change: More than anything.
Speaker Change: And so.
Speaker Change: We don't expect to dramatically change our.
Speaker Change: Our leverage profile.
Speaker Change: Change our leverage profile in a meaningful way as we're moving forward, we think were managing to a prudent level there.
Speaker Change: As discussed before we think that in the current environment that really.
Speaker Change: Results in a mid teen mid to high teen operating operating ROA.
Eric J. Hagen: Got you. Hey, thanks a lot. I appreciate it.
Speaker Change: Got you okay. Thanks, a lot appreciate it.
Speaker Change: Yeah.
Speaker Change: Okay.
Operator: We have no further questions at this time. I will now turn it back to Mr. Spector for the closing remarks.
Speaker Change: We have no further questions at this time I will now turn it back to Mr. Spector for any closing remarks.
David A. Spector: I'd like to thank everyone for joining us on the call today. If you have any questions, please feel free to reach out to our investor relations team. And I look forward to speaking to you all myself over the coming months. Thanks so much.
David A. Spector: I would like to thank everyone for joining us on the call today.
David A. Spector: If you have any questions. Please feel free to reach out to our Investor Relations team.
David A. Spector: And I look forward to speaking to you all myself over the next coming months. Thanks, so much.
David A. Spector: Okay.
David A. Spector: Okay.
David A. Spector: Hum.
David A. Spector:
David A. Spector: