Q3 2024 PennyMac Financial Services Inc Earnings Call
Good afternoon, and welcome to Pennymac Financial Services, Inc. 's third quarter 2024 earnings call.
There's no earnings earnings material, including presentation slides that will be referred to in this call are available on Pennymac Financial's website at P. F.
<unk> Dot Pennymac dotcom.
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.
Our 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 Dan periodic Pennymac financial.
<unk> financial officer.
Please go ahead.
David Spector: Thank you operator, good afternoon, and thank you to everyone for participating in our third quarter earnings call.
<unk> reported net income of $69 million.
Return on equity of 8%.
Speaker Change: Excluding the impact of fair value changes PFS I produced an annualized operating Roe of 20%.
Speaker Change: Our production segment pretax income nearly tripled from last quarter as lower mortgage rates provides us the opportunity to help many customers in our servicing portfolio lower their monthly mortgage payments.
Speaker Change: Refinancing.
Speaker Change: At the same time, our servicing portfolio now nearing $650 billion in unpaid principal balance and with nearly $2 6 million customers continues to grow driving increased revenue and cash flow contributions as well as providing low cost leads for our consumer direct.
Speaker Change: Lending division.
Speaker Change: Turning to the origination market current third party estimates forecast total originations of $2 three trillion in 2025, reflecting expectations for mortgage rates to continue their decline from current levels.
Speaker Change: Driving growth in both refinance and purchase volumes.
Speaker Change: As we have demonstrated our balanced and diversified business model with leadership in both production and servicing enabled strong financial performance and a foundation for continued growth as an industry, leading mortgage company, regardless of the direction of interest rates.
Speaker Change: Because we retain the servicing rights on nearly all mortgage loan production.
Speaker Change: It's been one of the largest producers of mortgage loans in recent periods.
We are uniquely positioned in the industry with a large and growing portfolio of borrowers who recently entered into mortgages at higher rates.
Speaker Change: And he would stand to benefit from a refinance in the future when interest rates decline.
Speaker Change: Our strong results in consumer direct with lots nearly doubling in originations up nearly 70% from last quarter demonstrate the future earnings earnings potential of our flywheel providing.
Speaker Change: Outstanding service to our large and growing customer base, while offering them the whole loan products best suited to their needs.
Speaker Change: On slide six of our earnings presentation, you can see as of September 30th approximately $200 billion in outbreak principal balance more than 30% of the loans in our portfolio, having no rate above 5%.
Speaker Change: $90 billion of which was government insured or guaranteed loans and $108 billion of which was conventional another one.
Speaker Change: The opportunity ahead as highlighted in this slide as indicated by our historic refinanced recapture rates, which have improved significantly from five years ago. As a result of our ongoing technology enhancements and process improvements.
Speaker Change: We expect these recapture rates to continue improving given our multiyear investments combined with the increased investment in our brand and use a targeted marketing strategy.
Speaker Change: Notably, we see higher recapture rates for government insured or guaranteed loans relative to conventional loans, given the low cost and more efficient nature of streamlined refinance programs.
Speaker Change: In 2022, when mortgage rates rapidly increased we acted quickly to introduce the closed end second lien product to enable our borrowers access to the equity in their homes.
Speaker Change: So retaining their low rate first lien mortgages.
Speaker Change: We believe offering this product was a significant importance for our customers given our strong emphasis on providing our borrowers with a cost advantage, while obtaining a second lien mortgage versus doing a cash out refinance at prevailing mortgage rates.
Speaker Change: The light section of the bars on the two charts adjust our refinanced recapture rates to include the impact of our closed end second lien program.
Speaker Change: In both the success in retaining our customers as well as our commitment to doing the right thing for them.
Our large and growing servicing portfolio continues to anchor our core operating results and then this higher interest rate period, we continue to realize the significant contribution from placement fees, a custodial balances due to higher short term rates.
Speaker Change: Additionally, this management team has done a tremendous job enhancing our proprietary servicing system.
Which has the flexibility to rapidly adjust for regulatory changes and incorporate new and emerging technologies, including artificial intelligence to drive operational efficiencies.
Speaker Change: We expect to gain additional operating leverage as the portfolio grows and as we continue to look for opportunities to drive down expenses, providing us with a strong base level of profitability in the future.
Speaker Change: In total we have built an operating platform that we believe is unmatched in the mortgage industry able to handle large growing volumes of loans at the highest quality standards.
Speaker Change: After delivering strong performance across various markets.
Speaker Change: Our ability to swiftly react to the increased opportunity the low production market reflects our significant and ongoing investments in technology. The operational enhancements, we have made and ultimately the scale we have achieved.
Speaker Change: <unk> stands stronger than ever given the continued growth of our servicing portfolio and the higher efficient cost structure that sets us apart from our competitors.
Speaker Change: With a leadership position in the correspondent channel and growing our market share in direct lending we are the best positioned in the industry to capitalize on opportunities provided by growth in the origination market.
Speaker Change: In total we expect to continue delivering strong financial results with annualized operating returns on equity equity in the high teens to low 20% in 2025.
Speaker Change: I will now turn it over to Dan who will review the drivers of <unk> third quarter financial performance.
David.
Dan Periodic: <unk> reported net income of $69 million in the third quarter of $1 30 in earnings per share for an annualized Roe of 8%. These.
Dan Periodic: These results included a $160 million of fair value declines on Msr's net of hedges as interest rates exhibited significant volatility during the quarter.
The 10 year Treasury yield declined approximately 60 basis points during the third quarter and range from a high of four 5% to a low of three 6%.
Dan Periodic: The impact of these items, our diluted earnings per share was negative $2 19.
<unk> Board of directors declared a third quarter common share dividend of <unk> 30 per share consistent with the prior quarter.
Dan Periodic: Turning to our production segment pretax income was $108 million up from $41 million in the prior quarter due to higher volumes across all channels with the largest increase in consumer direct.
Dan Periodic: Total acquisition and origination volumes were $32 billion in <unk>.
Dan Periodic: Paid principal balance up 17% from the prior quarter.
26 billion was for PFS size aren't account and $6 billion was fee based fulfillment activity for PMT.
Dan Periodic: Pennymac maintained its dominant position in correspondent lending in the third quarter with total acquisitions of $26 billion.
Dan Periodic: Up from $23 billion in the prior quarter.
Dan Periodic: Our correspondent channel margins in the third quarter were 33 basis points up from 30 basis points in the prior quarter due to less competitive pricing from certain channel participants.
Dan Periodic: In the fourth quarter, we expect PMT to retain approximately 15% to 25% of total conventional correspondent production a decrease from 42% in the third quarter.
Dan Periodic: And broker direct we continue to see strong trends and continued growth in market share as we position <unk> as a strong alternative to channel leaders.
Dan Periodic: What's in the channel were up 24% from last quarter and originations were up 8%.
Dan Periodic: The number of brokers approved to do business with us at quarter end with over 4400 up 25% from the same time last year and we expect this number to continue growing its top brokers increasingly look for strength and diversification and their business partners.
Broker channel margins were down slightly from the prior quarter, but remained near normalized levels.
And consumer direct lock volumes were up 93% from the prior quarter and originations were up 69%.
Speaker Change: Higher volumes were driven by an increase in refinance volumes as David mentioned earlier.
Speaker Change: Merchants in the channel were down and given a higher percentage of refinance loans versus lower balanced closed end second lien.
Speaker Change: Activity in October across all of our channels remains in line with third quarter levels, and though mortgage rates have increased and we expect some impact from normal seasonality. We expect another strong contribution from our production segment in the fourth quarter.
Speaker Change: Production expenses net of loan origination expense increased 18% from the prior quarter, primarily due to increased volumes in the consumer direct channel.
Speaker Change: Turning to servicing the servicing segment recorded a pretax loss of $15 million, excluding valuation related changes and nonrecurring items pre tax income was $151 million.
Speaker Change: Or nine five basis points of average servicing portfolio <unk> unchanged from last quarter.
Loan servicing fees were up from the prior quarter, primarily due to growth in <unk> owned portfolio and earnings our custodial balances and deposits and other income increased due to higher average balances.
Speaker Change: Custodial funds managed for <unk> owned portfolio averaged $6 9 billion in the third quarter up from $5 7 billion in the second quarter.
Realization of MSR cash flows increased $25 million from the prior quarter due to higher prepayment expectations due to lower mortgage rates.
Speaker Change: Operating expenses increased slightly but remained low at approximately six four basis points of average servicing portfolio <unk>.
Speaker Change: The fair value of <unk> MSR decreased by $402 million.
Speaker Change: Driven by lower market interest rates from the prior quarter end.
Hedging gains were $242 million and included significantly elevated hedge costs due to interest rate volatility and the inverted yield curve.
Excluding hedge costs hedging gains offset 78% of MSR fair value declines.
Speaker Change: We seek to moderate the impact of interest rate changes on the fair value of our MSR through our comprehensive hedging strategy. It also considers production related income, which was up significantly this quarter versus last quarter as David mentioned.
Speaker Change: The investment management segment contributed $700000 to pre tax income during the quarter and assets under management were essentially unchanged from the end of the prior quarter.
Provision for income tax expense was $25 million.
Speaker Change: Resulting in an effective tax rate of 26, 1%.
Speaker Change: We ended the quarter with $3 8 billion of total liquidity, which includes cash and amounts available to draw facilities, where we have collateral pledged.
Speaker Change: We will now open it up for questions operator.
Speaker Change: Thank you I would like to remind everyone. We will only take questions related to Panamax financial services, Inc. Our kiosk assai.
Speaker Change: Also ask that you. Please keep your questions limited to one preliminary question.
Speaker Change: One follow up question as we'd like to and I'm sure. We can answer as many questions as possible.
Speaker Change: If you'd like to ask a question during this time.
Speaker Change: Press Star one on your <unk>.
Speaker Change: Telephone keypad, and if you'd like to withdraw that question again press star one.
Speaker Change: First question comes from Doug Harter with UBS. Please go ahead.
Speaker Change: Thanks.
Doug Harter: Hoping you could share a little bit what youre seeing in terms of.
Doug Harter: Lock volume on consumer direct you know in the past couple of weeks.
Doug Harter: Post preferred as rates have started backing up.
I mean look clearly we've seen it come off of its highs.
Doug Harter: From where from where we were from where we were a month ago.
Doug Harter: I think that.
Doug Harter: It's a function obviously of the higher rates.
Doug Harter: It's probably I would say down 30% 30 ish percent.
So look having said that I think we looked at that we look at our direct lending businesses, both broker in consumer direct.
Doug Harter: As being able to react to market as they present themselves I can tell you in the broker direct channel. We continue to see nice share gains and you could see that last quarter.
We're in the third quarter by our estimation.
Doug Harter: 4% market share, which is up from a little above three a year ago and I'm really encouraged by what I'm seeing in that in that business as well on the on the on the consumer direct side, we were able to really.
Doug Harter: Really seasonally opportunity when rates presented themselves we are still seeing some good some good refinance activity, but it goes without saying.
Doug Harter: Rates, increasing that you're going to see a bit of a slow death.
Doug Harter: From the highs.
Speaker Change: And I guess, along those lines. If you could just talk about you know.
Speaker Change: City management kind of as volumes ramped up your ability to kind of meet that from capacity and volumes are all kind.
Speaker Change: Kind of how that plays through today.
Speaker Change: Yes look we're not we're not going to get whipsawed necessarily.
Speaker Change: By the movements in the market.
Speaker Change: Suffice it to say, we spent 22 23 really running capacity tight.
Speaker Change: Earlier this year, we made the decision to increase capacity and we're continuing to look to grow our capacity just given the natural growth in the portfolio and really versus versus the alternatives and hedging the MSR.
Speaker Change: It's the least expensive.
Speaker Change: Is the least expensive path that we can take with the most economic opportunity on the upside when rates do decline.
Speaker Change: And so we're going to be running a little bit more excess capacity, but you look at as I said volatility and the cost of hedging servicing and it's a very.
Speaker Change: It's a very straightforward solution for what we need to do to be able to manage the company.
Speaker Change: Other.
Speaker Change: The other lever that we have is that we still do have a significant number of loans in our portfolio with with equity embedded and so as rates increase.
Speaker Change: As we've talked about previously our loan officers are focused more on.
Speaker Change: Second lien opportunities as we're growing the capacity there is still a lot of opportunity in.
Speaker Change: And our portfolio there and then when interest rates decline again, we can redirect them back towards refinances are first lien loans.
Speaker Change: I appreciate it thank you.
Speaker Change: Your next question comes from the line of Crispin Love with Piper Sandler. Please go ahead.
Crispin Love: Thanks, Matt and good afternoon, everyone.
Crispin Love: I'll speak to your near term outlook for <unk>. Following a really strong third quarter, just where rates have backed up a bit in recent weeks and then and then for 2025 presentations expected Roe.
Crispin Love: High teen to low 20 can you just discuss a little bit what's implied in the estimates from the origination side and then our ROIC is expected to be higher.
Crispin Love: During the year 2020, thank you.
Speaker Change: Sure. So as we're looking in the fourth quarter as you are.
Speaker Change: Implied there.
Speaker Change: The operating ROE is going to be somewhat dependent on what we see happen with rates I think if you look back Pat.
Speaker Change: Prior to the <unk>.
Speaker Change: Prior to the third quarter, we saw our operating ROE.
Speaker Change: In the mid moving up towards the high teens, so even at these rate levels.
Speaker Change: We believe we can achieve the same type of or slightly higher <unk> than what we saw earlier in the year.
Speaker Change: Given the.
Speaker Change: On the production levels that we're seeing today, if we see rates if we see rates go higher we still would expect to be in the mid teens and if we see lower that would obviously drive us back towards <unk>.
Speaker Change: And towards the level that we achieved in the in the third in the third quarter.
Speaker Change: The outlook.
Speaker Change: Ro.
Speaker Change: Operating ROE that we cited in the low teens to high teens, I should say too low twenties.
Speaker Change: 2025.
Speaker Change: Really.
What's implied in there is.
Speaker Change: Somewhat of an increase or I should say the range there sort of covers a similar level.
Speaker Change: Or market level of production to what we've seen what we saw in 2024, maybe a little bit higher if we're on the low end of that range similar to the operating ROE is that we've seen earlier in the year or slightly above that if we do see rates a bit lower as is embedded in there.
The mortgage forecasts that we've seen from other industry participants that David cited at 2223 trillion dollar market.
Speaker Change: And a bit a bit higher a bit more refinance activity that would drive us up.
Speaker Change: Thats one is similar to what we saw here in the third quarter, which I would note generally speaking.
Speaker Change: Really the impact of lower rates in the third quarter was probably really only felt for a.
Two of the three months or a month and a half of the three months.
Speaker Change: So if we saw a bit more of a sustained lower interest rate environment.
Speaker Change: We think that would drive us up higher.
Speaker Change: Higher than that $20 range.
Speaker Change: Great. Thanks for that and then.
Just following up on one comment you made there just on the industry forecast.
Speaker Change: One seven showing in 2024, but probably more importantly, I believe its right around $2 three trillion. In 2025, you have settled on recent quarters that those might be a little ambitious.
Speaker Change: Still believe that might be the case.
Speaker Change: <unk> said that earlier, but just wanted to double click on that one.
Speaker Change: Yeah.
I think a lot of it comes down to exactly what the interest rates are going to be in in.
Speaker Change: <unk> five.
Speaker Change: I think if we did see interest rates.
Speaker Change: A little bit lower Sim.
Speaker Change: Similar to what we experienced or if rates have bounced around in the ranges that we saw during the third quarter I definitely think of 232223 trillion dollar market is.
Speaker Change: Is achievable or would be in that range, if we see.
Speaker Change: <unk> sustained at a higher level then.
Speaker Change: Then that would probably be a little bit high and we'd expect a little bit of a lower overall market size.
Speaker Change: But generally speaking.
Speaker Change: We don't think that that range is unreasonable, but it does come down.
Speaker Change: Meaningfully to what happens with interest rates I would say that in either case as we've talked about before whether interest rates are higher or lower given our balanced business model. We are built to perform well as I sort of gave the indication with the operating ROE. We are built to perform well in either environment if rates do stay higher for <unk>.
Speaker Change: Longer that will allow us to build up a higher a larger inventory of loans at higher mortgage rates that ultimately lead to even greater production income when rates eventually do decline and in the meantime, we have really significant earning.
Speaker Change: Earnings generated by our the servicing side of the business as well as meaningful meaningful income from our production side as we've exhibited over the past year, so in either way.
Speaker Change: I think we have a really create outlook for the company.
Speaker Change: As I discussed previously we could see a market ranging from probably the lower and slightly below two trillion dollars up to the mid two trillion, depending on what happens with interest rates next year.
Speaker Change: Great. Thank you I appreciate you taking my questions.
Speaker Change: Your next question comes from the line of Bose George with <unk>. Please go ahead.
Speaker Change: Hey, guys good afternoon.
Speaker Change: Wanted to go back to the MSR hedge I mean, historically your MSR hedge covered 80%.
Speaker Change: The Mark it was pretty close to that level. This quarter, but you had been targeting higher levels. Recently, so can you discuss the hedge performance this quarter just relative to your expectations.
Speaker Change: Sure Bose.
Speaker Change: The.
Speaker Change: Hedge overall in terms of insulating the change from the MSR change.
Speaker Change: Change in the MSR value.
Speaker Change: As.
Speaker Change: As I as I cited covered about.
80% before before the hedge costs that was in line with what we were targeting I think.
Speaker Change: <unk>.
Speaker Change: Our.
Speaker Change: On the earnings call last quarter, we said, we moved down from targeting a higher coverage level to 80, 90%, so 78% slightly lower than that what we did see during the quarter was given.
Speaker Change: Really for a lot of the quarter that further inversion of the yield curve, meaning that long rates going down and we didn't see short rates or financing rates go down until the very end of the quarter when the fed.
Speaker Change: Lowered its target.
Speaker Change: As well as the pretty significant interest rate volatility during the quarter. So I had mentioned.
Speaker Change: Covering I think over 100 base to 10 year covered I think over 100 basis points during the during the quarter and a lot of that was flowed through in implied volatility in option costs, we did see hedge costs that exceeded our normal 1% to 2% range during the quarter.
Speaker Change: And so as we continue to move through the next several periods we are.
Speaker Change: Looking at how we.
How we adjust our hedge cost versus our overall coverage as we move into the fourth quarter.
Speaker Change: We've seen rates.
Speaker Change: We've seen that very short rates and long rates D. Invert somewhat we've seen our hedge costs come back down into our IND.
Speaker Change: So our normal range and we're still continuing to target overall coverage of around 80%. So.
Speaker Change: So the long story short the overall hedge protection, we think operated as expected as it was at a higher cost than them.
Speaker Change: And then we have seen recently or would have targeted but we've seen those costs come back into range for similar level of protection here in the fourth quarter.
Speaker Change: Okay, Great and then actually just a related question. So just your you.
Speaker Change: You talked about the targeted operating Roe.
Speaker Change: Is that should we assume the GAAP roe's will be essentially the same target for your GAAP ROE eases and as your hedge costs come down.
Speaker Change: Two should be in line over time.
Speaker Change: Generally speaking we've seen as we talked about there.
Speaker Change: Hedge costs.
Speaker Change: And that 1% to 2% and 1% to 2% range, we've had instances, where we actually get paid to hedge and that goes the other way and it's dependent somewhat on the different factors of the interest rate the different factors of the interest rate environment, so over longer periods of time.
Speaker Change: We would generally probably expect those to converge fairly closely there may be.
Speaker Change: There probably is some amount of hedge cost that exists over time, so a GAAP Roe.
Could be slightly lower than the operating Roe.
Speaker Change: But generally speaking those two should be fairly close.
Okay, great. Thank you.
Speaker Change: Your next.
Speaker Change: Question comes from the line of Michael Kaye with Wells Fargo. Please go ahead.
Speaker Change: Hi.
Speaker Change: That's a prior to deal with that mini refi boom. We just had that one five months for example, where the higher note rate borrowers more likely to refi than you thought.
Speaker Change: Well look I think that I don't think anything surprised us per se I will tell you I was encouraged by the.
Speaker Change: The amount of for example, inbound inbound.
Speaker Change: Traffic, we saw it in the call center.
Speaker Change: Our ability to get borrowers to take refinances in block loans I.
Speaker Change: It was really impressive and really executing on the flywheel.
Speaker Change: The thing that in a way surprised me in the quarter is just the increase in jumbo activity that we've seen.
Speaker Change: We had a year ago.
Our loss for the quarter were $22 million this quarter they were.
$1 billion and I think we're a broker was 11% of total production as we're seeing banks stepping back. So I thought that was that to me was really interesting and that also I think speaks to what's driving the share.
Speaker Change: Gains that we're starting to see take place and broker.
Speaker Change: I think it's nice margins or are.
Speaker Change: Or kind of holding in check to going up and consumer direct a bit.
Speaker Change: And I think that.
Speaker Change: By and large.
Speaker Change: The <unk>.
Speaker Change: Tripling our production to me kind of really.
Speaker Change: Speaks to the power of the flywheel and so.
Speaker Change: As we think about the hedging of the asset and holds that get opened up one of the things. We often talk about is the team is to is to take into account that we had this production engine that's going to produce.
Speaker Change: High levels of profitability and we delivered on that front. So I thought it was.
Speaker Change: It was a very good quarter for us.
Speaker Change: I was wondering if you can give a sub servicing update.
Speaker Change: I know you talked previously about expecting some sub servicing deals to happen.
Speaker Change: In Q4, I don't think I heard anything in the prepared remarks is there any update to that you still expect that to happen and excited about the opportunity.
Speaker Change: We do we do we expect we expect to have one or two smaller customers by year end.
Speaker Change: It's going to take a month or two to onboard them.
Speaker Change: We're in discussions with larger clients nothing to really report out yet in terms of.
Speaker Change: I would say in terms of diligence or things that are getting close to the finish line of awards getting out there.
Speaker Change: I think that.
Speaker Change: We're getting a lot of interest in the technology and look a lot of it's because of the.
Speaker Change: A few things number one we're seeing a reduction in the expenses as you see every quarter and then there's things like.
Speaker Change: Last quarter, we introduced the VA vast program.
Speaker Change: Which we were able to sell 917 loans back to VA totaling $267 million in <unk>.
Speaker Change: It really.
Speaker Change: We had a negative mark.
Speaker Change: On the servicing of close to $4 million.
Speaker Change: And so look I think that people see what we're able to do with the technology and by the way we were the first ones out with the vast program.
Speaker Change: Loyalty to many others are out yet, but it just it shows the power of the technology and I think we're getting some really good inbound.
Speaker Change: Inquiry into into sub servicing and the opportunity. So look I am hopeful that by the end of the year with one or two smaller customers inked and then we'll be able to continue to grow that business.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of Mark to freeze with Deutsche Bank. Please go ahead.
Speaker Change: Thanks.
Speaker Change: As you just highlighted you've had some nice share gains in broker direct.
Speaker Change: And as you pointed out in the presentation.
<unk> brokers.
Speaker Change: Like 25% year over year I was just hoping you could talk about any kind of a natural lag there is between giving someone signed up and kind of ramping to a full run rate.
Speaker Change: And maybe also a sense of the size of the brokers have been signing recently, Rob the other ones to help us think through kind of what other future share gains we could expect there.
Speaker Change: Look look we're doing the team is doing a great great job.
Speaker Change: And really making the case that you have.
Speaker Change: Numbers, one and two.
Speaker Change: Who are going after one another on an exclusive basis and Laura brokers are understanding that they need a second alternative at a minimum.
Speaker Change: And so we're able to provide that opportunity. We've got great Tech supported our brokers and we spent a lot of time over the last two years developing that technology to final piece will be coming out in Q4.
Speaker Change: Our share is in existing brokers, who do large volume.
Speaker Change: And we're adding to our sales force in a meaningful way.
Speaker Change: <unk> bin.
Speaker Change: Pretty vocal about expecting share growth to continue at a pretty good pace and the team understands that.
Speaker Change: So far ahead of myself here, but perhaps I have in the past by putting markers out there on a quarter by quarter basis, but I think that the fact that brokers need that strong second option. The fact, we have a jumbo product that is providing consistent execution is meaningful we've launched closed on.
Speaker Change: Seconds into the broker channel and I look at our tech versus with Texas provided by two very well run organizations and the number one and two slots and I think we are just as good if not better in our tech.
Speaker Change: So I am highly encouraged by what I'm seeing in that channel.
Speaker Change: Got it.
Speaker Change: And then Dan I was hoping you could clarify I missed I think you provided some forward looking commentary on the fourth quarter.
Speaker Change: For the production segment could you just repeat that.
Dan Periodic: So we didn't give anything specific on in terms of guidance for the production segment.
Speaker Change: We did say that overall.
Speaker Change: Got a lot of the quarter left to go.
Speaker Change: But that in terms of our operating ROE.
We depending on what happens with the rates for the rest of the quarter, but still expect to probably be in that high teens range.
Speaker Change: With.
Speaker Change: Overall production.
Speaker Change: We're still seeing some positive effects in terms of the total overall availability of loans to be refinanced and certain amount of production for correspondent that's sort of carrying over from the third quarter since that volume tends to tends to lag a little bit.
Speaker Change: Since we're purchasing closed loans.
Speaker Change: So we do expect production income to still be.
Speaker Change: Strong and meaningful in the fourth quarter, but depending on rates and the backup that we've seen might not be at the same levels as what we saw in the third quarter.
Speaker Change: Okay got it thank you.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the line of Terry MA with Barclays. Please go ahead.
Speaker Change: Alright. Thank you good afternoon for.
Speaker Change: So you're servicing margins kind of held steady at about <unk>.
Speaker Change: Nine five basis points, the last two quarters and can you maybe just talk about how sustainable that is.
Speaker Change: Into next year.
Speaker Change: Delinquencies continue to tick up.
Speaker Change: Sure. So overall I think we've shown the ability over the last several quarters to maintain that.
Speaker Change: That margin and we do expect it to maintain at a similar level as we're moving into 2025.
Speaker Change: To the extent that we do see delinquencies pick up somewhat that could contribute a bit in terms of our operating expense I think the flip side of that is that we've shown our ability to drive down our operating expense over time through both a combination of efficiency enhancement.
Speaker Change: Including those that we get through our <unk>, our proprietary servicing platform and that's driven that 30% reduction in servicing costs over time and over the last few years and then.
Speaker Change: And as we continue to increase scale by growing the servicing portfolio. So I think the combination of those factors to the extent that we do see a bit of an uptick in.
Speaker Change: And delinquencies next year.
Speaker Change: See offsets from those continued efficiency enhancements and potentially even depending on depending on what we see and we're not necessarily expecting or I should say, we're not really expecting a meaningful uptick in delinquency next year.
Speaker Change: So absent that absent an uptick we think we'd be able to continue to drive down costs as we move through the next year.
Speaker Change: Got it.
Speaker Change: And then for production new correspondent market share.
Speaker Change: And margins have held up pretty well in spite of some of the competitive pressures you've mentioned in the last few quarters, maybe just talk about what you've seen in that channel in the third quarter and also early on in the fourth quarter.
Speaker Change: Look I think that there.
Speaker Change: There is.
Speaker Change: Okay.
Speaker Change: To your point.
In a period of some irrational pricing, we've managed to keep share.
Speaker Change: <unk>.
Much flat to a year ago, we're up we're up a decent amount in Q3.
Speaker Change: I would say that look we can margins margins were up from last quarter margins continue to stay strong.
Speaker Change: We're obviously focused on profitability as well as well as maintaining share and look I think that given the size and the scale of this market. We can continue to grow share.
Speaker Change: Wanted to do it in a meaningful way.
Speaker Change: But I think that the market knows that we're we're going to be the consistent bid out there we're going to be in the market every day.
Speaker Change: We're we're back to we're getting closer back to that 2020% share in correspondent.
Speaker Change: We'll run above there and if we see irrational pricing may fall below there, but I think.
And large I'm really I'm really pleased with the.
Speaker Change: With the 20% Q over Q increase in locks in correspondent.
Speaker Change: Fundings were up a little bit a little bit less than that but again in that.
And we're still in our seller base is still holding in strong way of close to 800, and so it's still it's still an industry, leading powerhouse that we havent correspondence.
Speaker Change: Got it thank you.
Speaker Change: Your next question comes from the line of Trevor Cranston with citizens JMP. Please go ahead.
Trevor Cranston: Alright. Thanks.
Trevor Cranston: Looking at the chart of the servicing operating expenses on slide seven.
Trevor Cranston: Theres been a pretty consistent improvement there over the last few years.
Trevor Cranston: I guess as you look forward.
Trevor Cranston: Would you say, we're at a point where that improvement starts to level out a little bit or.
Trevor Cranston: Think over the next couple of years and some of the new technology on board comes onboard.
How much lower do you think the.
Trevor Cranston: Expense efficiency efficiencies can realistically get on the servicing side. Thanks.
Speaker Change: Sure. So yes, we think there is still a significant amount of room left to run in terms of servicing efficiencies and continuing to drive down.
Speaker Change: That operating expense metric.
Speaker Change: It may not be at quite the quite the clip that we've seen over the past few years, which is pretty substantial but we do think that there is a lot of.
Speaker Change: A lot of runway and we're going to continue to progress on that in a meaningful way.
Speaker Change: We don't really want to set a.
Speaker Change: Don't want to set a specific floor necessarily but looking at what we think we can achieve through a combination of both continued scale as well as increased operating efficiencies. We believe there is at least 30%.
Speaker Change: Further reduction.
Speaker Change: That could be achieved in in that operating expense metric over time, that's not all going to be next year, but we can continue.
Speaker Change: To move that down in a meaningful way as we move through the next several several periods.
Speaker Change: Got it okay. That's helpful. Thank you.
Speaker Change: Your next question comes from the line of Derek <unk> with Jefferies. Please go ahead.
Speaker Change: Hey, good afternoon, everyone. Just looking at the production expenses I think in your prepared remarks, you attributed the increase to the consumer direct channel.
Speaker Change: And kind of plugging that gap there how should we think about broker direct kind.
Speaker Change: Kind of volume related or variable expenses as that channel continues to gain market share.
Speaker Change: Our overall.
Speaker Change: Variable <unk>.
Speaker Change: Expenses on the broker side.
Speaker Change: Our.
Speaker Change: I guess the way to think about it is sort of mid.
Speaker Change: Sure.
Speaker Change: Hi.
Speaker Change: What we've what we've disclosed previously is really in terms of basis points say in the.
Mid range around.
Speaker Change:
The mid range.
Speaker Change: Uh huh.
Speaker Change: Double digit.
Speaker Change: <unk>.
Speaker Change: So that as we increase we should continue to get.
Speaker Change: Meaningful scale from that from that channel as David mentioned, we are desperate.
Speaker Change: And that's probably on the variable expense side.
Speaker Change: We are continuing to grow our overall platform there and so that may not all be.
Speaker Change: Realized in.
Speaker Change: As you would see it as more sort of continuing to ramp up share in a meaningful way as we're bringing on additional additional resources to grow the channel.
Speaker Change: As you know from a pure variable standpoint, that's that's what we're going to expect.
Speaker Change: Got it thanks, and then on consumer direct volume expectations do.
Speaker Change: Do you expect kind of product mix from <unk> to <unk>.
Speaker Change: Fill through over to <unk> or are we going to see kind of a.
Speaker Change: More of a reversion back to second lien mix.
Speaker Change: If rates.
Speaker Change: If rates stay higher we would expect a bit of a reversion back to more of a second lien mix.
Speaker Change: It will be a bit rate dependent.
Speaker Change: We see more interest rate volatility and.
Speaker Change: And dip in rates then we would.
Speaker Change: See a bit of a shift back toward.
Speaker Change: Toward first lien refinances and Thats really because we discussed part of our strategy is being able to toggle between those products.
Speaker Change: And maintain our capacity in the channel.
Speaker Change: Bye.
Speaker Change: By rotating between the second liens in the higher interest rate environment and the refinances are firstly in refinances as rates decrease or when rates decrease.
Speaker Change: Got it thank you.
Speaker Change: Your next question comes from the line of Eric Hagen with <unk>.
Speaker Change: Please go ahead.
Speaker Change: Eric Your line is open.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Brian <unk> with Wedbush. Please go ahead.
Speaker Change: Great. Thanks for taking my question just one quick one from me wanted to get your view on custodial balance earnings no, there's probably going to be some seasonal declines in the fourth quarter, but just thoughts on how that part of the business trends into next year. If we do see a steeper decline in short term rates.
Is that something that could have an impact on servicing profitability and how does that factor into your R&D expectations for next year.
Speaker Change: Sorry, Brian could you repeat that.
Speaker Change: Yes, just views on the custodial balance earnings in terms of how that could impact servicing profitability.
Speaker Change: We do see a bigger decline in short term rates next year.
Speaker Change: Sure so to the extent that we see a decline in short term rates next year that would impact the earnings that we've been earning on custodial balances, which is generally driven or somewhat driven by what we see in short term rates.
Speaker Change: We would also see and you can sort of see it.
Speaker Change: This quarter as well.
Speaker Change: Some reduction in terms of our floating rate debt and the expense that we see there.
Speaker Change: Which has somewhat of an offsetting impact the other.
Speaker Change: The other aspect to take into account is relating to our realization of servicing cash flows so part of our.
Speaker Change: Hi.
Speaker Change: When we project out the cash flows for the servicing asset.
Speaker Change: Look at what should sort of fall off in any given period, that's really what flows into our.
Speaker Change: Our realization of servicing cash flows line that amortization line.
Speaker Change: And so since we are projecting lower.
Speaker Change: Given what the at least recently the forward curve has projected lower short term rates over time.
Speaker Change: You know that.
Speaker Change: That would drive.
Speaker Change: A lower amount of cash flow to be.
Speaker Change: The realized in any given period, which maintaining.
Maintaining a.
Speaker Change: Yield in terms of our cash flow would result in a lower realization of cash flows. So those two impacts we would expect to offset.
Speaker Change: The lower custodial balances.
Speaker Change: The lower earnings on custodial balances I should say.
Speaker Change: Great. Thank you very much.
Speaker Change: Your next question comes from the line of Shannon Q with Barclays. Please go ahead.
Hey, guys. Thanks for taking my question it looks like for like with days increased sequentially by 70 basis points on FHA at 50 basis points and USDA portfolios I know you mentioned.
Speaker Change: And romance with an expected level of them.
Speaker Change: On a prior question.
Speaker Change: You don't expect a meaningful uptick in delinquencies next year can you just comment on what drove that sequential increase in delinquencies.
Speaker Change: What gives you confidence on delinquency formation going forward for more of the reset Ginnie Mae origination.
Speaker Change: Elevated.
Speaker Change: I would say that the.
Speaker Change: Hello delinquency.
Speaker Change: We would call the noise around the increase in delinquency has to do with for example, how many how many business days in a month or where does the month end are there five Fridays in a month because people get paid on every other Friday.
Speaker Change: I would say by and large delinquency rates continue to remain at very very low levels and I think.
Speaker Change: I think that one given the state of the economy combined with the supply and the lack of supply in the marketplace.
Speaker Change: Those are that to me gives me great confidence in terms of the continued profitability in servicing.
Speaker Change: I think that we for borrowers who do find themselves struggling there are a tremendous amount of forbearance programs offered by FHA VA USDA, Fannie Freddie really with the ultimate goal to keep borrowers in their homes until they can get back on their feet.
Speaker Change: Yes, I think thats one of the great lessons learned out of the great financial crisis that we'd want to give borrowers every opportunity to stay in their homes.
Speaker Change: In the event that sought the case.
Speaker Change: Given the given the supply issues in the marketplace orderly dispositions are are clearly to be expected, which will help.
Speaker Change: Continue.
Speaker Change: To provide lower servicing cost for borrowers who do go into foreclosure.
Speaker Change: So by and large I think it's one of the great.
Speaker Change: Great stories, and then also the fact theres. So many low rate first lien mortgages in the marketplace. So the alternatives for borrowers.
<unk> are pretty slim if theyre in mortgages below 5% given what we're seeing in the rental markets in the alternatives.
Speaker Change: I think that staying in their homes is probably at the top of their list in terms of what they want to do so by and large I think that.
Speaker Change: So we'll see some we'll see some generations monthly quarterly, but I expect that they'll continue to run at these historically low levels.
Speaker Change: Great. Thank you and then last one for me how should we think about refinancing the five and three on.
October 2025.
Speaker Change: Early low coupon, but they're now current so how should we think about financing cost going forward.
Speaker Change: Sure so.
Speaker Change: As you mentioned, we've got the maturity for that five and three eighths bond later in the year next year as we're moving through two.
Speaker Change: 2025.
Speaker Change: Through the next few quarters, we will be looking to see if there are good opportunities to to be able to issue debt and refinance that bond, but as you mentioned it is at a pretty attractive.
Speaker Change: Pretty attractive coupon and so we are not necessarily.
Speaker Change: In a rush to refinance it.
Speaker Change: Do have as we mentioned.
Speaker Change: As I mentioned in the prepared remarks, $3 8 billion.
Speaker Change: $1 billion of liquidity available, including amounts available to be drawn on our secured lines against our MSR for example, which.
Speaker Change: Once we have a really significant amount of capacity and committed capacity available on so to the extent that we don't see.
Speaker Change: An opportunity or an attractive opportunity to be able to refinance we do have the ability to draw on those lines to retire that.
Speaker Change: The debt at maturity.
Speaker Change: Yes.
Speaker Change: If we don't see an opportunity to issue before then but it is our expectation that we would issue between now and the maturity to refinance that debt issue.
Speaker Change: Thank you guys.
Speaker Change: We have no further questions at this time I will now turn it back over to Mr. Spector for closing remarks.
David Spector: Well thank you.
David Spector: I'd like to thank everyone for joining us today on this call.
Speaker Change: Do you have any additional questions.
Speaker Change: As always please feel free to contact our Investor Relations Department.
Speaker Change: We will be at your at your availability to answer those questions and again, thank you for joining us.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Okay.
Speaker Change:
Speaker Change:
Speaker Change: Yeah.
Speaker Change: Yeah.