Q4 2024 PennyMac Financial Services Inc Earnings Call
Slides that will be referred to in this call are available on Panama Financial's website at P. F. S. I, the Pennymac dot com Biff.
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 materials.
David Spector: Now I'd like to introduce David Spector, Pennymac, Financial's, Chairman and Chief Executive Officer, and Dan Pillow, The Panama Financial's Chief Financial Officer, you may begin.
Speaker Change: Thank you operator, good afternoon, and thank you to everyone for participating in our fourth quarter earnings call.
Speaker Change: For the fourth quarter <unk> reported net income of $104 million or diluted earnings per share of $1 95.
Speaker Change: For an annualized return on equity of 11%.
Excluding the impact of fair value changes PSS PFS side produced an annualized operating Roe of 16%.
Speaker Change: By continued strength in our servicing business and a solid contribution from our production segment, despite higher mortgage rates.
Speaker Change: In total loan originations and acquisitions were $36 billion in unpaid principal balance up 13% from the prior quarter and driving the continued growth of our servicing portfolio to $666 billion in unpaid principal balance with $2 6 million cut.
Speaker Change: <unk>.
Speaker Change: Before I continue on I would like to talk about a change that we are reporting our financial results and reporting segments.
For the fourth quarter <unk> reported net income of $104 million or diluted earnings per share of $1 95 for an annualized return on equity of 11%.
Speaker Change: We took the opportunity to address our financial reporting for the evolution of our businesses and the way we manage it.
Speaker Change: As a result, we have modified our segment definitions.
The principal change we made with several remove the corporate overhead allocations from our business segments to better evaluate the performance of our operating businesses.
Excluding the impact of fair value changes PSS PFS Si produced an annualized operating Roe of 16%.
Speaker Change: We also determined that our investment management business was not an operational segment and as such there was later results are now consolidated into corporate and other items.
By continued strength in our servicing business and a solid contribution from our production segment, despite higher mortgage rates.
In total loan originations and acquisitions were $36 billion in unpaid principal balance.
Speaker Change: Our two operating segments are now production and servicing.
30% from the prior quarter and driving the continued growth of our servicing portfolio to $666 billion in unpaid principal balance with $2 6 million customers.
Speaker Change: And we have included non segment activity in activities related to our investment management business in corporate and other.
Speaker Change: Prior period amounts have been recast to conform these periods presentation to the current period presentation and I encourage investors to view the excel supplement posted on PSS sized a penny Mac dot com for more detailed information.
Before I continue on I would like to talk about a change that we are reporting our financial results and reporting segments.
Took the opportunity to address our financial reporting for the evolution of our businesses and the way we manage it.
Speaker Change: Now back to our results.
As a result, we have modified our segment definition.
Speaker Change: The fourth quarter marked the end of a very successful year for <unk> as you can see on slide four of our earnings presentation.
The principal change we made with several removed the corporate overhead allocations from our business segments to better evaluate the performance of our operating businesses.
Speaker Change: We highlighted some of our key achievements in 2024, which demonstrates the earnings power of our balanced business model and the significant gains in operating leverage we achieved it.
We also determined that our investment management business was not an operational segment and as such they were later results are now consolidated into corporate and other items.
Speaker Change: In the production segment total acquisition and origination volumes were $116 billion in <unk> up 17% from 2023.
Our two operating segments are now production and servicing.
And we have included non segment activity and activities related to our investment management business in corporate and other.
Speaker Change: Driven by a nearly 70% increase in originations from the direct lending channels.
Prior period amounts have been recast to conform these periods presentation to the current period presentation and I encourage investors to view the excel supplement posted on PFS sized a penny Mac dot com for more detailed information.
Production segment revenues were up 47% from 2023 and despite the large mix shift expenses remain contained up only 13% from 2023.
Speaker Change: Production segment pretax income in 2024 was $311 million up from $116 million in 2023, including a significantly higher contribution in the third quarter when rates decline.
Now back to our results.
The fourth quarter marked the end of a very successful year for PFS.
As you can see on slide four of our earnings presentation.
We highlighted some of our key achievements in 2024, which demonstrates the earnings power of our balanced business model and the significant gains in operating leverage we achieved.
Speaker Change: Highlighting our ability to rapidly address recapture opportunities and increased demand for refinances when mortgage rates decline.
Speaker Change: Our large servicing business provides ongoing revenue and cash flow contributions in this higher rate environment and continues to provide the foundation for our strong financial performance.
In the production segment total acquisition and origination volumes were $116 billion in <unk> up 17% from 2023.
Driven by a nearly 70% increase in originations from the direct lending channels.
The unpaid principal balance of our suite of our servicing portfolio increased 10% from the prior year and as production volumes more than offset runoff from prepayments.
Production segment revenues were up 47% from 2023 and despite the large mix shift.
Speaker Change: Servicing segment operating revenues were $1 5, billion% to 19% increase from the prior year, driven primarily by increased servicing fees and earnings on custodial balances due to growth in the owned portfolio.
Spencers remain contained up only 13% from 2023.
Production segment pretax income in 2024 was $311 million.
From $116 million in 2023, including a significantly higher contribution in the third quarter when rates decline.
Speaker Change: Operating expenses increased by only 3%.
Speaker Change: Demonstrating the ability of our servicing workflows and technology to scale efficiently with our growth.
Highlighting our ability to rapidly address recapture opportunities and increased demand for refinances when mortgage rates decline.
Speaker Change: While also providing our servicing associates with the tools they need to best serve our customers.
Our large servicing business provides ongoing revenue and cash flow contributions in this higher rate environment.
Speaker Change: In 2020 for servicing segment operating pre tax income was $643 million.
Continued to provide the foundation for our strong financial performance.
Speaker Change: Or 10, one basis points of average servicing portfolio <unk>.
The unpaid principal balance of our suite of our servicing portfolio increased 10% from the prior year and as production volumes more than offset runoff from prepayments.
Speaker Change: Up from $535 million from $9 three basis points in 2023.
Speaker Change: In total we delivered an operating return on equity of 17%.
Servicing segment operating revenues were $1 $5 billion in 19% increase from the prior year, driven primarily by increased servicing fees and earnings our custodial balances due to growth in the owned portfolio.
Speaker Change: GAAP ROE was 9%.
Speaker Change: Growth in book value per share was 6% and we also increased our dividend to <unk> 30 per quarter, an increase of 50% from the previous dividend.
Speaker Change: These strong yearly results demonstrate our commitment to operational excellence and our focus on delivering sustainable earnings through various interest rate cycles by leveraging our balanced business model.
Operating expenses increased by only 3%.
Demonstrating the ability of our servicing workflows and technology to scale efficiently with our growth.
While also providing our servicing associates with the tools they need to best serve our customers.
Speaker Change: Turning to the origination market current third party estimates for total originations in 2025 average two trillion.
In 2020 for servicing segment operating pre tax income was $643 million.
Speaker Change: Reflecting growth in overall volume.
Or 10, one basis points of average servicing portfolio U P b.
Speaker Change: So mortgage rates are back up into the 7% range. We believe ongoing volatility in rates will present opportunities in the origination market from time to time.
Up from $535 million or nine three basis points in 2023.
As you can see on slide six our balanced and diversified business model with leadership positions in both production and servicing enabled strong financial performance and a foundation for continued growth as an industry, leading mortgage company across different interest rate environment.
In total we delivered an operating return on equity of 17%.
GAAP ROE was 9%.
Growth in book value per share was 6% and we also increased our dividend to <unk> 30 per quarter, an increase of 50% from the previous dividend.
Speaker Change: We achieved a mid teens operating ROE and quarters characterized by higher mortgage rates and a 20% operating ROE in the third quarter when mortgage rates declined.
These strong yearly results demonstrate our commitment to operational excellence.
Our focus on delivering sustainable earnings through various interest rate cycles by leveraging our balanced business model.
Speaker Change: Because we retained the servicing rights on our loan production and have been one of the largest producer of mortgage loans in recent periods.
Turning to the origination market current third party estimates for total originations in 2025 averaged two trillion dollars.
Speaker Change: We are uniquely positioned with a large and growing portfolio of borrowers who recently entered into mortgages at higher rates and who stand to benefit from a refinance in the future when interest rates decline.
Reflecting growth in overall volume.
So mortgage rates are back up into the 7% range. We believe ongoing volatility in rates will present opportunities in the origination market from time to time.
Speaker Change: On slide seven of our earnings presentation, you can see that as of year end $220 billion in unpaid principal balance or approximately one third of the loans in our portfolio had a note rate above 5%.
As you can see on slide six our balanced and diversified business model with leadership positions in both production and servicing enabled strong financial performance and a foundation for continued growth as an industry, leading mortgage company across different interest rate environment.
Speaker Change: Approximately $100 billion were government loans, and approximately $120 billion with conventional and other loans.
Speaker Change: The potential opportunity for earnings growth as highlighted on this slide as well as our historic our historical refinanced recapture rates, which have improved significantly from five years ago. As a result of our ongoing technology enhancements and process improvements.
We achieved a mid teens operating ROE in quarters characterized by higher mortgage rates and a 20% operating ROE in the third quarter when mortgage rates declined.
Because we retain the servicing rights on our loan production and.
Speaker Change: We expect these recapture rates to continue improving given our multiyear investments combined with the increased investment in our brands.
It has been one of the largest producer of mortgage loans in recent periods.
We are uniquely positioned with a large and growing portfolio of borrowers who recently entered into mortgages at higher rates and who stand to benefit from a refinance in the future when interest rates decline.
Speaker Change: His use of targeted marketing marketing strategies.
Speaker Change: As I briefly discussed our large and growing servicing portfolio is a key asset.
On slide seven of our earnings presentation, you can see that as of year end $220 billion in unpaid principal balance or approximately one third of the loans in our portfolio and of note rate above 5%.
Speaker Change: Anchoring our core operational results in this higher interest rate environment, and driving low cost leads to our consumer direct division.
Speaker Change: Throughout our history, we've been focused on deploying new and emerging technologies to drive efficiencies and lower cost.
Approximately $100 billion were government loans, and approximately $120 billion with conventional other ones.
Speaker Change: As evidenced by the chart on the right side of slide eight which highlights the decline in our per loan servicing expenses by more than 35% since 2019.
The potential opportunity for earnings growth as highlighted on this slide as well as our historic or our historical 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 have a platform in the mortgage industry that I believe is unmatched and further our best in class management team remains committed to unlocking additional efficiencies through continued investments in workflow and technologies.
We expect these recapture rates to continue improving given our multiyear investments combined with the increased investment in our brand is use of targeted marketing marketing strategies.
Speaker Change: As for all of these reasons that I am confident in our ability to continue driving strong financial performance in this higher rate environment bolstered by increases in the origination market in periods, where mortgage rates decline.
As I briefly discussed our large and growing servicing portfolio is a key asset.
Speaker Change: 2025 will be an exciting year for us.
In growing our core operational results in this higher interest rate environment, and driving low cost leads to our consumer direct division.
Speaker Change: I will now turn it over to Dan who will review the drivers of <unk> fourth quarter financial performance. Thank.
Speaker Change: Thank you David.
Throughout our history, we've been focused on deploying new and emerging technologies to drive efficiencies and lower cost.
Speaker Change: <unk> reported net income of $104 million in the fourth quarter or $1 95 in earnings per share for an annualized Roe of 11%. These.
As evidenced by the chart on the right side of slide eight which highlights the decline in our per loan servicing expenses by more than 35% since 2019.
Speaker Change: These results included $68 million of fair value declines on MSR net of hedges and costs.
Speaker Change: And the impact of these items on diluted earnings per share was negative <unk> 93.
We have a platform in the mortgage industry that I believe is unmatched and further our best in class management team remains committed to unlocking additional efficiencies through continued investments in workflow and technologies.
Speaker Change: <unk> Board of directors declared a fourth quarter common share dividend of <unk> 30 per share.
Speaker Change: Beginning with our production segment pretax income was $78 million down from $129 million in the prior quarter.
It is for all of these reasons that I am confident in our ability to continue driving strong financial performance in this higher rate environment bolstered by increases in the origination market in periods when mortgage rates decline.
Speaker Change: Total acquisition and origination volumes were 36 billion in unpaid principal balance up 13% from the prior quarter as many months originally locked in the third quarter were funded in the fourth quarter.
Speaker Change: Total lock volumes were <unk> 36 billion and <unk> down 7% from the prior quarter due to higher mortgage rates.
2025 will be an exciting year for us.
I will now turn it over to Dan who will review the drivers of <unk> fourth quarter financial performance. Thank.
Of total acquisition and origination volumes $32 billion was for PFS is one account and $4 billion with fee based fulfillment activity for PMT.
Dan: Thank you David.
Dan: <unk> reported net income of $104 million in the fourth quarter or $1 95 in earnings per share for an annualized Roe of 11%. These.
Speaker Change: Pennymac maintained its dominant position in correspondent lending in the fourth quarter with total acquisitions of 28 billion.
Dan: These results included $68 million of fair value declines on MSR net of hedges and costs.
Speaker Change: Up from $26 billion in the prior quarter.
Speaker Change: Corresponded channel margins in the fourth quarter were 27 basis points down from 33 basis points in the prior quarter.
Dan: And the impact of these items on diluted earnings per share was negative 93.
Dan: <unk> Board of directors declared a fourth quarter common share dividend of <unk> 30 per share.
Speaker Change: However, the revenue contribution was essentially unchanged as increased volumes offset the lower margins.
Dan: Beginning with our production segment pretax income was $78 million down from $129 million in the prior quarter.
Speaker Change: Increased volume in the quarter was primarily due to PMT retaining 19% of total conventional correspondent production in the fourth quarter a decline from 42% in the third quarter.
Dan: Total acquisition and origination volumes were $36 billion in unpaid principal balance up 13% from the prior quarter as many moms originally locked in the third quarter were funded in the fourth quarter.
Speaker Change: In the first quarter of 2025, we expect PMT to retain approximately 15% to 25% of total conventional correspondent production consistent with the fourth quarter.
Total lock volumes were $36 billion in UBB down 7% from the prior quarter due to higher mortgage rates.
Speaker Change: Of note pursuant to a renewed mortgage banking agreement with PMT beginning in the third quarter of 2025, all correspondent loans will initially be acquired by Tsi. However, PMT will retain the right to purchase up to 100% of nongovernment correspondent loan production.
Dan: Of total acquisition and origination volumes $32 billion was for PFS is one account and $4 billion with fee based fulfillment activity for PMT.
Dan: Any Mac maintained its dominant position in correspondent lending in the fourth quarter with total acquisitions of 28 billion.
Speaker Change: 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: Up from $26 billion in the prior quarter.
Dan: Corresponded channel margins in the fourth quarter were 27 basis points down from 33 basis points in the prior quarter.
Speaker Change: Originations in the channel were up 22% as many loans locked in the third quarter were funded in the fourth while lock volume was down 17% given the reversal in mortgage rates.
Dan: However, the revenue contribution was essentially unchanged as increased volumes offset the lower margins.
Speaker Change: The number of brokers approved to do business with us at year end was over 4600 up 21% from the end of last year and we expect this number to continue growing as top brokers, increasing increasingly look for strength and diversification and their business partners.
Increased volume in the quarter was primarily due to PMT retaining 19% of total conventional correspondent production in the fourth quarter a decline from 42% in the third quarter.
Dan: In the first quarter of 2025, we expect PMT to retain approximately 15% to 25% of total conventional correspondent production consistent with the fourth quarter.
Speaker Change: Broker channel margins were up slightly from the prior quarter near normalized levels.
Speaker Change: Tumor directly similar with originations up 40% from the third quarter and lock volumes down 30%.
Dan: Of note pursuant to a renewed mortgage banking agreement with PMT beginning in the third quarter of 2025, all correspondent loans will initially be acquired by Tsi. However.
Speaker Change: Margins in the channel were up given a higher mix of refinance loans in the third quarter at lower margins activity.
Speaker Change: And January was down due to higher mortgage rates and typical seasonality.
Dan: However, PMT will retain the right to purchase up to 100% of nongovernment correspondent loan production.
Speaker Change: Production expenses net of loan origination expense increased 12% from the prior quarter due to a higher funded due to higher funded volumes and increased capacity in the direct lending channels.
Dan: 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.
Speaker Change: It is our preference to hold a level of excess origination capacity in the current market environment, given our belief that volatility in interest and mortgage rates will provide pockets of opportunity from time to time, and then we will need to be quick to react.
Dan: Originations in the channel were up 22% as many loans locked in the third quarter were funded in the fourth while lock volume was down 17% given the reversal in mortgage rates.
Dan: The number of brokers approved to do business with us at year end was over 4600 up 21% from the end of last year and we expect this number to continue growing as top brokers, increasing increasingly look for strength and diversification and their business partners.
Speaker Change: Turning to servicing the servicing segment recorded pretax income of $87 million.
Speaker Change: Excluding valuation related changes pretax income was $168 million or 10, three basis points of average servicing portfolio UBB.
Dan: Broker channel margins were up slightly from the prior quarter near normalized levels.
Speaker Change: Loan servicing fees were up from the prior quarter, primarily due to growth in <unk> portfolio and earnings on custodial balances in deposits and other income decreased due to lower short term rates.
Dan: Consumer direct was similar with originations up 40% from the third quarter and lock volumes down 30%.
Dan: Margins in the channel were up given a higher mix of refinance loans in the third quarter at lower margins.
Speaker Change: So aneel funds managed for PFS is on portfolio averaged seven 3 billion in the fourth quarter up from $6 9 billion in the third quarter, primarily due to increased prepayments.
Dan: Activity in January was down due to higher mortgage rates and typical seasonality.
Dan: Production expenses net of loan origination expense increased 12% from the prior quarter due to a higher funded due to higher funded volumes and increased capacity in the direct lending channels.
Speaker Change: Realization of MSR cash flows decreased $10 million from the prior quarter due to lower prepayment expectations as a result of higher mortgage rates.
Speaker Change: Operating expenses were down $2 million from the prior quarter at $81 million or five basis points of average servicing portfolio <unk>.
It is our preference to hold a level of excess origination capacity in the current market environment, given our belief that volatility in interest and mortgage rates will provide pockets of opportunity from time to time, and then we will need to be quick to react.
Speaker Change: The fair value of <unk>, MSR increased by $540 million driven by higher market interest rates.
Dan: Turning to servicing the servicing segment recorded pretax income of $87 million.
Speaker Change: <unk> losses, and costs were $608 million more than offsetting MSR fair value gains as David mentioned results from our investment management business are now included within corporate and other.
Dan: Excluding valuation related changes pretax income was $168 million were $10 three basis points of average servicing portfolio UBB.
Speaker Change: Corporate and other items contributed a pretax loss of $36 million.
Dan: Loan servicing fees were up from the prior quarter, primarily due to growth in <unk> portfolio and earnings on custodial balances in deposits and other income decreased due to lower short term rates.
Speaker Change: Compared to $39 million in the prior quarter.
Speaker Change: <unk> recorded a provision for tax expense of $25 million, resulting in an effective tax rate of 19, 2% a.
So real funds managed for PFS is on portfolio averaged seven 3 billion in the fourth quarter up from $6 9 billion in the third quarter, primarily due to increased prepayments.
Speaker Change: The reduction in the effective tax rate from the prior quarter was primarily due to a decline in the provision rate from $26, 85% 26, 7% and the resulting repricing of expected taxes on deferred income.
Dan: Realization of MSR cash flows decreased $10 million from the prior quarter due to lower prepayment expectations as a result of higher mortgage rates.
Speaker Change: We ended the quarter with $3 $3 billion of total liquidity, which includes cash and amounts available to draw on facilities, where we have collateral pledged.
Dan: Operating expenses were down $2 million from the prior quarter at $81 million or five basis points of average servicing portfolio <unk>.
Speaker Change: We will now open it up for questions.
Speaker Change: Operator.
Dan: The fair value of <unk>, MSR increased by $540 million driven by higher market interest rates.
Speaker Change: Thank you I would like to remind everyone. We will only take questions really just dependent on financial services, Inc. Our PFS Si.
Dan: Losses, and costs were $608 million more than offsetting MSR fair value gains as David mentioned results from our investment management business are now included within corporate and other.
Speaker Change: Ask that you. Please keep your questions. Congrats on a long term Minera question and one follow up question that you'd like to ensure we can answer as many questions as possible.
Speaker Change: Like to ask a question during this time simply press the star followed by the number one on your telephone keypad and if you would like to declare a question. Please press star one again.
Dan: Corporate and other items contributed a pretax loss of $36 million.
Dan: Compared to $39 million in the prior quarter.
Dan: <unk> recorded a provision for tax expense of $25 million.
Speaker Change: Your first question comes from the line of Doug Hunter.
Dan: Resulting in an effective tax rate of 19, 2% a.
Speaker Change: Harker with UBS. Please go ahead.
Dan: The reduction in the effective tax rate from the prior quarter was primarily due to a decline in the provision rate from $26 eight 5% 26, 7% and the resulting repricing of expected taxes on deferred income.
Go into a little bit more about the hedge performance this quarter kind of what drove the larger hedge loss.
Dan: We ended the quarter with $3 $3 billion of total liquidity, which includes cash and amounts available to draw on facilities, where we have collateral pledged.
Speaker Change: And I know in past quarters, you had talked about the change.
Speaker Change: <unk> the head strategy.
Speaker Change: Cost for that and just kind of give us an update on the strategy there.
Dan: We will now open it up for questions.
Speaker Change: Sure. So I'm, sorry, you cut out a little bit Doug So I am going to answer that.
Dan: Operator.
Speaker Change: Thank you I would like to remind everyone. We will only take questions related to Panama Financial Services, Inc. Our PFS Si.
Speaker Change: These are the questions that I heard and if theres some piece that I didn't answer just let me know afterwards in.
In terms of the performance of the hedge in the fourth quarter.
Speaker Change: I ask that you. Please keep your questions. Congrats alongside M&A question and one follow up question that you'd like to ensure we can answer as many questions as possible.
Speaker Change: Actually the overall hedge performed more or less in line with how we expected in terms of our insulation from changes in.
Speaker Change: Like to ask a question during this time keep your press star followed by the number one on your telephone keypad and if you would like to declare a question. Please press star one again.
Speaker Change: And market rates, one change that we did have during the quarter is that as interest rates increased significantly when rates were at lower levels. We have discussed we were attempting to hedge and sort of at $80 to 90% area as we move up to higher rates were again and sort of near term rallies theres not as much of an.
Doug Hunter: Your first question comes from the line of Doug Hunter.
Doug Hunter: Heartburn with UBS. Please go ahead.
Speaker Change: Go into a little bit more about the hedge performance. This quarter, you know kind of what drove the larger hedge loss.
Speaker Change: Path to production.
Speaker Change: We moved that hedge ratio back towards 90% to 100%.
Speaker Change: And I know in past quarters, you had talked about changing the head strategy.
Speaker Change: As as rates increased and Thats, where we started the quarter and how we are currently what were currently.
Speaker Change: Cost for that and just kind of give us an update on the strategy there.
Speaker Change: Sure.
Speaker Change: Targeting today.
Speaker Change: Sorry, you cut out a little bit Doug So I am going to answer.
Speaker Change: We did see impact the net hedge results.
Speaker Change: During the quarter that departed from that 90% to 100% hedge ratio did say fee hedge costs since we view utilize options and the curve was.
Speaker Change: The question that I heard and if there is some piece that I didn't answer just let me know afterwards.
Speaker Change: In terms of the performance of the hedge in the fourth quarter.
Speaker Change: Actually the overall hedge performed more or less in line with how we expected in terms of our insulation from changes in <unk>.
Speaker Change: No.
Speaker Change: Flat to inverted for a for a lot of the or for part of the.
Speaker Change: Part of the quarter.
Speaker Change: And then.
And market rates, one change that we did have during the quarter is that as interest rates increased significantly when rates were at lower levels. We have discussed we were attempting to hedge in sort of an $80 to 90% area as we move up to higher rates were again and sort of near term rallies theres not as much of.
Speaker Change: We did see some excess prepayments we mentioned the prepayments fees were a bit higher in the fourth quarter due to the impact of.
Speaker Change: Of rates being lower in the third quarter, although that was baked into our model. The speeds, we're a bit in excess of what we had projected and for us that flows through into our changes in fair value and so that had a little bit of a negative or a bit of a negative impact in the quarter as well and so those components together.
Speaker Change: And impact to production.
Speaker Change: We moved that hedge ratio back towards 90% to 100%.
Speaker Change: As as rates increase then Thats, where we started the quarter and how we are currently.
Speaker Change: Account for most of the the.
Speaker Change: The negative contribution on the hedged during the quarter as we're going into the first quarter. We've seen the hedge performed fairly well thus far as I mentioned, we are hedging more than the 90% to 100% range currently.
Speaker Change: We're currently targeting today.
Speaker Change: What we did see impact the net hedge results.
Speaker Change: During the quarter that departed from that 90% to 100% hedge ratio, we could say see hedge costs since we view utilize options and the curve was.
Speaker Change: Given where we're sitting in the in the interest rate environment and the amount of production that we would see them just.
Speaker Change: And our near term rally and <unk>.
Speaker Change: So.
Speaker Change: <unk> rally, where we're not relying very significantly.
Speaker Change: Flat to inverted for a for a law.
Lot of the or for part of the.
Speaker Change: Great I appreciate that Dan.
Speaker Change: Part of the quarter.
Speaker Change: And then.
Speaker Change: Okay.
Speaker Change: We did see some excess prepayments we mentioned the prepayments fees were a bit higher in the fourth quarter due to the impact of.
Your next question comes from the line of Michael Kaye with Wells Fargo. Please go ahead.
Michael Kaye: A quick question on 2025 ROE guidance, it looks like Youre downgrade today.
Speaker Change: Of rates being lower in the third quarter, although that was baked into our model. The speeds, we're a bit in excess of what we had projected and for us that flows through into our changes in fair value and so that had a little bit of a negative or a bit of a negative impact in the quarter as well and so those components together.
From prior what kind of <unk> environment.
Michael Kaye: Contemplated in that at revise our <unk> guidance is that current rates on the low end or is it some sort of improvement can you just flush that out a little bit.
Speaker Change: Account for most of the the.
Michael Kaye: Yes, that's really more or less assuming a rate environment, that's pretty similar to where we are today. So we arent.
Speaker Change: The negative contribution on the hedged during the quarter as we're going into the first quarter. We've seen the hedge performed fairly well thus far as I mentioned, we are hedging more than the 90% to 100% range currently.
Michael Kaye: Really forecasting a significant decline in interest rates given that.
Michael Kaye: With that in mid teens to high teens.
Speaker Change: Given where we're sitting in the in the interest rate environment and the amount of production that we would see in gist.
Michael Kaye: Teens operating Roe guidance.
Michael Kaye: And so given what we're seeing and.
Speaker Change: And our near term rally.
Michael Kaye: The production environment that we think is likely in that case, and especially their refinance environment, that's likely in that case.
Speaker Change: <unk> rally, where we're not relying very significantly.
Speaker Change: Great I appreciate that Dan.
Michael Kaye: <unk> as you mentioned sort of brings down our operating ROE expectations from what we had communicated.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Michael Kaye with Wells Fargo. Please go ahead.
Michael Kaye: I go to the extent that we do see.
Michael Kaye: A quick question on 2025 ROE guidance, it looks like Youre downgrade in it.
Michael Kaye: A meaningful rally or pockets of meaningful rallies from here that would allow those operating ROE to get back up into the 20th like we saw in Q3.
Speaker Change: From prior what kind of environment.
Speaker Change: Have you contemplated in that at revise our <unk> guidance does that current rates on the low end or is it some sort of improvement can you just flush that out a little bit.
Michael Kaye: Or or higher if theres, a more sustained and if theres a more sustained rally, but that operating ROE projection was really.
Speaker Change: Yes, that's really more or less assuming a rate environment, that's pretty similar to where we are today. So we arent.
Michael Kaye: More contemplating the <unk>.
Michael Kaye: Rates at levels that we're currently at.
Michael Kaye: Okay.
Speaker Change: Really forecasting a significant decline in interest rates given the.
Michael Kaye:
Michael Kaye: A question on.
Michael Kaye: Whats the impact to the Penny Mac Ed.
Speaker Change: With that in mid teens to high teens.
Speaker Change: Teens operating Roe guidance.
Michael Kaye: <unk> exit conservatorship and just wondering how many Mac is preparing for that potential and maybe you could talk about how.
Speaker Change: And so given what we're seeing and.
Speaker Change: The production environment that we think is likely in that case, and especially their refinance environment, that's likely in that case.
Michael Kaye: The benefit of having PMT.
Michael Kaye: Benefits <unk> in that scenario.
Speaker Change: As you mentioned sort of brings down our operating ROE expectations from what we had communicated.
Michael Kaye: Well you kind of answered the question Michael So thank you, but let me kind of take it from the top here how are you doing.
Speaker Change: Quarter ago to the extent that we do see.
Michael Kaye: Okay.
Good good book, we from day, one to manage this company to a range of outcomes.
Speaker Change: A meaningful rally or pockets of meaningful rallies from here that would allow those operating ROE to get back up into the 20th like we saw in Q3.
Michael Kaye: And I think on a period of time when the Gse's, We're 90 plus percent of the market we are leading.
Speaker Change: <unk> were higher if there's a more sustained if theres a more sustained rally, but that operating ROE projection was really.
Michael Kaye: Mortgage residential mortgage lender and producer of mortgages and servicer in and then.
Michael Kaye: The GSC begin to retrace that which which we're starting to see parts of that.
Speaker Change: More contemplating b.
Speaker Change: Rates at levels that we're currently at.
Speaker Change: Okay.
Michael Kaye: To continue to operate better than anyone in the industry.
Speaker Change:
Speaker Change: Question on.
Michael Kaye: I think I think that we as you pointed out we are uniquely positioned with PMT to have an investment vehicle to invest in credit related investments.
Speaker Change: Whats the impact to the Penny Mac.
Speaker Change: <unk> exit conservatorship and just wondering how many Mac is preparing for that potential and maybe you could talk about how.
Michael Kaye: And I think the.
Michael Kaye: In Q4, we had two securitizations of Investor enrollment second home loans.
Speaker Change: The benefit of having PMT.
Speaker Change: Benefits.
At execute better in the private markets and they do delivering to the Gse's. We closed our first deal for 2025 today we're.
Speaker Change: So in that scenario.
Michael Kaye: Well you kind of answered the question Michael So thank you, but let me kind of take it from the top here how are you doing.
Michael Kaye: We're on track to do a deal a month, which represents about 50% of that production with the remaining production going home to.
Speaker Change: All right.
Speaker Change: Good good well look we from day, one to manage this company to a range of outcomes and I think on a period of time when the Gse's. We're 90 plus percent of the market we are leading.
Michael Kaye: The whole loan buyers I can <unk> companies. What's important there is you can begin to see how we think about distribution as the GSE footprint gets reduced.
Speaker Change: Mortgage.
Speaker Change: We went to a mortgage lender and producer of mortgages and servicer and and then if the GSC begin to retrace.
Michael Kaye: Okay guarantee fees.
Michael Kaye: If you listen to some people about they say theyre going to go up.
Michael Kaye: With the new administration, but if guarantee fees were to go up the ability to access all outlets in the market as a trademark of my career in this company and so we'll continue to find whole loan investors will continue to do securitization to PMT and PMT is going to thrive in that opportunity.
Speaker Change: At which we're starting to see parts of that.
Speaker Change: We're going to continue to operate better than anyone in the industry.
Speaker Change: I think I think that we as you pointed out we are uniquely positioned with P&C to have an investment vehicle to invest in credit related investments and I think.
Michael Kaye: PMT is expanding the the.
Speaker Change: In Q4, we had two securitizations of Investor enrollment second home loans that execute better in the private markets and they do delivering to the Gse's. We closed our first deal for 2025 today.
Michael Kaye: Expanding the loans that they are looking to do securitization.
Michael Kaye: There's opportunities in jumbo theres opportunities.
Michael Kaye: Less so in closed end seconds, but I will tell you that I think that PMT is going to PMT had a great quarter in the fourth quarter will be.
Speaker Change: On track to do the deal on malls, which represents about 50% of that production with the remaining production going home.
Michael Kaye: On up to a really nice start in the first quarter and Thats something that were going to leverage it.
Speaker Change: It's a whole loan buyers I can <unk> companies. What's important there is you can begin to see how we think about distribution as the GSE footprint gets reduced.
Michael Kaye: If we see the GSE retracement take place in addition.
Michael Kaye: Interesting about the Q4 results and we're seeing it.
Speaker Change: Guarantee fees.
Speaker Change: If you listen to some people, but they say theyre going to go up.
Michael Kaye: January it as strong as the amount of jumbo volume were deal.
Speaker Change: With the new administration, but if guarantee fees were to go up the ability to access all outlets in the market as a trademark of my career in this company and so we will continue to find whole loan investors will continue to do securitization to PMT and PMT is going to thrive in that opportunity.
Michael Kaye: In the fourth quarter, we did almost a $1 billion of jumbo production across all three channels.
We are on pace to do more than that in the in the first quarter.
Michael Kaye: And there were as I mentioned, we're looking to do a securitization in PMT and before in the first half of this year, but again, we're accessing the markets. There is a whole low markets there as well.
Speaker Change: AMC is expanding the the.
Speaker Change: Expanding the loans that they are looking to do securitization.
Michael Kaye: Then on the consumer direct side, we had a really nice quarter in terms of closed end second production in the fourth quarter and that kind of again plays into our ability to distribute loans away from the agency.
Speaker Change: There's opportunities in jumbo theres opportunities.
Less so in closed end seconds, but I will tell you that I think that PMT is going to PMT had a great quarter in the fourth quarter will be.
Michael Kaye: And we're building a great operation to access pools of capital to be able to put entrees to be able to settle trades and so as we see if we see in a marketplace where loans move away from the agencies, we're going to continue to be the leader in the industry.
Speaker Change: One or two really nice start in the first quarter and Thats something that were going to leverage.
Speaker Change: If we see the GSE retracement take place in addition.
Speaker Change: What's interesting about the Q4 results and we're seeing it in January as strong as the amount of jumbo volume or deal.
Speaker Change: In the fourth quarter, we did almost $1 billion of jumbo production across all three channels.
Michael Kaye: And being able to maximize the economic net really when you look at when I look at our our organization, which we <unk> PMT. That's the differentiator is our expertise to be able to price and execute on best execution.
Speaker Change: We are on pace to do more than that in the in the in the first quarter.
Speaker Change: And there were as I mentioned, we're looking to do a securitization in PMT and before in the first half of this year, but again, we're accessing the markets. There is a whole loan market there as well.
Michael Kaye: For our customers, our correspondents and our brokers.
Michael Kaye: Okay. Thank you.
Speaker Change: Your next question comes from the line of Terry MA with Barclays. Please go ahead.
Speaker Change: Then in the consumer direct side, we had a really nice quarter in terms of closed end second production in the fourth quarter and that kind of again plays into our ability to distribute loans away from the agency.
Terry MA: Hey, Thank you good evening.
Terry MA: Just had a follow up on the operating ROE range for 2025.
Terry MA: Mid to high teens, I guess your exit rate for this year is kind of already in the mid teens I'm. Just curious what do you need to see to get to the high teens do you need to see many rate rallies or do you think you can continue to kind of grind higher on the ROE V scale, even if you kind of even if rates stay where they are right now.
Speaker Change: And we're building a great operation to access pools of capital to be able to put entrees to be able to settle trades and so as we see if we see in a marketplace where loans move away from the agencies, we're going to continue to be the leader in the industry.
Terry MA: I think yeah. Thanks, Terry that's a great question, so as we see.
Speaker Change: And being able to maximize the economics net really when you look at you know when I look at our our organization, which we've <unk> TMT. That's the differentiator is our expertise to be able to price and execute on best execution.
Terry MA: Or if we see.
Terry MA: Rates continue to stay at this high level, we do expect to continue to drift upwards in terms of operating ROE I think the key aspect. There is the our efficiencies that we've gained over time in the servicing and servicing space and servicing portfolio. So.
Speaker Change: For our customers, our correspondents and our brokers.
Speaker Change: Okay. Thank you.
Terry MA: Hi.
Terry MA: Your next question comes from the line of Terry MA with Barclays. Please go ahead.
Terry MA: Yes.
Terry MA: We have a page we have a page in the deck that shows our decrease in operating expenses over time with respect to our servicing portfolio Thats gone down by 30% over the past.
Terry MA: Hey, Thank you good evening.
Terry MA: Just had a follow up on the operating ROE range for 2025.
Speaker Change: Our mid to high teens I guess your exit rate for this year is kind of already in the mid teens I'm. Just curious what do you need to see to get to the high teens do you need to see many rate rallies or do you think you can continue to kind of grind higher on the ROE V scale, even if you kind of even if rates stay where they are right now.
Terry MA: A few years since 2019.
Terry MA: We expect to be able to continue to drive that down on a on a per unit basis, both as a function of scale.
Terry MA: As well as continuing to make our operations more efficient and so on that basis, we would generally expect our.
Speaker Change: I think yeah. Thanks, Terry that's a great question, so as we see.
Terry MA: Even if we stay in the current environment, our operating Roe to.
Speaker Change: If we see.
Terry MA: To drift upwards and so the.
Speaker Change: Rates continue to stay at this high level, we do expect to continue to drift upwards in terms of operating Roe.
Terry MA: Mid to high <unk> mid to high teens.
Speaker Change: I think to your point, depending on what you consider mid and high.
Speaker Change: The key aspect there is the our efficiencies that we've gained over time in the servicing and servicing space and servicing portfolio. So.
Speaker Change: We would generally expect to be drifting upwards towards the high teens over the year, if we stay up in this rate level.
Speaker Change: If we stay up in this rate environment, where we're gaining further further efficiencies as we go through the year.
Speaker Change: Hi.
Speaker Change: Yes.
Speaker Change: We have a page we have a page in the deck that shows our decrease in operating expenses over time with respect to our servicing portfolio that has gone down by 30% over the past.
Speaker Change: A couple of things about about 2024, that's really I think highlights the power of the company is that you look at the you look at the Q3 results. So we had that brief rally and you can see how quickly the Roe.
Speaker Change: Few years since 2019.
Speaker Change: We expect to be able to continue to drive that down on a on a per unit basis, both as a function of scale.
Speaker Change: And climbed to 20% and even higher if that route if a rallies protracted and then similarly to speak about the operating scale historically when we've had rallies you recognize the work when you recognize the gain or loss when you take it but the expenses a lot of the expenses hit when you close the law and so in <unk>.
Speaker Change: As well as continuing to make our operations more efficient and so on that basis, we would generally expect our.
Speaker Change: Even if we stay in the current environment, our operating Roe to.
Speaker Change: Q4, we were closing out loans in the pipeline and we still have we still have a relatively very good Roe.
Speaker Change: To drift upwards and so the.
Speaker Change: Mid to high <unk>.
Speaker Change: Mid to high teens.
Speaker Change: And so I think that there is there is it speaks to the leverage that we have in our production channels and I think as you continue to see growth in the non agency products combined with the continued efficiencies that our production teammates.
Speaker Change: I think to your point, depending on what you consider mid and high.
Speaker Change: We would generally expect to be drifting upwards towards the high teens over the year, if we stay up in this rate level.
Speaker Change: They have to in this rate environment, where we're gaining further further efficiencies as we go through the year.
Speaker Change: <unk> to isolate and perfect that.
Speaker Change: No.
Speaker Change: A couple of things about about 2024, Thats really I think highlights the power of the company is that when you look at the you look at the Q3 results. So we had that brief rally and you can see how quickly the row and.
Speaker Change: A lot of it is in our control and then you take the piece that's not in control and Thats the market in <unk>.
Speaker Change: One thing for sure rates go up and rates come down and so our ability to be able to seize on that opportunity is vitally important and thats one of the reasons why we've we've brought in some excess capacity in our consumer direct channel and so we have had we have about additional 100 at Lowe's at the moment that are.
The decline in the 20% and even higher if that route if a rallies protracted and then similarly to speak about the operating scale historically when you've had rallies.
Speaker Change: Recognize the work when you recognize the gain or loss when you take it but the expenses a lot of the expenses heads when you close the law and so in Q4, we were closing out loans in the pipeline and we still have we still have a relatively very good Roe.
Speaker Change: We're really focused on at the moment working for our customers who are cash out refinances are closed end seconds or are looking to buy new homes. Likewise as rates decline, we can pivot those lows to focus on rate and term refis and historically when when markets.
Speaker Change: And so I think that there is there is it speaks to the leverage that we have in our production channels and I think as you continue to see growth in the non agency products combined with the continued efficiencies that our production teammates.
Speaker Change: New originators go out and they try to find additional capacity, but we're in a position because of the strength of the organization to be able to maintain that capacity and be able to do so a while having products that they can offer our customer base.
Speaker Change: Continue to to isolate and perfect that is a.
Speaker Change: A lot of it is in our control and then you take the piece that's not in control Thats. The market. We know one thing for sure rates go up and rates come down and so our ability to be able to seize on that opportunity is vitally important and thats one of the reasons why we've we brought in some excess capacity in our consumer direct channel.
Speaker Change: Got it that's very helpful color and then just to follow up.
Speaker Change: Any color you can provide on what you're seeing.
Speaker Change: With respect to just delinquencies in your portfolio.
Speaker Change: 60, plus day delinquency rate increased.
Speaker Change: Increased sequentially, but it also the year over year increase also accelerated in the quarter.
Speaker Change: And so we have had we have about additional 100 at Lowe's at the moment that are really focused on at the moment working for our customers who are cash out refinances are closed end seconds or are looking to buy new homes. The likewise as rates decline, we can pivot those lows to focus.
Speaker Change: Excuse me, ladies and gentlemen, please standby as it appears that the presenters got disconnected.
Speaker Change: On rate and term refis and historically when.
Speaker Change: Please.
Speaker Change: When markets move originators go out and they try to find additional capacity, but we're in a position because of the strength of the organization and be able to maintain that capacity and be able to do so a wire having products that they can offer our customer base.
Speaker Change: Got it that's very helpful color and then just to follow up.
Speaker Change: I mean any color you can provide on what you're seeing.
Speaker Change: With respect to just delinquencies in your portfolio.
Speaker Change: 60, plus day delinquency rate.
Speaker Change: Increased sequentially, but it also the year over year increase also accelerated in the quarter.
Speaker Change: <unk>.
Speaker Change: Excuse me, ladies and gentlemen, please standby as it appears the presenters got disconnected.
Speaker Change: Please.