Q1 2025 PennyMac Financial Services Inc Earnings Call
Good afternoon and welcome to PennyMac Financial Services Inc's first quarter 2025 earnings call.
Additional earnings materials including presentation slides that will be referred to in this call are available on PennyMac's website at pfsi.pennemaric.com
Before we begin, let me remind you that this call may contain forward-looking statements.
Letter's subject of search and risk identified on slide two of the earnings presentation that could cost the company's actual results to different materially, as well as non-GAAP measures that have been reconciled to their gap equivalent in the earnings materials.
Speaker Change: I'd no like to introduce David Spector, PennyMac Financial's Chairman, and Chief Executive Officer, and then Perotti, PennyMac Financial's Chief Financial Officer.
Speaker Change: Thank you, operator. Good afternoon and thank you to everyone from participating in our first quarter earnings call.
Speaker Change: For the first quarter, PFSI reported net income of $76 million for diluted earnings per share of $1.42 for an annualized return on equity of 8%.
Speaker Change: Excluding the impact of fair value changes, PFSI produced an annualized operating ROE of 15%. Driven by continued strength in our servicing business and a solid contribution from our production segment despite elevated mortgage rents.
Speaker Change: In total, loan originations and acquisitions were $29 billion in unpaid principal balance, driving the continued growth of our servicing portfolio to $680 billion in unpaid principal balance with $2.7 million households.
Speaker Change: Before reviewing our quarterly results in greater detail, I would like to highlight our newly announced partnership with Team USA and the L.A.28 Olympic and Paralympic Games.
Speaker Change: In recent periods, we have made significant investments in technology and capacity.
Speaker Change: and given our market position as the second largest producer mortgage loans and the sixth largest servicer in the country, we are well positioned for sustained investment in our brand. This strategic for your partnership is a powerful catalyst for our business.
Speaker Change: We will elevate our brand with our customers, business partners and employees while connecting PennyMac with the shared values of respect and excellence embodied by the US Olympic and Paralympic Movement.
Speaker Change: Team USA has a massive fan base offering unparalleled reach and brand association with the Olympic and Paralympic Games drives increased engagement, memorability, and ultimately greater customer consideration.
Speaker Change: This marks the first significant investment in our brand, building upon our established success and performance marketing.
Speaker Change: We expect the partnership to boost both portfolio recapture and non-portfolio customer acquisition with integrated campaigns and athlete partnerships that deliver the message of the importance of home and home ownership.
Speaker Change: Additionally, this partnership is a key driver in our strategy to expand our market share
Speaker Change: Our association with TUSA will also foster a stronger sense of pride and purpose among our employees. And as we look to grow our employee base, this partnership increases PennyMac's value proposition as an employer of choice.
Speaker Change: It is important to note that this partnership is a strategic four-year investment that we've structured to align with our financial discipline. The related expenses will be lower in the early years of the partnership gradually building
Speaker Change: This phase approach allows us to strategically build brand relevance awareness and engagement without significant up-prone costs.
Speaker Change: We are incredibly enthusiastic about the opportunities this partnership presents and its potential to drive significant value across all facets of our business.
Now, turn to the origination market.
Speaker Change: Current third-party estimates forecast total origination of $2 trillion in 2025, reflecting projections for growth and overall volumes with moderate contributions from both refinance and purchase.
Speaker Change: We remain intensely focused on the organic growth of our service portfolio and the continued development of our balanced business model and we are committed to successfully navigating this economic landscape without distraction.
Speaker Change: As we've highlighted on slide 7, our synergistic relationship with PennyMac Mobile Investment Trust The P&T continues to provide us with a unique competitive advantage.
Speaker Change: Our deep and experienced management team has built the best and cost operating platform that include the large and agile multi-channel origination business and the scaled servicing operations.
Speaker Change: Both supported by industry-leading technology and processes we've thoughtfully developed over our long history.
Speaker Change: As we have demonstrated, this strategically built platform provides the ability to generate strong returns for our stockholders across different market environments.
Speaker Change: As a mortgage read, PNC provides a tax-advantaged balance sheet to hold an invest in long-term mortgage assets.
Speaker Change: This model enables PFSI to generate capital-wide recurring revenue stream in the form of servicing fees, fulfillment fees and management fees.
Speaker Change: PFSI's deep access to the origination market, combined with PMT's ability to execute private label securitization and retain the related investments.
Speaker Change: Provide both entities the opportunity to capitalize on the evolving landscape for secondary market execution should the GFCs reduce the overall footprint. [inaudible]
Speaker Change: We have repeatedly demonstrated that our balanced, diversified business model.
Speaker Change: with leadership in both production and servicing and our dynamic hedging program enables strong financial performance in a foundation for a continued growth as an industry-leading mortgage company regardless of the direction of interest rates.
Speaker Change: As you can see on slide 8 of our presentation, we have produced operating returns on equity in the mid-teens through periods of higher rates.
Speaker Change: with the potential for increased returns when mortgage rates decline as evidenced by our performance in the third quarter of last year.
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 strong financial performance
Speaker Change: The unpaid principal balance of our servicing portfolio increased 2% from the prior quarter, and 10% from Mark 31st, 2024 has production volumes more than offset runoff from repayment.
Speaker Change: Because we retain the servicing rights on nearly all mortgage loan production and it's been one of the largest producers of mortgage loans in recent periods, we are uniquely positioned in the industry.
Speaker Change: Our large and growing portfolio of borrowers who recently entered into mortgages of fire rates, stand to benefit from a refinance in the future when interest rates decline, positioning our consumer direct lending division for strong future growth.
Speaker Change: On slide nine of our earnings presentation, you can see that as of March 31st, $240 billion and unpaid principal balance, or 35% of the loans in our portfolio had a no rate above 5%.
Speaker Change: Approximately $17 billion for government loans, and approximately $133 billion for conventional other loans.
Speaker Change: The opportunity for earnings growth is highlighted on the slot, along with our historic refinance recapturing, which has 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 multi-year investments combined with the increased investment in our brand, as mentioned earlier, and use of targeted marketing strategies.
Speaker Change: Slide 10 illustrates the advantages of growing our service import fully organically via our own production, a key differentiator for PennyMac Financial.
Speaker Change: We can consistently source loans through different channels, depending on the market environment and our servicing portfolio growth has been more consistent than others that were primarily through bulk acquisitions.
Speaker Change: Loan by Loan processing gives us the ability to perform diligent and compliance reviews for all of the loans we produce and ultimately serve. We need to increase fraud detection and minimal defect rates versus bulk MSR purchases.
Speaker Change: This is evidenced by the strongest historical performance of our MSR assets with lower delinquency, especially in recently originated loan vintage's relative to the broader industry, which validates the efficacy of our prudent credit strategy.
Speaker Change: As I briefly discussed, our large and growing servicing portfolio, the key asset, anchoring our core operational results in its higher interest rate environment and driving low cost leads to our consumer direct division.
Speaker Change: On Slide 11, you can see the strong revenue contributions from our servicing portfolio in recent periods.
Speaker Change: with growth driven by a portfolio expansion and the higher proportion of own servicing in recent periods, as well as increased placement fees due to elevated short-term interest rates.
Speaker Change: Due outer history, we've been focused on deploying new and emerging technologies to drive efficiencies in lower costs, as evidenced by the chart on the right, which highlights the continued decline in our poor-loan servicing expenses in 2019.
Speaker Change: We continue to demonstrate 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: Given our best-in-class proprietary technologies with advanced capabilities and our unmatched excellence in servicing, we are committed to expanding our subservicing business beyond P&T, and we deliver a compelling value proposition to Emma Tharovers.
Speaker Change: This includes superior capabilities for both performing and non-performing loans, powered by our proprietary technology, and extensive customer self-service capabilities.
Speaker Change: and MSR owners that utilize PennyMac as a sub-servicer, collaborate our robust marketing and recapture tools to generate leads and best support their origination efforts.
Speaker Change: On Slide 12, you can see we've signed our first three clients with one already onboarded and we are actively engaged with 20 additional prospects that represent approximately $65 billion in UPD.
Speaker Change: Beyond that, we estimate our correspondent sellers collectively own approximately $465 billion and unpaid principal balance of services, and that the total address of a market for sub-servicing is approximately $4 trillion.
Speaker Change: Given consideration to changing market dynamics, we expect further market penetration, aiming to capture a broader share of MSR owners who are seeking a best-in-class low-cost subservicer.
Speaker Change: This strategic focus on sub-servicing is a testament to our commitment to diversifying our revenue streams while maximizing the value of our servicing platform.
Speaker Change: It is for all of these reasons that I am confident in our ability to continue driving strong financial performance in this volatile environment no matter the direction of interest rate.
Speaker Change: I will now turn it over to Dan who will review the drivers of PFSI's first quarter financial performance. Thank you, David. PFSI reported net income of $76 million in the first quarter for $1.42 cents in earnings per share. For an annualized ROE of 8 percent.
Dan Perotti: These results included $99 million of fair value declines on MSRs, NetAppedges, and Costs, and the impact of these items on diluted earnings per share was negative $1.35.
Dan Perotti: He emphasized board of directors declared a first-quarter common share dividend of 30 cents per share.
Dan Perotti: Beginning with our production segment, prefaxing some with $62 million down from $78 million in the prior quarter.
Dan Perotti: Total acquisition and origination volumes were $29 billion in unpaid principal balance, down 19% from the prior quarter and consistent with a decline in the overall market.
Dan Perotti: Of total acquisitions and origination volumes, $26 billion was for PFSI's own account, and $3 billion was fee-based fulfillment activity for PMT.
Dan Perotti: Total lock volumes were $34 billion in UPB, down just 6% from the fire quarter.
Dan Perotti: PennyMac maintained its dominant position in correspondence lending in the first quarter, with total acquisitions of $23 billion, down from $28 billion in the prior quarter.
Dan Perotti: Correspondent channel margins in the first quarter were 27 basis points, unchanged from the prior quarter.
Dan Perotti: Fallout-adjusted locks for PFSI's own account were down from the prior quarter, which drove a lower revenue contribution.
Dan Perotti: BMC retained 21% of total conventional conforming corresponded production, up slightly from 19% in the prior quarter.
Dan Perotti: In the second quarter, we expect CMC to retain approximately 15 to 25% of total conventional conforming corresponded production, consistent with first quarter levels.
Dan Perotti: Of note, pursuant to our renewed mortgage banking agreement with PMT, beginning in the third quarter of 2025, all correspondent loans will initially be acquired by PSSI.
Dan Perotti: However, PMC were paying the right to purchase up to 100% of non-government correspondent loan production.
Dan Perotti: In Broker Direct, we continue to see strong trends and continued growth in market share, as we position PennyMac as a strong alternative to channel leaders.
Dan Perotti: Originations in the channel were down 21% from the prior quarter, as many of the loans locked when rates declined in the third quarter of 2024, funded in the prior quarter.
Dan Perotti: Lot of volumes in the first quarter were up 23% from the prior quarter, as we continued growing our market position and as we enter the spring and summer home buying season.
Dan Perotti: The number of brokers approved to do business with us at year end was up with over 4,850, up 19% from the end of last year, and we expect this number to continue growing as top brokers increasingly, increasingly look for strength and diversification in their business partners.
Dan Perotti: We saw similar volume trends in consumer direct with origination volumes down 24% from the prior quarter, but lock volumes of up to 6%.
Dan Perotti: The margins in the channel were up to you to a larger mix of higher margin, closed end, second lanes during the quarter.
Dan Perotti: Activity across our channels in April has been up, reflecting lower mortgage rates in the beginning of the month and typical seasonality.
Dan Perotti: Production expenses, net of loan origination expense, increased 5% from the prior quarter, partially due to seasonal compensation impacts.
Speaker Change: This 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
Dan Perotti: Turning to servicing, the servicing segment recorded pre-tax income of $76 million.
Dan Perotti: Excluding valuation-related changes, pre-fact income was $172 million, or 10.2 basis points of average servicing portfolio UPB, down slightly from 10.3 basis points in the prior quarter.
Dan Perotti: Loan servicing fees were up from the prior quarter primarily due to growth in PFCI's own portfolio.
Dan Perotti: Cassodial Funds Managed for PSI's own portfolio averaged $6.2 billion in the first quarter, down from $7.3 billion in the fourth quarter due to seasonal impacts and lower repayment.
Dan Perotti: As a result, earnings on custodial balances and deposits and other income decreased.
Dan Perotti: Realization of MSR cash flows increased from the prior quarter due to continued growth in the own portfolio and expectations for higher free payment activity in the future.
Dan Perotti: Operating expenses were essentially unchanged from the prior quarter at $81 million, or 4.8 basis points of average servicing portfolio UPD, down from five basis points in the prior quarter and representing an all-time quarterly low level.
Dan Perotti: We seek to moderate the impact of interest rate changes on the fair value of our MSR asset through a comprehensive hedging strategy that also considers production related income.
Dan Perotti: For example, when refining its volumes and production-related income are highly responsive to changes in interest rates, our target and head ratio can decline to as low as 60 percent.
Dan Perotti: And we're going to re-finance volumes and production related income are less responsive to changes in interest rates. Our targeted hedge ratio can increase to as high as a hundred percent.
Dan Perotti: The fair value of PSS-MSR detries by $205 million in the first quarter.
Dan Perotti: Of that, $183 million was due to lower market interest rates, which drove expectations for higher-prepayment activity in the future, and $23 million was due primarily to the prepayments that were faster than modeled and other factors.
Dan Perotti: Excluding costs, hedging gains were $131 million. Edge costs were $24 million. Our targeted hedge ratio moved lower during the quarter as interest rates declined, and other factors such as the change in the shape of the yield curve had a slightly negative impact.
Dan Perotti: Each of these two factors decreased our head-effectiveness during the quarter by about 10% versus the 90-100% range previously communicated.
Dan Perotti: At current rate levels, our targeted hedge ratio is in the 80-90% range.
Dan Perotti: Thus far in the second quarter, interest rates have been extremely volatile. As a result, our hedge target ratio has varied and it may change throughout the quarter if this level of volatility continues.
Dan Perotti: Additionally, hedge costs this far in the second quarter have been elevated.
Dan Perotti: Corporate and other items contributed a pre-fact loss of $34 million compared to $36 million in the prior quarter.
Dan Perotti: PSSI recorded a provision for tax expense of $28 million, resulting in an effective tax rate of 26.8%.
Dan Perotti: In February , we successfully issued $850 million on secured senior notes due in 2033. We used proceeds to reduce the outstanding balance of our secured revolving bank financing lines.
Dan Perotti: Regarding the upcoming maturity of $650 million in unsecured senior notes due in October of 2025, we have ample liquidity to retire the notes with additional flexibility to draw on our available revolving banks and dancing lines.
Dan Perotti: We ended the quarter with $4 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged.
We'll now open it up for questions. Operator?
Speaker Change: I would like to remind everyone we will only take questions related to PennyMac Financial Services Inc or PFFI. We also ask that you please keep your questions limited to one preliminary question and one follow-up question. I would like to ensure we can answer as many questions as possible.
Speaker Change: If you would like to ask a question during this time, simply press star, follow up with number one on your telephone keypad, and if you'd like to withdraw your question, again, it's our line.
Speaker Change: Your first question comes from the line of Michael Kaye with Wells Fargo, please go ahead.
Michael Kay: afternoon. There's been an uptake in M&A and a sector, you know, particularly the Rothex acquisition of Mr. Cooper.
Speaker Change: I wanted to see if you felt this was a greater competitive thread, you know, perhaps in a corresponding channel and maybe perhaps on a contrary, could create some more subsurface in business, maybe just some thoughts on that.
Speaker Change: Yeah, Michael, how are you doing today?
Great. Thank you.
Speaker Change: Good good. So, well, there, there has been, you know, with this, with this transaction, there's been a lot of, a lot of discussions that have been taking place in the industry. I have tremendous respect for both management teams and the businesses they built.
Speaker Change: I think I take great comfort in our earning stability over the years and
Speaker Change: It's demonstrating the power of the balance business model and while this transaction may try to duplicate that, I think what we've created is so powerful that I don't know if it can be duplicated. [inaudible]
Speaker Change: We are going to continue to focus on organic growth of our servicing portfolio and continue the development of balanced business models.
Speaker Change: I, you know, we don't have any distractions here at the company and
Speaker Change: I don't know if others in the industry can say the same thing.
Speaker Change: But, you know, we're going to continue to be the number one correspondent aggregator.
Speaker Change: and we're going to continue to, you know, we're going to continue our dominance there. Our dominance there comes from the fact that, you know, our ability to process at a cost structure that I've not seen anywhere else in the industry is not something that can be easily duplicated.
Speaker Change: I think that we have tremendous opportunity in our broker direct channels. You can see we've, you know, year over year we've grown our market share from 3.5% to almost 5%. And we're well on our way to achieving our 10% market share goal by the end of 2026.
and I think I'm the sub-servicing front.
Speaker Change: You know, suffice it to say, you know, we're in a great position.
Speaker Change: to deal with any concerns about what happened in the self-servicing business.
Speaker Change: over the past three years has been, you know, players leaving and players not growing and
You know, players changing their business models and we believe that...
Speaker Change: You know, we offer a great value proposition on the Sub-Servicing Channel and the Sub-Servicing
Speaker Change: that we want to continue to emphasize throughout the organization. And it's through our relationship with our correspondent aggregators as well as our reputations as a management team that I believe is going to continue to allow us to be one of the leading sub-servicers in the industry.
Okay.
Speaker Change: Thank you for that. I wonder if you could talk about the impact under a unit economic with some of the changes in the FHA, FHA loss mitigation programs, including two partial claims and payment supplements. Thank you very much.
Speaker Change: Sure, so I'll start by saying the new law's mitigation waterfalls largely in line with our expectations.
Speaker Change: and I think it's been carefully sought out. We've been having discussions with FHA and the Fire Administration about it. Here we're looking at this Administration.
The changes are manageable.
Speaker Change: The limitation for Mod is one in 24 months versus 18, and I think this is more than workable for borrowers, servicers and the FHA, and I believe it will improve the fault rates as well as ring out the bad actors.
Speaker Change: in the industry. There's a greater priority for MOZ versus partial planes, so what we lose in modern comes, for more to make up for EBO activity.
Speaker Change: And that's where I believe we are best positioned.
Speaker Change: I'm in the industry as you all know, Jerry Cove, and we had tremendous success with EBO activity and it starts with having a strong which risk management discipline, the ability to hedge EBOs, the ability to buy out the loans.
Speaker Change: Get them re-performing our expertise in default servicing really shines through in those situations.
Speaker Change: and having the infrastructure in place to handle EVOs is important. That infrastructure with capital markets, expertise, credit facilities in place.
Speaker Change: understanding when to buy out the loans, when to re-deliver them. So I am viewing this as really a positive source from a P&L perspective. I don't take comfort in borrowers losing their property.
Speaker Change: I think from an accounting impact, I don't view it negatively, as I said, it's going to reduce law's mitigation, but it's going to mark the return of more orderly property disposition in the way the market is historically operated.
Speaker Change: Finally, I'll tell you, I think for borrowers who unfortunately can't get a mod, we're in a much different environment than we've been in in the last.
College 20 years. There's, borrowers have a lot of equity.
Speaker Change: And there's housing supply issues, and with the strong demand for housing, I think it's a borrowed, fortunately, has to get a devalued foreclosure or a short sale or foreclose upon that this position of the properties will be in a more orderly fashion.
Okay, thank you so much.
Speaker Change: Your next question comes from the line of Doc Harter. Would you be asked, please go ahead.
Doug Carter: Thanks. Can you talk about your outlook for continued cost efficiencies on both the servicing?
Doug Carter: and the origination side, you know, the ability to continue to scale those businesses, you know, in what role, you know, technology including AI might play in that.
Doug Carter: I'm really excited about the work that's being done in both servicing and our low production divisions really with the sole goal is to drive down the cost.
Okay, and I think A.I. is clearly-
Doug Carter: clearly where the focus is. We're working with business with our business partners, like Google and Amazon, to realize the efficiencies. We set up an AI team in our technology group to really provide bandwidth to our business leaders.
Doug Carter: to help identify opportunities where AI can be deployed as well as we can work with our third-party vendors who are investing in AI.
Doug Carter: I'm seeing more and more deployment of chatbots across the organization that will increase productivity.
Doug Carter: And I had no doubt that we're going to see benefits, and we're out of, I'll give you a few examples in a minute, but we're going to see a shortened timeline for getting loans originated and sold in the capital market.
Doug Carter: Right now, we're focused on yellow efficiency in our fulfillment area. And you know, all this is also going to find itself in creating a better customer experience.
Doug Carter: On the servicing front, we are uniquely positioned. Having SSE gives us the ability to customize and integrate AI into our system.
Doug Carter: and, you know, we've automated 20 different processes in servicing. Just to give you an example, in servicing, we have a servicing customer interaction system called MAC Chat that allows customers to engage with PennyMac on a 24-7 basis.
Doug Carter: It's annual life savings for us has been over 45,000 hours a year roughly translating to 2 million dollars a year in savings [inaudible]
Doug Carter: in our, you know, in servicing. We have a servicing document processing and process automation system that has saved us over $2 million a year or 130,000 hours.
Doug Carter: And then finally in TPO or Booker Direct Channel, we've instituted Document Processing System.
Doug Carter: that allows us for full indexing and creation of long-closing document package at X that it saves at a pocket expenses to the consumer of $7 a loan.
Doug Carter: So we'll be, you know, on a go forward basis, be exposing more and more of this activity, but I am really enthusiastic and proud of the work that's getting done.
Thanks, David.
Speaker Change: Your next question comes from the line of Christian Love at Piper Sandler. Please go ahead.
Kristen Love: Thank you, and good afternoon everyone. In recent quarters you've been pretty vocal on expecting episodic great moves and...
Speaker Change: We've seen that with Rape Ball, Tilly, Jim By the Mac Grown. As you mentioned, April volume started off strong, but have you seen a significant drop off in recent weeks relative to earlier in the month in volumes or lots just following the recent moves and rates?
So look, we've seen, we've seen the clients.
Speaker Change: Inactivity, but not as much as one would expect. I'll tell you, for sure, on Correspondent, there's a lag in terms of the Correspondent Activity. About, I would call it 45 to 60 days.
Speaker Change: So, the increased activity we saw earlier in the month will avail itself later in the month in the beginning or in May in terms of corresponding activity.
Speaker Change: In terms of our consumer direct and broker direct channels, we have, you know, we have a lot of ourselves for consumer direct. We have a lot of loans that are in the high fixes low sevens.
Speaker Change: And in the marketplaces, you can see in our earnings materials, there's a large number of these loans and I think with the volatility and rates
Speaker Change: When borrowers see that they have a loan that they can refinance [inaudible]
Speaker Change: and a meetre goal, the idea of weighing for rates to go lower.
Speaker Change: is not really playing into their thinking. And so there is, there is just greater clarity of the market and what the kind of break even is for bars and they're taking, my, I believe that they're taking the position that they're going to refinance alone, if rates come down further than the refinance again.
Speaker Change: Great. Thank you, David, for that. And then just also related to the rate ball play that we've seen in April to date and in the last few courses, we just got to discuss the MSR edge in a little more detail. I'm flying 19. You do call out that the head ratio can decline to around 60% when re-five volumes are highly responsive to rates, but you are targeting 80 to 90%.
Speaker Change: Can you dig a little deeper into your term expectations and the key sensitivities you'd expect to impact a hedge effectiveness?
Speaker Change: companies are expected production income, as well as the hedge costs that we experience. And so, the increasing volatility with the increasing volatility.
Speaker Change: and so that has run a bit higher than we saw in the first quarter.
Speaker Change: But overall, in terms of the rate moves and the pretty significant whippiness that we've seen, we've really, the team has really, I think, done a good job in terms of insulating us from that, and minimizing the overall rate impacts that we've experienced quarter to date apart from, as I mentioned, the increased hedge costs that we've had through the first part of the quarter.
Great. Thank you. I appreciate all the color.
Speaker Change: Your next question comes from the line of boss George, would KBW, please go ahead.
Speaker Change: Hey guys, good afternoon. Just wanted to follow up on the MSR hedging question. I mean, I can understand that, you know, why certain backdrops, you know, create a lower hedge ratio, but it seems like in the past, you know, there were some times where a hedge issue would be lower, sometimes it would be over 100% and it would kind of, you know, net out over time.
Speaker Change: You know, it's going to be somewhat lower than the operating overtime. So can you just talk about that? Is something changed in terms of, you know, how you view the hedging or how you do it? Or yeah, just any comment here and that would be great.
Speaker Change: since we discussed this on a regular basis. Lay out how what our hedging philosophy is.
Speaker Change: Serious where rates are, I say generally lower, the mortgage market is bigger and there's more variability. There's more overall refinance volume.
Speaker Change: and more variability with respect to rates on production income. Typically, we would allow our hedge ratio with respect to rates to be lower. What that really means is that we would see increases in overall value when interest rates go up as we saw in 2022.
Speaker Change: You know, what we've really sought to do here on, you know, on page 19 and we'll give a bit more clarity to this going forward. We've talked about it is identify apart from those rate impacts.
Speaker Change: and the effectiveness versus what our target has been. The hedge costs that are impacting us during the quarter, and then if there's any other assumptions that have impact.
Speaker Change: and so that's really what we've laid out in the current environment where…
Speaker Change: You know, the yield curve, at least, from the short race to the, compared to the longer race have been flat to inverted and overall volatility has been high. You know, that wouldn't be too some. [inaudible]
Speaker Change: You know, negative hedge costs as we had in the first and as I alluded to in the second quarter as the yield curve normalizes somewhat. Thank you very much.
Speaker Change: or become steeper with respect to, again, short rates versus longer rates and as overall bald decline, you know, we would expect those hedge costs can get lower. Potentially, we've seen periods of time where they're positive and, you know, that'd be...
Speaker Change: The overall impact of just the rate impacts quarter of a quarter would comprise more of the, you know, the total that you would see on a quarter to quarter basis.
Speaker Change: But, and like I said, could really be balanced whether we see a positive impact or negative impact in any given quarter.
Speaker Change: Okay, great. But I think over an extended period, is it fair to say you expect your gap are we to equally operating are we over in the not of a quarter quarter, but over a multi-year period, is that fair?
Speaker Change: It would depend a bit on the shape of the yield curve and volatility. So I think if we look back, just historically over at least recent periods, we've seen that there's been negative hedge cost impact.
Speaker Change: But certainly, if we look over, you know, longer periods of time and the way that, you know, that we've positioned ourselves, you know, there's opportunities for both positive impacts and negative impacts as he said.
Speaker Change: Periodic Wi-Fi waves, and maybe that's kind of the way to get to the 2 trillion niche that the MBA is forecasting.
Speaker Change: Yeah, the two trillion that the MBA is forecasting, I think, is-
really
Speaker Change: And so the other piece that should drive higher over time is also related to housing turnover where David noted there's a pretty significant. And, uh,
a pretty significant demand, I think, that there's continued.
Speaker Change: Pensive Demand for housing as well as for folks to move out of whatever house they may have outgrown. And so there's some.
Speaker Change: There's some upward lift from that even at current rate levels versus the prior year, but I think there will need to be some contribution from refinances related to dissing rates during the year to reach that $2 trillion mark.
So, okay, big sense. Thanks.
Speaker Change: Your next question comes from the law of Eric Hagen with BTIG. Please go ahead.
Hey, thanks.
Speaker Change: It looks like a really healthy recapture rate, but a couple of questions there. Are most of the loans that you're currently recapturing because of rate in term refinances or are they purchase recapture because borrowers are moving from one home to another? And on the loans that you're not recapturing, like what is the explanation maybe for...
for that.
Speaker Change: Okay, Eric, if you point out, recaper a tab included, meaning to lay, I will tell you most, most of the loans are coming from rate and term, and it's just, it speaks to the legion technology and processes that we put into place.
Speaker Change: to give us better capability to categorize the market in the money customers to be able to recapture the loans.
Speaker Change: We're working harder and harder on the purchase recapture front and that's one of the drivers to invest in the brand.
I think it's important that we continue to impress upon on.
Art Customers [inaudible]
and non-customers [inaudible]
to be able to have our name.
Speaker Change: associated with the mortgage-owned origination process to be able to get purchase recaptures as well as purchase money transactions.
Speaker Change: And so, you know, look, we're going to be keeping an eye on increase in percentage of non-ported originations and as well as increase in recapture.
Speaker Change: But it is rate in term and I think this is something that given the volatility in the market, you're going to see more and more of this improvement in recapture.
Yeah, okay, that's helpful.
Speaker Change: Can you also say how you deployed the proceeds from the unsecured debt that you raised in February and how much flexibility or even like the appetite that you have to pay down the bilateral MSR financing lines from this point? And then can you maybe also remind us, are all of these secured MSR lines subject to margin calls or does the margin call only apply to some of the funding there? Yeah.
Speaker Change: Sure. So the proceeds from the $850 million unsecured debt raise were used to pay down the the bilateral MSR financing line.
Speaker Change: and that really gives us great flexibility. Obviously, we can redraw on those lines.
Once we've repaid them, because the collateral is still outstanding.
Speaker Change: All of those lines are subject to Mark to market, but as we've noted
Speaker Change: based on the collateral that we have today. We have over $3 billion of capacity to be able to draw against those lines.
Speaker Change: So, you know, a practical perspective, even if we had significant interest rate volatility today, we wouldn't face, you know, a margin call at this point in time because we have so much excess collateral, and so...
Speaker Change: We're in a very good position with respect to our overall financing capacity. As we approach our maturity that's coming up later in the year, we will be looking for opportunities in the market to potentially issue additional, unsecured debt, but to the sense that the market is not conducive, we have significant capacity.
Speaker Change: We have significant capacity on our financing lines to be able to pay down that maturity.
Speaker Change: If interest rates rally another important component of this is that as interest rates rally, we do see a decrease in the value of our MSR asset.
Speaker Change: We're hedging the MSR, and so we do have offsetting hedge gains against that. That would be inflows from a cash perspective. So even if we were more fully advanced, that is a component of our hedge program that would allow us to pay down that debt with those hedge proceeds.
Speaker Change: So obviously there's been a pretty significant amount of volatility, but as then a little bit more competitive than we saw through the full first quarter on the corresponding side. And really the direct channels I would say haven't even been that have been pretty similar.
Speaker Change: Consumer Direct, given the refinances that the refinance loss that we saw given the interest rate rally, those on a basis point basis tend to be a bit lower than...
Speaker Change: that what we see on some of our second lean. So the extent that we've had more refinanced locks than we proportionally did in the first quarter or overall basis point margin is lower, but our dollar per loan margin is higher. But those have been the dynamics that we've seen quarter to date thus far.
Got you, helpful. Thank you guys so much.
Shana Kewitt: Your next question comes from the line of ShanaQ with Mark Lee's, please go ahead.
Shana Kewitt: Hey guys, thanks for taking my question. You know, you guys mentioned the bid to high teams already guidance.
Speaker Change: but it contemplates stable delinquencies. Can you quantify where you would need to see delinquencies rise to make an impact on the ROE guidance?
of any accompanying decrease in interest rates.
So, D-trees and interest rates would drive up [inaudible]
Production Income, and EBO Income, which would be offsetting to...
to potential increases in costs from the link links used.
Speaker Change: in the last few years or quarters, which have ranged up if you look over the past year, within a 1% range, so we need to see really multiples of that to get to impacting in a meaningful way the ROE guidance.
Thanks, and I guess...
Speaker Change: you know during COVID but we saw massive rate declines I guess in this environment where you have changes in the loss mitigation program. You know what I mean?
Speaker Change: and rates potentially staying higher for longer. How should we think about, you know, EBO income or your ability to modify, you know, potential increases into the link with these in that environment?
Speaker Change: Well, I think in a higher rate environment, you're obviously, you know, as much firepower in terms of the rates that are being offered to the ballers, but I think they're still, you know, between.
You have the 40-year mod [inaudible]
Speaker Change: and other programs in place. I do think that there will be opportunity.
Dan Perotti: to drive incremental EBO volume. I would say to Dan's point, if you see the crime that comes with that which leads to more EBO opportunity.
Dan Perotti: But I think there is, we're seeing some data that shows that rates decline and you see borrowers require no rates, that due to fault, that due to modification programs, there will be more UBL opportunity.
Thank you, guys.
Dan Perotti: We have no further questions at this time, and I'll turn it back to David, Spector, for closing remarks.
David Spector: I just want to thank everyone for joining us today. If you have any questions please don't hesitate to reach out to our IR team and again thank you for your time.