Q2 2025 PennyMac Financial Services Inc Earnings Call
Good afternoon and welcome to PennyMac Financial Services Inc. Second quarter, 2025 earnings, call additional earnings materials, including presentation, slides, that will be referred to the to in this call are available on PennyMac financials website at pssi, pennymac.com
Before we begin, let me remind you that this call may contain. Forward-looking statements that are subject to certain risks identified on slide 2 of the earnings presentation that could cause the company's actual results to differ materially as well as non-gaap measures that have been reconciled to their Gap. Equivalent in the earnings materials. Now, I'd like to introduce David Spectre PennyMac financials chairman and chief executive officer and Dan paradi Penny Mac, financials Chief Financial Officer, please go ahead.
Thank you, operator.
Speaker Change: Good afternoon and thank you to everyone for participating in our second quarter earnings call.
Speaker Change: For the second quarter as shown on slide, 3 pfsi reported, a net income of 136 million or diluted earnings per share of $2.54.
Speaker Change: This reflects an annualized return on Equity of 14%.
Speaker Change: Excluding the impact of fair value changes in a non-recurring tax benefit, which Dan will talk about later. Pssi produced an annualized operating Roi of 13%
Speaker Change: These results highlight the resilience of our balance business model and our continued ability to produce solid Financial results even during periods of extreme volatility.
Such as earlier in the second quarter.
Speaker Change: As you can see on slide 5 are consistent performance over recent periods of elevated. Mortgage rates demonstrates, the strength of our organically built comprehensive Mortgage Banking platform.
The stability provided by our balance business model, especially in this higher prolonged rate, environment is a real strategic advantage.
Speaker Change: We expect that if interest rates stay in the range of 6 and a half percent to 7 and a half percent are operating Returns on Equity will continue to range in the mid to high teams throughout the remainder of this year.
You can you can further see the Strategic advantage of our comprehensive Mortgage Banking platform on slide 6.
Speaker Change: As our business model functions, as a very powerful flywheel.
Speaker Change: Because we are the second largest producer of mortgage loans and the 6th largest serer. We operate with the significant scale advantage in both businesses.
Speaker Change: Everything portfolio.
Speaker Change: At the end of the second quarter, our portfolio totaled, 700 billion dollars in unpaid principal balance representing 2.7 million households.
Speaker Change: This large and growing customer base Drive. Efficient cost-effective leads to our consumer direct group. As we leverage our proprietary servicing platform to effectively service, our customers needs.
Speaker Change: Whether it's a refinance when interest rates decline, or if they're in the market for a new home purchase or closed end, second mortgage to access their home equity while retaining, their low rate. Firstly, mortgage
Speaker Change: And because we have instilled in our team, a culture of continued process Improvement and Technology Innovation.
Speaker Change: We believe we can continue to drive further scale and operational efficiencies into our platform.
Our strategy also allows us to Excel on capturing growth, in the expanded in the expanding purchase Market.
Speaker Change: The chart on the bottom of slide, 7 illustrates the projected growth in overall volume.
Speaker Change: Which is primarily driven by the more consistent purchase Market compared to the refinance Market.
Speaker Change: this trend underscores why our strategic emphasis on our relationship businesses with strong ties in their local markets is so vital
Our strong access to this growing Market is achieved through our robust presence in correspondent lending and are rapidly. Increasing market share in broker Direct.
Our Market leadership is supported by our unmatched excellence and support for our business Partnerships Illustrated on slide 8.
Speaker Change: This Foundation provides a significant strategic alignment with our business partners. That is difficult to replicate and has been organically and carefully built over time.
We offer Cutting Edge technology, a continued presence in markets with reliable, execution, and Rapid closing and turn times.
Speaker Change: Additionally, we have long-standing relationship with key partners and 1 of the lowest cost structures. In the industry driven by our highly efficient fulfillment operation.
Speaker Change: Turning the slide 9, we proudly showcase our position as the outright leader in correspondent Lending.
Speaker Change: over the last 12 months, we have generated approximately 100 billion dollars in upb of correspondent production,
Speaker Change: achieving an estimated market share of approximately 20% in the first half of 2025.
Speaker Change: This significant volume is a direct result of our more than 15 years of operational excellence Technology Innovation and our deep Partnerships with many of our nearly 800 active sellers across the country.
Speaker Change: A key aspect of our leadership in this channel is our exceptional, operational, leverage, and scale.
Speaker Change: In fact, we have the ability to increase production by approximately 50% from our current levels with no increase to our fixed expenses.
Speaker Change: This capability, underscores, our fundamental strength as a highly efficient low-cost provider in this channel.
Speaker Change: Solidifying, our truly dominant position and creating a substantial competitive advantage.
Speaker Change: Similarly, you can see on slide 10 that we are increasingly becoming more relevant in the broker direct Channel.
Speaker Change: From our entry to this business. In 2018, her broker direct market, share has expanded significantly currently standing at approximately 5%.
Speaker Change: We have clearly established ourselves as a trusted partner for Brokers. And though, we are already the third largest in the channel. We see tremendous momentum to continue our growth to more than 10% market share by the end of 2026.
Speaker Change: This remarkable growth and our position as a trusted. Alternative are driven by our Tech forward platform with unmatched support throughout the origination process.
This Advanced infrastructure and dedicated assistance assures Brokers that their customers will experience a seamless and efficient origination process. Empowering Brokers and reinforcing their trust in us as a reliable long-term partner.
Speaker Change: On slide 11. We highlight the significant opportunity for our direct for our consumer Direct business and why we are intensely focused on building on our successes in this channel.
Speaker Change: And we are leveraging our industry-leading team and data analytics to identify refinance and other opportunities. So we are best positioned to help meet our customers home finance needs.
Speaker Change: Are we Finance? Recapture rates already twice the industry average, which effectively protects from the lower impact from the impacts of lower MSR values has rates declined.
Speaker Change: And we will continue to leverage our strategic partnership with Team, USA, and the LA 28 Olympic and paralympic games. Along with targeted model, driven campaigns to increase our visibility and recognition.
Speaker Change: While driving growth in recapture and new customer acquisition.
Turning the slide 12, you can see the significant recapture opportunity for our consumer direct division when interest rates, do decline.
Speaker Change: as of June 30th, 267 billion dollars in upb or 38% of the loans, in our servicing portfolio, have a note rate above 5%
Speaker Change: And 181 billion dollars in upb or 26% of the loans. In our portfolio, have a note right above 6%.
Speaker Change: This large and growing portfolio bars, who recently entered into mortgages at higher rates and stand a benefit from a refinance in the future. When interest rates due to climb positions are consumer, direct lending division for strong future growth.
Speaker Change: our multi-year investments in technology and process Innovation, have already driven meaningful improvements in recapture rates and we expect these to continue improving
Speaker Change: now let's turn to an area that has not just critical but truly transformative for our entire balance business model, our unwavering intense focus and artificial intelligence
Speaker Change: On slide 13, you'll see, we're not just building momentum. We are accelerating with breakthrough speed in the development of AI.
We are aggressively advancing. Our AI capabilities, making targeted and strategic Investments.
This strategic commitment is a natural evolution of our history of investing and Leading Edge technology.
Speaker Change: And it is designed to enhance the customer experience. Unlock new revenue streams and crucially drive, unprecedented levels of efficiency to dramatically reduce expenses.
Are dedicated AI accelerator team is at the Forefront relentlessly focused on delivering and adopting AI applications and productivity tools faster than ever before.
Speaker Change: Our cloud-based and flexible proprietary platforms, have positioned us extraordinarily well to integrate AI.
Profiling our capabilities and efficiency across our entire technology landscape.
Speaker Change: In production we're seeing game changes.
Speaker Change: Our proprietary chat. Bots aren't just tools. They're extensions of our loan officers and Underwriters providing instant compliance answers sourced directly from our deep. Well of comprehensive policies and procedures.
Speaker Change: This empowers our team members with unparalleled accuracy and allows them to focus squarely on what they do. Best driving sales and closing more loans.
Speaker Change: And with our Ai call summarization for automating critical, after-all, work bring up valuable time and insights for our sales teams contributing directly to increase conversion.
In servicing. Our AI initiatives are equally impactful, enhancing both efficiency and the client experience.
Speaker Change: Behind the scenes. Our servicing AI processing. Solution is automating. Critical. Document workflows and streamlining operations.
And for our clients, our Advanced servicing automated assistance available instantly on web and mobile provides immediate access to loan, specific information and answers to their questions.
Speaker Change: This empowers, our clients with self-service convenience and speed elevating their overall experience and allowing our team members to focus on more complex. High-value interactions
Speaker Change: Today, we've already launched or are actively developing more than 35 a tools and applications with the projected annual economic benefit of approximately 25 million dollars.
Speaker Change: While this is far more than a strong start, this is just the beginning of what's possible. And we are incredibly excited about what the future holds.
Speaker Change: This brings me to slide 14 which illustrate Penny Max, ambitious, groundbreaking groundbreaking vision for artificial intelligence.
Speaker Change: Significant Milestones from Advanced coding productivity tools to sophisticated workplace, tools and intelligent chatbots that are reshaping daily operations.
Speaker Change: But our road map is truly Visionary. It includes sophisticated agent automation of complex, loan processing activities. Robust and intuitive self-service capabilities. That empowers our customers.
Speaker Change: And advanced lead generation processes. That will redefine our Outreach.
Speaker Change: Our ultimate vision is a fully automated loan process, including a seamless, self-service, origination and servicing experience.
Speaker Change: This is not to just technology. This is the future of Mortgage Banking and Penny. Mac is leading the way.
Speaker Change: In conclusion, our balanced and diversified business model continue to deliver strong financial performance.
Speaker Change: We maintain our leadership position in the purchase Market through our strong correspondent franchise and growing broker direct lending presence which provides consistent business volumes.
Speaker Change: These volumes directly grow our servicing portfolio, creating a significant future opportunity. In our consumer direct Channel further, enhanced by our strategic brand Investments,
Speaker Change: And throughout all of our operations, our intense focus on AI and technology is effectively driving down costs contributing to our overall Financial strength.
Speaker Change: Our strategic Foundation, solidly positions, PennyMac for continued growth and strong performance in any Market environment. And I'm incredibly excited about what our future holds.
Speaker Change: I will now turn it over to Dan who will review the drivers of pfsi second quarter financial performance.
Dan Paradi: Thank you, David.
Dan Paradi: Tfsi reported net. Income of 136 million in the second quarter for 2 dollars and 54 cents in earnings per share for an annualized Roi of 14%.
Dan Paradi: These results, included, 93 million of fair value declines on msrs. Net of Hedges and costs and a non-recurring. Net tax benefit of 82 million.
The contribution from these items to diluted earnings per. Share was 19 cents.
Dan Paradi: The FSI is a board of directors, declared a second quarter, common share dividend of 30 cents per share.
Dan Paradi: Beginning with our production, our beginning with our production segment pre-tax income was 58 million down from 62 million in the prior quarter.
Dan Paradi: Total acquisition and origination volumes were 38 billion in unpaid principal balance up 31% from the prior quarter.
Dan Paradi: Of this 35 billion was for pfsi own account, and 3 billion was fee, based fulfillment activity for PMT.
Total loss volumes were 43 billion in, upb up 26% from the prior quarter.
Penny Mac maintained, its dominant position in correspondent lending in the second quarter with total Acquisitions of 30 billion of 30% from the prior quarter.
Dan Paradi: Correspondent Channel margins. In the second quarter were 25 basis points down slightly from the first quarter.
While follow the adjusted locks for PFS, own account, were up from the prior quarter. Pfsi account revenues were impacted by a negative contribution from timing of Revenue and loan origination expense recognition hedging and pricing execution, and other items, as well as a higher proportion of volume in the correspondent and broker direct lending channels relative to the last quarter.
Dan Paradi: PMC retains 17% of total conventional. Conforming correspondent production down from 21% in the prior quarter.
Dan Paradi: Of note, pursuant to our renewed Mortgage Banking agreement. With PMT effective, July 1st 2025, all correspondent, loans are initially acquired by pfsi
However, PMT will retain the right to purchase up to 100% of non-government correspondent, Loan Production.
Dan Paradi: in the third quarter, we expect TMT to acquire approximately 15 to 25% of total conventional, conforming correspondent production consistent with levels in recent quarters,
Dan Paradi: in broker direct, we continue to see strong Trends and continued growth in market share as we position Penny, Max is strong alternative to channel leaders.
Dan Paradi: Originations in the channel were up. Almost 6%. And locks were up more than 30% from the prior quarter driven by a growing number of approved brokers who are increasingly recognizing and leveraging our distinct value proposition.
Dan Paradi: The number of Brokers approved to do business with us at quarter end, was nearly 5100 up 19% from the same time last year and we expect this number to continue growing. As top Brokers, increasingly look for strength and diversification in their business partners.
Dan Paradi: Broker Channel. Margins, were down slightly from the prior quarter.
Dan Paradi: Consumer direct with origination volumes up 6% and lock volumes down to percent from the prior quarter.
Margins in the channel were up due to a larger mix of higher margin, closed and second Lanes during the quarter.
Activity across our channels in July has been mixed with increased activity across correspondent and broker direct and volumes and consumer direct similar to levels reported in the second quarter.
Dan Paradi: production expenses net of loan origination expense increased, 8% from the prior quarter, partially due to increased capacity and direct lending, which is expected to drive our ability to rapidly address opportunities presented by lower mortgage rates,
Dan Paradi: Turning to servicing. As David mentioned, our servicing portfolio continues to grow ending the quarter at 700 billion dollars in unpaid principal balance.
Dan Paradi: The servicing segment recorded pre-tax income of 54 million?
Dan Paradi: Excluding valuation related changes, pre-tax income, was 144 million or 8.3 basis points of average servicing portfolio. Upb
Dan Paradi: Loan Servicing fees were up from the prior quarter, primarily due to growth in pfsi MSR portfolio.
Dan Paradi: Custodial funds. Managed for pfi's owned portfolio. Averaged 7.5 billion dollars in the second quarter up from 6.2 billion dollars in the first quarter due to seasonal impacts and higher prepayments.
Dan Paradi: As a result earnings on custodial, balances and deposits. And other income increased
Dan Paradi: Realization of MSR cash, flows increased from the prior quarter. Did the continued growth of the MSR asset and higher realized, and projected prepayment activity.
Operating expenses were 800 million for the quarter or 4.6 basis points of average servicing portfolio. Upd down from the prior quarter.
Dan Paradi: You can see on slide 21 in our servicing segment. Our per Loan Servicing expenses are among the lowest in the industry reflecting unit costs that have been on a consistent decline since 2019.
Our operating expenses measured as basis points of average servicing portfolio, upb have come down from almost 8, basis points in 2020 to less than 5 basis points in the last 12 months.
Dan Paradi: This is a direct result of our proprietary technology. Continuous process Improvement and platform scale.
Dan Paradi: 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 Paradi: During the second quarter, the fair value of pfsi is MSR increased by 16 million. 26 million was due to changes in Market interest rates which was partially offset by 10 million dollars of other assumption changes and performance related impacts.
Dan Paradi: Excluding costs hedge fair value. Declines were 55 million hedge costs were 54 million. The majority of which were incurred in April due to extreme interest rate volatility,
Dan Paradi: As we moved into the third quarter, we strategically adjusted our hedging practices to align with our increased. Direct lending capacity and we currently expect lower hedge costs and greater consistency of hedge performance. With respect to the direction of rate movements in future periods,
Dan Paradi: Corporate and other items contributed a pre-tax loss of 305 million compared to 34 million in the prior quarter.
Dan Paradi: tfsi recorded a tax benefit of $60 million in the quarter driven by, a non-recurring tax, benefit of 82 million, which primarily consisted of a repricing of deferred tax liabilities, due to state of forcement changes driven by recent legislation,
Dan Paradi: The FSI tax provision rate in future periods. Is expected to be 25.2% down from 26.7% in recent quarters.
Dan Paradi: We were also active in the management of our financing in the second quarter.
Dan Paradi: In may, we successfully issued 850 million of unsecured senior notes due in 2032 and utilize the portion of the proceeds to redeem. Our initial unsecured debt, offering of 60 650 million dollars. That was due later this year in October.
Additionally, we redeemed million dollars of Jeannie Mae MSR term notes. Due in May of 2027 and replace that debt with MSR financing from 1 of our lenders at a more attractive spread to optimize our costs.
Dan Paradi: we ended the quarter with 4 billion dollars of total liquidity, which includes cash and amounts available to draw on facilities, where we have collateral pledged,
Dan Paradi: We'll now open it up for questions, operator.
Speaker Change: Thank you. I would like to remind everyone we will only take questions related to PennyMac Financial Services, Inc, or pfsi. We also ask that you please keep your questions. Limited to 1 preliminary question and 1. Follow-up question. As we'd like, to ensure we can answer as many questions as possible. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. And if you'd like to withdraw your question, it's star 1 again.
Speaker Change: Thank you. And, uh, good afternoon everyone. Um, first just on the operating Roe, they were 13% in the quarter, some of the lowest levels for several quarters. So curious, if you can first discuss some of the puts and takes in the quarter including margin Trends and then your confidence of getting back to that mid to high teens level in the back half of the year as stated in your guidance.
Speaker Change: Uh, sure Chris. And this is, uh, Stan. Thanks for your question. Um,
With respect to the operating Roe uh dipping a bit to 13%. Really. I would say driven by uh you know 2 factors in the quarter 1, um was uh related to on the production side, uh related to the margins in the in the channel. So those came down a bit quarter over quarter, some of that was driven. Uh, if you look versus the prior quarters, um, by a negative impact, in some of the Cross channel, uh, some of the Cross Channel activities, um, which was down about 10 million dollars, uh, this quarter and negative contribution of about 10 million dollars, this quarter versus 17 million dollars in the prior quarter. And this is uh, is on page 18 of the of the of the deck. Um you know we typically we see that that that this cross Channel impacts fluctuate. We had a, you know, a bit of a negative impact uh due to some of the interest rate and spread volatility in the
Speaker Change: The second quarter. Um we did see some of that you know, reversed itself as we go into the third quarter and overall margins um towards the end of the second quarter and beginning of the third quarter have been uh trending higher, uh, especially in the correspondent Channel. And so as we look out uh with respect to production uh moving forward for the next uh for the next few quarters, we expect um, you know, improvement from the on the, on the margin base. And in terms of the uh in terms of the overall income from that channel,
Speaker Change: looking at the the servicing, uh, on the servicing side did see a reduction in the, um,
Speaker Change: In the pre-tax income, excluding valuation related changes for the quarter. Uh, that was primarily driven by, uh, uh, an increase in the realization of MSR cash, flows quarter over quarter, which was driven by an uptick, uh, in overall prepayment speeds as well as an increase in the overall size of the MSR asset, as well as a bit of an uptick in some of the non-operating expense items. So, payoff related expenses, um, and interest expense, some of those, uh, you know, especially related to, some of the, um, prepayment activity. Uh, you know, we don't necessarily expect to see at the same level that we saw, um, that we saw this quarter. Um, additionally, interest expense in,
Speaker Change: Includes certain um, you know, certain 1-time items related to uh the retirement of some of our debt. And so we expect that to maintain on a a bit more of a level basis, as we continue to increase our servicing portfolio. So all of that being said, is that our, our expectation, as we're moving into the next couple of quarters. Um, in terms of our operating, our operating Roe is that we expect it to improve from the levels that we saw, uh, that we saw here in Q2 I think. And I think, look, I share,
Speaker Change: I share the disappointment in in the, in kind of that lower number, but I will tell you what I've seen. It, it really is improving in the latter part of the quarter in, in July, has been a continuation of the Improvement. Um, I think that, you know, we're seeing margins. Margins are have clearly, bottomed out and corresponding. We're seeing a slight increase there, as well as what we're seeing in broker direct, is something something similar. Um, and so, I think that, you know, we're, we're looking forward to continuing to participate in getting those margins up, um, in both of those channels as well.
Speaker Change: Great. Uh, thank you very much, Dan, and David for that color. Um, just a follow-up for me on hedging going forward. Dan. You commented, some changes you made that you expect greater consistency. Can you dig a little bit more into that? What are you changing? Are you still targeting a 80 to 90% hedge ratio? And then just has that the recent rates that
Speaker Change: Helped as well just on the hedging side.
Speaker Change: And we've adjusted our staffing in our direct channels to ensure that if we do see rate volatility or dips in rates that we can vary quickly and actively, you know, pursue those um, recapture and origination opportunities that uh, will serve as an offset, uh, to reductions in the value of the MSR portfolio. And that's allowed us to um, adjust
Speaker Change: Some of the ways that we approach uh our hedging of the MSR portfolio um to be uh a bit more stable and less active in terms of uh adjusting our Hedges with changes in rates. And so, in doing that we expect that we will have lower costs as we go forward. You can see that we did have uh fairly significant costs in the quarter related to some of the interest rate volatility that we that we experienced in April.
Speaker Change: Um, but we expect lower costs as we're moving forward as well as, um, you know, given the positioning, uh, the positioning that we have to have greater, uh, consistency. In terms of, you know, when interest rates increase being a net increase in the value of the MSR versus the hedges and the opposite, when interest rates decline, overall we are still targeting an 80 to 90%. Um, Edge ratio, at least in uh sort of race uh, within a a um
Speaker Change: A near band to uh, to current rate levels. Uh, and um and so we haven't, you know, changed our posture, from that perspective, but given the uh uh our changes in the uh, the way we've implemented, the, the hedging profile as we go forward. We do expect more stability in terms of the Hedge position, which drives lower costs, as well as greater sort of directional performance.
Speaker Change: Great. Uh thank you for taking my questions.
George: Up. Next is Bose, George KBW.
George Bose: Yes, good afternoon. Um, just wanted to follow up on, uh, the, the profitability of questions just in terms of the servicing portfolio. You know, what's a good run rate for the profitability there, just in looking at it to send basis points. I mean, it makes sense the amortization increased with a bigger MSR but conceptually, you know, I'd have thought that would be offset by a higher, you know, servicing fee. So yes, it's just kind of a good way to think about what that number should be.
George Bose: um, you know if you look back over the past few quarters, uh this was a bit in terms of the uh,
George Bose: You know, the pre-tax income excluding Market, excluding valuation changes, you know, was a bit of a dip from what we've seen historically, uh, as I said, you know, there were some 1-time items or, you know, items that were specific to this quarter, um, you know, that impacted that generally at these, uh, you know, at the rate levels that were at currently.
Um, you know which are uh, a bit a bit higher, uh, and assuming not great, you know, very significant levels of of rate volatility. Uh, we'd expect the basis points on the servicing portfolio to, uh, move toward what we've seen over the past few quarters in the, you know, 9 to 10 basis point range. Um,
George Bose: Uh you know in any given quarter, there can be certain items that uh that impact the overall uh the overall result. But that would be our expectation. Generally going forward at this at these rate levels
Speaker Change: Okay, great. And the decline there or the increase, I guess in the basis points would be largely on on Lower amortization.
Speaker Change: Um uh uh lower lower slightly lower proportional amortization. Um uh as I mentioned some of the other impacts that we saw during the quarter uh payoff related expenses, there was a slight uptick versus what our run rate has been in terms of the losses and Provisions for defaulted loans, um, and the and the interest expense contributions. So um, really
Speaker Change: You know, some normalization across those different facets.
Speaker Change: Okay, great. And then in terms of that the cross Channel volatility number the, you know, on slide 17 and is that mainly um, like was that mainly hedging related on the uh, this quarter or are there other what, you know, things kind of driving that as well.
Speaker Change: Into uh, agency execution. That's driving higher margins in a number of our channels. Um, but uh, to the extent that we see spread volatility in in those channels, um, you know, can especially you know, at certain points in the quarter, can have a uh, you know, an impact in that other other line item.
Speaker Change: okay, so so things like non- agency and second is getting marked through their
Speaker Change: uh, yes, so the extent that it occurs after we've lost the loan,
Speaker Change: Yeah, yeah. Okay, great. Thank you.
The next question will come from Eric Haugen btig.
Eric Haugen: Hey, thanks. Um, maybe following up on the profitability. Looking at the servicing profitability on page 20, is there a way to like sensitize? The earnings on both the custodial balances and the interest expense Line? If the Fed delivers a rate cut like for a 25 basis point cut, how much are each of those lines changing? And are they changing by a proportional amount if you will?
Eric Haugen: um, yes, so you you can look at the outstanding um,
Eric Haugen: You know, the outstanding debt that we have that is related to msrs. Uh, is almost all so our MSR term notes as well as the repo related to msrs, which is all basically all uh floating rate debt, um, would be tied to. So for which is very directly tied to uh, you know, the
Eric Haugen: The Fed rate. Um, similarly, we would expect that the, uh, the earnings on custodial balance, is, is tied very similarly, or would move very similarly, to how, uh, you know, the Fed rate moves. Um, and we, uh, you know, we've provided the balances of custodial funds here. So, you know, you could pass that through in terms of those outstanding balances, and that would be the impact of those 2. Those 2 line items.
Speaker Change: Yep. Okay, that's good. Um, you know, if mortgage rates are higher from here. I mean, how sticky do you expect margins to be in the correspondent Channel? I mean, do you think we could get a scenario where, you know, Community Banks? Either use the cash window more frequently or they keep loans in the portfolio by advancing them at the fhlb?
Like what's the, what are the conditions that might?
Speaker Change: you know, drive that
Okay, I think that I think that you know, we're seeing um actually the opposite in our correspondent channel in that we're seeing more of the production going to whole loan buyers like ourselves. Um primarily because number 1 the sellers don't have um the margin to be able to retain the servicing but more importantly given the high rate of the servicing and the fact that they don't hedge the servicing, it makes more sense for them to sell the whole loan. So I I think that, you know, we're going to continue
Speaker Change: Need to see correspondent aggregators to be very active, um, in this higher for longer environment, where you see retention taking place, is typically when margins are wide are wider and rates are at a perceived bottom. And so, I think, you know, we're, we're just, I think, you know, coming out of coming out of Co we've seen this phenomenon, only grow. Um, you know, the cache windows can can can get busier from time to time but that's at their, that's at their discretion. It's not at the discretion of the seller, um, and typically, those who do sell to the cache, when there are more Mortgage Bankers, that perhaps will aggregate servicing and auction it off. But again, given the volatility in the markets aggregating, servicing is not for the faint of heart. And I think it it if you're not hedging servicing, it could backfire pretty quickly quickly on you. So I think that look, I think this speaks to how we're growing share, incorp
Speaker Change: Correspondent and just the level of feedback we're getting from from our customers. Um, is pretty impactful, um, and I continued and I continue to expect it to to stay that way for the foreseeable future. We're just in a really tough Market in that we've been higher for a lot longer, um, and that's something, you know, we continue to focus on here are the things we can control and, you know things like, you know, growing share becoming more efficient. Um and can
Speaker Change: Continuing to reduce our expenses and deploy, technology are things that we that we're focused on and looked at that, that kind of that. Now, kind of in the newest of the benefit of those who are selling loans because we can just be, um, more active and more dynamic as we're looking to grow, share and correspondence.
Speaker Change: Great stuff. Appreciate your comments. Thank you.
Michael K: Michael K from Wells. Fargo has the next question.
I wanted to see if you can dig into, um, the loan origination expense line item, that was up a lot quarter over quarter.
Speaker Change: Um was that driven by the the broker direct volume? You know what's happening over there?
Speaker Change: Yeah, that's exactly. Uh, that's exactly correct. Michael, and thanks for the question. So our production, uh, or origination expense line item. Um, in terms of our accounting includes the uh, the fee paid through to the broker. And so if you look at the, you know, if you looked at an individual transaction for our broker direct channel, uh, we have a, you know, a larger gain on sale, that would be excluding the broker fee. And then the broker fee, uh, which is a pretty, uh, meaningful component showing up in origination expenses and so we'll see an out outside increase in uh, those origination expenses as um, you know, compared to the overall total as broker becomes a greater percentage of our overall, uh, of our overall production or overall origination. Um, you know, we do look to normalize for that. So, in terms of the way that we think about, uh, margin
Speaker Change: Uh, we really think of, you know, our, our gross margins or our Revenue margins being net of that broker that broker fee. And so the, you know, the presentation that we have in the earnings, uh, in the earnings deck that we had been referencing on page 18 of the earnings deck Nets, the, you know, nets, all of the, uh, uh, origination expenses out of, you know, each of the individual lines so that broker direct margin that's reflected their of 87 basis. Points in this quarter is net of that broker fee that is represented and origination expenses. But as we continue to grow uh our broker direct originations that uh you know, those broker fees falling through to origination expense will have an outsized impact um to the extent that Brokers growing at a faster clip than you know the rough than our other um than our other channels.
Speaker Change: My um, Paul question. Um, I don't think I've heard um they're in a calling any update on the the sub-servicing initiatives and oh yeah.
Speaker Change: The, some early agreements the last quarter, you mentioned and and some negotiations still going on. It's any anything meaningful there.
Speaker Change: Look we're making, we're making a lot of good Headway on the sub-servicing. Um, we don't have anything substantial to report. I can tell you that we've brought in a, a major leader uh into the organization to lead that effort. And we're continuing to work with our correspondents in particular, but we're looking to um starting with this quarter to expand out on the horizon in terms of different pockets of those who own servicing. So I expect to see good activity. Um before the end of the year on that front, many correspondent, many of our correspondent customers who own servicing have either have either moved that servicing, um off their balance sheets or they're selling Whole loans as I talked about a few minutes ago. Um I think also given the Dynamics in the marketplace. I think larger holders
Speaker Change: Of servicing, who have their sub-service, who have, who have their servicing place? Um, are waiting to see, you know how things, how things play out in the marketplace. And I think, you know, over the next 6 to 12 months you'll see more servicing moving but amongst Suber. And so we're just positioning ourselves to be 1 of those Suber to to capitalize on the opportunity.
Speaker Change: Okay, thank you.
Speaker Change: Next up is Doug Harter from UBS.
Doug Harter: Uh, thanks, uh, Dan. As I look at, uh, slide 23 on unleveraged, um, you talked that non-funded, you know, the non funding debt might sort of trend above your, your target. You just talked about, you know, how you're thinking about leverage and, you know, whether you view any, uh, constraints, you know, from your current leverage level.
Speaker Change: So, yeah, we, we did not have any concerns from our current leverage level, uh, at, you know, at elevated rates at the higher for longer as, as David had kind of had mentioned earlier. Um, you know, we do expect to run, we have a heavier emphasis on the servicing, uh, side of the business and the MSR assets and that's driving our non-funded debt to equity levels a bit, uh, a bit higher than our
At these levels, we don't have any concerns. We do think that we could run, uh, potentially a little bit above on the non-funded debt to equity. As we mentioned here, a little bit above the 1.5 times. Um, you can see our, uh, our overall debt to equity, uh, 3.4 times is consistent with the prior quarter, um, and with our overall, uh, or overall debt to equity Target. And so we don't have any concerns on the, on The Leverage side. You know, I I I shared dance point of view from the rating agency standpoint and from our business partner standpoint. I can tell you and our industry. We're always worried about leverage um and I think it's something that is always front and center in our minds. I think that you know the to the point Dan's raising, you know we've been very focused on judicious and how we think about leverage and how we think about the that that non funding debt. Um number um and I think you know, we're we're
Dan Paradi: It factors into how we think about pricing for servicing and how we price for loans. And and I think it's something that, you know, we're very mindful of, but I think given given the environment we're in, it's something that is not come as a surprise to us to see it, creep back up. But at the same time, there are, you know? We we we clearly have it front and center.
Speaker Change: Great. I appreciate the thoughtful answer. Thank you.
Ryan: We'll go next to Ryan. Shelly, from Bank of America.
Ryan Shelly: Hey guys. Thanks
Ryan Shelly: Most of mine I've been answered. Uh I was just hoping give any color around uh delinquency rates. It looks like they, um, you know, picked up a bit in the quarter but still below the Euro period. So just any commentary or any specific uh and Mark has to call out. Um, there would be probably helpful. Thank you.
Sure. Uh, thanks for the question. So you know, page 32 has our trends for delinquency rates. Um, you're correct that they did, uh, creep up during the quarter. Although that's really consistent with what we see, on a seasonal basis, typically, um, I think the item of note is really that they decrease on a year-over-year basis. So down from 75.7 to 5.6%. And so overall, um, you know, we are seeing relative stability in terms of the delinquencies in the portfolio. Uh, part of what has allowed us to hold in delinquencies in the portfolio is, um, our, uh, you know, our judicious underwriting of the loans that we are bringing into the portfolio and so you can see the uh, the performance of, you know, for the more greatly exposed um, credit areas of the of the servicing port.
Folio in terms of more recent vintage government loans, FHA and VA loans are delinquencies, are significantly lower than the overall, um, the overall industry. And I think that really speaks to our ability to shape the portfolio and ensure that we are, um, less exposed to some of the lower, uh, you know, the lower.
Ryan Shelly: credit portions of, uh, of the Universe, um, of the of the, uh,
Of the mortgage loan universe and that we have greater stability in terms of the delinquencies in our portfolio.
Ryan Shelly: Okay, I think that while the delinquencies are
Ryan Shelly: uh, advances are down.
Ryan Shelly: Bars in a lot of equity built up in their in their uh, properties. And there's still even with the cut back of a few government programs. There's still good government programs to help keep ours in their homes.
Dan Paradi: And the thing that uh, you know, the number that I'm um encouraged by is the delinquencies of our recently. Originated vintages, our low, our lower than the overall industry. And that speaks to the point, Dan made about our ability to diligence our loans and correspondent and to underwrite in broker and consumer direct. Um, and that's, and that's the, you know, that speaks to the risk management culture that we have here at the company.
Got it. Thank you. Uh, thanks for the question. Very helpful.
Trevor Cranston: And we'll go to Trevor Cranston from citizens JMP.
Trevor Cranston: Hey thanks. Um, follow-up question on the uh, change in the the hedging strategy. Um, if I understood correctly you said it was mainly, you know, increasing the capacity at consumer direct, um, to to improve recapture.
Trevor Cranston: um,
Trevor Cranston: um,
is that, is that related to the change in Hydro strategy? Or should we be thinking about some incremental increase in production expenses in 32, um, specifically related to that change in hedging strategy? Thanks. No, that's exactly correct. So the hedging or the sorry, the production expenses for Q2 do incorporate
Trevor Cranston: um,
Trevor Cranston: most of the, uh, additional capacity that we have brought on that, uh, has allowed us to, uh, feel comfortable repositioning our, our hedge or, or approaching our hedge strategy, a bit differently. Um, the uh, overall, uh, in, you know, we've been building that capacity through this quarter. Most of the expenses are reflected here in the second quarter. There may be an additional 1 to 3 million dollars that, uh, of of that since we didn't have the capacity on for the entire quarter, that would be increased on a, you know, completely flat basis uh, as we go into the third quarter, but most of its reflected here in these expenses for the second quarter. You know, if you look at if you look at the Hedge performance of the 80 84 million negative, 54 million of it is hedge costs. And so, you know, 1 of the 1 of the areas that we've spent a lot of time on is really getting our getting our arms around.
What is the recapture opportunity that we have in the portfolio? And how do we factor that into how 1 we value the servicing? And how does that affect the Hedge? And obviously it should bring down the Hedge costs.
Now, if you have that in, if you have that in your methodology, you want to make sure you're going to recapture the loans and to do that we have to put on the capacity but the capacity is a fraction of the Hedge cost that we've been experiencing over the prior quarters. And so I'm encouraged, you know, by what I'm saying, you know, really even even this quarter in terms of that hedge cost number um, you know, driving a significantly lower. Um, and so I think it's something that's going to that's going to lend itself to more consistent Roes as we look forward.
Speaker Change: Right. Okay, that makes sense. Thank you guys.
Speaker Change: And we have no further questions at this time. I'll now turn it back to David Spectre for closing remarks.
I want to thank everyone for joining us here today and and for giving us for their time. And uh as always, if you have any questions, please don't hesitate to reach out to our IR team and Isaac and the team. And uh thank you all very much for the time and thoughtful questions and looking forward to speaking to all of you soon, take care.
And thank you all for joining us. This afternoon. We encourage investors with additional questions to contact our investor relations team by email or phone. Thank you. You may now disconnect