Speaker #1: Good afternoon. And welcome to PennyMac Financial Services, Inc. Fourth quarter and full year 2025 earnings call. Additional earnings materials including presentation slides that will be referred to in this call are available on pennymacfinancial's website at pfsi dot pennymac dot com.
Operator: Good afternoon, and welcome to PennyMac Financial Services Inc.'s Q4 and full year 2025 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, are available on PennyMac Financial's website at investor.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 GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial Officer.
Operator: Good afternoon, and welcome to PennyMac Financial Services Inc.'s Q4 and full year 2025 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, are available on PennyMac Financial's website at investor.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 GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial Officer.
Speaker #1: 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.
Speaker #1: Now I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial
Speaker #1: Officer. Thank you, Operator.
David Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our Q4 and full year 2025 earnings call. As shown on slide 3, PFSI finished the year with a solid Q4, generating net income of $107 million or $1.97 per share. To refresh, in the Q3, we capitalized on higher lock volumes, driven by an initial decline in interest rates to generate an 18% annualized return on equity. While our previous guidance was for annualized operating ROEs in the high teens to low 20s, the sustained rally continued into the Q4 and drove market prepayment speeds significantly higher than what both we and the market expected. This activity resulted in a meaningful increase in realization of MSR cash flows and accelerated runoff of our servicing asset.
David Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our Q4 and full year 2025 earnings call. As shown on slide 3, PFSI finished the year with a solid Q4, generating net income of $107 million or $1.97 per share. To refresh, in the Q3, we capitalized on higher lock volumes, driven by an initial decline in interest rates to generate an 18% annualized return on equity. While our previous guidance was for annualized operating ROEs in the high teens to low 20s, the sustained rally continued into the Q4 and drove market prepayment speeds significantly higher than what both we and the market expected. This activity resulted in a meaningful increase in realization of MSR cash flows and accelerated runoff of our servicing asset.
Speaker #2: Good afternoon, and thank you to everyone for participating in our fourth quarter and full year 2025 earnings call. As shown on slide three, PFSI finished the year with a solid fourth quarter.
Speaker #2: Generating net income of $107 million or $1.97 per share. To refresh, in the third quarter we capitalized on higher loss volumes driven by an initial decline in interest rates to generate an 18% annualized return on equity.
Speaker #2: While our previous guidance was for annualized operating ROEs in the high teens to low twenties, the sustained rally continued into the fourth quarter and drove market prepayment speeds significantly higher than what both we and the market expected.
Speaker #2: This activity resulted in a meaningful increase in realization of MSR cash flows and accelerated runoff of our servicing asset. While we generally expect production income to act as a natural hedge to this runoff, the benefit in the fourth quarter was impacted by competitive dynamics.
David Spector: While we generally expect production income to act as a natural hedge to this runoff, the benefit in Q4 was impacted by competitive dynamics. Many industry participants have also added significant capacity in anticipation of lower rates, and this excess capacity has created a more competitive origination market, limiting expected production margin increases and revenues typically associated with an interest rate rally. As a result, the growth in our production segment income did not fully offset the higher level of runoff in our MSR portfolio, leading us to generate a 10% annualized return on equity in Q4. I will speak to the strategic actions we are taking to improve overall production income later in my presentation. Turning to slide 4, you can see that for the full year 2025, our results were very strong.
While we generally expect production income to act as a natural hedge to this runoff, the benefit in Q4 was impacted by competitive dynamics. Many industry participants have also added significant capacity in anticipation of lower rates, and this excess capacity has created a more competitive origination market, limiting expected production margin increases and revenues typically associated with an interest rate rally. As a result, the growth in our production segment income did not fully offset the higher level of runoff in our MSR portfolio, leading us to generate a 10% annualized return on equity in Q4. I will speak to the strategic actions we are taking to improve overall production income later in my presentation. Turning to slide 4, you can see that for the full year 2025, our results were very strong.
Speaker #2: Many industry participants have also added significant capacity and anticipation of lower rates, and this excess capacity has created a more competitive origination market. Limiting expected production margin increases and revenues typically associated with an interest rate rally.
Speaker #2: As a result, the growth in our production segment income did not fully offset the higher level of runoff in our MSR portfolio leading us to generate a 10% annualized return on equity in the fourth quarter.
Speaker #2: I will speak to the strategic actions we are taking to improve overall production income later in my presentation. Turning the slide four, you can see that for the full year 2025 our results were very strong.
Speaker #2: Pre-tax income was up 38%, and net income was up 61% from their respective 2024 levels. We generated a 12% return on equity and grew book value per share by 11%.
David Spector: Pre-tax income was up 38% and net income was up 61% from their respective 2024 levels. We generated a 12% return on equity and grew book value per share by 11%. These results highlight our ability to consistently deliver stockholder value through disciplined execution, driven primarily by the strong operational performance of both segments, which you can see on the right side of the slide. In our production segment, total volumes increased 25%, driving a 19% increase in pre-tax income. Similarly, in our servicing segment, we grew the total unpaid principal balance of our portfolio by 10%, which, along with improved MSR hedging results, helped drive a 58% increase in pre-tax income from the prior year. Turning to slide 6, you can see the financial impacts of the dynamics I described earlier.
Pre-tax income was up 38% and net income was up 61% from their respective 2024 levels. We generated a 12% return on equity and grew book value per share by 11%. These results highlight our ability to consistently deliver stockholder value through disciplined execution, driven primarily by the strong operational performance of both segments, which you can see on the right side of the slide. In our production segment, total volumes increased 25%, driving a 19% increase in pre-tax income. Similarly, in our servicing segment, we grew the total unpaid principal balance of our portfolio by 10%, which, along with improved MSR hedging results, helped drive a 58% increase in pre-tax income from the prior year. Turning to slide 6, you can see the financial impacts of the dynamics I described earlier.
Speaker #2: These results highlight our ability to consistently deliver stockholder value through disciplined execution, driven primarily by the strong operational performance of both segments which you can see on the right side of the slide.
Speaker #2: In our production segment, total volumes increased 25%, driving a 19% increase in pre-tax income. Similarly, in our servicing segment, we grew the total unpaid principal balance of our portfolio by 10%, which, along with improved MSR hedging results, helped drive a 58% increase in pre-tax income from the prior year.
Speaker #2: Turning the slide six, you can see the financial impacts of the dynamics I described earlier. While production segment income was approximately double the levels reported in the first two quarters of this year, the growth from the third quarter to the fourth quarter did not offset the runoff of the portfolio's prepayment speeds increase.
David Spector: While production segment income was approximately double the levels reported in Q1 and Q2 of this year, the growth from Q3 to Q4 did not offset the runoff of the portfolio's prepayment speeds increase. However, we've taken strategic and targeted actions to drive improvements over the course of this year. By accelerating the deployment of new technologies such as Vesta, quickly ramping our capacity, and continuing to enhance efficiencies, we are positioning ourselves to better capture the significant opportunities presented by lower mortgage rates and further increase production income in comparison to MSR runoff. In January, total volumes have been consistent with those reported in Q4, but with a mix shift towards the higher margin direct lending channels. This is driving our expectations for production segment income in Q1 to be higher. Channel margins remain at similar levels.
While production segment income was approximately double the levels reported in Q1 and Q2 of this year, the growth from Q3 to Q4 did not offset the runoff of the portfolio's prepayment speeds increase. However, we've taken strategic and targeted actions to drive improvements over the course of this year. By accelerating the deployment of new technologies such as Vesta, quickly ramping our capacity, and continuing to enhance efficiencies, we are positioning ourselves to better capture the significant opportunities presented by lower mortgage rates and further increase production income in comparison to MSR runoff. In January, total volumes have been consistent with those reported in Q4, but with a mix shift towards the higher margin direct lending channels. This is driving our expectations for production segment income in Q1 to be higher. Channel margins remain at similar levels.
Speaker #2: However, we've taken strategic and targeted actions to drive improvements over the course of this year. By accelerating the deployment of new technologies such as Vesta, quickly ramping our capacity, and continuing to enhance efficiencies, we are positioning ourselves to better capture the significant opportunities presented by lower mortgage rates.
Speaker #2: And further increase production income in comparison to MSR runoff. In January, total volumes have been consistent with those reported in the fourth quarter. But with a mixed shift towards the higher margin direct lending channels.
Speaker #2: This is driving our expectations for production segment income in the first quarter to be higher. Channel margins remain at similar levels. On slide seven, we highlight the significant opportunity for our consumer direct channel's mortgage rates decline.
David Spector: On slide seven, we highlight the significant opportunity for our consumer direct channel as mortgage rates decline. As of year-end, we serviced a combined $312 billion in UPB of loans with note rates above 5%, of which $209 billion in UPB of loans had a note rate above 6%. As rates decline, these borrowers stand to benefit financially by refinancing their loans. While our recapture rates have improved, we see significant upside potential from current levels. To that end, we are making targeted investments in AI and other technologies to drive these recapture rates higher and ensure we capture the value embedded in our portfolio. The cornerstone of our technological investment is shown on slide eight.
On slide seven, we highlight the significant opportunity for our consumer direct channel as mortgage rates decline. As of year-end, we serviced a combined $312 billion in UPB of loans with note rates above 5%, of which $209 billion in UPB of loans had a note rate above 6%. As rates decline, these borrowers stand to benefit financially by refinancing their loans. While our recapture rates have improved, we see significant upside potential from current levels. To that end, we are making targeted investments in AI and other technologies to drive these recapture rates higher and ensure we capture the value embedded in our portfolio. The cornerstone of our technological investment is shown on slide eight.
Speaker #2: As of year-end, we serviced a combined 312 billion in UPB of loans with note rates above 5%. Of which 209 billion in UPB of loans had a note rate above 6%.
Speaker #2: As rates decline, these borrowers stand to benefit financially by refinancing their loans. While our recapture rates have improved, we see significant upside potential from current levels.
Speaker #2: To that end, we are making targeted investments in AI and other technologies. To drive these recapture rates higher, and ensure we capture the value embedded in our portfolio.
Speaker #2: The cornerstone of our technological investment is shown on slide eight. We previously discussed the early stages of our transition to Vesta, the modern and next-generation loan origination system we invested in to improve and grow our consumer direct lending operations.
David Spector: We previously discussed the early stages of our transition to Vesta, the modern and next-generation loan origination system we invested in to improve and grow our consumer direct lending operations. We are on track to have Vesta fully implemented across our consumer direct channel in the Q4. And completing this migration on time, excuse me, in the Q1, and completing this migration on time is a key driver of our 2026 outlook, ensuring that for the bulk of the year, we are operating on our most efficient AI-enabled platform in order to capture the production income improvements we expect. We are already seeing the power of this technology transform our workflow. By deploying AI-driven automation for tasks that were previously performed manually, we are experiencing an immediate impact, unlocking efficiency gains of approximately 50% for our loan officers.
We previously discussed the early stages of our transition to Vesta, the modern and next-generation loan origination system we invested in to improve and grow our consumer direct lending operations. We are on track to have Vesta fully implemented across our consumer direct channel in the Q4. And completing this migration on time, excuse me, in the Q1, and completing this migration on time is a key driver of our 2026 outlook, ensuring that for the bulk of the year, we are operating on our most efficient AI-enabled platform in order to capture the production income improvements we expect. We are already seeing the power of this technology transform our workflow. By deploying AI-driven automation for tasks that were previously performed manually, we are experiencing an immediate impact, unlocking efficiency gains of approximately 50% for our loan officers.
Speaker #2: We are on track to have Vesta fully implemented across our consumer direct channel in the fourth quarter. And completing this migration on time—excuse me—in the first quarter.
Speaker #2: And completing this migration on time is a key driver of our 2026 outlook. Ensuring that for the bulk of the year we are operating on our most efficient AI-enabled platform in order to capture the production income improvements we expect.
Speaker #2: We are already seeing the power of this technology transform our workflow. By deploying AI-driven automation for tasks that were previously performed manually, we are experiencing an immediate impact, unlocking efficiency gains of approximately 50% for our loan officers.
Speaker #2: Locking a loan with a borrower on the phone which took over an hour in our legacy system has been cut to just 30 minutes with Vesta.
David Spector: Walking a loan with a borrower on the phone, which took over an hour on our legacy system, has been cut to just 30 minutes with Vesta. The impact also extends to our fulfillment operations, where intelligent workflows are streamlining the loan manufacturing process. We are seeing a reduction in the average end-to-end loan processing time by approximately 25%. When multiplying these sales and fulfillment time savings across the number of loans originated on our consumer direct origin- our consumer direct channel in 2025, it represents approximately 240,000 hours of time saved. This operational velocity has a direct financial impact, with a corresponding 25% decrease in our operational costs to originate, creating another lever in our pricing strategy and giving us the flexibility to be even more competitive in the market.
Walking a loan with a borrower on the phone, which took over an hour on our legacy system, has been cut to just 30 minutes with Vesta. The impact also extends to our fulfillment operations, where intelligent workflows are streamlining the loan manufacturing process. We are seeing a reduction in the average end-to-end loan processing time by approximately 25%. When multiplying these sales and fulfillment time savings across the number of loans originated on our consumer direct origin- our consumer direct channel in 2025, it represents approximately 240,000 hours of time saved. This operational velocity has a direct financial impact, with a corresponding 25% decrease in our operational costs to originate, creating another lever in our pricing strategy and giving us the flexibility to be even more competitive in the market.
Speaker #2: The impact also extends to our fulfillment operations. Our intelligent workflows are streamlining the loan manufacturing process. We are seeing a reduction in the average end-to-end loan processing time by approximately 25%.
Speaker #2: When multiplying these sales and fulfillment time savings across the number of loans originated on our consumer direct channel in 2025, it represents approximately 240,000 hours of time saved.
Speaker #2: This operational velocity has a direct financial impact, with a corresponding 25% decrease in our operational cost to originate. This creates another lever in our pricing strategy and gives us the flexibility to be even more competitive in the market.
Speaker #2: It represents a transformative shift in our unit economics. Increases our capacity without substantially increasing operational costs and unlocks new levels of scalability. This enhanced operational scale will be a huge benefit in interest rate rally.
David Spector: It represents a transformative shift in our unit economics, increases our capacity without substantially increasing operational costs, and unlocks new levels of scalability. This enhanced operational scale will be a huge benefit in interest rate rally. If we see a continuation of the rate decline and volume increase, this AI-forward infrastructure will allow us to rapidly scale in order to absorb an increase in recapture volume. Looking ahead, this modern architecture allows for rapid iteration and integration of new AI processes and technologies to deliver meaningful improvements in the customer experience, while unlocking significantly more efficiency gains throughout 2026 and beyond. Finally, on slide nine, you can see how Vesta fits into our broader customer retention strategy. Our customer relationships are our most important asset, and we are deriving strategies to retain those customers for life.
It represents a transformative shift in our unit economics, increases our capacity without substantially increasing operational costs, and unlocks new levels of scalability. This enhanced operational scale will be a huge benefit in interest rate rally. If we see a continuation of the rate decline and volume increase, this AI-forward infrastructure will allow us to rapidly scale in order to absorb an increase in recapture volume. Looking ahead, this modern architecture allows for rapid iteration and integration of new AI processes and technologies to deliver meaningful improvements in the customer experience, while unlocking significantly more efficiency gains throughout 2026 and beyond. Finally, on slide nine, you can see how Vesta fits into our broader customer retention strategy. Our customer relationships are our most important asset, and we are deriving strategies to retain those customers for life.
Speaker #2: If we see a continuation of the rate decline and volume increase, this AI forward infrastructure will allow us to rapidly scale in order to absorb an increase in recapture volume.
Speaker #2: Looking ahead, this modern architecture allows for rapid iteration and integration of new AI processes and technologies to deliver meaningful improvements in the customer experience while unlocking significantly more efficiency gains throughout 2026 and beyond.
Speaker #2: nine, you can see how Vesta fits into our broader customer retention Finally, on slide relationships are our most important asset. driving strategies to retain those And we are strategy.
Speaker #2: Our customer customers for life. A faster and more efficient origination and processing workflow
David Spector: A faster and more efficient origination and processing workflow is just a part of our synchronized effort. We are beginning to utilize artificial intelligence to drive greater customer service and using deeper servicing integrations to anticipate borrower needs with real-time data. By combining this technology with our growing brand presence, we are transforming single transactions into lifetime partnerships. We believe these investments will allow us to achieve greater efficiencies and drive recapture to new heights, and we expect PFSI, PFSI's operating return on equity to move into the mid to high teens later in the year. As we look ahead, PennyMac is uniquely positioned to continue leading the mortgage industry. Our balanced business model and cutting-edge technology provide a powerful foundation for our continued growth, and we remain focused on the continued advancement of our strategies to drive sustained long-term value for our stockholders.
A faster and more efficient origination and processing workflow is just a part of our synchronized effort. We are beginning to utilize artificial intelligence to drive greater customer service and using deeper servicing integrations to anticipate borrower needs with real-time data. By combining this technology with our growing brand presence, we are transforming single transactions into lifetime partnerships. We believe these investments will allow us to achieve greater efficiencies and drive recapture to new heights, and we expect PFSI, PFSI's operating return on equity to move into the mid to high teens later in the year. As we look ahead, PennyMac is uniquely positioned to continue leading the mortgage industry. Our balanced business model and cutting-edge technology provide a powerful foundation for our continued growth, and we remain focused on the continued advancement of our strategies to drive sustained long-term value for our stockholders.da
Speaker #1: greater drive customer service To and using deeper servicing integrations to anticipate borrower needs with real time data . By combining this technology with our brand growing presence , we are transforming single transactions into lifetime partnerships .
Speaker #1: We believe these investments will allow us to achieve greater efficiencies and drive recapture to new heights , and we expect fcis operating return on equity to move as operating return on equity to move into the mid to high teens later in the year .
Speaker #1: As we look ahead , Pennymac is uniquely positioned to continue leading the mortgage industry . Our business balanced model and cutting edge technology provide a powerful foundation for our continued growth , and we remain focused on the continued advancement of our strategies to drive sustained , long term value for our stockholders .
David Spector: I will now turn it over to Dan, who will review the drivers of PFSI's fourth quarter financial performance.
I will now turn it over to Dan, who will review the drivers of PFSI's fourth quarter financial performance.
Speaker #1: I will now turn it over to Dan , who will review the drivers of Fsi's fourth quarter financial performance .
Daniel Perotti: Thank you, David. PFSI reported net income of $107 million in the fourth quarter, or $1.97 in earnings per share, for an annualized ROE of 10%. These results included $1 million of fair value gains on MSRs net of hedges and costs, and the contribution from these items to diluted earnings per share was $0.01. PFSI's board of directors declared a fourth quarter common share dividend of $0.30 per share. On Slides 11 through 13, beginning with our production segment, pre-tax income was $127 million, up slightly from $123 million in the prior quarter. Total acquisition and origination volumes were $42 billion in unpaid principal balance, up 16% from the prior quarter.
Dan Perotti: Thank you, David. PFSI reported net income of $107 million in the fourth quarter, or $1.97 in earnings per share, for an annualized ROE of 10%. These results included $1 million of fair value gains on MSRs net of hedges and costs, and the contribution from these items to diluted earnings per share was $0.01. PFSI's board of directors declared a fourth quarter common share dividend of $0.30 per share. On Slides 11 through 13, beginning with our production segment, pre-tax income was $127 million, up slightly from $123 million in the prior quarter. Total acquisition and origination volumes were $42 billion in unpaid principal balance, up 16% from the prior quarter.
Speaker #2: Thank you . David . PFC reported net income of $107 million in the fourth quarter , or $1.97 in earnings per share , for an annualized ROE of 10% .
Speaker #2: These results included value gains on MSRs, net of hedges and costs, and the contribution from these items to diluted earnings per share was $0.01. The Board of Directors declared a fourth quarter common share dividend of $0.30 per share. See slides 11 through 13.
Speaker #2: Beginning with our production segment , pre-tax income was $127 million , up slightly from $123 million in the prior quarter . Total acquisition and origination volumes were principal $42 billion in unpaid balance , up 16% from the prior quarter .
Daniel Perotti: Of this, $38 billion was for PFSI's own account, and $4 billion was fee-based fulfillment activity for PMT. Total lock volumes were $47 billion in UPB, up 8% from the prior quarter. PennyMac maintained its dominant position in correspondent lending, with total acquisitions of over $30 billion in Q4, up 10% from the prior quarter. Correspondent channel margins were 25 basis points, down from 30 basis points in Q3 due to increased levels of competition. Under its fulfillment agreement, PMT retains the right to purchase all non-government correspondent loan production from PFSI. In Q4, PMT purchased 17% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, both percentages unchanged from the prior quarter.
Of this, $38 billion was for PFSI's own account, and $4 billion was fee-based fulfillment activity for PMT. Total lock volumes were $47 billion in UPB, up 8% from the prior quarter. PennyMac maintained its dominant position in correspondent lending, with total acquisitions of over $30 billion in Q4, up 10% from the prior quarter. Correspondent channel margins were 25 basis points, down from 30 basis points in Q3 due to increased levels of competition. Under its fulfillment agreement, PMT retains the right to purchase all non-government correspondent loan production from PFSI. In Q4, PMT purchased 17% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, both percentages unchanged from the prior quarter.
Speaker #2: Of this , $38 billion was for Fsi's own account , and $4 billion was fee based fulfillment activity . For PMT , total lock volumes were $47 billion in UPB , up 8% from the prior quarter .
Speaker #2: PennyMac maintained its dominant position in correspondent lending, with total acquisitions of over $30 billion in the fourth quarter, up 10% from the prior quarter.
Speaker #2: Correspondent channel margins were 25 basis points , down from 30 basis points in the third quarter due to increased levels of competition under its fulfillment agreement , PMT retains the right to purchase all non-government correspondent loan production from PFC in the fourth quarter , PMT purchased 17% of total conventional conforming correspondent production and 100% of Non-agency eligible correspondent production .
Speaker #2: Both percentages are unchanged from the prior quarter. In the first quarter of 2026, we expect TMT to purchase 15% to 25% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production.
Daniel Perotti: In Q1 2026, we expect PMT to purchase 15% to 25% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, consistent with levels in the recent quarters. In Broker Direct, we continue to see momentum as we position PennyMac as a strong alternative to channel leaders. Originations were up 16% from the prior quarter. However, locks were down 5% as we maintained our pricing discipline in highly competitive segments of the channel. The number of brokers approved to do business with us continues to grow, reaching nearly 5,300 at year-end, up 17% from year-end 2024, reflecting the growing number of brokers who are increasingly recognizing and leveraging our distinct value proposition.
In Q1 2026, we expect PMT to purchase 15% to 25% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, consistent with levels in the recent quarters. In Broker Direct, we continue to see momentum as we position PennyMac as a strong alternative to channel leaders. Originations were up 16% from the prior quarter. However, locks were down 5% as we maintained our pricing discipline in highly competitive segments of the channel. The number of brokers approved to do business with us continues to grow, reaching nearly 5,300 at year-end, up 17% from year-end 2024, reflecting the growing number of brokers who are increasingly recognizing and leveraging our distinct value proposition.
Speaker #2: Consistent with levels in the recent quarters in Brokered Direct, we continue to see momentum as we positioned PennyMac as a strong alternative to channel leaders.
Speaker #2: Originations were up 16% from the prior quarter . However , locks were down 5% as we maintained our pricing discipline in highly competitive segments of the channel .
Speaker #2: The number of brokers approved to do business with us continues to grow , reaching nearly 5300 at year end , up 17% from year end 2024 , reflecting the growing number of brokers who are increasingly recognizing and leveraging our distinct value proposition .
Daniel Perotti: The revenue contribution from Broker Direct was essentially unchanged from the prior quarter, as the impact from lower fallout adjusted lock volume was offset by higher margins. Consumer Direct volumes were up, with originations up 68% and locks up 25% from the prior quarter. However, the contribution from higher volumes in the channel was largely offset by lower margins from increased competition, as well as a higher percentage of first lien versus closed-end second lien loans, and a more focused effort on recapture of higher balance, lower margin conventional loans. We also benefited from a strong secondary market execution relative to initial pricing, which contributed $34 million to PFSI's account revenues during the quarter. Production expenses, net of loan origination expense, increased 3% from the prior quarter due to higher volumes.
The revenue contribution from Broker Direct was essentially unchanged from the prior quarter, as the impact from lower fallout adjusted lock volume was offset by higher margins. Consumer Direct volumes were up, with originations up 68% and locks up 25% from the prior quarter. However, the contribution from higher volumes in the channel was largely offset by lower margins from increased competition, as well as a higher percentage of first lien versus closed-end second lien loans, and a more focused effort on recapture of higher balance, lower margin conventional loans. We also benefited from a strong secondary market execution relative to initial pricing, which contributed $34 million to PFSI's account revenues during the quarter. Production expenses, net of loan origination expense, increased 3% from the prior quarter due to higher volumes.
Speaker #2: The revenue contribution from Broker Direct was essentially unchanged from the prior quarter , as the impact from lower fallout adjusted lock volume was offset by higher margins .
Speaker #2: Consumer direct volumes were up, with originations up 68% and locks up 25% from the prior quarter. However, the contribution from higher volumes in the channel was largely offset by lower margins from increased competition, as well as a higher percentage of first lien versus closed end.
Speaker #2: Second lien loans and a more focused effort on higher balance . recapture of Lower margin conventional loans . We also benefited from a strong secondary market execution relative to initial pricing , which contributed $34 million to Fsi's account revenues during the quarter .
Speaker #2: Production expenses , net of loan origination expense , increased 3% from the prior quarter due to higher volumes . Turning to servicing on slides 14 and 15 , our servicing portfolio continued to grow , quarter ending the at $734 billion in unpaid principal balance , $470 billion was owned , servicing $227 billion was sub for PMT , and $12 billion was sub service for other Non-affiliates $24 billion was interim servicing related to MSR an sale , which has since been transferred to a third party servicing segment .
Daniel Perotti: Turning to servicing on Slides 14 and 15, our servicing portfolio continued to grow, ending the quarter at $734 billion in unpaid principal balance. $470 billion was own servicing, $227 billion was subservicing for PMT, and $12 billion was subservicing for other non-affiliates. $24 billion was interim subservicing related to an MSR sale, which has since been transferred to a third party. The servicing segment recorded pre-tax income of $37 million. Excluding valuation-related changes, pre-tax income was $48 million, or 2.6 basis points of average servicing portfolio UPB, down from $162 million, or 9.1 basis points in the prior quarter. Loan servicing fees were roughly flat to the prior quarter due to MSR sales, which offset own portfolio growth from production.
Turning to servicing on Slides 14 and 15, our servicing portfolio continued to grow, ending the quarter at $734 billion in unpaid principal balance. $470 billion was own servicing, $227 billion was subservicing for PMT, and $12 billion was subservicing for other non-affiliates. $24 billion was interim subservicing related to an MSR sale, which has since been transferred to a third party. The servicing segment recorded pre-tax income of $37 million. Excluding valuation-related changes, pre-tax income was $48 million, or 2.6 basis points of average servicing portfolio UPB, down from $162 million, or 9.1 basis points in the prior quarter. Loan servicing fees were roughly flat to the prior quarter due to MSR sales, which offset own portfolio growth from production.
Speaker #2: Recorded pre-tax income of $37 million , excluding valuation related changes , pre-tax income was $48 million , or 2.6 basis points of average servicing portfolio UPB , down from $162 million , or 9.1 basis points , in the prior quarter .
Speaker #2: Loan servicing fees were roughly flat to the prior quarter due to MSR sales , which offset owned portfolio growth from production . Earnings from custodial balances were unchanged from the prior quarter , as lower earnings rates offset the benefit of higher average balances .
Daniel Perotti: Earnings from custodial balances were unchanged from the prior quarter, as lower earnings rates offset the benefit of higher average balances. Custodial funds managed for PFSI's own portfolio averaged $9.1 billion in Q4, up from $8.5 billion in Q3. Realization of MSR cash flows was up 32% from the prior quarter, consistent with the increase in prepayment speeds for our own portfolio as lower mortgage rates drove higher prepayment activity. Operating expenses were $82 million for the quarter, or 4.5 basis points of average servicing portfolio UPB, down from the prior quarter. EBO revenue decreased as a reintroduction of FHA's trial payment plans, extended modification timelines, and delayed redeliveries into future quarters.
Earnings from custodial balances were unchanged from the prior quarter, as lower earnings rates offset the benefit of higher average balances. Custodial funds managed for PFSI's own portfolio averaged $9.1 billion in Q4, up from $8.5 billion in Q3. Realization of MSR cash flows was up 32% from the prior quarter, consistent with the increase in prepayment speeds for our own portfolio as lower mortgage rates drove higher prepayment activity. Operating expenses were $82 million for the quarter, or 4.5 basis points of average servicing portfolio UPB, down from the prior quarter. EBO revenue decreased as a reintroduction of FHA's trial payment plans, extended modification timelines, and delayed redeliveries into future quarters.
Speaker #2: funds managed for Custodial size owned portfolio averaged $9.1 billion in the fourth quarter , up from $8.5 billion in the third quarter . Realization of MSR cash flows was up 32% from the prior quarter , consistent with the increase in prepayment speeds for our owned portfolio as lower mortgage rates drove higher prepayment activity Operating .
Speaker #2: expenses were $82 million for the quarter , or 4.5 basis points of average servicing portfolio . UPB , down from the prior quarter .
Speaker #2: Ebo revenue decreased as a reintroduction of FH of FH trial payment plans extended modification timelines , and delayed deliveries into future quarters , similar to the prior quarter .
Daniel Perotti: Similar to the prior quarter, we saw the operating and GAAP ROEs converge as gains from changes in fair value inputs on MSRS were offset by hedging declines in costs. The fair value of PFSI's MSR increased by $40 million. $35 million was due to changes in market interest rates, and $5 million was due to other assumption and performance-related impacts.
Similar to the prior quarter, we saw the operating and GAAP ROEs converge as gains from changes in fair value inputs on MSRS were offset by hedging declines in costs. The fair value of PFSI's MSR increased by $40 million. $35 million was due to changes in market interest rates, and $5 million was due to other assumption and performance-related impacts.
Speaker #2: We saw the operating and GAAP rose converge as gains from changes in fair value inputs on Msrs were offset by hedging declines and costs .
Speaker #2: The fair value of . Fsi's MSR increased by $40 million . $35 million was due to changes in market interest rates , and $5 million was due to other assumption and performance related impacts .
David Spector: ... excluding costs, hedge fair value losses were $38 million, and hedge costs were $2 million. As previously stated, we expect hedge costs to remain contained and that we will more consistently realize results in line with our targeted, targeted hedge ratio going forward. Our hedge ratio is currently near 100%, up from 85% to 90% last quarter. Corporate and other items contributed a pretax loss of $30 million, down from $44 million in the prior quarter, primarily driven by reduced expenses related to technology initiatives and performance-based incentive compensation. PFSI recorded a provision for tax expense of $28 million, resulting in an effective tax rate of 20.5%.
... excluding costs, hedge fair value losses were $38 million, and hedge costs were $2 million. As previously stated, we expect hedge costs to remain contained and that we will more consistently realize results in line with our targeted, targeted hedge ratio going forward. Our hedge ratio is currently near 100%, up from 85% to 90% last quarter. Corporate and other items contributed a pretax loss of $30 million, down from $44 million in the prior quarter, primarily driven by reduced expenses related to technology initiatives and performance-based incentive compensation. PFSI recorded a provision for tax expense of $28 million, resulting in an effective tax rate of 20.5%.
Speaker #2: Excluding costs , hedge fair value losses were $38 million and hedged costs were $2 million . As previously stated , we expect hedge costs to remain contained and that we will more .
Speaker #2: We will more consistently realize results in line with our targeted , targeted hedge ratio going forward . Our hedge ratio is currently near 100% , up from 85 , up from 85 to 90% last quarter .
Speaker #2: Corporate and other items contributed a pre-tax loss of $30 million, down from $44 million in the prior quarter, primarily driven by reduced expenses related to technology initiatives and performance-based incentive compensation.
Speaker #2: PFC recorded a provision for tax expense of $28 million , resulting in an effective tax rate of 20.5% . The provision for tax expense included a $4 million benefit tax benefit consisting of a repricing of deferred tax liabilities and an adjustment to the 2025 tax accrual tax provision rate .
David Spector: The provision for tax expense included a $4 million tax benefit, consisting of a repricing of deferred tax liabilities and an adjustment to the 2025 tax accrual. PFSI's tax provision rate in future periods is expected to be 25.1%, down slightly from 25.2% in recent quarters. As noted earlier, we sold approximately $24 billion in UPB of low note rate government MSRs to a third party on a servicing release basis. This sale represented an opportunistic rotation of capital. By monetizing these lower yielding assets at a strong valuation, we are unlocking capital to strategically reinvest into the continued growth of our servicing portfolio with new originations at current market rates and significantly higher recapture potential, while maintaining prudent levels of leverage on our balance sheet.
The provision for tax expense included a $4 million tax benefit, consisting of a repricing of deferred tax liabilities and an adjustment to the 2025 tax accrual. PFSI's tax provision rate in future periods is expected to be 25.1%, down slightly from 25.2% in recent quarters. As noted earlier, we sold approximately $24 billion in UPB of low note rate government MSRs to a third party on a servicing release basis. This sale represented an opportunistic rotation of capital. By monetizing these lower yielding assets at a strong valuation, we are unlocking capital to strategically reinvest into the continued growth of our servicing portfolio with new originations at current market rates and significantly higher recapture potential, while maintaining prudent levels of leverage on our balance sheet.
Speaker #2: In future periods, it is expected to be 25.1%, down slightly from 25.2% in recent quarters. As noted earlier, we sold approximately $24 billion in UPB of low note rate government MSRs to a third-party servicer on a released basis.
Speaker #2: This sale represented a rotational, opportunistic use of capital by monetizing these lower-yielding assets at a strong valuation. We are unlocking capital to strategically reinvest into the continued growth of our servicing, new with originations at current market rates, and significantly higher recapture potential.
Speaker #2: While maintaining prudent levels of leverage on our balance sheet, debt to total equity at year end was 3.6 times, and non-funded debt to equity at the end of the quarter was 1.5 times, both within our targeted levels.
David Spector: Total debt-to-equity at year-end was 3.6 times, and non-funding debt-to-equity at the end of the quarter was 1.5 times, both within our targeted levels. Finally, we ended the quarter with $4.6 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged, giving us significant liquidity resources to be able to deploy opportunistically or in adverse market circumstances. We'll now open it up for questions. Operator?
Total debt-to-equity at year-end was 3.6 times, and non-funding debt-to-equity at the end of the quarter was 1.5 times, both within our targeted levels. Finally, we ended the quarter with $4.6 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged, giving us significant liquidity resources to be able to deploy opportunistically or in adverse market circumstances. We'll now open it up for questions. Operator?
Speaker #2: Finally, we ended the quarter with $4.6 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged.
Speaker #2: significant Giving us liquidity , resources to be able to deploy opportunistically or in adverse market circumstances . We'll now open it up for questions .
Speaker #2: Operator .
Operator: I would like to remind everyone. We will only take questions related to PennyMac Financial Services, Inc., or PFSI. We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure we can answer as many questions as possible. If you would like to ask a question during this time, please raise your hand. If you have dialed in to today's call, please press star followed by the number one to raise your hand. And if you'd like to withdraw your question, press star one again. Your first question comes from the line of Terry Ma with Barclays. Your line is open. Please go ahead.
Operator: I would like to remind everyone. We will only take questions related to PennyMac Financial Services, Inc., or PFSI. We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure we can answer as many questions as possible. If you would like to ask a question during this time, please raise your hand. If you have dialed in to today's call, please press star followed by the number one to raise your hand. And if you'd like to withdraw your question, press star one again. Your first question comes from the line of Terry Ma with Barclays. Your line is open. Please go ahead.
Speaker #3: I would like to remind everyone that we will only take questions related to PennyMac Financial Services, Inc. or PFSI. We also ask that you please keep your questions limited to one preliminary question and one follow-up question.
Speaker #3: 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, please raise your hand. If you dialed in to today's call, please press star followed by the number one to raise your hand.
Speaker #3: like to withdraw And if you'd your question , press star one again . Your first question comes from the line of Terry Ma with Barclays .
Speaker #3: Your line is open. Please go ahead.
Terry Ma: Hey, thank you. Good evening.
Terry Ma: Hey, thank you. Good evening.
David Spector: Hi, Terry.
David Spector: Hi, Terry.
Terry Ma: So I guess to start, hi. So you guys have kind of talked about, you know, increasing capacity in Consumer Direct all year long. You guys have kind of talked about holding excess origination capacity, kind of stacked your servicing book with more current coupon. It seems like almost an obvious to plan for kind of like a moment like this. So maybe kind of just talk about, like, what went wrong, and then on a go-forward basis, like, maybe just talk about what you're doing to kind of address the issue and your level of confidence.
Terry Ma: So I guess to start, hi. So you guys have kind of talked about, you know, increasing capacity in Consumer Direct all year long. You guys have kind of talked about holding excess origination capacity, kind of stacked your servicing book with more current coupon. It seems like almost an obvious to plan for kind of like a moment like this. So maybe kind of just talk about, like, what went wrong, and then on a go-forward basis, like, maybe just talk about what you're doing to kind of address the issue and your level of confidence.
Speaker #4: Thank you . Good Hey . evening . So , I guess to start , hi . So you guys have kind of talked about , you know , increasing capacity and consumer direct all year long .
Speaker #4: You guys have kind of talked about holding excess origination capacity, kind of stacked servicing book with your more current coupon. It seems like, almost obviously, to plan for kind of like a moment like this.
Speaker #4: So maybe kind of just talk about like what . wrong on a went And then go forward basis , like maybe just talk about what you're kind of doing to address the issue and your level of confidence .
David Spector: Yeah. So, thanks for the question. So, you know, coming out of Q3, we felt very good about our ability to attack the portfolio and be able to participate in the recapture opportunity afforded to us by the decrease in rates. But then as, you know, Q4 got underway and throughout the quarter, we saw increasing amounts of amortization that indicated to us that not only did, perhaps we thought we are adding capacity, but I think two things took place. First, that the rest of the market had to have capacity in place also. And so where you would typically, in a declining rate environment, see increasing margins, those also did not come into play. And so the competitive environment for refinances was, quite frankly, stronger than what I've seen historically in an interest rate decline.
David Spector: Yeah. So, thanks for the question. So, you know, coming out of Q3, we felt very good about our ability to attack the portfolio and be able to participate in the recapture opportunity afforded to us by the decrease in rates. But then as, you know, Q4 got underway and throughout the quarter, we saw increasing amounts of amortization that indicated to us that not only did, perhaps we thought we are adding capacity, but I think two things took place. First, that the rest of the market had to have capacity in place also. And so where you would typically, in a declining rate environment, see increasing margins, those also did not come into play. And so the competitive environment for refinances was, quite frankly, stronger than what I've seen historically in an interest rate decline.
Speaker #1: Yeah . So thanks for the question . So , you know , coming out of Q3 , we felt very good about our ability to attack the portfolio and be able to participate in the recapture opportunity afforded to us by the decrease in rates .
Speaker #1: But then , as you know , Q4 got underway and throughout the quarter , we saw increasing amounts of amortization that that indicated to us that not only did perhaps we thought we are adding capacity , but I think two things took place .
Speaker #1: First , that the rest of the market had had capacity in place . Also . And so where you would typically in a in a declining rate environment , see increasing margins , those also did not come into play .
Speaker #1: the competitive And so environment for refinances was quite frankly , stronger than , than what I've seen historically in interest rate decline . And so , you we pivoted throughout the quarter rather quickly to do a few things .
David Spector: And so, you know, we pivoted throughout the quarter rather quickly to do a few things. One, we're accelerating our move on to Vesta, which will give us additional capacity, as I point out. Two, we are adding even more capacity to not just, you know, we had capacity in place, and we were continuing to build capacity, but these flash rallies are so robust that we have to have capacity in place to deal with a 50 to 75 basis point rally, you know, in less than a week. And so we're just continuing to add more capacity. We also, you know, changed some strategies to really help improve recapture, and we saw some of those strategies pay off nicely throughout the quarter and into January.
And so, you know, we pivoted throughout the quarter rather quickly to do a few things. One, we're accelerating our move on to Vesta, which will give us additional capacity, as I point out. Two, we are adding even more capacity to not just, you know, we had capacity in place, and we were continuing to build capacity, but these flash rallies are so robust that we have to have capacity in place to deal with a 50 to 75 basis point rally, you know, in less than a week. And so we're just continuing to add more capacity. We also, you know, changed some strategies to really help improve recapture, and we saw some of those strategies pay off nicely throughout the quarter and into January.
Speaker #1: One , we're accelerating our move on Vesta , which will give us additional capacity . As I point out . Two , we are adding even more capacity to not just , you know , there's a you know , we were we had capacity in place and we were continuing to build capacity .
Speaker #1: But these these rallies are these flash rallies are so robust that we have to have capacity in deal with a 50 to 75 basis point rally .
Speaker #1: You know , in less than a week . And so we're just continuing to add more , more capacity . We also , you know , changed some strategies to really help improve recapture .
Speaker #1: And we saw some of those strategies pay off nicely quarter . And and into January . And so I think that , you know , the you know , I have a lot of confidence in the team that we're in a continue to accelerate our recapture and accelerate our growth in consumer direct .
David Spector: And so I think that, you know, I have a lot of confidence in the team that we're going to continue to accelerate our recapture and accelerate our growth in consumer direct. I think that, you know, this is one of the reasons why, you know, we expect to get to mid to high, operate mid to mid-teen ROEs, you know, by the middle of the year. And, you know, I just think that you're going to continue to see us move into that direction.
And so I think that, you know, I have a lot of confidence in the team that we're going to continue to accelerate our recapture and accelerate our growth in consumer direct. I think that, you know, this is one of the reasons why, you know, we expect to get to mid to high, operate mid to mid-teen ROEs, you know, by the middle of the year. And, you know, I just think that you're going to continue to see us move into that direction.
Speaker #1: I think that , you know , this is one of the reasons why , you know , we expect to get to mid to high , mid to mid-teen Rois , you know , by the middle of the year .
Speaker #1: And you know, I just think that you're going to continue to see us move in that direction.
Terry Ma: ... Got it. That, that's helpful. Maybe just a little bit more on the ROE guide, low double digits to kind of mid to high teens. Like, any more color on kind of, you know, what's contemplated in that expansion? Like, maybe just some more color on that, please. Thank you.
Terry Ma: ... Got it. That, that's helpful. Maybe just a little bit more on the ROE guide, low double digits to kind of mid to high teens. Like, any more color on kind of, you know, what's contemplated in that expansion? Like, maybe just some more color on that, please. Thank you.
Speaker #4: Got it . That helpful . Maybe just a little bit more on the ROE guide a low double digits to kind of mid to high teens .
Speaker #4: Like any more color on kind of you know , what's contemplated in that expansion . Like maybe just some more color on that please .
David Spector: Yeah. So look, I think we're. Remember, these forecasts that we give are based on a point in time. And so first of all, you know, we expect an origination market to grow between $2.3 and 2.4 trillion in the year. Rates, you know, rates, obviously, if rates go up, that will change. We expect to grow production in consumer, to grow production and recapture in Consumer Direct, and grow share and volumes in TPO. Correspondent, we are maintaining at generally current flat levels, market share levels. A lot of that is coming out of, you know, increased competition we're seeing primarily on the conventional side through the cash windows of the two GSEs, as they're looking to proceed on their path to buy more mortgages.
David Spector: Yeah. So look, I think we're. Remember, these forecasts that we give are based on a point in time. And so first of all, you know, we expect an origination market to grow between $2.3 and 2.4 trillion in the year. Rates, you know, rates, obviously, if rates go up, that will change. We expect to grow production in consumer, to grow production and recapture in Consumer Direct, and grow share and volumes in TPO. Correspondent, we are maintaining at generally current flat levels, market share levels. A lot of that is coming out of, you know, increased competition we're seeing primarily on the conventional side through the cash windows of the two GSEs, as they're looking to proceed on their path to buy more mortgages.
Speaker #4: Thank you .
Speaker #1: So look , I Yeah . think we're . Remember these these forecasts that we give are based on a point time in . And so first of all , know , we you expect an origination market to grow between 2.3 and 2.4 trillion in the year .
Speaker #1: Rates . You know , obviously if rates rates go up that will change . We expect to grow production in consumer to grow production and recapture .
Speaker #1: And consumer direct and grow , share in volumes and TPO correspondent . We are maintaining a generally current flat levels , market share levels .
Speaker #1: A lot of that is coming out of, you know, increased competition. We're seeing it primarily on the conventional side through the cash windows of the two.
Speaker #1: The two gse's as they're looking up to to proceed on their on their path to , to buy more mortgages , we expect margins to remain at levels to those we saw in the fourth quarter .
David Spector: We expect margins to remain at levels to those we saw in Q4. And so this is, you know, there could be some. You know, in Q4, we did see a little margin compression in brokers. The top two participants were very aggressive in a race to be the number one loan producer. But I think, you know, we're going to stay disciplined. But I think what we're not factoring in this, which is, you know, what we've, as I said, we've historically seen, is margin expansion. And should that margin expansion take place, obviously, there'll be upside from there. We expect the realization of cash flows to remain similar as a percentage of MSR values versus what we saw in Q4, and I expect that, you know, to pretty much be the story.
We expect margins to remain at levels to those we saw in Q4. And so this is, you know, there could be some. You know, in Q4, we did see a little margin compression in brokers. The top two participants were very aggressive in a race to be the number one loan producer. But I think, you know, we're going to stay disciplined. But I think what we're not factoring in this, which is, you know, what we've, as I said, we've historically seen, is margin expansion. And should that margin expansion take place, obviously, there'll be upside from there. We expect the realization of cash flows to remain similar as a percentage of MSR values versus what we saw in Q4, and I expect that, you know, to pretty much be the story.
Speaker #1: And so this is , you know , there's there there could be some , you know , in the fourth quarter , we did see margin a little compression in brokers .
Speaker #1: The top two participants , we're very aggressive in a race to be the number one loan producer . But I think , you know , we're going to stay disciplined .
Speaker #1: But I think what we're not factoring in this , which is you know what we've as I said , we've historically seen is margin margin expansion .
Speaker #1: And should that margin expansion take place , obviously there'll be upside from there . We expect the realization of cash flows to remain similar as a percentage of MSR value versus what we saw in the fourth quarter .
Speaker #1: And I expect that to pretty much be the story . There are some continued efficiency gains in servicing with pre-tax income . You know , grinding higher as a result .
David Spector: There are some continued efficiency gains in servicing, with pre-tax income, you know, grinding higher as a result. There will definitely be some scale benefits that we see coming out of the deployment of the Vesta technology, as well as the growth in share in TPO. And, you know, there are some additional leverage outside of this, that could drive it higher. But I generally believe that we've, you know, we've mapped out, and I have the confidence that we can get back to the mid to high operating ROEs. It's just, you know, it's not going, you know, to be, at the pace that perhaps we'd all would love.
There are some continued efficiency gains in servicing, with pre-tax income, you know, grinding higher as a result. There will definitely be some scale benefits that we see coming out of the deployment of the Vesta technology, as well as the growth in share in TPO. And, you know, there are some additional leverage outside of this, that could drive it higher. But I generally believe that we've, you know, we've mapped out, and I have the confidence that we can get back to the mid to high operating ROEs. It's just, you know, it's not going, you know, to be, at the pace that perhaps we'd all would love.
Speaker #1: There will definitely be some scale benefits that we see coming out of the deployment of the Vesta technology , as well as the growth in share and TPO .
Speaker #1: And you know , there is there are some additional levers of outside this that could drive it higher , but I generally believe that we've we've mapped out and I have the confidence that we can get back to the mid to high operating ROE .
Speaker #1: just , you It's know , it's not going , to be , you know , at the pace that perhaps we would all would love .
Terry Ma: Great. Thanks for all the color.
Terry Ma: Great. Thanks for all the color.
David Spector: Thanks, Terry.
David Spector: Thanks, Terry.
Speaker #4: Great. Thanks for the color.
Speaker #1: Thanks , Terry .
Operator: Your next question comes from Mark DeVries of Deutsche Bank. Your line is open. You may go ahead.
Operator: Your next question comes from Mark DeVries of Deutsche Bank. Your line is open. You may go ahead.
Speaker #3: Your next question comes from Mark DeVries of Deutsche Bank . Your line is open . You may go ahead .
Mark DeVries: Yeah, thanks. David, I think you indicated that, you know, the prepayments you saw in your servicing book were even faster than you would've thought. Any insight as to kind of what happened there, or is it just how rapidly the market responded to rate incentives that you kind of alluded to-
Mark DeVries: Yeah, thanks. David, I think you indicated that, you know, the prepayments you saw in your servicing book were even faster than you would've thought. Any insight as to kind of what happened there, or is it just how rapidly the market responded to rate incentives that you kind of alluded to-
Speaker #5: Yeah, thanks. I think you indicated that the prepayments you saw servicing in your book were even faster than you would have.
Speaker #5: You would have thought any insight as to kind of what happened there, or is it just how rapidly the market responded to rate incentives?
David Spector: So, yeah.
David Spector: So, yeah.
Mark DeVries: Hey.
Speaker #5: You kind of alluded to prior comments and hey .
Mark DeVries: Hey.
David Spector: I'm sorry for interrupting. Did you want to continue?
David Spector: I'm sorry for interrupting. Did you want to continue?
Speaker #1: I'm sorry for interrupting . Did you want to continue ?
Mark DeVries: Oh, and then just a follow-up. Did I hear you right? You expect realization of cash flows at least in the guidance you kind of provided, or at least the high-level guidance, to be consistent with what you saw in Q4?
Mark DeVries: Oh, and then just a follow-up. Did I hear you right? You expect realization of cash flows at least in the guidance you kind of provided, or at least the high-level guidance, to be consistent with what you saw in Q4?
Speaker #5: Oh , and then and then just a follow up . Did I hear you right ? You expect realization of cash flows at least in the guidance you kind of provided , or at least the high level guidance to be consistent with saw in for what you Q .
David Spector: In the fourth quarter? Yes.
David Spector: In the fourth quarter? Yes.
Mark DeVries: Yep.
Mark DeVries: Yep.
Speaker #1: In the fourth quarter, yes.
David Spector: So let me just point out that the market generally what has been surprised by the increased prepayment speeds. They were forecasted, but not to the level that we've seen. And so I think that that's something that you know we've reported throughout the Street in speaking to them, and this is something that has been, I think, kind of a-- you've seen it throughout you know the market. I think that you know is in terms of where we're seeing it, I generally will tell you everywhere.
David Spector: So let me just point out that the market generally what has been surprised by the increased prepayment speeds. They were forecasted, but not to the level that we've seen. And so I think that that's something that you know we've reported throughout the Street in speaking to them, and this is something that has been, I think, kind of a-- you've seen it throughout you know the market. I think that you know is in terms of where we're seeing it, I generally will tell you everywhere.
Speaker #5: Yeah .
Speaker #1: So let me let me just point out that the market generally what has been surprised by the increased repayment speeds there were forecasted , but not to the level that we've seen .
Speaker #1: And so I think that that's that's something that , you know , you know , you know , we've we've we've heard it throughout the street and speaking to them .
Speaker #1: And this is something that has been , I think kind of a you've seen it throughout , you know , the market . I think that , you know , as the terms of where , where we're seeing it , I generally will tell you everywhere is probably there a little bit more it's a little bit more competitive on the higher balance loans , obviously , because , you know , there's just there's that's generally where , we see brokers focusing on as well as some of our correspondents prepayment speeds on lower balance loans .
David Spector: There is probably a little bit more—it's a little bit more competitive on the higher balance loans, obviously, because, you know, there's just—there's—that's generally where, you know, we see brokers focusing on, as well as some of our, our correspondents. Prepayment speeds on lower balance loans, while fast, are a little bit slower versus the comparable high balance. On the VA IRRRL, they're o—it's pretty competitive. You know, and but we're, you know, we're getting, you know, the expected market share there. The biggest, the biggest issue from my perspective is you're not seeing the m—you're not seeing margin expansion. And that's, you know, something that, you know, we're gonna... Of course, you know us really well.
There is probably a little bit more—it's a little bit more competitive on the higher balance loans, obviously, because, you know, there's just—there's—that's generally where, you know, we see brokers focusing on, as well as some of our, our correspondents. Prepayment speeds on lower balance loans, while fast, are a little bit slower versus the comparable high balance. On the VA IRRRL, they're o—it's pretty competitive. You know, and but we're, you know, we're getting, you know, the expected market share there. The biggest, the biggest issue from my perspective is you're not seeing the m—you're not seeing margin expansion. And that's, you know, something that, you know, we're gonna... Of course, you know us really well.
Speaker #1: While fast , are a little bit slower versus the comparable high balance on the on the VA URLs . There . It's pretty competitive , you know , and but we're you know , we're getting you know , the expected market share there .
Speaker #1: The biggest the biggest issue from my perspective is you're not seeing you're not seeing margin expansion . And that's something that we're going to of course , you know us really well .
David Spector: You know, in the 18 years we've been operating, we need to get more margin, and we're going to continue to test the waters on that. But, you know, it's a bit more competitive than we've historically seen when rates increase. Margins have come up a little bit, but not to the levels that we would've thought, given the rally.
You know, in the 18 years we've been operating, we need to get more margin, and we're going to continue to test the waters on that. But, you know, it's a bit more competitive than we've historically seen when rates increase. Margins have come up a little bit, but not to the levels that we would've thought, given the rally.
Speaker #1: You know, in the 18 years we've been operating, we're always leaning to get more margin, and we're going to continue to test the waters on that.
Speaker #1: But you know , the it's a it's it's it's a bit more competitive than we've historically seen rates , margins have come little bit .
Speaker #1: Up, but not to the levels that we would have thought given the rally.
Mark DeVries: Okay, got it. And are you seeing some disparate margins across, you know, all the channels in purchase versus refi? Or was it refi that really was under pressure? And also, any thoughts on, you know, rates really kind of, the decline we've seen, kind of reducing some of the lock-in effect and starting to stimulate more purchase activity as well?
Mark DeVries: Okay, got it. And are you seeing some disparate margins across, you know, all the channels in purchase versus refi? Or was it refi that really was under pressure? And also, any thoughts on, you know, rates really kind of, the decline we've seen, kind of reducing some of the lock-in effect and starting to stimulate more purchase activity as well?
Speaker #5: it . And Okay . Got are you seeing some disparate margins across , you know , all the channels and purchase versus refi , or was it refi that really was under pressure ?
Speaker #5: And also any thoughts on , you know , rates really kind of the decline we've seen kind of reducing some of the lock in effect in certain to stimulate more purchase activity as well .
David Spector: You know, I think that given the fact that everyone is stretched on capacity. We're seeing, you know, typically it's on both purchase and refi, that, you know, we're just not seeing one necessarily differentiation. But I think, you know, we're focused on, you know, in our consumer direct channel, we have a purchase team that we continue to focus on purchase activity. On the refi side, you know, one of the strategies we put in place is, on the closed-end seconds, we, you know, we took some of our focus in closed-end seconds and moved it over to conventional. And that's why you see the overall margin differential in consumer direct quarter over quarter. That's more of a mix issue than anything else.
David Spector: You know, I think that given the fact that everyone is stretched on capacity. We're seeing, you know, typically it's on both purchase and refi, that, you know, we're just not seeing one necessarily differentiation. But I think, you know, we're focused on, you know, in our consumer direct channel, we have a purchase team that we continue to focus on purchase activity. On the refi side, you know, one of the strategies we put in place is, on the closed-end seconds, we, you know, we took some of our focus in closed-end seconds and moved it over to conventional. And that's why you see the overall margin differential in consumer direct quarter over quarter. That's more of a mix issue than anything else.
Speaker #1: You know , I think that given the fact that everyone , everyone is stretched on capacity , we're seeing , you know , typically it's on both purchase and refi that , you know , we're just I'm not I'm not seeing one necessarily differentiation .
Speaker #1: But I think , you know , we're we're we're focused on , you know , in our consumer direct channel . We have a purchase team that we continue to focus on , purchase activity on the refi side , you know , one of the strategies we put in place is we is we on the closed end we seconds , we took some of our focus and closed end seconds and moved it over to conventional .
Speaker #1: And that's why you see the overall margin differential in consumer direct over quarter quarter . That's more of a mix issue than anything else .
David Spector: You know, I generally think that, you know, there's a lot, you know, everyone's going after the loans.
You know, I generally think that, you know, there's a lot, you know, everyone's going after the loans.
Speaker #1: But you know , generally think that , you know , there is there's there's a lot you know , there's a everyone's going after the lungs .
Operator: The next question is from Bose George with KBW. Your line is now open. You may go ahead.
Operator: The next question is from Bose George with KBW. Your line is now open. You may go ahead.
Speaker #3: The next question is from Rose George with KBW. Your line is now open. You may go ahead.
Bose George: Good. Hey, you guys. Good afternoon. Yeah, just wanted to follow up on those, the same themes here. Is this kind of a structural change in the industry where historically, runoff happens, originations pick up and margins pick up because of capacity constraints? And now with technology and, is it a scenario where people can run with excess capacity, so you don't see that offset through runoff?
Bose George: Good. Hey, you guys. Good afternoon. Yeah, just wanted to follow up on those, the same themes here. Is this kind of a structural change in the industry where historically, runoff happens, originations pick up and margins pick up because of capacity constraints? And now with technology and, is it a scenario where people can run with excess capacity, so you don't see that offset through runoff?
Speaker #6: Hey guys . Good afternoon . Yeah . I just wanted to follow up on the same themes here . Is this kind of a structural change in the industry where historically , runoff happens , originations and pick up margins pick up because of capacity constraints .
Speaker #6: And now with technology, is it a scenario where people can run with excess capacity? So you don't see that offset to runoffs?
David Spector: You know, I'm not ready to declare it a structural change in the industry, okay? I think that the administration and others in the industry have been warning us for well over a year that they're going to be pulling levers to reduce rates. And so I think it gave people, you know, you know, the nod that they needed to have capacity in place. I think that there is, on the other side of it, it's going to get increasingly, you know, easier to refinance loans as you start to see technologies like we're using and others are using, to reduce the amount of time to refinance a loan, to get the borrower a lower payment.
David Spector: You know, I'm not ready to declare it a structural change in the industry, okay? I think that the administration and others in the industry have been warning us for well over a year that they're going to be pulling levers to reduce rates. And so I think it gave people, you know, you know, the nod that they needed to have capacity in place. I think that there is, on the other side of it, it's going to get increasingly, you know, easier to refinance loans as you start to see technologies like we're using and others are using, to reduce the amount of time to refinance a loan, to get the borrower a lower payment.
Speaker #1: You know, I'm not ready to declare it a structural change in the industry, okay? I think that the administration and others in the industry have been warning us for well over a year that they're going to be pulling levers to reduce rates.
Speaker #1: And so I think it gave people , you know , the the , you know , the nod that they needed to have capacity in place .
Speaker #1: I think that there is on the other side of it , it's going to get increasingly , you know , easier to refinance loans as you start to see technologies like we're using and others are using to reduce the amount of time to refinance a loan to get borrower the lower payment .
David Spector: And so this is why, you know, I think that one of the things that we're, you know, we're focusing on more and more is issues like revenue per loan and net income per loan, as opposed to margin. Because margin, as we have it, is a gross number, and as we see these, you know, expenses come down, I would expect, you know, the revenue is the gross margin, but I would expect the net income per loan to, you know, go up, ultimately. And so that's something that, you know, is something we're, we're talking about internally. But I think, look, I think the story of this quarter, we've seen it with some of those who've already reported.
And so this is why, you know, I think that one of the things that we're, you know, we're focusing on more and more is issues like revenue per loan and net income per loan, as opposed to margin. Because margin, as we have it, is a gross number, and as we see these, you know, expenses come down, I would expect, you know, the revenue is the gross margin, but I would expect the net income per loan to, you know, go up, ultimately. And so that's something that, you know, is something we're, we're talking about internally. But I think, look, I think the story of this quarter, we've seen it with some of those who've already reported.
Speaker #1: And so this is why , you know , I think that one of the things that we're , you know , we're focusing on more and more is issues like revenue per loan and net income per loan , as opposed to margin , because margin as we have , it is a gross number .
Speaker #1: And as we see these , you know , expenses come down . I would expect , you know , the revenues , the gross margin , but I would expect the net income per loan to , you know , go up ultimately .
Speaker #1: so And that's something that , you know , something is we're we're talking about internally . But I think , look , I think the story of this quarter , we've seen it with some of those who've already reported , you know , volumes have been up , margins have been down .
David Spector: You know, volumes have been up, margins have been down, and I generally think it's just the fact that people were ready, you know, for rates to decline in this initial decline. If rates were to decline, you know, 75, 100 basis points, you definitely would see margin expansion. There's just no doubt about it.
You know, volumes have been up, margins have been down, and I generally think it's just the fact that people were ready, you know, for rates to decline in this initial decline. If rates were to decline, you know, 75, 100 basis points, you definitely would see margin expansion. There's just no doubt about it.
Speaker #1: And I and I generally think it's it's just the fact that people were ready , you know , for rates to decline in this initial decline , if rates were to decline , you know , 75 , 100 basis points , definitely you would see margin expansion .
Bose George: So, okay, great. That's helpful. Thanks. And then, in terms of the competition and the different channels, in the correspondent channel, was it really driven by the GSE cash windows, or how about sort of the other participants?
Bose George: So, okay, great. That's helpful. Thanks. And then, in terms of the competition and the different channels, in the correspondent channel, was it really driven by the GSE cash windows, or how about sort of the other participants?
Speaker #1: doubt just no about it There's
Speaker #1: .
Speaker #6: okay , great . So That's helpful . Thanks . And then in terms of the competition and the different channels in the corresponding channel , did you was it really driven by the GSE cash windows or how about sort of other participants .
David Spector: Yeah, look, I think on the conventional side, it was generally the cash windows. And I think that's going to be, you know, the story for 2026. I think that, you know, with the announcement coming out of Washington, D.C., the GSEs are going to be very active. And so, you know, we will-- I'm not expecting a share decline per se, but I'm not expecting us to be at 25% at the end of the year either. We're going to maintain our discipline, and we're not just, you know, just not going to be focused on volume and share. I think that on the government side, you know, there, it's, you know, we had a really good December.
David Spector: Yeah, look, I think on the conventional side, it was generally the cash windows. And I think that's going to be, you know, the story for 2026. I think that, you know, with the announcement coming out of Washington, D.C., the GSEs are going to be very active. And so, you know, we will-- I'm not expecting a share decline per se, but I'm not expecting us to be at 25% at the end of the year either. We're going to maintain our discipline, and we're not just, you know, just not going to be focused on volume and share. I think that on the government side, you know, there, it's, you know, we had a really good December.
Speaker #1: Yeah . Look I think on the on the conventional side , it was , it was generally the cash windows . And I think that's going to be the story for 2026 .
Speaker #1: I think that , you know , with the announcement coming out of Washington , D.C. , the GSE are going to be very active .
Speaker #1: And so , you know , we have to you know , we will . I'm not expecting a share decline , per se , but I'm not expecting us to be at 25% at the end of the year either .
Speaker #1: We're going to we're going to maintain our discipline and we're not just , you know , we're just not going to be focused on volume and share .
Speaker #1: I think that on the government side , you know , they're it's you know , we we had a really good December I would say October in , November , you know , we saw some of the other market participants get very aggressive .
David Spector: I would say in October, November, you know, we saw some of the other market participants get very aggressive, and so our market discipline there, it just caused us to really just, you know, wait, wait for the market to come our way. And, in fact, as I said, in December, we had a really good December.
I would say in October, November, you know, we saw some of the other market participants get very aggressive, and so our market discipline there, it just caused us to really just, you know, wait, wait for the market to come our way. And, in fact, as I said, in December, we had a really good December.
Speaker #1: And so our market discipline there , just caused us to really just , you know , wait , wait for the market to come our way .
Speaker #1: And , and in fact , as I said in December , we had a really good December .
Operator: Your next question comes from Doug Harder with UBS. Your line is now open. Go ahead.
Operator: Your next question comes from Doug Harder with UBS. Your line is now open. Go ahead.
Speaker #3: Your next question comes from Doug Harter with UBS. Your line is now open. Go ahead.
Doug Harder: Thanks. Thanks. As you were talking about the benefits from Vesta, do you envision that of, you know, actually taking costs out of the origination business or just continuing to build capacity and, you know, as volume comes back, lowering the cost per loan?
Doug Harter: Thanks. Thanks. As you were talking about the benefits from Vesta, do you envision that of, you know, actually taking costs out of the origination business or just continuing to build capacity and, you know, as volume comes back, lowering the cost per loan?
Speaker #6: Thanks . Thanks . As you were talking about the the benefits from from Vesta , do you envision that of , you know , actually taking costs out of the origination business or just continuing to build and capacity as volume comes back , lowering the cost per loan .
David Spector: The answer is both. Okay, I will tell you first off, with the deployment that will be in place in Q1, we will get the benefits of just a more modern system that will lead to just greater efficiency gains on both the sales side and the fulfillment side. Throughout 2026, and this is what's very exciting for us, we're going to see more and more deployment of AI tools and AI agents. That's really going to have a meaningful effect on our ability to originate a loan, you know, as inexpensive as anyone else in the industry, as quickly as anyone in the industry, and most importantly, to be able to close the loan when the borrower wants to close the loan. And so that's something that is very exciting to us.
David Spector: The answer is both. Okay, I will tell you first off, with the deployment that will be in place in Q1, we will get the benefits of just a more modern system that will lead to just greater efficiency gains on both the sales side and the fulfillment side. Throughout 2026, and this is what's very exciting for us, we're going to see more and more deployment of AI tools and AI agents. That's really going to have a meaningful effect on our ability to originate a loan, you know, as inexpensive as anyone else in the industry, as quickly as anyone in the industry, and most importantly, to be able to close the loan when the borrower wants to close the loan. And so that's something that is very exciting to us.
Speaker #1: The answer is both. Okay, I will tell you, first off, it is with the deployment that will take place in Q1. We will get the benefit of just a more modern system that will lead to just greater efficiency gains on both the sales side and the fulfillment side throughout 2026.
Speaker #1: And this is what's very exciting for us. We're going to see more and more deployment of AI tools and AI agents.
Speaker #1: That's really going to have a meaningful effect on on our ability to originate a loan in , you know , as inexpensive as anyone else in the industry .
Speaker #1: As quickly as anyone in the industry. And most importantly, to be able to close the loan when the borrower wants to close the loan.
Speaker #1: And so that's something that is very exciting to us . And I think that's something that I'm really looking forward . You to sharing with all you as it as it gets deployed .
David Spector: I think that's something that I'm really looking forward, you know, to sharing with you all, as it gets deployed.
I think that's something that I'm really looking forward, you know, to sharing with you all, as it gets deployed.
Crispin Love: Great, thank you.
Doug Harter: Great, thank you.
Speaker #6: Thank you Great . .
Operator: Your next question comes from Trevor Cranston with Citizens JMP. Your line is now open.
Operator: Your next question comes from Trevor Cranston with Citizens JMP. Your line is now open.
Speaker #3: Next, your question comes from Trevor Cranston with Citizens JMP. Your line is now open. Go ahead.
Trevor Cranston: Hi.
Trevor Cranston: Hi.
Operator: Go ahead.
Operator: Go ahead.
Trevor Cranston: All right, thanks. Follow up on some of the earlier questions. I guess as we think forward for this year, you know, if we were to see an additional leg down in mortgage rates, you know, whether it's driven by reduction in GPs or some of the other things that have been discussed a little bit, you know, how should we think about the net impact on the company if that were to happen? Would you expect to see the production offset kick in pretty well if there was an additional rally? Or how should we think about kind of the net impact on the returns of the company?
Trevor Cranston: All right, thanks. Follow up on some of the earlier questions. I guess as we think forward for this year, you know, if we were to see an additional leg down in mortgage rates, you know, whether it's driven by reduction in GPs or some of the other things that have been discussed a little bit, you know, how should we think about the net impact on the company if that were to happen? Would you expect to see the production offset kick in pretty well if there was an additional rally? Or how should we think about kind of the net impact on the returns of the company?
Speaker #6: Hi . Thanks . Follow up on some of the earlier questions . I guess as we think as we think forward for this year , you know , if we were to see an additional leg down in mortgage rates , you know , whether it's driven by reduction in GDP or some of the other things that have been discussed a little bit , how should we think about the net impact on the company if that were to happen ?
Speaker #6: You know, would you expect to see the production offset kick in pretty well if there was an additional rally? Or how should we think about kind of the net impact on the returns of the company?
David Spector: Look, we are. There's no one driving for more capacity in this company, more so than me. And so I will tell you that, you know, we, you know, we want to have enough capacity to be able to withstand, you know, a ferocious rally, and that's gonna come in two forms. The obvious one is we're gonna need to add, you know, some headcount to deal with some of the regulatory requirements for LOs to speak to customers. But at the same time, I expect to get if, you know, more and more capacity benefits coming out of our technology. And I, you know, it is my stated goal to not get it to be in this position where, you know, we're saying to you that, you know, we had, you know, amortization that exceeded, you know, the recapture necessary to balance it.
David Spector: Look, we are. There's no one driving for more capacity in this company, more so than me. And so I will tell you that, you know, we, you know, we want to have enough capacity to be able to withstand, you know, a ferocious rally, and that's gonna come in two forms. The obvious one is we're gonna need to add, you know, some headcount to deal with some of the regulatory requirements for LOs to speak to customers. But at the same time, I expect to get if, you know, more and more capacity benefits coming out of our technology. And I, you know, it is my stated goal to not get it to be in this position where, you know, we're saying to you that, you know, we had, you know, amortization that exceeded, you know, the recapture necessary to balance it.
Speaker #1: Well , we are there's no one driving for more capacity in this company , more me so than so . And I will tell you that , you know , we you know , we want to have enough capacity to be able to withstand , you know , a ferocious rally .
Speaker #1: And that's going to come in two forms. The obvious one is we're going to need to add some headcount to deal with some of the regulatory requirements for loss, to speak to customers.
Speaker #1: But at the same time , I expect to get more and more capacity benefits coming out of our technology . And I , you know , it is my stated goal to not get it to be in this position where , you know , we're saying to you that , you know , we had , you know , amortization that exceeded , you know , the recapture necessary to balance it .
David Spector: That's something that, you know, we are going to continue to, to perfect. It's not, it's not like, you know, aspirational, something that's going to take place this year, and it's going to be achieved, you know, long before the end of the year. So I think that, you know, we're gonna be in a position to be able to execute on a rally.
That's something that, you know, we are going to continue to, to perfect. It's not, it's not like, you know, aspirational, something that's going to take place this year, and it's going to be achieved, you know, long before the end of the year. So I think that, you know, we're gonna be in a position to be able to execute on a rally.
Speaker #1: And that's something that , you know , we are going to continue to to perfect . And it's not it's not like , you know , aspirational something that's going to take place this year .
Speaker #1: And it's going to be achieved long before the end of the year. So I think that, you know, we're going to be in a position to be able to execute on a rally.
Daniel Perotti: The other thing that I'd add is that we talked about it a little bit earlier, you know, is that we continue to increase our hedge ratio as well. So as, you know, as our interest rates decline further from here, you know, we have even greater protection from, you know, from our financial hedges that we put into place in our hedging discipline.
Dan Perotti: The other thing that I'd add is that we talked about it a little bit earlier, you know, is that we continue to increase our hedge ratio as well. So as, you know, as our interest rates decline further from here, you know, we have even greater protection from, you know, from our financial hedges that we put into place in our hedging discipline.
Speaker #2: The other the thing that other I'd add is that we talked about it a little bit earlier , is that we continue to increase our hedge ratio as well .
Speaker #2: So as , you know , as or if interest rates decline further from here , you know , we have even greater protection from , from our financial hedges that we that we put into place in our hedging discipline .
Trevor Cranston: Got it. Okay. And I guess as a second part to that question, can you maybe talk about how you're thinking about, you know, the likelihood of something coming through, like a significant reduction in G-fees or a change to loan-level pricing, or sort of other levers that could be pulled in an attempt to lower mortgage rates?
Trevor Cranston: Got it. Okay. And I guess as a second part to that question, can you maybe talk about how you're thinking about, you know, the likelihood of something coming through, like a significant reduction in G-fees or a change to loan-level pricing, or sort of other levers that could be pulled in an attempt to lower mortgage rates?
Speaker #6: Got it . Okay . And I guess as a second part to that question , can you maybe talk about how you're thinking about , you know , the likelihood of something , something coming through like a significant reduction in fees or a change to loan level pricing or sort of other levers that could be pulled in an attempt to lower rates .
David Spector: You know, of course, I read everything you're reading. I don't necessarily see a reduction of guarantee fees coming. While the administration is hyper-focused on affordability and doing what they can to drive down rates, I think the usage of the portfolios to buy mortgages is the logical place for them to continue to lean on. You know, the $200 billion number is a big number, but that's not to say it couldn't get bigger. I think that, you know, as it pertains to loan-level price adjustments, you know, the between the capital rule and other rules that they have, changing those would take some time. So I generally think that they're gonna continue to focus on keeping mortgage spreads tight to treasuries.
David Spector: You know, of course, I read everything you're reading. I don't necessarily see a reduction of guarantee fees coming. While the administration is hyper-focused on affordability and doing what they can to drive down rates, I think the usage of the portfolios to buy mortgages is the logical place for them to continue to lean on. You know, the $200 billion number is a big number, but that's not to say it couldn't get bigger. I think that, you know, as it pertains to loan-level price adjustments, you know, the between the capital rule and other rules that they have, changing those would take some time. So I generally think that they're gonna continue to focus on keeping mortgage spreads tight to treasuries.
Speaker #1: You know , I of read you're course , I everything reading . I don't necessarily see a reduction of guarantee fees coming . I , while the administration is hyper focused on affordability and doing what they can to drive down rates , I think there are the usage of the portfolios to buy mortgages is the logical place for them to continue to lean on and the $200 billion number is a big number .
Speaker #1: But that's not to say it couldn't get bigger . I think that , you know , as it pertains to loan level , price adjustments , you know , between the capital rule and other rules that they have changing those would take would take some time .
Speaker #1: And so I . Generally think that they're going to continue to focus on keeping mortgage spreads tight to treasuries . And you know , they're going to , you know , continue to try to rates jawbone down .
David Spector: And, you know, they're going to, you know, continue to try to jaw loan rates down. But I'm, you know... Look, we manage the company to a range of outcomes. And so, you know, I generally believe if, of course, if G fees comes down, that's better, and we'll have the capacity in place to take advantage of that. And likewise, you know, at times we hear loan-level price adjustments are gonna be going up. And that speaks to the, you know, the work we've done to distribute close to 15% of our agency collateral outside of the agencies to, you know, insurance companies and whole loan investors. And so, you know, managing to the range of outcomes and continuing to build, you know, to build and, and enhance the, you know, the customer journey is something that we'll be able to react to.
And, you know, they're going to, you know, continue to try to jaw loan rates down. But I'm, you know... Look, we manage the company to a range of outcomes. And so, you know, I generally believe if, of course, if G fees comes down, that's better, and we'll have the capacity in place to take advantage of that. And likewise, you know, at times we hear loan-level price adjustments are gonna be going up. And that speaks to the, you know, the work we've done to distribute close to 15% of our agency collateral outside of the agencies to, you know, insurance companies and whole loan investors. And so, you know, managing to the range of outcomes and continuing to build, you know, to build and, and enhance the, you know, the customer journey is something that we'll be able to react to.
Speaker #1: But I'm , you know , look , we manage the company to a range of outcomes . And so I you know , I generally believe if of course , if GPS comes down that's better .
Speaker #1: And we'll have the capacity in place to take advantage of that . And likewise , you know , at times we hear low level price adjustments are going to be going up .
Speaker #1: And that speaks to the, you know, the work we've done to distribute close to 15% of our agency collateral outside of the agencies to, you know, insurance companies and investors.
Speaker #1: And so , you know , managing the range of outcomes and continuing to build and , you know , to build and and enhance the the customer journey is something that we'll be able to react to .
Trevor Cranston: Got it. Okay, that's helpful. Thank you.
Trevor Cranston: Got it. Okay, that's helpful. Thank you.
David Spector: Thanks, Trevor.
David Spector: Thanks, Trevor.
Speaker #6: Okay, that's helpful. Thank you.
Operator: Your next question comes from the line of Crispin Love with Piper Sandler. Your line is now open. Please go ahead.
Operator: Your next question comes from the line of Crispin Love with Piper Sandler. Your line is now open. Please go ahead.
Speaker #1: Thanks , Trevor .
Speaker #3: Your next question comes from the line of Crispin Love with Piper Sandler. Your line is now open. Please go ahead.
Crispin Love: Thanks. Appreciate you taking my question. Can you talk a little bit about Q1 activity thus far, what that means for near-term ROE as just yet spreads tighten in mortgage rates got pretty close to 6%.
Crispin Love: Thanks. Appreciate you taking my question. Can you talk a little bit about Q1 activity thus far, what that means for near-term ROE as just yet spreads tighten in mortgage rates got pretty close to 6%.
Speaker #7: Thanks . I appreciate you taking my question . Can you talk a little bit about first quarter activity thus far ? What that means for near ROE is just you have spreads tightened mortgage rates got pretty close to 6% .
David Spector: Yes.
David Spector: Yes.
Crispin Love: Are you experiencing an episodic rate and pickup in refi? Just kind of curious how purchase is trending, and then the momentum through January, the trajectory there. And then just kind of bigger picture, how you'd expect ROE to trend throughout the year as you add capacity and invest. Is it a ramp higher? Just curious on how you're thinking about it.
Crispin Love: Are you experiencing an episodic rate and pickup in refi? Just kind of curious how purchase is trending, and then the momentum through January, the trajectory there. And then just kind of bigger picture, how you'd expect ROE to trend throughout the year as you add capacity and invest. Is it a ramp higher? Just curious on how you're thinking about it.
Speaker #7: Are you experiencing an episodic rate and pickup in Refis . Just kind of curious how purchase is trending . And then the momentum through January , the trajectory there and then and then just kind of bigger picture how you'd expect ROE to trend throughout the year as you add capacity and invest .
Speaker #7: Is it a ramp hire? Just curious on how you're thinking about it.
David Spector: Yeah. So, you know, Dan will go over the ramp in a second. January has been a good month. For a month that historically has been very slow coming out of the holidays, we've had a good production month. We're seeing nice increases in production. Offsetting that, we're seeing increases in demand statements that I would expect to see prepayments in February, you know, kind of go back to where they were in December. January will, I think, be a little bit slower. And so I think, you know, one of the things I'm looking at is our recapture, and our recapture numbers are going up. Is it-- You know, of course I want more. Everyone wants more in the organization, and that kind of speaks to the ramp.
David Spector: Yeah. So, you know, Dan will go over the ramp in a second. January has been a good month. For a month that historically has been very slow coming out of the holidays, we've had a good production month. We're seeing nice increases in production. Offsetting that, we're seeing increases in demand statements that I would expect to see prepayments in February, you know, kind of go back to where they were in December. January will, I think, be a little bit slower. And so I think, you know, one of the things I'm looking at is our recapture, and our recapture numbers are going up. Is it-- You know, of course I want more. Everyone wants more in the organization, and that kind of speaks to the ramp.
Speaker #1: It . Yeah . So you know , Dan will go over the ramp in a second . January has been a good month for a month that historically has been very slow coming out of the holidays .
Speaker #1: We've had a good we've had a good production month . We're seeing nice increases in production offsetting that . We're seeing increases in demand statements that I would expect to see prepayments in February .
Speaker #1: You know , you know , kind of go back to where they were in December . January , I think will be a little bit slower .
Speaker #1: And so I think , you know , one of the things I'm looking at is our recapture and our recapture , recapture numbers are , are going up .
Speaker #1: Is it , you know , of course I want more . Everyone wants more in the organization . And that kind of speaks to the ramp .
David Spector: But it's something that we're seeing. And, you know, margins are generally holding in. And so I think that that's something that I really am pleased to see. And I generally think, you know, in TPO, we saw a hyper-competitive market in Q4 that I believe is starting to, you know, we're getting a little bit of rational pricing coming into that. And so I'm generally of the belief that our growth in TPO, while perhaps was slowed a bit in Q4 due to a price war, will continue to accelerate at higher margins.
But it's something that we're seeing. And, you know, margins are generally holding in. And so I think that that's something that I really am pleased to see. And I generally think, you know, in TPO, we saw a hyper-competitive market in Q4 that I believe is starting to, you know, we're getting a little bit of rational pricing coming into that. And so I'm generally of the belief that our growth in TPO, while perhaps was slowed a bit in Q4 due to a price war, will continue to accelerate at higher margins.
Speaker #1: But it's something that we're seeing . And , you know , margins , margins are , are , are generally holding in . And so I think that that's something that that's I really that I really am pleased to see .
Speaker #1: And I generally think , you know , in TPO , we saw hyper competitive market in Q4 that I believe is starting to , you know , we're getting we're little getting a bit of rational pricing coming into that .
Speaker #1: And I'm so generally , you know , that the belief our growth in TPO while perhaps was was slow to bid in Q4 due to a price war , will continue to accelerate at higher margins .
Daniel Perotti: With respect to the trajectory through the year, I think consistent with the way that David described it in our implementation of these initiatives and build, you know, continued build of capacity, and so forth, we are expecting, you know, basically a ramp through the year, consistent with the guidance that we gave during the prepared remarks. So, you know, starting out in the lower double digits and then ramping up to the mid to high double digits as we get later in the year.
Dan Perotti: With respect to the trajectory through the year, I think consistent with the way that David described it in our implementation of these initiatives and build, you know, continued build of capacity, and so forth, we are expecting, you know, basically a ramp through the year, consistent with the guidance that we gave during the prepared remarks. So, you know, starting out in the lower double digits and then ramping up to the mid to high double digits as we get later in the year.
Speaker #2: And with respect to the trajectory through the year , I think consistent with the way that David described it in our implementation of these initiatives and , you know , continued build of capacity and so forth , we are expecting , you know , a basically a ramp through the year , consistent with the with the guidance that we gave during the prepared remarks .
Speaker #2: So , you know , starting out and the lower double digits and then ramping up to the mid to high , the mid to high double digits as we get later in the year .
Crispin Love: Great. Thank you. Then, just a little bit deeper into that, kind of what's baked into the ROE guide for realization of MSR cash flows and recapture beyond the first quarter? It seems that Q1 should be similar to Q4. I think the MSR prepay rate was about 16% in the fourth quarter. So curious on how you think about that through the year. I completely understand it's just a point in time, not very rate dependent, but just curious on that and kind of where you are on recapture today and what kind of levels you might be targeting.
Crispin Love: Great. Thank you. Then, just a little bit deeper into that, kind of what's baked into the ROE guide for realization of MSR cash flows and recapture beyond the first quarter? It seems that Q1 should be similar to Q4. I think the MSR prepay rate was about 16% in the fourth quarter. So curious on how you think about that through the year. I completely understand it's just a point in time, not very rate dependent, but just curious on that and kind of where you are on recapture today and what kind of levels you might be targeting.
Speaker #7: Great, thank you. And then just a little bit deeper into that, kind of what's baked into the ROE guide for realization of MSR cash flows and recapture beyond the first quarter.
Speaker #7: That one question should be similar to, it seems, four questions. Like, the MSR prepaid rate was about 16% in the fourth quarter. So I'm curious how you think about that through the year.
Speaker #7: I completely understand—it’s just a point in time now, very dependent, but just curious on that rate and kind of where you are on recapture today, and what kind of levels you might be targeting.
Daniel Perotti: So overall, in terms of the realization of cash flows, we are expecting, you know, from, on a dollar basis, to be at a pretty similar level in Q1, and also as we, you know, as we move, as we move through the year. As you have the sort of dynamics, you know, given that, we did see this initial responsiveness, and there will be a, you know, a little bit of a pullback in terms of, borrower responsiveness at these levels as we move, you know, as we move overall through the year. But expecting overall dollar realization of cash flows to remain in a fairly similar place, to what we saw in Q4 and Q1, and both as, and similarly, as we move through the year.
Dan Perotti: So overall, in terms of the realization of cash flows, we are expecting, you know, from, on a dollar basis, to be at a pretty similar level in Q1, and also as we, you know, as we move, as we move through the year. As you have the sort of dynamics, you know, given that, we did see this initial responsiveness, and there will be a, you know, a little bit of a pullback in terms of, borrower responsiveness at these levels as we move, you know, as we move overall through the year. But expecting overall dollar realization of cash flows to remain in a fairly similar place, to what we saw in Q4 and Q1, and both as, and similarly, as we move through the year.
Speaker #2: So overall, in terms of the realization of cash flows, we are expecting, on a dollar basis, to be at a pretty similar level in the first quarter.
Speaker #2: And also as we , you know , as we move , as we move through the year , as you have the sort of dynamics , you know , given that we initial did see this responsiveness and there will be , you know , a little bit of a pullback in terms of borrower responsiveness at these levels as we move , as we move overall through the year .
Speaker #2: But expecting overall dollar realization of cash flows to remain in a fairly similar place to what we saw in Q4 and Q1.
Speaker #2: both And as and similarly as we move through the year with respect to respect to recapture , you know , also expect incremental , incremental gains , consistent with the way that with the way that David had described it as we as we move through the year to facilitate the increase in production income as well as gains in our share in , in TPO or in broker , that will further increase our production income as a which will offset some of the declines that we've seen in the in the servicing segment .
Daniel Perotti: With respect to recapture, you know, also expect incremental gains, consistent with the way that, you know, with the way that David had described it as we move through the year to facilitate the increase in production income, as well as gains in our share in TPO or in broker, that will further increase our production income, which will offset some of the declines that we've seen in the servicing segment.
With respect to recapture, you know, also expect incremental gains, consistent with the way that, you know, with the way that David had described it as we move through the year to facilitate the increase in production income, as well as gains in our share in TPO or in broker, that will further increase our production income, which will offset some of the declines that we've seen in the servicing segment.
Crispin Love: Thanks, appreciate it. Thanks for my questions.
Crispin Love: Thanks, appreciate it. Thanks for my questions.
David Spector: Thanks, Christian.
David Spector: Thanks, Christian.
Speaker #2: Thanks .
Speaker #7: I appreciate you taking my questions .
Operator: Your next question comes from Shanna Chee with Barclays. Your line is now open. Please go ahead.
Operator: Your next question comes from Shanna Chee with Barclays. Your line is now open. Please go ahead.
Speaker #1: Thanks , Kristen .
Speaker #3: Your next question comes from Shanachie with Barclays. Your line is now open. Please go ahead.
Shanna Chee: Hey, guys, thanks for taking my question. So just looking at the FHA delinquencies, looks like it ticked up to 7.5%, quarter from 5.9% sequentially. I think it was roughly 6%, last year. So can you comment on what you're seeing in the FHA loans? I think previously you guys had shown some slides that showed your FHA delinquencies substantially below the, you know, industry level, and, feels like quite a jump there in context or color there.
Shanna Qiu: Hey, guys, thanks for taking my question. So just looking at the FHA delinquencies, looks like it ticked up to 7.5%, quarter from 5.9% sequentially. I think it was roughly 6%, last year. So can you comment on what you're seeing in the FHA loans? I think previously you guys had shown some slides that showed your FHA delinquencies substantially below the, you know, industry level, and, feels like quite a jump there in context or color there.
Speaker #8: Hey, guys. Thanks for taking my question. So, I was looking at the FHA delinquencies. Looks like it ticked up to 7.5% this quarter from 5.9% sequentially.
Speaker #8: I think it was roughly 6% . Last year . So can you comment on what you're seeing in the FHA loans ? I think previously you guys had showed some slides that showed FHA delinquencies substantially below the , industry level .
Speaker #8: And feels like jump—quite a there in context or color. There.
Daniel Perotti: Sorry, we weren't able to hear your question very clearly, but I know that it was on, you know, delinquencies and, specifically FHA delinquencies. So we do see, you know, we do see delinquencies increase seasonally in the fourth quarter. If we look at our overall, you know, delinquency profile or our overall delinquencies for our book, you know, increased marginally year over year, had a similar, you know, sort of slope, in terms of delinquencies through the year. Overall, with respect to FHA delinquencies, as we mentioned, as part of the, as in part of the prepared remarks, the FHA did change its policy around modifications, during the latter half of the year, moving from, allowing streamlined modifications that required no trial payments to requiring trial payments.
Dan Perotti: Sorry, we weren't able to hear your question very clearly, but I know that it was on, you know, delinquencies and, specifically FHA delinquencies. So we do see, you know, we do see delinquencies increase seasonally in the fourth quarter. If we look at our overall, you know, delinquency profile or our overall delinquencies for our book, you know, increased marginally year over year, had a similar, you know, sort of slope, in terms of delinquencies through the year. Overall, with respect to FHA delinquencies, as we mentioned, as part of the, as in part of the prepared remarks, the FHA did change its policy around modifications, during the latter half of the year, moving from, allowing streamlined modifications that required no trial payments to requiring trial payments.
Speaker #2: Sorry, we weren't able to hear your question very clearly, but I know that it was on, you know, the delinquencies and specifically FHA delinquencies.
Speaker #2: So we do see , you know , we do see delinquencies increase seasonally in the fourth quarter . If we look at our overall delinquency profile , our overall delinquencies for our book , you know , increased marginally year over year , had a similar sort of slope in terms of delinquencies through the year .
Speaker #2: Overall , with respect to FHA delinquencies , as we as mentioned , part of the as part of the prepared remarks , the FHA did change its policy around modifications during the latter half of the year , moving from allowing streamlined modifications that required no trial payments to requiring trial payments .
Daniel Perotti: Really, what that is, you know, going to result in is a bit of a lag in terms of loans that had been delinquent, getting those modifications implemented and coming back to current. So that is generally what is driving some of those increases in delinquencies that you're seeing specifically in FHA. We do expect that that's primarily a lag and not something that is going to dramatically change the performance overall of the FHA book... We also saw that, excuse me, impact our revenue from EBO redeliveries during the quarter. That went down by about a third from last quarter.
Really, what that is, you know, going to result in is a bit of a lag in terms of loans that had been delinquent, getting those modifications implemented and coming back to current. So that is generally what is driving some of those increases in delinquencies that you're seeing specifically in FHA. We do expect that that's primarily a lag and not something that is going to dramatically change the performance overall of the FHA book... We also saw that, excuse me, impact our revenue from EBO redeliveries during the quarter. That went down by about a third from last quarter.
Speaker #2: And really, what that is going to result in is a bit of a lag in terms of loans that have been delinquent.
Speaker #2: Getting those modifications implemented and coming back to current, and so that is generally what is driving some of those increases in delinquencies that you're seeing specifically in FHA. We do expect that that's primarily a lag and not something that is going to dramatically change the performance overall of the FHA book.
Speaker #2: We also saw that impact our excuse me , impact our our revenue from Ebo during the deliveries quarter that went down by a about third from from last quarter .
Daniel Perotti: Again, we expect that to be, you know, just a lag, and our current expectation is that will come back up to levels that we had seen over the past few quarters, or come back up by that third as we get into the first quarter. And we see it as those folks move through the trial, and receive those modifications and come back to current.
Again, we expect that to be, you know, just a lag, and our current expectation is that will come back up to levels that we had seen over the past few quarters, or come back up by that third as we get into the first quarter. And we see it as those folks move through the trial, and receive those modifications and come back to current.
Speaker #2: Again , we expect that to be , know , just you a lag . And our current expectation is that will come back up to levels that we had seen over the past few quarters or come back up by that .
Speaker #2: Third, as we get into the first quarter and we see those folks move through the trial and receive those modifications and come back to current.
Shanna Chee: Okay, thank you. And then I know you guys mentioned your hedge ratio is, you know, now over around 100%, and you moved it up from last quarter. You know, I think there's a bit of rate volatility in Q1, and we had heard that that could cause some basis hedging issues so far in Q1. So just any color on, you know, the rate moves and if you've seen any impacts on your hedging strategy from that.
Shanna Qiu: Okay, thank you. And then I know you guys mentioned your hedge ratio is, you know, now over around 100%, and you moved it up from last quarter. You know, I think there's a bit of rate volatility in Q1, and we had heard that that could cause some basis hedging issues so far in Q1. So just any color on, you know, the rate moves and if you've seen any impacts on your hedging strategy from that.
Speaker #9: Okay . Thank you . And then I know you guys mentioned your hedge ratio is , you now over around 100% . And you moved it up from last quarter .
Speaker #9: You know ,
Speaker #8: I think there's a bit of rate . There has been a bit of rate volatility in one Q and we had heard that some that could cause some basis hedging issues so far in one .
Speaker #8: Q so just any color on , you know , the rate moves seen any and if impacts on your you've strategy from , from hedging that .
Daniel Perotti: Overall, during the first quarter, thus far, as you said, there has been, you know, specifically, some basis movements really related to the announcement around the GSE buying. You know, we did see some of that volatility did have a slight impact, thus far, on our hedging results. Obviously, we're still early in the quarter, and a lot of things can change. Overall, I would say it had, you know, a slight, a slight impact, but not anything substantial.
Dan Perotti: Overall, during the first quarter, thus far, as you said, there has been, you know, specifically, some basis movements really related to the announcement around the GSE buying. You know, we did see some of that volatility did have a slight impact, thus far, on our hedging results. Obviously, we're still early in the quarter, and a lot of things can change. Overall, I would say it had, you know, a slight, a slight impact, but not anything substantial.
Speaker #2: Overall, during the first quarter thus far, as you said, there has been specifically some basic movements really related to the announcement around the GSE buying.
Speaker #2: We some of that did see volatility did have a slight impact thus far on our hedging results . Obviously , we're still early in the quarter , and a lot of things can change .
Speaker #2: Overall , I would say it had , you a slight a slight impact , but not anything substantial .
David Spector: It's a hedge-
David Spector: It's a hedge-
Operator: Your next-
Operator: Your next-
David Spector: The hedge performed really well in Q4, and-
David Spector: The hedge performed really well in Q4, and-
Speaker #1: The hedge performed really well in the fourth quarter.
Daniel Perotti: Q3.
Dan Perotti: Q3.
David Spector: The third quarter. I will tell you that, absent this one change, when they announced that the GSEs were going to be buying mortgages and everything stayed flat with the exception of mortgages, which rallied, which really had a very small effect on us. The hedge continues to perform, along the lines that we've seen in the third and fourth quarters.
David Spector: The third quarter. I will tell you that, absent this one change, when they announced that the GSEs were going to be buying mortgages and everything stayed flat with the exception of mortgages, which rallied, which really had a very small effect on us. The hedge continues to perform, along the lines that we've seen in the third and fourth quarters.
Speaker #2: And the third quarter.
Speaker #1: And the third quarter . And I will tell you that absent this one change , when they announced that the GSC were going to be buying mortgages and everything stayed flat with the exception of mortgages , which rallied , which which really had a very small effect on us .
Speaker #1: The hedge continues to perform along the lines that we've seen in the third and fourth quarters.
Operator: Your next question comes from Eric Hagan with BTIG. Your line is now open. Please go ahead.
Operator: Your next question comes from Eric Hagan with BTIG. Your line is now open. Please go ahead.
Speaker #3: Your next question comes from Eric Hagan with BTIG. Your line is now open. Please go ahead.
Eric Hagan: Hey, thanks. Good afternoon. A lot of good discussion here. I think I just have one. You know, lots of debt raised over the last couple of years, unsecured debt. I think a good portion of that has been used to pay down the secured term notes that you guys have. I mean, how do you guys think about the asset liability match on the balance sheet right now? You know, if prepayment speeds are picking up, right? And if the macro backdrop is for faster speeds, then is there a limit to how much unsecured debt that you'd may keep on the balance sheet, or do you think there's room to raise more?
Eric Hagen: Hey, thanks. Good afternoon. A lot of good discussion here. I think I just have one. You know, lots of debt raised over the last couple of years, unsecured debt. I think a good portion of that has been used to pay down the secured term notes that you guys have. I mean, how do you guys think about the asset liability match on the balance sheet right now? You know, if prepayment speeds are picking up, right? And if the macro backdrop is for faster speeds, then is there a limit to how much unsecured debt that you'd may keep on the balance sheet, or do you think there's room to raise more?
Speaker #10: Hey , thanks . Good afternoon . A lot of good discussion here . I think I just have one . You know , lots of debt raised over the last couple of years .
Speaker #10: Unsecured debt I think a good portion of that has been used to pay down the secured term notes that you guys have . I mean , how do you guys think about the asset liability match on the balance sheet right now ?
Speaker #10: You know , if prepayment speeds are picking up , right . And if the macro backdrop is for faster speeds and is there a limit to how much unsecured debt that you keep on the balance sheet , or do you think there's room to raise more ?
Daniel Perotti: I mean, so we generally look at our overall debt with respect, you know, with respect to the balance sheet. You know, the main lens that we look at that through is our, you know, non-funding debt-to-equity ratio, which we've maintained around that one and a half times, you know, basically for the past couple of years, I think, at this point. And so, as, you know, we continue to build equity in the business, and retain equity and continue to build our MSR portfolio, you know, notwithstanding, runoff or, or sales, we do expect to continue to grow our overall MSR asset and our overall equity. And given both of those, we do think that there is potential for, you know, additional debt, including unsecured debt, as we move forward.
Dan Perotti: I mean, so we generally look at our overall debt with respect, you know, with respect to the balance sheet. You know, the main lens that we look at that through is our, you know, non-funding debt-to-equity ratio, which we've maintained around that one and a half times, you know, basically for the past couple of years, I think, at this point. And so, as, you know, we continue to build equity in the business, and retain equity and continue to build our MSR portfolio, you know, notwithstanding, runoff or, or sales, we do expect to continue to grow our overall MSR asset and our overall equity. And given both of those, we do think that there is potential for, you know, additional debt, including unsecured debt, as we move forward.
Speaker #2: I mean , so we generally look at our overall debt with respect , with respect to the balance sheet . You know , the main lens that we look at , that through is our , you know , is our equity debt to non ratio , which we've maintained around that one and a half times .
Speaker #2: You know basically for the past couple of years I think at this point . And so as we continue to build equity in the business and retain equity and continue to build our MSR portfolio , you know , notwithstanding runoff or or sales , we do expect to continue to grow our overall MSR asset and our overall equity .
Speaker #2: And given both of those , we do think that there is potential for additional debt , including unsecured debt , as we move forward with respect to , you know , would we with respect to our balance sheet , preference our is generally to deploy into unsecured debt .
Daniel Perotti: With respect to, you know, would we with respect to our balance sheet, our preference is generally to deploy into unsecured debt. We think that's a stronger deployment, gives us greater liquidity, flexibility with respect to our ability to draw down on facilities if we so need, that are secured by our MSR, as we, you know, as mentioned in the prepared remarks. And so we do think that there is potential for us to issue additional unsecured debt as we move, you know, through 2026 and beyond. But, you know, we'll be related to what the build is like, like, as I mentioned, in terms of our equity and our MSR asset and maintaining our leverage ratios at prudent levels.
With respect to, you know, would we with respect to our balance sheet, our preference is generally to deploy into unsecured debt. We think that's a stronger deployment, gives us greater liquidity, flexibility with respect to our ability to draw down on facilities if we so need, that are secured by our MSR, as we, you know, as mentioned in the prepared remarks. And so we do think that there is potential for us to issue additional unsecured debt as we move, you know, through 2026 and beyond. But, you know, we'll be related to what the build is like, like, as I mentioned, in terms of our equity and our MSR asset and maintaining our leverage ratios at prudent levels.
Speaker #2: We think that's a stronger deployment; it gives us greater liquidity flexibility with respect to our ability to draw down on facilities, if we so need, that are secured by our MSR, as you know, as was mentioned in the prepared remarks.
Speaker #2: And so we do think that there is potential for us to issue additional unsecured as we move through 2026 and beyond. But, you know, it will be related to what the build is like.
Speaker #2: As I mentioned, in terms of our equity and our MSR asset, and maintaining our leverage ratios at prudent levels.
Operator: Your next question is from Ryan Shelley with Bank of America. Your line is now open. Please go ahead.
Operator: Your next question is from Ryan Shelley with Bank of America. Your line is now open. Please go ahead.
Speaker #3: Next, your question is from Ryan Kelley with Bank of America. Your line is now open. Please go ahead.
Ryan Shelley: Hey, guys. Thanks for the question. Most of them might have been answered. I just wanted to, you know, touch back on recapture. Sounds like it's a good theme here. So you talked about investments you're making in AI, other technologies, to improve. And then you also, in the deck here, talk about implementation of specific solutions. Can you just run through what those solutions might be? And then, might as well try for it. Anything you could do to quantify that potential upside that you see remaining? Thanks.
Ryan Shelley: Hey, guys. Thanks for the question. Most of them might have been answered. I just wanted to, you know, touch back on recapture. Sounds like it's a good theme here. So you talked about investments you're making in AI, other technologies, to improve. And then you also, in the deck here, talk about implementation of specific solutions. Can you just run through what those solutions might be? And then, might as well try for it. Anything you could do to quantify that potential upside that you see remaining? Thanks.
Speaker #11: Hey, guys. Thanks for the question. Most of it might have been answered. I just want to touch back on recapture.
Speaker #11: Sounds like it's going to be a theme here. So, you've talked about investments you're making in other technologies to improve, and then you also, in the deck here, talk about implementation of specific solutions.
Speaker #11: Can you just run through what those solutions might be . And then try for well it . might as Any anything you could do to quantify that potential upside that you see remaining .
David Spector: Yeah. Well, thanks, Ryan. Look, I'll tell you that, you know, the solutions obviously start with, you know, bringing on more capacity, bringing on, you know, additional headcount, as well as getting the technology fully deployed across the organization. In the meantime, you know, we're- as I mentioned to you earlier, you know, there are some strategies that we deployed in Q4, including, taking some of the focus that we typically have had on closed and seconds, and moving that focus to the conventional recap efforts and, you know, the recap efforts in general. On the fulfillment side, you know, we're just continuing to add capacity. You know, as I said, we're getting some good, you know, inroads from the technology move that we made.
David Spector: Yeah. Well, thanks, Ryan. Look, I'll tell you that, you know, the solutions obviously start with, you know, bringing on more capacity, bringing on, you know, additional headcount, as well as getting the technology fully deployed across the organization. In the meantime, you know, we're- as I mentioned to you earlier, you know, there are some strategies that we deployed in Q4, including, taking some of the focus that we typically have had on closed and seconds, and moving that focus to the conventional recap efforts and, you know, the recap efforts in general. On the fulfillment side, you know, we're just continuing to add capacity. You know, as I said, we're getting some good, you know, inroads from the technology move that we made.
Speaker #11: Thanks .
Speaker #1: Yeah . Well thanks Ryan . With the I'll that , tell you you know , the solutions obviously start with , you know , bringing on more capacity , bringing on , you know , additional headcount as well as getting the technology fully deployed across the organization .
Speaker #1: In the meantime , you know , we're as I mentioned to you earlier , there are some strategies that we deployed in Q4 , including taking some of the focus that we typically have had on closed end seconds and moving that focus to the conventional recap efforts .
Speaker #1: And , you know , the recap efforts in general on the on the fulfillment side , you know , there were just continuing to add capacity .
Speaker #1: And , you know , as I said , we're getting we're getting some good , you know , inroads from from the technology move that we made .
David Spector: I think that, you know, generally it's something that, you know, combined with continuing to test the waters to try to drive up margins. Those are the strategies, you know, to increase recapture in a profitable, in the most profitable fashion, which is what, you know, I think is really, really important, that we want that, you know, we want the profitability, and we wanted to do it, you know, in the most, you know, I would say, productive way when combined with, you know, the actual production.
I think that, you know, generally it's something that, you know, combined with continuing to test the waters to try to drive up margins. Those are the strategies, you know, to increase recapture in a profitable, in the most profitable fashion, which is what, you know, I think is really, really important, that we want that, you know, we want the profitability, and we wanted to do it, you know, in the most, you know, I would say, productive way when combined with, you know, the actual production.
Speaker #1: I and I And think that , you know , generally it's it's something that , you know , combined with continuing to test the waters to try to drive up margins , those are those are the strategies to increase recapture in a profitable in the most profitable fashion , which is what I think is really , really important that we want that , you know , we want the profitability .
Speaker #1: we And wanted to do it . You know , in the most , you know , I would say productive way when combined with , you know , the actual production .
Operator: Your next question comes from Bose George with KBW. Your line is now open. Please go ahead.
Operator: Your next question comes from Bose George with KBW. Your line is now open. Please go ahead.
Speaker #3: Your next question comes from Bose George with KBW. Your line is now open. Please go ahead.
Bose George: Hey, guys, thanks for the follow-up. In terms of the, you know, the areas where you saw the increased prepayments, you know, where the offset on the margin wasn't, you know, wasn't as expected, was that more on the Ginnie Mae side versus the conventional, or is that - was that kind of across the board?
Bose George: Hey, guys, thanks for the follow-up. In terms of the, you know, the areas where you saw the increased prepayments, you know, where the offset on the margin wasn't, you know, wasn't as expected, was that more on the Ginnie Mae side versus the conventional, or is that - was that kind of across the board?
Speaker #12: Hey , guys . Thanks for the follow up . In terms of the , you know , the areas where you saw the the increased prepayments where the , you know , offset on the margin was .
Speaker #12: You know , was wasn't as expected . Was that more on the Ginnie Mae side versus a conventional or is that was that kind of across the board ?
David Spector: So look, I think it's, it's generally across the board. I will tell you, and your, you know, your question indicates you do understand this. There are loans with the varying servicing strips in Ginnie servicing, that obviously, when you have 69 basis points of servicing, your basis in the loan is much greater than when you have 19. And so, you know, with the proliferation of 69 basis point strips in the market over the last three years, you know, that's something that, you know, obviously is, you know, just provides a bit, a bit of a headwind, when you're running a balanced business model. But having said that, this is one of the reasons why we've brought the hedge ratios up, and this is something that, you know, we continue to focus on getting the recapture on those loans.
David Spector: So look, I think it's, it's generally across the board. I will tell you, and your, you know, your question indicates you do understand this. There are loans with the varying servicing strips in Ginnie servicing, that obviously, when you have 69 basis points of servicing, your basis in the loan is much greater than when you have 19. And so, you know, with the proliferation of 69 basis point strips in the market over the last three years, you know, that's something that, you know, obviously is, you know, just provides a bit, a bit of a headwind, when you're running a balanced business model. But having said that, this is one of the reasons why we've brought the hedge ratios up, and this is something that, you know, we continue to focus on getting the recapture on those loans.
Speaker #1: think So look , I it's it's generally across the board . I will tell you and I and your , your your question indicates you understand this .
Speaker #1: There are loans with varying servicing strips in Ginnie servicing that, obviously, when you have 69 basis points of servicing, your basis in the loan is much greater than when you have 19.
Speaker #1: And so , you know , with the proliferation of 69 basis point strips in the market over the last three years , you know , that's something that , you know , obviously is , you know , just provides a bit a bit of a headwind when you're running a balanced business model .
Speaker #1: But having said that, this is one of the reasons why we brought the hedge ratios up. And this is something that we continue to focus on—getting the recapture on those loans.
David Spector: But, you know, obviously, I think on the Ginnie side, you know, the fact that there's more 69 basis point strips in the portfolio just lends itself to this issue. On the conventional side, there, I think it's really on, as I mentioned, on the higher balance product. And there, you know, we're just seeing a lot of activity, a lot of competition from those who are buying trigger leads, which, by the way, that goes away in, you know, at the end of Q1. But that's something that, you know, the last hurrah for that activity. And so I think that added a little bit of play.
But, you know, obviously, I think on the Ginnie side, you know, the fact that there's more 69 basis point strips in the portfolio just lends itself to this issue. On the conventional side, there, I think it's really on, as I mentioned, on the higher balance product. And there, you know, we're just seeing a lot of activity, a lot of competition from those who are buying trigger leads, which, by the way, that goes away in, you know, at the end of Q1. But that's something that, you know, the last hurrah for that activity. And so I think that added a little bit of play.
Speaker #1: But , you know , obviously , I think on the on the Virginia side , you know , the fact that there's more 60 basis points , strips in the portfolio just lends itself to this issue on the conventional side , there .
Speaker #1: I think it's really , as I mentioned on the higher balance product , and there , you know , we're just seeing of a lot activity , a lot of competition from those who are buying trigger leads , which , by the way , that goes away .
Speaker #1: And , you know , at the end of Q1 , but that's something that , you know , the last hurrah for that activity .
Speaker #1: And so I think that that had a little bit of play when we looked at our runoff that we didn't recapture. At the top of the list was broker originators.
David Spector: When we looked at our runoff that we did recapture, at the top of the list was broker originators, and I generally think that they're gonna be hard pressed to, you know, you know, to duplicate that once this trigger leads comes into play.
When we looked at our runoff that we did recapture, at the top of the list was broker originators, and I generally think that they're gonna be hard pressed to, you know, you know, to duplicate that once this trigger leads comes into play.
Speaker #1: And I generally think that they're going to be hard pressed to , know , you you know , to duplicate that once this trigger law comes into play .
Operator: Your final question comes from Eric Hagan with BTIG. Your line is now open. Please go ahead.
Operator: Your final question comes from Eric Hagan with BTIG. Your line is now open. Please go ahead.
Speaker #3: question comes Your final from Eric Hargan with Btig . Your line is now open . Please go ahead .
Eric Hagan: Thank you for the follow-up. You know, the stock has done so well, but can you refresh us on how much room you have on your buyback authorization right now?
Eric Hagen: Thank you for the follow-up. You know, the stock has done so well, but can you refresh us on how much room you have on your buyback authorization right now?
Speaker #10: Thank you for the follow up . You know , the stock has done so well , but can you refresh us on how much room you have on your buyback authorization right now ?
David Spector: We have a little over $200 million of buyback available. That's, you know, I think it's, it's something that, as you know, historically, we've had no problems using, and it's something that, you know, I think it's something that in our culture of capital allocation and cost to capital and how we think about capital deployment, that's one of the tools that we have, and it's something that we utilized ever so briefly in Q3, and it's something that, you know, we look at on a regular basis.
David Spector: We have a little over $200 million of buyback available. That's, you know, I think it's, it's something that, as you know, historically, we've had no problems using, and it's something that, you know, I think it's something that in our culture of capital allocation and cost to capital and how we think about capital deployment, that's one of the tools that we have, and it's something that we utilized ever so briefly in Q3, and it's something that, you know, we look at on a regular basis.
Speaker #1: We have a little over 200 million of buyback available , and that's , you know , I think it's something that , as you know , historically , we've had no problems using and it's something that , you know , think I something it's that in our culture of capital allocation and cost of capital and how about we think capital deployment , that's one of the tools that we have .
Speaker #1: And it's something that we utilize ever so briefly in Q3. And it's something that, you know, we look at on a regular basis.
Operator: We have no further questions at this time. I'll now turn it back to David Spector for closing remarks.
Operator: We have no further questions at this time. I'll now turn it back to David Spector for closing remarks.
Speaker #3: We have no further questions at this time. I'll now turn it back to David Spector for closing remarks.
David Spector: I just wanna thank everyone for joining us on this call today. Great questions, good, robust discussion. If anyone has any follow-up questions, I'm available, Dan's available, Isaac and Kevin are available. Please don't hesitate to reach out. Thank you all for the time, and have a good day.
David Spector: I just wanna thank everyone for joining us on this call today. Great questions, good, robust discussion. If anyone has any follow-up questions, I'm available, Dan's available, Isaac and Kevin are available. Please don't hesitate to reach out. Thank you all for the time, and have a good day.
Speaker #1: I just want to everyone for joining thank us on this call today . Great questions . Good robust discussion . And if anyone has any follow up questions I'm available .
Speaker #1: Dan's available. Isaac and Kevin are available. Please don't hesitate to reach out. Thank you all for your time, and have a good day.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
