Q2 2026 PennyMac Financial Services Inc Earnings Call

July 29, 2026

Speaker #1: This is Inc.'s second quarter 2026 earnings call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press *1 to raise your hand.

Speaker #1: To withdraw your question, press *1 again. Additional earnings materials including presentation slides that will be referred to in this call, as well as an Excel file with supplemental information, are available on PennyMac Financial's website.

Speaker #1: At P-F-S-I dot PennyMac dot 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.

Speaker #1: Good afternoon. And welcome to PennyMac Financial Services, Inc.'s second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session.

Speaker #1: As well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. I'd now like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial Officer.

Speaker #1: If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. Additional earnings materials including presentation slides that will be referred to in this call, as well as an Excel file with supplemental information, are available on PennyMac Financial's website at pfsi dot pennymac dot com.

Speaker #1: Please go ahead.

Speaker #2: Thank you, Operator. Good afternoon, and thank you to everyone for participating in our second quarter 2026 earnings call. As shown on slide 3, PennyMac Financial generated net income of $22 million in the second quarter, or $41 in earnings per diluted share, representing a 2% annualized return on equity.

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 2 of the earnings presentation, that could cause the company's actual results to differ materially.

Speaker #2: While interest rate volatility during the quarter created non-cash MSR valuation headwinds that impacted our GAAP results, our underlying adjusted earnings per share came in at $1.39, or a 7% annualized adjusted return on equity.

Speaker #1: As well as non-GAAP measures that equivalent in the earnings materials. I'd now like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial Officer.

Speaker #2: Although our operational execution remained solid, these results fell short of our expectations as interest rates increased and origination demand declined. To address these rate headwinds, we have already taken proactive steps to align our cost structure with current market conditions.

Speaker #1: Please go ahead.

Speaker #2: And the operational capabilities provided by recent enhancements to our technology platform. Our results were also impacted by our current funding of major technology initiatives in AI and automation, that will structurally lower our cost to produce and cost to service while enhancing the customer experience and expanding our origination servicing capacity.

Speaker #2: At the same time, I'm particularly encouraged by the strong underlying operational momentum across our platform, highlighted by the meaningful increase in our recapture rates.

Speaker #2: Turning to slide 4, let's review several key business updates. First, the transaction to our new consumer direct loan origination system has helped to facilitate our rapid deployment and development of process-automating AI agents.

Speaker #2: Another example of our technology transformation is the recent launch of our proprietary natural language virtual agent, or NLVA, which handles 24/7 conversational voice interactions across both inbound and outbound customer calls.

Speaker #2: And the operational capabilities provided by recent enhancements to our technology platform. Our results were also impacted by our current funding of major technology initiatives in AI and automation that will structurally lower our cost to produce and cost to service while enhancing the customer experience and expanding our origination servicing capacity.

Speaker #2: This technology deployment is already directly benefiting customer engagement and retention. Conventional first-lean refinance recapture rates increased 7 percentage points from the prior quarter to 29%.

Speaker #2: At the same time, I'm particularly encouraged by the strong underlying operational momentum across our platform, highlighted by the meaningful increase in our recapture 4, let's review several key business updates.

Speaker #2: While government first-lean refinance recapture rates increased 9 percentage points to 59%. Third, we continue to make excellent progress toward onboarding similar subservicing portfolios. With the transaction on track to close in the fourth quarter.

Speaker #2: First, the transaction to our new consumer direct loan origination system has helped to facilitate our rapid deployment and development of process-automating AI agents. Another example of our technology transformation is the recent launch of our proprietary natural language virtual agent, or NLVA, which handles 24/7 conversational voice interactions across both inbound and outbound customer calls.

Speaker #2: And finally, we expanded our strategic partnership with Amazon Web Services to further bolster our transformation as an AI-driven mortgage technology leader. Turning to slide 5, I want to address our financial outlook and the steps we are taking to right-size our cost structure.

Speaker #2: With a smaller projected origination market due to higher interest rates, we expect adjusted ROEs to remain in the high single digits through 2026 as we reduce our expense base.

Speaker #2: This technology deployment is already directly benefiting customer engagement and retention. Conventional first-lien refinance recapture rates increased 7 percentage points from the prior quarter to 29%.

Speaker #2: Earlier this month, we took targeted actions to reduce our production footprint and adjust staffing levels to better align with the smaller market. And because of our investments in technology, we are able to execute these expense reductions while preserving operational capacity when mortgage demand increases.

Speaker #2: While government first-lean refinance recapture rates increased 9 percentage points to 59%. Third, we continue to make excellent progress toward onboarding similar sub-servicing portfolios. With the transaction on track to close in the fourth quarter.

Speaker #2: With exciting new technology fully deployed in our consumer direct channel, and our AI agents expanding rapidly, we are laying the foundation for unprecedented operational capacity and long-term ROE expansion.

Speaker #2: Turning to slide 6, while our near-term outlook reflects high single-digit adjusted ROEs through the back half of this year, we see a well-defined and visible path back to mid-teens ROEs.

Speaker #2: With the smaller projected origination market due to higher interest rates, we expect adjusted ROEs to remain in the high single digits through 2026 as we reduce our expense base.

Speaker #2: The cost realignments we executed this month are expected to generate approximately $60 million of annualized cost savings, which will begin to be realized in the third quarter.

Speaker #2: We believe expansion in our ROEs will be driven by the structural operating leverage we are creating across the enterprise. Our proprietary AI agents and workflow automation are permanently lowering both our cost to produce and cost to service, expanding our operating margins without adding fixed overhead.

Speaker #2: Our trajectory towards higher returns is also based on the operational momentum we are building today. With continued growth in broker direct and in consumer direct, with a meaningful increase in our recapture rates positions us to capture upside as the origination market normalizes.

Speaker #2: And while we are currently running at a higher expense base to fund our tech transformation, these technology expenses have begun to decline and we expect they will continue trending lower.

Speaker #2: The cost realignments we executed this month are expected to generate approximately $60 million of annualized cost savings. Which will begin to be realized in the third quarter.

Speaker #2: As we pair this technology foundation with the capital lifescale of similar subservicing portfolio in the coming months, we expect to realize significant operating leverage.

Speaker #2: Slide 7 highlights the opportunity in our consumer direct channel if interest rates decline as well as our first-lean refinance recapture rates over the five most recent quarters.

Speaker #2: Expanding our operating margins without adding fixed overhead. Our trajectory towards higher returns is also based on the operational momentum we are building today. With continued growth in broker direct and in consumer direct, we're the meaningful increase in our recapture rates positions us to capture upside as the origination market normalizes.

Speaker #2: As of June 30th, we serviced a combined $343 billion in UPB of loans with note rates above 5%. Of which more than half had note rates above 6%.

Speaker #2: As you can see on the charts in the middle of the page, government refinance originations from our portfolio in the consumer direct channel have more than doubled from the second quarter of 2025 as our refinance recapture rates have grown to 59% from 44%.

Speaker #2: We are seeing even more success in conventional loans. Where volumes are up nearly threefold from levels reported in the second quarter of 2025. Driven by a significant improvement in recapture rates to 29% from 17%.

Speaker #2: As we pair this technology foundation with the capital lifescale of similar sub-servicing portfolio in the coming months, we expect to realize significant operating leverage.

Speaker #2: Slide 7 highlights the opportunity in our consumer direct channel if interest rates decline as well as our first-lean refinance recapture rates over the five most recent quarters.

Speaker #2: Given the size of our servicing portfolio, our technology foundation and our accelerating recapture trends, we feel a high level of conviction in our ability to execute on this opportunity as refinance demand grows.

Speaker #2: As of June 30th, we serviced a combined 343 billion dollars in UPB of loans with no rates above 5%. Of which more than half had no rates above 6%.

Speaker #2: Turning to slide 8, our servicing segment continues to demonstrate the power of scale combined with our advanced technology otherwise known as PLACE. According to the latest MBA study, PennyMac's direct servicing expense per loan was $89.2025, down 8% from 2024 and far below both the large IMB average of $133 and the overall industry average of $185.

Speaker #2: We are seeing even more success in conventional loans, where volumes are up nearly threefold from levels reported in the second quarter of 2025, driven by a significant improvement in recapture rates to 29% from 17%.

Speaker #2: And we've achieved these low costs despite our higher concentration of government loans, which are inherently more complex and costly to service. As you can see, our operating expenses remain extremely low at 4.5 basis points of average servicing UPB.

Speaker #2: The combination of our proven low cost to service and AI capabilities gives me confidence that we will continue to drive down unit costs and expand platform efficiencies as we prepare to onboard similar subservicing portfolio.

Speaker #2: Slide 9 details the transformative operational gains we are realizing in production. Consumer direct has facilitated a rapid implementation of process automated and AI agents.

Speaker #2: And we are now beginning the transition of that into our broker direct channel to deliver these same structural efficiencies and automation gains to our broker partners.

Speaker #2: Across our production workflows, we have mapped and standardized 150 discrete origination tasks. Today, approximately 25% of these tasks are being completed by an automated logic or AI agent, and we are targeting 80% by year-end 2027.

Speaker #2: This technology is delivering immediate measurable benefits. We have already seen a significant reduction in our processing cost to produce alone, and we are targeting an additional 20% or more by the end of the third quarter.

Speaker #2: Similarly, we've seen dramatic cycle time reductions of 40 to 80 percent across major loan programs specifically from application to conditional approval on files where our autonomous AI agents are deployed.

Speaker #2: Slide 9 details the transformative operational gains we are realizing in production. Consumer direct has facilitated a rapid implementation of process automated and AI agents.

Speaker #2: And we are now beginning the transition of this into our broker direct channel to deliver these same structural efficiencies and automation gains to our broker partners.

Speaker #2: Speed is a direct cost saver, and closing loans faster allows us to price more profitably through shorter lock windows. Drastically reduces fallout while delivering a best-in-class experience for our borrowers.

Speaker #2: And I believe we are still in the early stages of this transformation. As we scale AI automation, onboard similar's capital light subservicing portfolio, and capitalize on our consumer direct recapture momentum, we are establishing a permanent structural advantage that will compound our across our platform for years to come.

Speaker #2: This technology is delivering immediate measurable benefits. We have already seen a significant reduction in our processing cost to produce alone and we are targeting an additional 20% or more by the end of the third quarter.

Speaker #2: We have the right strategy to scale and the technology to navigate current market headwinds. While driving a clear return to mid-teens ROEs and delivering compelling long-term value for our stockholders.

Speaker #2: Similarly, we've seen dramatic cycle time reductions of 40% to 80% across major loan programs, specifically from application to conditional approval, on files where our autonomous AI agents are deployed.

Speaker #2: I will now turn it over to Dan, who will review the drivers of PFSI's second quarter financial performance.

Speaker #3: Thank you, David. PFSI reported net income of $22 million in the second quarter, or $41 cents in earnings per share. For an annualized ROE of 2%.

Speaker #2: Speed as a direct cost saver and closing loans faster allows us to price more profitably through shorter lock windows. Drastically reduces fallout while delivering a best-in-class experience for our borrowers.

Speaker #3: Adjusted net income was $74 million. Or $1.39 in adjusted earnings per share, for an annualized adjusted ROE of 7%. The 98 cent difference between our gap and adjusted EPS was driven by 77 million dollars of fair value declines on MSR's net of hedges and costs.

Speaker #2: And I believe we are still in the early stages of this transformation. As we scale AI automation, onboard Simular's capital-light sub-servicing portfolio, and capitalize on our consumer direct recapture momentum, we are establishing a permanent structural advantage that will compound across our platform for years to come. We have the strategy to scale and the technology to navigate current market headwinds while driving a clear return to mid-teens ROEs and delivering compelling long-term value for our stockholders.

Speaker #3: A $9 million valuation gain related to our minority interest investa, and $1 million of expenses related to our acquisition of similar subservicing business. PFSI's board of directors declared a second quarter common share dividend of 30 cents per share.

Speaker #3: On slides 11 and 12, beginning with our production segment, pre-tax income was $38 million. Down from $134 million in the prior quarter and $58 million in the second quarter of 2025.

Speaker #2: I will now turn it over to Dan who will review the drivers of PFSI's second quarter financial performance.

Speaker #3: Thank you, David. PFSI reported net income of $22 million in the second quarter, or $0.41 in earnings per share, for an annualized ROE of 2%.

Speaker #3: Total acquisition and origination volumes were $35 billion in unpaid principal balance. Down 6% from the prior quarter and 8% from the second quarter of last year.

Speaker #3: Of this, $32 billion was for PFSI's own account, and $3 billion was fee-based fulfillment activity for PMT. PennyMac maintained its leading position in correspondent lending.

Speaker #3: The revenue contribution from the channel was down $9 million from the prior quarter. Fallout adjusted lock volumes were down compared to previous periods due to higher rates and a highly competitive environment, which includes the GSTs.

Speaker #3: A $9 million valuation gain related to our minority interest investa and $1 million of expenses related to our acquisition of similar sub-servicing business. PFSI's board of directors declared a second quarter common share dividend of 30 cents per share.

Speaker #3: Correspondent margins were 29 basis points, up from 28 basis points in the prior quarter due to a shift in mix toward higher margin government loans.

Speaker #3: Under its fulfillment agreement, PMT retains the right to purchase all non-government correspondent loan production from PFSI. However, in June, PMT elected to stop acquiring agency-eligible conventional loans through correspondent production, but will continue acquiring 100% of all non-agency loans.

Speaker #3: On slides 11 and 12, beginning with our production segment, pre-tax income was $38 million. Down from $134 million in the prior quarter and $58 million in the second quarter of 2025.

Speaker #3: Total acquisition and origination volumes were $35 billion in unpaid principal balance, down 6% from the prior quarter and 8% from the second quarter of last year.

Speaker #3: In July, correspondent volumes were down versus the second quarter, versus second quarter levels. Reflecting our pricing discipline in a competitive environment and our continued focus on allocating capital to drive optimal returns.

Speaker #3: Of this, $32 billion was for PFSI's own account and $3 billion was fee-based fulfillment activity for PMT. PennyMac maintained its leading position in correspondent lending.

Speaker #3: In broker direct, we continue to see strong momentum despite increasing levels of competition. And the number of brokers approved to do business with us continues to grow.

Speaker #3: Reflecting brokers who are increasingly leveraging our distinct value proposition. Broker direct's revenue contribution was down $3 million from the prior quarter. Fallout adjusted lock volumes were down 8%, but were up 21% from the second quarter of 2025, driven by market share gains and a larger origination market.

Speaker #3: Correspondent margins were 29 basis points, up from 28 basis points in the prior quarter due to a shift in mix toward higher margin government loans.

Speaker #3: Margins increased to 104 basis points from 99 basis points in the prior quarter. Non-QM locks in our broker channel more than tripled from 515 million dollars in UPV, underscoring the positive reception and rapid market adoption of our expanding product menu.

Speaker #3: In July, correspondent volumes were down versus second quarter levels, reflecting our pricing discipline in a competitive environment and our continued focus on allocating capital to drive optimal returns.

Speaker #3: The revenue contribution from our consumer direct channel declined 36 million dollars from the prior quarter, as higher interest rates resulted in lower refinance demand.

Speaker #3: Fallout adjusted lock volumes were down 32% from the prior quarter. And margins were up to 317 basis points from 267 basis points in the prior quarter, reflecting an increase in closed-end second lien production as refinance volumes declined.

Speaker #3: In broker direct, we continue to see strong momentum despite increasing levels of competition. The number of brokers approved to do business with us continues to grow.

Speaker #3: Post-lock impacts across the channels resulted in a 23 million dollar pre-tax loss, compared to 13 million dollars of pre-tax income in the prior quarter.

Speaker #3: This 36 million dollar shift was driven by adverse market price changes on specialized pools and other cross-channel impacts. Production expenses net of loan origination expense increased 6% from the prior quarter due to increased capacity and funded unit volume in the consumer direct lending channel.

Speaker #3: Margins increased to 104 basis points from 99 basis points in the prior quarter. Non-QM locks in our broker channel more than tripled from the prior quarter to $515 million in UPV, underscoring the positive reception and rapid market adoption of our expanding product lending.

Speaker #3: As David mentioned, the cost realignments we executed in July are expected to be reflected in our third quarter results. Turning to the servicing segment, on slides 13 and 14, our total servicing portfolio UPB ended the quarter at 731 billion dollars, up 1% from the end of the prior quarter and 4% from June 30th, 2025, as production volumes more than offset runoff due to prepayments.

Speaker #3: The revenue contribution from our consumer direct channel declined $36 million from the prior quarter, as higher interest rates resulted in lower refinance demand.

Speaker #3: Fallout-adjusted lock volumes were down 32% from the prior quarter, and margins were up to 317 basis points from 267 basis points in the prior quarter, reflecting an increase in closed-end second lien production as refinance volumes declined.

Speaker #3: The servicing segment recorded pre-tax income of $22 million. Excluding valuation-related changes, pre-tax income was 99 million dollars, or $5.5 basis points of average servicing portfolio UPB.

Speaker #3: Post-lock impacts across the channels resulted in a 23 million dollar pre-tax loss, compared to 13 million dollars of pre-tax income in the prior quarter.

Speaker #3: Up from 57 million dollars, or 3.1 basis points in the prior quarter. Average custodial deposit balances increased 7% from seasonal lows in the prior quarter.

Speaker #3: Driving a 14 million dollar increase in earnings on custodial balances and deposits. Realized prepayment speeds were 11.6%, down from 13.7% in the prior quarter.

Speaker #3: Realization of cash flows declined 9% as prepayment speeds declined. Operating expenses in the quarter were 4.2 basis points of average servicing portfolio UPB, or 76 million dollars, both lower than prior quarters.

Speaker #3: Income from EBO activities was higher as buyout and redelivery volumes increased from the prior quarter. Including the provision for losses on active loans, the fair value of PFSI's MSR increased by 110 million dollars.

Speaker #3: The servicing segment recorded pre-tax income of 22 million dollars. Excluding valuation-related changes, pre-tax income was 99 million dollars, or 5 and a half basis points of average servicing portfolio UPB, up from 57 million dollars, or 3.1 basis points in the prior quarter.

Speaker #3: An increase of 96 million dollars was due to changes in market interest rates, and another 13 million dollars was due to other model and performance-related impacts.

Speaker #3: Hedge fair value losses, including principal-only bond accretion changes, were 135 million dollars. Hedge costs were 52 million dollars, up from 14 million dollars last quarter, reflecting elevated option pricing due to heightened interest rate volatility.

Speaker #3: Average custodial deposit balances increased 7% from seasonal lows in the prior quarter, driving a $14 million increase in earnings on custodial balances and deposits.

Speaker #3: Realized prepayment speeds were 11.6%, down from 13.7% in the prior quarter. Realization of cash flows declined 9% as prepayment speeds declined. Operating expenses in the quarter were 4.2 basis points of average servicing portfolio UPB, or 76 million dollars, both lower than prior quarters.

Speaker #3: While rate movements created some adverse impacts in May, our hedging strategy was highly effective for the remainder of the quarter. Our hedge ratio remains near 100% to proactively manage prepayment risk.

Speaker #3: Coming out of the quarter, hedge costs have moderated significantly, trending in the mid-single-digit millions of dollars. Maintaining a disciplined continuous hedge is central to how we manage risk.

Speaker #3: Rather than leaving our balance sheet exposed to directional rate impacts, we prioritize book value preservation to protect stockholder capital across all market environments. Corporate and other items recorded a pre-tax loss of 29 million dollars, down from 42 million dollars in the prior quarter, as the prior quarter's expenses included elevated marketing expense related to the Olympic and Paralympic Winter Games, PFSI recorded a provision for tax expense of 10 million dollars, resulting in an effective tax rate of 31%.

Speaker #3: An increase of $96 million was due to changes in market interest rates, and another $13 million was due to other model and performance-related impacts.

Speaker #3: Total debt-to-equity at quarter end was 3.6 times, down from 4 times at the end of the prior quarter, and non-funding debt-to-equity was 1.8 times, up slightly from the end of the prior quarter.

Speaker #3: The decrease in total leverage from the prior quarter was driven by a decline in funding debt, reflecting lower overall production. The increase in non-funding leverage from the prior quarter was driven by higher interest rates, which drove increased utilization of our MSR credit facilities.

Speaker #3: Coming out of the quarter, hedge costs have moderated significantly, trending in the mid-single-digit millions of dollars. Maintaining a disciplined, continuous hedge is central to how we manage risk.

Speaker #3: We expect these leverage ratios to remain near these levels as interest rates remain high. Finally, we ended the quarter with $4 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged.

Speaker #3: We'll now open it up for questions. Operator?

Speaker #1: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand.

Speaker #3: PFSI recorded a provision for tax expense of $10 million, resulting in an effective tax rate of 31%. Total debt-to-equity at quarter-end was 3.6 times, down from 4 times at the end of the prior quarter, and non-funding debt-to-equity was 1.8 times, up slightly from the end of the prior quarter.

Speaker #1: To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.

Speaker #1: If you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Doug Harter.

Speaker #1: With BTIG. Your line is open. Please go ahead.

Speaker #2: Thanks. And good afternoon. Just talk about how your balancing kind of trying to take costs out that you mentioned with also kind of being prepared if we ultimately do get a reversal in rates.

Speaker #3: We'll now open it up for questions. Operator?

Speaker #1: We will now begin the question and answer session. Please limit yourself to one question, and one follow-up. If you would like to ask a question, please press star 1 to raise your hand.

Speaker #2: To not kind of be caught short in capacity like you were late last year.

Speaker #3: Yeah. Hi, Doug. Thanks so much for the question. So look, as you know, we've always been disciplined in how we think about expenses and capacity and look, I think that one of the things that we did at the end of last year, and we talked about, was adding capacity in the event that the market did decline.

Speaker #1: To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.

Speaker #1: If you're muted device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Doug Harder. With BTIG.

Speaker #3: What's really exciting for me is that in the technology work that we've been doing on the new loan origination platform, we're creating that excess capacity.

Speaker #1: Your line is open. Please go ahead.

Speaker #3: And so there's it's going to lead to really a meaningful reduction in costs and really what the costs the cost reduction that we're talking about is $60 million annually.

Speaker #2: Thanks, and good afternoon. Could you talk about how you're balancing trying to take costs out, as you mentioned, with also being prepared in case we ultimately do get a reversal in rates?

Speaker #3: And it's really coming about as a result of one, rates being higher but also as we've gotten more and more confident with the technology we feel very comfortable and convicted that the excess capacity that we've brought on at the end of last year is no longer needed.

Speaker #2: To not kind of be caught short in capacity like you were, late last year.

Speaker #3: Yeah. Hi, Doug. Thanks so much for the question. So as you know, we've always been disciplined in how we think about expenses and capacity and look, I think that one of the things that we did at the end of last year, and we talked about, was adding capacity in the event that the market did decline.

Speaker #3: And the as we sit here today, that we've as we've talked about, there's a lot of work that we're doing to continue to chip away at that.

Speaker #3: What's really exciting for me is that in the technology work that we've been doing on the new loan origination platform, we're creating that excess capacity.

Speaker #3: But I think where also I think we've really shined these last few quarters is just to continued growth of recapture. And so when you look at the recapture rates that we're getting on both the government and the conventional servicing portfolios, they're very, very good.

Speaker #3: And so it's going to lead to a really meaningful reduction in costs, and really, the cost reduction that we're talking about is $60 million annually.

Speaker #3: And so I think I believe that as we get a normalized market, this work that we're doing, that we've done, is going to allow us to maintain the recapture levels as we get into a bigger market.

Speaker #3: And it's really coming about as a result of, one, rates being higher, but also, as we've gotten more and more confident with the technology, we feel very comfortable and convicted that the excess capacity that we brought on at the end of last year is no longer needed.

Speaker #2: Great. Appreciate that, David. And then just quickly, the ROE, as you kind of laid out the path back to mid-teens, does that require lower rates or do you think you can get there with the current rate environment?

Speaker #3: And as we sit here today, as we've talked about, there's a lot of work that we're doing to continue to chip away at that.

Speaker #3: Look, I think the path that we've laid out at this level and we're at very high levels of rates. Today I saw the 10 years at a I'm sorry, the 30 years at a 20-year high.

Speaker #3: And so at this level of rates, I would say that the at the path we've laid out is more weighted to an exit of 2027.

Speaker #3: Obviously, if rates were to decline that would accelerate getting there just getting there faster.

Speaker #3: And so, I think—I believe that as we get a normalized market, this work that we're doing, that we've done, is going to allow us to maintain the recapture levels as we get into a bigger market.

Speaker #2: Great. Thank you.

Speaker #1: Your next question. From the line of Mark DeVries, with Deutsche Bank. Your line is open. Please go ahead.

Speaker #2: Thank you. David, when you think about kind of getting to your objective of the drive to 65, could you just talk about how much of that is coming from added operating efficiency versus just scale and how much to send our kind of help get you there?

Speaker #3: But I think the path that we've laid out at this level we're at very high levels of rates. Today I saw the 10 years at a I'm sorry, the 30 years at a 20-year high.

Speaker #3: Look, as we look at the drive to 55, we're really focused on cutting actual expenses without really leaning into growing the denominator as you would talk about in terms of adding send loss.

Speaker #3: And so, at this level of rates, I would say that the path we've laid out is more weighted to an exit of 2027.

Speaker #3: Obviously, if rates were to decline, that would accelerate getting there—just getting there faster.

Speaker #3: There is a lot of AI agents being developed to be put into place for us to be able to drive down the costs. Obviously, with the scale in place, not just from send loss but from our own activity, that will accelerate to get down to 55.

Speaker #2: Great. Thank you.

Speaker #1: Your next question. From the line of Mark Devries, with Deutsche Bank. Your line is open. Please go ahead.

Speaker #3: But my feeling is is that there's a lot of deeper servicing integrations that need to take place. There's a lot of additional agents that need to be built.

Speaker #3: And I think from the team's standpoint, when we look at it, we look at it just in terms of the current the effect of the activity vis-à-vis the current expense structure.

Speaker #3: Because we as we look at the drive to 55, we're really focused on cutting actual expenses without really leaning into growing the denominator as you would talk about in terms of adding send loss.

Speaker #3: Not focusing necessarily on the scale itself. But as I said, the scale always helps.

Speaker #2: Okay. That's helpful. And then, Dan, I think you indicated that hedge costs have actually come down a lot since the end of the quarter.

Speaker #3: There are a lot of AI agents being developed to put into place for us to be able to drive down costs. Obviously, with scale in place, not just from send loss but from our own activity, that will accelerate getting down to 55.

Speaker #2: Although we've had another obviously big spike in rates and a lot of volatility. Could you just talk about how the hedge is performing so far quarter to date?

Speaker #4: So far, quarter to date, the hedge overall has been more stable than what we saw in the second quarter. And especially with the emphasis on hedge costs given what we saw in the second quarter, we've adjusted some of our practices in terms of readjusting our hedges.

Speaker #3: But my feeling is that there's a lot of deeper servicing integrations that need to take place. There are a lot of additional agents that need to be built.

Speaker #3: And I think from the team's standpoint, when we look at it, we look at it just in terms of the current the effect of the activity vis-à-vis the current expense structure.

Speaker #4: That was part of what contributed to our overall the overall cost during the quarter. Was given the volatility and the overall realized volatility during the quarter, and the impact that that has on the MSR.

Speaker #3: Not focusing necessarily on the scale itself, but as I said, the scale always helps.

Speaker #4: Adjusting fairly frequently, we've sort of calibrated our practices to minimize that the amount of impact that has. And that has been despite the fact that we've had a little bit of uptick of volatility here in the last couple of days has been beneficial.

Speaker #2: Okay. That's helpful. And then Dan, I think you indicated that hedge costs have actually come down a lot since the end of the quarter.

Speaker #2: Although we've had another obviously big spike in rates and a lot of volatility. Could you just talk about how the hedge is performing so far quarter to date?

Speaker #4: And we've been able to maintain lower run rate of hedge costs going here into the third quarter. So overall, tracking much better, especially on the hedge cost side than what we saw in the second quarter.

Speaker #3: So far quarter to date, the hedge overall has been more stable than what we saw in the second quarter. And especially with the emphasis on hedge costs given what we saw in the second quarter, we've adjusted some of our practices in terms of readjusting our hedges that was part of what contributed to our overall the overall cost during the quarter.

Speaker #2: Got it. Thank you.

Speaker #1: Your next question. Comes from the line of Crispin Love, with Piper Sandler. Your line is open. Please go ahead.

Speaker #3: We were given the volatility and the overall realized volatility during the quarter. And given the impact that has on the MSR adjusting fairly frequently, we’ve sort of calibrated our practices to minimize the amount of impact that has.

Speaker #5: Thank you. Good afternoon. Appreciate you taking my question. Just on the ROE outlook, how would you frame 2027 based on what you know today?

Speaker #5: Previously, you were expecting getting back to that low to mid-teens by the end of '26, but that's pushed out now. So would you expect ROEs to grind higher from the end of the year into 2027, so looking at a low to mid-double digits in '27?

Speaker #3: And that has been despite the fact that we've had a little bit of uptick of volatility here in the last couple of days has been beneficial.

Speaker #5: Or could there be a step function higher just based on the environment? Just curious on how you're thinking about this.

Speaker #3: And we've been able to maintain a lower run rate of hedge costs going here into the third quarter. So overall, tracking much better, especially on the hedge cost side, than what we saw in the second quarter.

Speaker #3: Yeah. Look, I think Crispin, you have it identified correctly. I think as we look at where we are in rates today, combined with the fact that we're going to be reducing expenses throughout the year, I view us leaving 2026 kind of in the lower part of that range call it high single digits to low double digits.

Speaker #2: Good. Thank you.

Speaker #1: Your next question comes from the line of Chris Benlough with Piper Sandler. Your line is open. Please go ahead.

Speaker #3: I generally think that throughout the year, '27, that's when you'll see the step up to the mid-teens level that we spoke about. I think there's going to be real benefit to some of the key initiatives we're working on in 2027, including things like getting our broker direct channel onto Vesta.

Speaker #4: Thank you. Good afternoon. I appreciate you taking my question. Just on the ROE outlook—how would you frame 2027, based on what you know today?

Speaker #4: Previously, you were expecting getting back to that low to mid-teens by the end of '26. But that's pushed out now. So would you expect ROEs to grind higher from the end of the year into 2027 so looking at a low to mid double digits in '27?

Speaker #3: That's going to be a key component that we should have them on by the middle of 2027. I think we'll begin the work in terms of transitioning send loss onto the servicing portfolio and achieving some of the efficiencies there.

Speaker #4: Or could there be a step function higher just based on the environment? Just curious how you're thinking about this.

Speaker #3: Yeah. Look, I think Chris, you have it identified correctly. I think as we look at where we are in rates today, combined with the fact that we're going to be reducing expenses throughout the year, I view us leaving 2026 kind of in the lower part of that range, call it high single digits to low double digits.

Speaker #3: And I think that we're going to continue to focus on driving down the cost to originate in our consumer direct channel. But I think that obviously as you're because everyone on the call is aware of it, the path to how quickly we get that, there is an interest rate component to that.

Speaker #3: But even without interest rates moving, I feel good about exiting '27 if these levels at the mid-teens levels that we talk about.

Speaker #3: I generally think that throughout the year, the '27, that's when you'll see the step up to the mid-teens level that we spoke about. I think there's going to be real benefit to some of the key initiatives we're working on in 2027, including things like getting our broker direct channel onto Vesta.

Speaker #5: All right. Great, David. I appreciate the color there. And then just on the broker channel, you discussed elevated competition looking in your deck, your market share over the past year or so is about 6%.

Speaker #5: Can you remind us of your targets here? Was it getting to 10% by the end of '26 first? Is that still attainable? Is there investment needed there that maybe now on hold just given the plans?

Speaker #5: And what would you need to do to get there? Thank you.

Speaker #3: And I think that we're going to continue to focus on driving down the cost to originate in our consumer direct channel. But I think that obviously as you're stepping on the call is aware of it, the path to how quickly we get that, there is an interest rate component to that.

Speaker #3: Yeah. So look, I think that our view in terms of share growth and broker direct or TPO is number one, we want to do it profitably.

Speaker #3: And we're being disciplined in how we approach that. Obviously, that part of the market, there's it's been a little bit it's been a little bit more volatile with some of the market participants.

Speaker #3: But even without interest rates moving, I feel good about exiting '27 at these levels, at the mid-teens levels that we talk about.

Speaker #3: I will tell you that given the work we're doing in terms of getting broker onto Vesta, I don't see us getting to that 10% market share by the end of '26.

Speaker #4: All right. Great, David. Appreciate the color there. And then just on the broker channel, you discussed elevated competition looking in your deck, your market share over the past year or so is about 6%.

Speaker #3: But I can tell you that the brokers I think are going to be really enthusiastic about what they're going to see when we get broker on there, in mid-'27.

Speaker #4: Can you remind us of your targets here? Was it getting to 10% by the end of '26 first? Is that still attainable? Is there investment needed there that maybe now on hold?

Speaker #3: So we don't want to do anything irrational or do anything that's not disciplined. And so that's how we're that's how we're thinking about the broker channel.

Speaker #4: Just given the plans and what would you need to do to get there? Thank you.

Speaker #5: Great. Thank you, David. Appreciate your questions.

Speaker #3: Yeah. So, look, I think that our view, in terms of share growth in broker direct or TPO, is, number one, we want to do it profitably.

Speaker #1: Your next question from the line of Terry Ma, with Barclays. Your line is open. Please go ahead.

Speaker #5: Hey. Thank you. Good evening. I guess maybe just on the ROE guide, is it still the target that high teens, low 20s is the kind of right normalized ROE for the business going forward?

Speaker #3: I will tell you that given the work we're doing in terms of getting broker onto Vesta, I don't see us getting to that 10% market share by the end of '26.

Speaker #5: And then as we kind of think about it, any reason why it can't be higher than that with all the enhanced efficiencies from tech investments that you're making?

Speaker #3: But I can tell you that the brokers I think are going to be really enthusiastic about what they're going to see when we get broker on there, in mid-'27.

Speaker #3: Yeah. So look, it is the mid the high teens to low 20s is a guiding principle of this company. And it will continue to be a guiding principle of this company.

Speaker #3: So we don't want to do anything irrational or do anything that's not disciplined. And so that's how we're—that's how we're thinking about the broker channel.

Speaker #3: I think that what we're in the midst of now is, one, we're at the higher rates; two, we're investing a lot in technology. And that's an investment for the long term to create a consistent high teens to low 20 operating company.

Speaker #4: Great. Thank you, David. I appreciate you taking the questions.

Speaker #1: Your next question, from the line of Terry Ma with Barclays. Your line is open. Please go ahead.

Speaker #3: And so I think that it's going to continue to grind up there. And I see that we are going to be one of a few winners because we can afford to make the investment in the technology and to build something clearly unique in the market.

Speaker #5: Hey, thank you. Good evening. I guess maybe just on the ROE guide—is it still the target that high teens, low 20s is the kind of right normalized ROE for the business going forward?

Speaker #3: And when you combine what we're doing on the production side to what we're doing on the servicing side, that's something to me that is truly, truly unique.

Speaker #5: And then as we kind of think about it, any reason why it can't be higher than that with all the enhanced efficiencies from tech investments that you're making?

Speaker #3: Our servicing technology is something that is, I think, served us really well. As you can as we talked about, we are the low-cost service server by a meaningful, meaningful amount.

Speaker #3: Yeah. So look, it is the mid the high teens to low 20s is a guiding principle of this company. And it will continue to be a guiding principle of this company.

Speaker #3: I think that what we're in the midst of now is, one, we're at the higher rates; two, we're investing a lot in technology. And that's an investment for the long term, to create a consistent high-teens to low-20 operating company.

Speaker #3: Industry parties see the low cost. They see the scale benefits. It doesn't go unnoticed. And I think as we think about continuing to drive down cost, I think we are really the only ones who can get down to $55 a loan.

Speaker #3: And that's, by the way, with a heavy government portfolio. And so what we're in the midst of right now is a perfect storm of negatively, I'm sorry, to where the fact that we are investing a lot in the future and in technology combined with the fact that we see rates at high levels, as it pertains to this cycle.

Speaker #3: And when you combine what we're doing on the production side to what we're doing on the servicing side, that's something to me that is truly, truly unique.

Speaker #3: And so I think that you're going to see a company coming out of this. I truly believe that we're going to live by the high teens to low 20 North Star that we've run this company on for the last 18 years.

Speaker #3: Our servicing technology is something that is, I think, served us really well as you can as we talked about, it's we are the low-cost servicer by a meaningful, meaningful amount.

Speaker #5: Got it. That's helpful. And then on a recapture rates, you guys show on slide 7. It's good to see the consistent improvement as you embark on this tech journey.

Speaker #3: Industry parties see the low cost. They see the scale benefits. It doesn't go unnoticed. And I think, as we think about continuing to drive down cost, we are really the only ones who can get down to $55 a loan.

Speaker #5: I guess, is there a target or a goal in mind that you have after you kind of run rate all these improvements? Just trying to figure out what the upside is.

Speaker #3: And that's, by the way, with a heavy government portfolio. And so what we're in the midst of right now is a perfect storm of negativity, I'm sorry, to where the fact that we are investing a lot in the future and in technology, combined with the fact that we see rates at high levels, as it pertains to this cycle.

Speaker #5: Thank you.

Speaker #3: Yeah. So look, the target for us is we want to recapture every possible loan that we can. And the work that the team is doing both operationally and analytically using AI is allowing us to meaningfully grow our recapture levels.

Speaker #3: And so I think that you're going to see a company coming out of this. I truly believe that we're going to live by the high teens to low 20s North Star that we've run this company on for the last 18 years.

Speaker #3: And I think that as we deploy the work investa to close loans faster, to close loans cheaper, those recapture rates are going to be growing even more.

Speaker #3: The idea that you can close a BA Earl in 14 days and the rest of the market is taking 34 days is a meaningful competitive advantage.

Speaker #5: Got it. That's helpful. And then on recapture rates, as you show on slide 7, it's good to see the consistent improvement as you embark on this tech journey.

Speaker #3: And that's something that we're guiding towards. And so I think it's more we're looking at it as ways to drive down the cost to originate, drive down the days to close, and then the investment in the technology and the consumer experience I believe will continue to see those recapture rates grow.

Speaker #5: I guess, is there a target or a goal in mind that you have after you kind of run rate all these improvements? Just trying to figure out what the upside is.

Speaker #5: Thank you.

Speaker #1: Your next question comes from the line of Bose George, with KBW. Your line is open. Please go ahead.

Speaker #3: And I think that as we deploy the work in Vesta to close loans faster, to close loans cheaper, those recapture rates are going to be growing even more.

Speaker #2: Hey, guys. Good afternoon. Your volume in the correspondence channel looked like it declined again or at least the share probably declined a little bit again.

Speaker #3: The idea that you can close a VA Earl in 14 days when the rest of the market is taking 34 days is a meaningful competitive advantage.

Speaker #2: Can you just talk about the competitive dynamics there? Is it still the cash window? Are there other factors? And then when we just think about the share, do you think it kind of stays at this level?

Speaker #3: And that's something that we're guiding towards. So I think we're looking at it more as ways to drive down the cost to originate and drive down the days to close.

Speaker #2: For the foreseeable future until something changes?

Speaker #3: Yeah. Look, I think that in correspondent, we have a combination of factors taking place. As you point out, we're seeing the GSEs continue to be aggressive and on some days they're even more aggressive.

Speaker #3: And then the investment in the technology and the consumer experience, I believe, will continue to see those recapture rates grow.

Speaker #3: Through the cash window. And so that's a meaningful change from even Q4 of last year. We are maintaining our pricing discipline. We have a very large servicing portfolio with a lot of loans that would become refinanceable in the event of an interest rate decline.

Speaker #1: Your next question comes from the line of Bose George with KBW. Your line is open. Please go ahead.

Speaker #2: Hey, guys. Good afternoon. Actually, your volume in the correspondence channel looked like it declined again, or at least the share probably declined a little bit again.

Speaker #3: And I think we want to maintain our dry powder should perhaps rates move higher and we need more leads or we want to do more activity.

Speaker #3: And likewise, I think that we want to do so at adhering to our margin discipline. I do think that there are market participants at the time to time that perhaps are being a bit irrational.

Speaker #2: For the foreseeable future, until something changes?

Speaker #3: But I wouldn't read too much into the correspondent decline. I think it's more again a combination of the GSEs and from time to time other participants.

Speaker #3: Through the cash window, and so that's a meaningful change from even Q4 of last year. We are maintaining our pricing discipline. We have a very large servicing portfolio, with a lot of loans that would become refinanciable in the event of an interest rate decline.

Speaker #3: But we're still the leaders in the space. And we'll continue to be the leaders in the space.

Speaker #2: Okay. It's helpful. Thanks. And then if you're just looking at the difference between the gap in operating results, I mean, is there something structural like maybe Genie May complexity, which just makes it harder to hedge that asset and are you comfortable that that gap will close on the mid-teens next year is both a gap and an operating ROE?

Speaker #3: And I think we want to maintain our dry powder should perhaps rates move higher. And we need more leads, or we want to do more activity.

Speaker #3: Yeah. Look, let me talk about the results and the hedge and where we sit today. As everyone knows, the hedge, we have in place PRODEX, protects MSR values against interest rate moves.

Speaker #3: And likewise, I think that we want to do so while adhering to our margin discipline. I do think that there are market participants, from time to time, that perhaps are being a bit irrational.

Speaker #3: And I think and I know in this quarter we did that. The MSR rose by 110 million and the hedge offset it as intended.

Speaker #3: But I wouldn't read too much into the correspondent decline. I think it's more, again, a combination of the GSEs and, from time to time, other participants.

Speaker #3: We had 135 million dollar loss on rate moves. What we had was 52 million dollars of hedge costs. And so that's what so those two components are what resulted in our 77 million dollar loss.

Speaker #3: But we're still the leaders in the space, and we'll continue to be the leaders in the space.

Speaker #3: Putting aside the 52 million dollars of hedge costs for a minute, the underlying protection worked well. And rather than an intentional attempt to perhaps hedge out sell-off gains or this was driven by a somewhat conservative positioning for an interest rate rally, that ultimately didn't materialize, which naturally neutralized our sensitivity as rates moved higher.

Speaker #2: Okay. It's helpful. Thanks. And then actually, just looking at the difference between the gap and operating results, I mean, is there something structural like maybe Jenny May complexity, which just makes it harder to hedge that asset and you're comfortable that that gap will close in the mid-teens next year?

Speaker #2: Is both a gap and an operating ROE?

Speaker #3: Yeah. Look, let me talk about the results and the hedge and where we sit today. As everyone knows, the hedge, we have in place PRODEX, protects MSR values against interest rate moves.

Speaker #3: And I say interest rate rally, not that we're making necessarily market calls. It's just we're running a hedge coverage ratio close to 100%. And so really what the net result really came down to this perfect storm and unusual volatility disconnect and really some specific headwinds.

Speaker #3: And I think and I know in this quarter we did that. The MSR rose by 110 million. And the hedge offset it as intended.

Speaker #3: And that was really a few things. One was volatility. In Q2, volatility traded in a tight 40 basis point range. Primarily on the geopolitical tension and the widening distribution of monetary policy outcomes.

Speaker #3: And we saw a sharp diversion between implied and realized volatility. As a matter of fact, in the second quarter, this was a quarter that the largest quarterly drop in short-dated implied volatility in 15 years where realized volatility didn't decline.

Speaker #3: And so that drove a loss on the option holdings that we have. And furthermore, as we had to rebalance as rates went up, the rebalancing costs were elevated.

Speaker #3: And I say interest rate rally not that we're making necessarily market calls. It's just we're running a hedge coverage ratio close to 100%. And so really what the net result really came down to this perfect storm and unusual volatility disconnect and really some specific headwinds.

Speaker #3: At the same time, we had this kind of weird phenomenon where agency MBS spreads widened as rates moved higher with further magnified our MSR's negative convexity.

Speaker #3: And to manage that, we had to reduce our positive carrying MBS holdings, which pushed hedge costs higher. And so really, I think what we've done is we've seen we've maintained our discipline.

Speaker #3: We're hedging the MSR. As Dan pointed out, hedge costs this quarter are down. These are the mid-single-digit millions. And we're keeping the book position for a wide range of rate and economic outcomes.

Speaker #3: And we saw a sharp divergence between implied and realized volatility. As a matter of fact, in the second quarter, this was a quarter that had the largest quarterly drop in short-dated implied volatility in 15 years, while realized volatility didn't decline.

Speaker #3: And I think the hedging story is one that is not going to be unique to us. And I think when the whenever when we see how everyone else has done, I think you're going to see that we actually did a very good job.

Speaker #3: And so, that drove a loss on the option holdings that we have. Furthermore, as we had to rebalance as rates went up, the rebalancing costs were elevated.

Speaker #3: And it was just the hedge costs that really in this perfect storm that led to the 77 million dollar loss.

Speaker #3: At the same time, we had this kind of weird phenomenon where agency MBS spreads widened as rates moved higher. It was further magnified our MSR's negative convexity.

Speaker #2: Okay. Great. Thanks a lot for the details.

Speaker #3: You bet.

Speaker #1: Your next question from the line of Don Fandetti with Wells Fargo. Your line is open. Please go ahead.

Speaker #3: And to manage that, we had to reduce our positive-carrying MBS holdings, which pushed hedge costs higher. And so, really, I think what we've done is we've shown we've maintained our discipline.

Speaker #2: All right. Can you talk about Q2 margins for broker and consumer direct if you kind of strip out some of the non-QM and second lien just for the directionally and where you think those could be going near term just given a smaller market?

Speaker #3: We're hedging the MSR. As Dan pointed out, hedge costs this quarter are down. These are in the mid-single-digit millions. And we're keeping the book positioned for a wide range of rate and economic outcomes.

Speaker #3: So look, I think that as we see in broker direct, margins have been pretty steady. I think we have broker direct margins running roughly 100 basis points.

Speaker #3: And I think that there's still from time to time, we see some pressures from other larger market participants. They were up in Q2 from 99 to 104.

Speaker #3: And it was just the hedge costs that really in this perfect storm that led to the 77 million dollar loss.

Speaker #2: Okay, great. Thanks a lot for the details.

Speaker #3: You bet.

Speaker #3: But I generally think that we're going to see rational pricing taking place. Obviously, the non-QM, as you well pointed out in jumbo margins, are higher.

Speaker #1: Your next question comes from the line of Don Fandetti with Wells Fargo. Your line is open. Please go ahead.

Speaker #2: Hi. Can you talk about Q2 margins for broker and consumer direct, if you kind of strip out some of the non-QM and second lien, just for the directionally, and where you think those could be going near term?

Speaker #3: And that leads to higher reported margins. But I would say generally speaking that the margin story in broker direct and as well as correspondent consumer direct are staying very steady.

Speaker #2: Just give a smaller market.

Speaker #3: So look, I think that as we see in broker direct, margins have been pretty steady. I think we have broker direct margins running roughly 100 basis points.

Speaker #2: Got it. And back to the ROE commentary, thanks for all the detail and you've covered a lot of angles. I guess I'm just trying to understand the sort of path to the increasing ROE, can you do that in this type of rate market, let's say the 10-year goes up a little bit, can you sort of still hit that upward slope through some of the efficiencies and things of that nature?

Speaker #3: And I think that there's still from time to time, we see some pressures from other larger market participants. They were up in Q2 from 99 to 104.

Speaker #3: I believe so. And I truly believe that. I think number one, you take, for example, the 60 million dollar cost reductions that we just announced, and look, there's going to be additional efficiencies that we're going to see both in our consumer direct channel and in our broker direct channels.

Speaker #3: But I generally think that we're going to see rational pricing taking place. Obviously, the non-QM, as you well pointed out and jumbo margins, are higher.

Speaker #3: We get broker direct onto Vesta. And so this is going to have a meaningful effect in terms of the cost to originate. I also believe that we're going to continue to grow share profitably in broker direct.

Speaker #2: Got it. And back to the ROE commentary, thanks for all the detail—you've covered a lot of angles. I guess I'm just trying to understand the sort of path to the increasing ROE. Can you do that in this type of rate market? Let's say the 10-year goes up a little bit. Can you still hit that upward slope through some of the efficiencies and things of that nature?

Speaker #3: And I think as we grow our servicing portfolio, you can't help but grow share a bit in the consumer direct channel while having a very being able to compete in a meaningful way and being the low-cost producer will allow us to grow profitability.

Speaker #3: In addition, I think there's I don't want to say that there's a finite amount of tech initiatives, but I will say is we have a lot of tech initiatives taking place at the moment.

Speaker #3: I believe so. And I truly believe that. I think, number one, you take, for example, the $60 million cost reductions that we just announced, and look, there's going to be additional efficiencies that we're going to see both in our consumer direct channel and in our broker direct channel as we get broker direct onto Vesta.

Speaker #3: And as we wind those down, of course, there will be others that arise but I think generally speaking, our tech spend is going to come down in a meaningful way not just from the number of tech initiatives, but also the cost to develop AI agents, the cost for developers to do their work is dramatically decreasing as they use AI tools like Claude Code, Cursor.

Speaker #3: And so, this is going to have a meaningful effect in terms of the cost to originate. I also believe that we're going to continue to grow share profitably in broker direct.

Speaker #3: And so I think you'll see tech expense coming down in a meaningful way. And then this is even before we start bringing on the benefits coming out of the seminar transaction.

Speaker #3: And that's going to have a meaningful effect. And what's exciting about that is it's capital life fee growth, which is an area of our company that has real potential to continue to grow.

Speaker #3: In addition, I think there's—I don't want to say that there's a finite amount of tech initiatives, but I will say we have a lot of tech initiatives taking place at the moment.

Speaker #3: Seminar is going to continue to add clients. We've been in the sub-servicing business for now four years. We added up a couple of clients ourselves this quarter.

Speaker #3: Obviously, it's going to come together as one platform. But I think we'll get real benefits there. And as we bring the seminar clients onto our platform, we're going to get the efficiencies that come from being a higher cost platform to a lower cost platform.

Speaker #4: And I think just to add on to that, in terms of in terms of a lot of these initiatives, as David mentioned, in particular in servicing, reducing the cost to service adding the equity life flows are not rate dependent and bringing down the technology.

Speaker #3: And so I think you'll see tech expense coming down in a meaningful way. And then this is even before we start bringing on the benefits coming out of the seminar transaction.

Speaker #3: And that's going to have a meaningful effect. What's exciting about that is it's capital-like fee growth, which is an area of our company that has real potential to continue to grow.

Speaker #4: Expense are not rate dependent. Are not rate dependent at all. Expanding our presence in the direct lending channels from the base that we are today is also not rate dependent, but we'll expand our overall earnings.

Speaker #3: Seminar is going to continue to add clients. We've been in the sub-servicing business for four years now. We added a couple of clients ourselves this quarter.

Speaker #4: And I'd say if you look at our historical operating ROEs going back to the first half of last year, where we were in the mid-teens returns, it's a we've shown that we can reach those levels even at these higher at these higher interest rate levels.

Speaker #3: Obviously, it's going to come together as one platform, but I think we'll get real benefits there. As we bring the seminar clients onto our platform, we're going to get the efficiencies that come from moving from a higher-cost platform to a lower-cost platform.

Speaker #4: We were at around the same level of rates at the beginning half of last year. And that's before we add some of these other additional drivers.

Speaker #4: And I think just to add on to that, in terms of a lot of these initiatives, as David mentioned, in particular in servicing, reducing the cost to service and adding the equity life flows, are not rate-dependent, and bringing down the technology.

Speaker #1: Your next question. Comes from the line of Trevor Cranston, with Citizens JMP. Your line is open. Please go ahead.

Speaker #4: Expenses are not rate-dependent. They are not rate-dependent at present in the direct lending channels from the base that we are today, which is also not rate-dependent, but we'll expand our overall earnings.

Speaker #2: All right. Thanks. One more question on the expense side of things. And I appreciate all the color you've given there and the expectation for near-term savings levels.

Speaker #2: I guess looking at slide 9, you have the target there for the year-end '27 of getting up to kind of 80% of the workflow automated.

Speaker #2: Is there a way to sort of translate that goal of moving from 25 to 80 percent into kind of a expense savings in terms of the cost to produce per loan sort of beyond the kind of 20% near-term target you guys have shown there on the top right?

Speaker #4: We were at around the same level of rates at the beginning half of last year. And that's before we add some of these other additional drivers.

Speaker #2: Thanks.

Speaker #3: I think that as we sit here today, I think the 25% is what I would call more low hanging fruit. We're seeing the expense reduction coming in about 25, 30 percent.

Speaker #1: Your next question comes from the line of Trevor Cranston with Citizens JMP. Your line is open. Please go ahead.

Speaker #2: Okay, thanks. One more question on the expense side of things, and I appreciate all the color you've given there and the expectation for near-term savings levels.

Speaker #3: I think it's that 80% number, I would be remiss if I had a ballpark number. I think, look, a lot of it is going to depend on the scale of the organization.

Speaker #2: I guess, looking at slide 9, you have the target there for year-end ’27 of getting up to kind of 80% of the workflow automated.

Speaker #3: And it's going to further I think depend on volumes to some degree. But suffice it to say that should come down. Look, the cost to originate should come down by more than 50%.

Speaker #2: Is there a way to sort of translate that goal of moving from 25 to 80 percent into an expense savings in terms of the cost to produce per loan, sort of beyond the 20% near-term target you guys have shown there on the top right?

Speaker #3: Okay. That's a given. Whether it's 60, 65, I don't I think that we'll have a better sense of that in the coming quarters.

Speaker #2: Got it. That makes sense. Okay. Thank you.

Speaker #2: Thanks.

Speaker #3: You know, I think that as we sit here today, I think the 25% is what I would call more low-hanging fruit. We're seeing the expense reduction coming in at about 25% to 30%.

Speaker #3: Thanks, Trevor. Good question.

Speaker #1: Your next question comes from the line of Kyle Joseph, with Stevens. Your line is open. Please go ahead.

Speaker #5: Hey. Good afternoon. Thanks for taking my questions. Just kind of wanted to refresh going over to the balance sheet. You guys have been drawing down a little bit more on your bank lines.

Speaker #3: I think it's that 80% number—I would be remiss if I gave a ballpark number. I think, look, a lot of it is going to depend on the scale of the organization.

Speaker #5: Looks like you're up to one and a half billion. Just kind of what's driving that? And then kind of refresh us how the balance sheet looks after when seminar closes.

Speaker #3: And it's going to further, I think, depend on volumes to some degree. But suffice it to say, that should come down. Look, the cost to originate should come down by more than 50%.

Speaker #3: Sure. So overall, as we mentioned in some of the commentary, as interest rates increase everything else being equal, we have a couple of impacts to the balance sheet.

Speaker #3: Okay, that's a given. Whether it's 60, 65—I don't—I think that we'll have a better sense of that in the coming quarters.

Speaker #3: Overall, as the production environment shrinks and production volumes decline a bit, our overall leverage our overall leverage declines. So it went from four times to 3.6 last quarter to 3.6 times this quarter.

Speaker #2: Got it. That makes sense. Okay, thank you.

Speaker #3: Thanks, Trevor. Good question.

Speaker #1: Your next question comes from the line of Kyle Joseph with Stevens. Your line is open. Please go ahead.

Speaker #3: We have a bit if you look at the non-funding leverage of sort of the opposite movement where as interest rates increase, that drives an increase in our overall MSR, MSR valuation, and a decline in our hedge.

Speaker #5: Hey, good afternoon. Thanks for taking my questions. I just wanted to refresh by going over to the balance sheet. You guys have been drawing down a little bit more on your bank lines.

Speaker #5: Looks like you're up to $1.5 billion. Just kind of what's driving that? And then can you refresh us on how the balance sheet looks after the Seminar closes?

Speaker #3: The decline in our hedge is generally leads to a margin call, which needs to be funded. And so we draw on our bank lines to fund those amounts that are driven by the increase in the MSR value and, of course, we have more collateral in terms of our MSR to draw against.

Speaker #3: Sure. So overall, as we've mentioned in some of the commentaries, as interest rates increase everything else being equal, we have a couple of impacts to the balance sheet.

Speaker #3: Overall, as the production environment shrinks and production volumes decline a bit, our overall leverage declines. So it went from four times in Q2 to 3.6 last quarter, and to 3.6 times this quarter.

Speaker #3: But it does lead to upward pressure in terms of our non-funding leverage ratio. So ticked up slightly from 1.7 to 1.8. But in the context of the overall balance sheet and leverage on the balance sheet, that decline and so we look at those two things in conjunction or in balance and are comfortable at the levels that we're at today and expect our overall leverage to remain in that area to the extent that overall to the extent that rates remain in this vicinity.

Speaker #3: We have a bit, if you look at the non-funding leverage of, sort of, the opposite movement, where as interest rates increase, that drives an increase in our overall MSR—MSR valuation—and a decline in our hedge.

Speaker #3: The decline in our hedge generally leads to a margin call, which needs to be funded. And so we draw on our bank lines to fund those amounts.

Speaker #3: In terms of the impacts of seminar, when we close the seminar transaction, versus tangible equity, we would expect a slight increase in terms of our terms of leverage given that the seminar transaction will include a bit of goodwill.

Speaker #3: That are driven by the increase in the MSR value, and, of course, we have more collateral in terms of our MSR to draw against.

Speaker #3: But it does lead to upward pressure in terms of our non-funding leverage ratio, so it ticked up slightly from 1.7 to 1.8. But in the context of the overall balance sheet, and leverage on the balance sheet, that declines.

Speaker #3: Goodwill and intangibles. So around 200, 230 to 240 million dollars of goodwill and intangibles, we would expect to recognize on the balance sheet as a in conjunction with the transaction.

Speaker #3: And so we look at those two things in conjunction or in balance in our comfortable at the levels that we're at today and expect our overall leverage to remain in that area to the extent that overall to the extent that rates remain in this vicinity.

Speaker #3: And so that's overall we'll have the effect looking at tangible equity of slightly increasing the reported leverage ratios. That, of course, will be offset by the increased the increased cash flow and earnings from the seminar transaction.

Speaker #3: In terms of the impacts of Seminar, when we close the Seminar transaction, versus tangible equity, we would expect a slight increase in our terms of leverage, given that the Seminar transaction will include a bit of goodwill.

Speaker #3: We'd expect that to both contribute positively to the ROE over time and also help to reduce the leverage ratios we move forward from that point in time.

Speaker #5: Got it. Really helpful. Thanks for taking my question.

Speaker #1: Your next question from the line of Ryan Shelley, with Bank of America. Your line is open. Please go ahead.

Speaker #3: A goodwill and intangibles. So around 200, 230 to 240 million dollars of goodwill and intangibles, we would expect to recognize on the balance sheet as a in conjunction with the transaction.

Speaker #6: Hey, guys. Thanks for the question. Number one, on seminar, there's a comment in here about expanding B2B relationships and potential for additional product offerings post-close there.

Speaker #6: Obviously, that hasn't closed yet, but could you just provide us any insight on potential areas you might like to expand with the capabilities of seminar?

Speaker #3: Hey, Ryan. Hey, Ryan. Can you speak up a bit?

Speaker #3: We'd expect that to both contribute positively to the ROE over time and also help to reduce the leverage ratios as we move forward from that point in time.

Speaker #6: Yes. Sorry. Is that better?

Speaker #3: Yeah.

Speaker #6: Yes. Sorry. Just I'll quickly recap. On the seminar, there's a comment in the deck around potential additional product offerings. Obviously, it's early. It hasn't closed yet.

Speaker #5: Got it. Really helpful. Thanks for taking my question.

Speaker #6: But could you just give us some color on what potential additional products you might like to build using the capabilities you get with seminar?

Speaker #1: Your next question from the line of Ryan Shelley with Bank of America. Your line is open. Please go ahead.

Speaker #3: Yeah. Look, I think that we have some ancillary businesses and title and appraisal that I think can lead to some additional ancillary income. I think that there's other things we can do vis-à-vis our technology to be able to offer technology solutions to reduce the cost to the hundred seminar clients that they're incurring because they have to do certain middle office work and other reconciliations that through AI and other tools we can help to reduce the cost.

Speaker #6: Hey, guys. Thanks for the question. Number one, on Seminar, there's a comment in here about expanding B2B relationships and the potential for additional product offerings post-close there.

Speaker #6: Obviously, that hasn't closed yet, but could you just provide us any insight on potential areas you might like to expand with the capabilities of Seminar?

Speaker #3: Hey, Ryan. Hey, Ryan, can you speak up a bit?

Speaker #6: Yes. Sorry. Is that better?

Speaker #3: Yeah.

Speaker #6: Yes, sorry. I'll just quickly recap. In the seminar, there's a comment in the deck around potential additional product offerings. Obviously, it's early—it hasn't closed yet.

Speaker #3: I do think that there's other product offerings that as we think about sub-servicing when we started sub-servicing, we thought of things that we can bring to our sub-servicing clients, including warehouse potential warehouse financing or servicing advanced financing.

Speaker #6: But could you just give us some color on what potential additional products you might like to build using the capabilities you get with Seminar?

Speaker #3: Yeah. Look, I think that we have some ancillary businesses in title and appraisal that I think can lead to some additional ancillary income. I think that there are other things we can do vis-à-vis our technology to be able to offer technology solutions to reduce the cost to the 100 Sema clients that they're incurring because they have to do certain middle-office work and other reconciliations that, through AI and other tools, we can help to reduce the cost.

Speaker #3: But that's down the road. There's a good amount of that available in the market today. But I think there is real opportunity to work with our business partners that we're going to have once we close the seminar transaction.

Speaker #6: Got it. Thank you. And then just one more quick one, if I may. So EBO loan volume was up. Sequentially, about 600 mill. Could you give us some color on how that's trended post-quarter and then just any color on if there's any particular drivers to call out there?

Speaker #3: I do think that there are other product offerings that, as we think about sub-servicing and when we started sub-servicing, we thought of things that we can bring to our sub-servicing clients, including potential warehouse financing or servicing advance financing.

Speaker #6: Thank you.

Speaker #3: Respect to EBO volume. Overall, EBO volume is as we're moving into the next quarter, we are seeing that slow, slightly what a couple of factors there.

Speaker #3: One, at higher levels of rates, the overall sort of modifications that can be done at market rates are slightly higher. And so somewhat similar to and the gains related to redelivery of that are potentially lower for lower level of rate, however you want to think about that.

Speaker #6: Got it, thank you. And then just one more quick one, if I may. So EBO loan volume was up sequentially, about $600 million. Can you give us some color on how that's trended post-quarter, and then just any color on if there's any particular drivers to call out there?

Speaker #3: And so that is a bit of a dampening effect in terms of the EBO gains and activity. We're also seeing a little bit of slowing in terms of modification volume driven by some of the changes in the FHA some of the changes that we previously discussed around FHA modifications.

Speaker #6: Thank you.

Speaker #3: With respect to EBO volume, overall, EBO volume, as we're moving into the next quarter, we are seeing that slow slightly. There are a couple of factors there.

Speaker #3: And the fact that they now require a trial payment and that they are there's lower ability to remodify loans also has a bit of a dampening effect in terms or we're expecting a bit of a dampening effect of modifications in EBOs as we go into the second half of the year.

Speaker #3: One, at higher levels of rates, the overall sort of modifications that can be done at market rates are slightly higher. And so, somewhat similarly, the gains related to redelivery of that are potentially lower for a lower level of rates, however you want to think about that.

Speaker #6: Thank you very much.

Speaker #1: There are no further questions at this time. I will now turn the call back to David Spector for closing remarks.

Speaker #3: And so, that is a bit of a dampening effect in terms of the EBO gains and activity. We're also seeing a little bit of slowing in terms of modification volume, driven by some of the changes in the FHA—some of the changes that we previously discussed around FHA modifications.

Speaker #3: I just want to take these last few ew minutes and thank you all for joining us and to remind you, if you have any additional questions please reach out to our investor relations team.

Speaker #3: And again, thank you so much for the time.

Speaker #3: And the fact that they now require a trial payment, and that there is lower ability to remodify loans, also has a bit of a dampening effect—in terms of, we're expecting a bit of a dampening effect—on modifications in EBOs as we go into the second half of the year.

Speaker #6: Thank you very much.

Speaker #1: There are no further questions at this time. I will now turn the call back to David Spector for closing remarks.

Speaker #3: I just want to take these last few minutes and thank you all for joining us, and to remind you—if you have any additional questions, please reach out to our Investor Relations team.

Speaker #3: And again, thank you so much for your time.

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