PennyMac Financial Services Inc. Q4 2025 Earnings Call - MSR Runoff Outpaced Production as Competition Blunted Margin Benefit

Operator: Good afternoon, and welcome to PennyMac Financial Services Inc.’s 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 PennyMac Financial’s website at pfsi.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.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Thank you, Operator. Good afternoon, and thank you to everyone for participating in our Fourth Quarter and Full Year 2025 Earnings Call. As shown on Slide 3, PFSI finished the year with a solid fourth quarter, generating net income of $107 million, or $1.97 per share. To refresh, in the third quarter, 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-low 20s, the sustained rally continued into the fourth quarter 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.

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. 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 the fourth quarter. 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.

Pretax 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 pretax 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 pretax income from the prior year. Turning to Slide 6, 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. 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 the fourth quarter, but with a mixed shift towards the higher margin direct lending channels. This is driving our expectations for production segment income in the first quarter to be higher. Channel margins remain at similar levels.

On Slide 7, 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 8. 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 fourth quarter. In completing this migration on time, excuse me, in the first quarter. In 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. 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 the 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. 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. 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 an 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 9, you can see how Vesta fits into our broader customer retention strategy. Our customer relationships are our most important asset, and we are driving strategies to retain those customers for life. 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’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. I will now turn it over to Dan, who will review the drivers of PFSI’s fourth quarter financial performance.

Dan Perotti, Chief Financial Officer, PennyMac Financial Services: 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, pretax 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. 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 the fourth quarter, up 10% from the prior quarter. 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 PFSI. In the fourth quarter, PMT purchased 17% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, both percentages unchanged from the prior quarter. In the first quarter of 2026, we expect PMT to purchase 15%-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. 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. 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 owned servicing, $227 billion was subserviced for PMT, and $12 billion was subserviced 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 pretax income of $37 million. Excluding valuation-related changes, pretax 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 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. Custodial funds managed for PFSI’s own 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 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 the reintroduction of FHA’s trial payment plans, extended modification timelines, and delayed redeliveries into future quarters. Similar to the prior quarter, we saw the operating and gap 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. 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 hedge ratio going forward.

Our hedge ratio is currently near 100%, up from 85%-90% last quarter. 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. PFSI 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 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. 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?

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 into 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.

Analyst: Hey, thank you. Good evening.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Hey, Jerry.

Analyst: So, I guess to start, you guys have kind of talked about 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 obviously to plan for kind of a moment like this. So maybe kind of just talk about what went wrong. And then on a go-forward basis, maybe just talk about what you’re doing to kind of address the issue and your level of confidence.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Yep. So thanks for the question. So 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 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 had 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. And so we pivoted throughout the quarter and 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’re adding even more capacity to not just there’s a we had capacity in place and we were continuing to build capacity, but these rallies, these flash rallies are so robust that we have to have capacity in place to deal with a 50-75 basis point rally in less than a week. And so we’re just continuing to add more capacity. We also 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 I think that 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 this is one of the reasons why we expect to get to mid- to high mid-teen ROEs by the middle of the year. And I just think that you’re going to continue to see us move into that direction. Got it. That’s helpful. Maybe just a little bit more on the ROE guide, a little double digits to kind of mid- to high teens. Any more color on kind of what’s contemplated in that expansion? Maybe just some more color on that, please. Thank you. Yeah. So look, I think, remember, these forecasts that we give are based on a point in time. And so first of all, we expect an origination market to grow between $2.3-$2.4 trillion in the year. Rates, obviously, if rates go up, that will change.

We expect to grow production in Consumer Direct 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 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. We expect margins to remain at levels to those we saw in the fourth quarter. And so this is, there could be some; in the fourth quarter, we did see a little margin compression in brokers as the top two participants were very aggressive in a race to be the number one loan producer. But I think we’re going to stay disciplined.

But I think what we’re not factoring in this, which is 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 the fourth quarter. And I expect that to pretty much be the story. There are some continued efficiency gains in servicing with pretax income 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 and TPO. And there are some additional levers outside of this that could drive it higher.

But I generally believe that we’ve mapped out, and I have the confidence that we can get back to the mid- to high-operating ROEs. It’s just it’s not going to be at the pace that perhaps we’d all would love. Great. Thanks, Robert. Color. Thanks, Terry.

Operator: Your next question comes from Mark DeVries of Deutsche Bank. Your line is open. You may go ahead.

Analyst: Yeah, thanks. David, I think you indicated that the prepayments you saw in your servicing book were even faster than 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 you kind of alluded to?

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: So yeah, hey.

Analyst: I’m sorry for interrupting. Did you want to continue?

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: 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 4Q? In the fourth quarter, yes.

Analyst: Yep.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: So let me just point out that the market generally 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 we’ve heard it throughout the street and speaking to them. And this is something that has been, I think, kind of a you’ve seen it throughout the market. I think that in terms of where we’re seeing it, I generally will tell you everywhere. There is probably a little bit more it’s a little bit more competitive on the higher balance loans, obviously, because there’s just that’s generally where we see brokers focusing on, as well as some of our correspondents. Prepayment speeds on lower balance loans, while fast, are a little bit slower versus the comparable high balance. On the VA Earls, it’s pretty competitive.

But we’re getting the expected market share there. The biggest issue, from my perspective, is you’re not seeing margin expansion. And that’s something that we’re going to, of course, you know us really well. In 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. But 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 have thought given the rally.

Analyst: Okay, got it. And are you seeing some disparate margins across all the channels in purchase versus refi? Or was it refi that really was under pressure? And also, any thoughts on 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?

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: I think that given the fact that everyone is stretched on capacity, we’re seeing typically it’s on both purchase and refi that I’m not seeing one necessarily differentiation. But I think we’re focused on in our consumer direct channel, we have a purchase team that we continue to focus on purchase activity. On the refi side, one of the strategies we put in place is we on the closed-end seconds, 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. But I generally think that there’s a lot, everyone’s going after the loans.

Operator: The next question is from Bose George with KBW. Your line is now open. You may go ahead.

Analyst: Good. Hey, you guys. Good afternoon. Yeah, 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 pick up and margins pick up because of capacity constraints? And now with technology, is it a scenario where people can run with excess capacity so you don’t see that offset through runoffs?

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: 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 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 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. And so this is why I think that one of the things that 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 expenses come down, I would expect the revenue is the gross margin, but I would expect the net income per loan to go up ultimately. And so that’s something that is something 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 volumes have been up, margins have been down. And I generally think it’s just the fact that people were ready for rates to decline in this initial decline. If rates were to decline 7,500 basis points, you definitely would see margin expansion. There’s just no doubt about it.

Analyst: Sure. Okay, great. That’s helpful. Thanks. And then in terms of the competition in the different channels, in the correspondent channel, was it really driven by the GSE cash windows, or how about sort of other participants?

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Yeah, look, I think on the conventional side, it was generally the cash windows. And I think that’s going to be the story for 2026. I think that with the announcement coming out of Washington, D.C., the GSEs are going to be very active. And so we have to 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 we’re just not going to be focused on volume and share. I think that on the government side, there it’s we had a really good December. I would say in October, November, we saw some of the other market participants get very aggressive. And so our market discipline there just caused us to really just wait for the market to come our way.

In fact, as I said, in December, we had a really good December.

Operator: Your next question comes from Doug Harter with UBS. Your line is now open. Go ahead.

Analyst: Thanks. Thanks. As you were talking about the benefits from Vesta, do you envision that of actually taking costs out of the origination business or just continuing to build capacity and, as volume comes back, lowering the cost per loan?

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: The answer is both. Okay, I will tell you, first off, is 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 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.

I think that’s something that I’m really looking forward to sharing with you all as it gets deployed.

Analyst: Great. Thank you.

Operator: Your next question comes from Trevor Cranston with Citizens JMP. Your line is now open.

Analyst: Hi.

Operator: Go ahead.

Analyst: All right. Thanks. Follow-up on some of the earlier questions. I guess as we think forward for this year, if we were to see an additional leg down in mortgage rates, whether it’s driven by reduction in G-fees 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? 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, Chairman and Chief Executive Officer, PennyMac Financial Services: Look, there’s no one driving for more capacity in this company more so than me. And so I will tell you that we want to have enough capacity to be able to withstand a ferocious rally. 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 LOs to speak to customers. But at the same time, I expect to get more and more capacity benefits coming out of our technology. And it is my stated goal to not get it to be in this position where we’re saying to you that we had amortization that exceeded the recapture necessary to balance it. And that’s something that we are going to continue to perfect. And it’s not like aspirational.

It’s something that’s going to take place this year, and it’s going to be achieved long before the end of the year. So I think that we’re going to be in a position to be able to execute on a rally.

Dan Perotti, Chief Financial Officer, PennyMac Financial Services: The other thing that I’d add is that we talked about it a little bit earlier, is that we continue to increase our hedge ratio as well. So as or if interest rates decline further from here, we have even greater protection from our financial hedges that we put into place in our hedging discipline.

Analyst: Got it. Okay. And I guess as a second part to that question, can you maybe talk about how you’re thinking about 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?

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: 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. And the $200 billion number is a big number, but that’s not to say it couldn’t get bigger. I think that as it pertains to loan-level price adjustments, between the capital rule and other rules that they have, changing those would take some time. And so I generally think that they’re going to continue to focus on keeping mortgage spreads tight to treasuries, and they’re going to continue to try to jawbone rates down. But look, we manage the company to a range of outcomes.

And so I generally believe, of course, if G-fees come down, that’s better, and we’ll have the capacity in place to take advantage of that. And likewise, at times we hear loan-level price adjustments are going to be going up. And that speaks to the work we’ve done to distribute close to 15% of our agency collateral outside of the agencies to insurance companies and home loan investors. And so managing to the range of outcomes and continuing to build and enhance the customer journey is something that we’ll be able to react to.

Analyst: Got it. Okay. That’s helpful. Thank you.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Thanks, Trevor.

Operator: Your next question comes from the line of Crispin Love with Piper Sandler. Your line is now open. Please go ahead.

Analyst: Thanks. Appreciate you taking my question. Can you talk a little bit about first-quarter activity thus far, what that means for near-term ROEs? Just yet, spreads tight in mortgage rates got pretty close to 6%. Are you experiencing an episodic rate pickup in refis? 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 ROEs 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.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Yeah. So 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 kind of go back to where they were in December. On January, I think will be a little bit slower. And so I think one of the things I’m looking at is our recapture. And our recapture numbers are going up. Of course, I want more. Everyone wants more in the organization. And that kind of speaks to the ramp. But it’s something that we’re seeing. And margins are generally holding in. And so I think that that’s something that I really am pleased to see.

I generally think in TPO, we saw a hyper-competitive market in Q4 that I believe is starting to. We’re getting a little bit of rational pricing coming into that. 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.

Dan Perotti, Chief Financial Officer, PennyMac Financial Services: 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 continued build of capacity and so forth, we are expecting basically a ramp through the year consistent with the guidance that we gave during the prepared remarks. 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.

Analyst: 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? It seems that 1Q should be similar to 4Q. 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 now, 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.

Dan Perotti, Chief Financial Officer, PennyMac Financial Services: 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. And also as we move through the year, as you have the sort of dynamics, given that we did see this initial responsiveness, and there will be a little bit of a pullback in terms of our responsiveness at these levels 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, in Q1, and similarly as we move through the year.

With respect to recapture, also expect incremental gains consistent 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.

Analyst: Thanks. Appreciate your technical questions.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Thanks, Crispin.

Operator: Your next question comes from Shanna Chee with Barclays. Your line is now open. Please go ahead.

Dan Perotti, Chief Financial Officer, PennyMac Financial Services: 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. 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 delinquency substantially below the industry level. And it feels like quite a jump there. Any context or color there?

Sorry, we weren’t able to hear your question very clearly, but I know that it was on delinquencies and specifically FHA delinquencies. So we do see we do see delinquencies increase seasonally in the fourth quarter. If we look at our overall delinquency profile or our overall delinquencies for our book, increased marginally year-over-year, had a similar sort of slope in terms of delinquencies through the year. Overall, with respect to FHA delinquencies, as we mentioned 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. Really what that is 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.

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. We also saw that impact our excuse me, impact our revenue from EBO redeliveries during the quarter. That went down by about a third from last quarter. Again, we expect that to be 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 those folks move through the trial and receive those modifications and come back to current.

Okay. Thank you. And then I know you guys mentioned your hedge ratio is now around 100%, and you moved it up from last quarter. I think there has been a bit of rate volatility in 1Q, and we had heard that that could cause some basis hedging issues so far in 1Q. So just any color on the rate moves and if you’ve seen any impacts on your hedging strategy from that.

Overall, during the first quarter thus far, as you said, there has been specifically some basis movements really related to the announcements around the GSE buying. 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 a slight impact, but not anything substantial.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: The hedge performed really well in the fourth quarter.

Dan Perotti, Chief Financial Officer, PennyMac Financial Services: Yes. And the third quarter.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: 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.

Operator: Your next question comes from Eric Hagen with BTIG. Your line is now open. Please go ahead.

Analyst: Okay. Thanks. Good afternoon. A lot of good discussion here. I think I just have one. 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 if prepayment speeds are picking up, right? And if the macro backdrop is for faster speeds, 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?

Dan Perotti, Chief Financial Officer, PennyMac Financial Services: I mean, so we generally look at our overall debt with respect to the balance sheet. The main lens that we look at that through is our Non-Funding Debt to Equity ratio, which we’ve maintained around 1.5 times 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, notwithstanding runoff 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 additional debt, including unsecured debt, as we move forward. 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 mentioned in the prepared remarks. And so we do think that there is potential for us to issue additional unsecured debt as we move through 2026 and beyond, but will be related to what the build is, 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.

Analyst: Hey, guys. Thanks for the question. Most of mine have been answered. I just want to touch back on recapture. Sounds like it’s going to be a theme here. So you’ve talked about investments you’re making in AI, other technologies to improve. And then you also, in the back 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.

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Yeah. Well, thanks, Ryan. Look, I’ll tell you that the solutions obviously start with bringing on more capacity, bringing on additional headcount, as well as getting the technology fully deployed across the organization. In the meantime, 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 and the recap efforts in general. On the fulfillment side, there, we’re just continuing to add capacity. And as I said, we’re getting some good inroads from the technology move that we made.

I think that generally, it’s something that, combined with continuing to test the waters to try to drive up margins, 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 we want the profitability, and we wanted to do it in the most, I would say, productive way when combined with the actual production.

Operator: Your next question comes from Bose George with KBW. Your line is now open. Please go ahead.

Analyst: Hey, guys. Thanks for the follow-up. In terms of the areas where you saw the increased prepayments where the offset on the margin wasn’t as expected, was that more on the Ginnie Mae side versus the conventional, or was that kind of across the board?

David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: So look, I think it’s generally across the board. I will tell you, and your question indicates you 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 with the proliferation of 69 basis point strips in the market over the last 3 years, that’s something that obviously just provides 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 brought the hedge ratios up. And this is something that we continue to focus on getting the recapture on those loans. But obviously, I think on the Ginnie side, 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, as I mentioned, on the higher balance product. And there 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 at the end of Q1. But that’s something that is a last hurrah for that activity. And so I think 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. And I generally think that they’re going to be hard-pressed to duplicate that once this trigger law comes into play.

Operator: Your final question comes from Eric Hagen with BTIG. Your line is now open. Please go ahead.

Analyst: Thank you for the follow-up. 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, Chairman and Chief Executive Officer, PennyMac Financial Services: We have a little over $200 million of buyback available. And I think it’s something that, as you know, historically, we’ve had no problems using. And it’s something that I think in our culture of capital allocation and cost of 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 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.

I just want to 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.

This concludes today’s call. Thank you for attending. You may now disconnect.