PennyMac Financial Services, Inc.

Good afternoon, and welcome to Panamac Financial Services Inc. Fourth Quarter 2024 Earnings Call. Additional earnings materials, including presentation slides that will be referred to in this call, are available on Panamac Financial's website at pfsi.panamac.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 two of the earnings presentation that could cause the company's actual results to differ materially, as well as stand gap measures that have been reconciled to their gap equivalent in the earnings materials. Now I'd like to introduce David Spector, Panama Financial's Chairman and Chief Executive Officer, and Dan Perotti, Panama Financial's Chief Financial Officer. You may begin.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our fourth quarter earnings call. For the fourth quarter, PFSI reported net income of $104 million, or diluted earnings per share of $1.95 for an annualized return on equity of 11%. Excluding the impact of fair value changes, PFSI produced an annualized operating ROE of 16%, driven by continued strength in our servicing business and a solid contribution from our production segment despite higher mortgage rates. In total, loan originations and acquisitions were $36 billion in unpaid principal balance, up 13% from the prior quarter and driving the continued growth of our servicing portfolio to $666 billion in unpaid principal balance with 2.6 million customers. Before I continue on, I would like to talk about a change that we are reporting our financial results and reporting segments. We took the opportunity to address our financial reporting for the evolution of our businesses and the way we manage them. As a result, we have modified our segment definitions. The principal change we made was to remove the corporate overhead allocations from our business segments to better evaluate the performance of our operating businesses. We also determined that our investment management business was not an operational segment, and as such, the related results are now consolidated into corporate and other items. Our two operating segments are now production and servicing, and we have included non-segment activities and activities related to our investment management business in corporate and other. Prior period amounts have been recast to conform these periods of presentation to the current period of presentation. And I encourage investors to view the Excel supplement posted on pfsi.pennymac.com for more detailed information. Now back to our results. The fourth quarter marked the end of a very successful year for PFSI, as you can see on slide four of our earnings presentation. We highlighted some of our key achievements in 2024. which demonstrates the earnings power of our balanced business model and the significant gains in operating leverage we achieved. In the production segment, total acquisition and origination volumes were $116 billion in UPB, up 17% from 2023, driven by a nearly 70% increase in originations from the direct lending channel. Production segment revenues were up 47% from 2023, and despite the large mix shift, expenses remain contained, up only 13% from 2023. Production segment pre-tax income in 2024 was $311 million, up from $116 million in 2023. including a significantly higher contribution in the third quarter when rates decline, highlighting our ability to rapidly address recapture opportunities and increase demand for refinances when mortgage rates decline. Our large servicing business provides ongoing revenue and cash flow contributions in this higher rate environment and continues to provide the foundation for our strong financial performance. The unpaid principal balance of our servicing portfolio increased 10% from the prior year end, as production volumes more than offset runoff from prepayments. Servicing segment operating revenues were $1.5 billion, a 19% increase from the prior year, driven primarily by increased servicing fees and earnings on custodial balances due to growth in the owned portfolio. operating expenses increased by only 3%, demonstrating the ability of our servicing workflows and technology to scale efficiently with our growth, while also providing our servicing associates with the tools they need to best serve our customers. In 2024, servicing segment operating pre-tax income was $643 million, or 10.1 basis points of average servicing portfolio UPB, up from $535 million from 9.3 basis points in 2023. In total, we delivered an operating return on equity of 17%. Gap ROE was 9%. Growth in book value per share was 6%, and we also increased our dividend to 30 cents per quarter. an increase of 50% from the previous dividend. These strong yearly results demonstrate our commitment to operational excellence and our focus on delivering sustainable earnings through varying interest rate cycles by leveraging our balanced business model. Turning to the origination market, current third-party estimates for total originations in 2025 averaged $2 trillion. reflecting growth in overall volume. Though mortgage rates are back up into the 7% range, we believe ongoing volatility in rates will present opportunities in the origination market from time to time. As you can see on slide six, our balanced and diversified business model with leadership positions in both production and servicing enables strong financial performance and a foundation for continued growth. as an industry-leading mortgage company across different interest rate environments. We achieved a mid-teens operating ROE in quarters characterized by higher mortgage rates and a 20% operating ROE in the third quarter when mortgage rates declined. Because we retained the servicing rights on our loan production and have been one of the largest producer of mortgage loans in recent periods, We are uniquely positioned with a large and growing portfolio of borrowers who recently entered into mortgages at higher rates and who stand to benefit from a refinance in the future when interest rates decline. On slide seven of our earnings presentation, you can see that as of year end, $220 billion in unpaid principal balance, or approximately one-third of the loans in our portfolio, had a note rate above 5%. Approximately $100 billion were government loans, and approximately $120 billion were conventional and other loans. The potential opportunity for earnings growth is highlighted on this slide, as well as our historical refinance recapture rates, which have improved significantly from five years ago as a result of our ongoing technology enhancements and process improvements. We expect these recapture rates to continue improving given our multi-year investments combined with the increased investment in our brand as use of targeted marketing strategies. As I briefly discussed, our large and growing servicing portfolio is a key asset, anchoring our core operational results in this higher interest rate environment and driving low-cost leads to our consumer direct division. Throughout our history, we have been focused on deploying new and emerging technologies to drive efficiencies and lower costs, as evidenced by the chart on the right side of slide eight, which highlights a decline in our per loan servicing expenses of more than 35% since 2019. We have a platform in the mortgage industry that I believe is unmatched. And further, our best-in-class management team remains committed to unlocking additional efficiencies through continued investments in workflow and technologies. It is for all of these reasons that I am confident in our ability to continue driving strong financial performance in this higher rate environment bolstered by increases in the origination market in periods when mortgage rates decline. 2025 will be an exciting year for us. I will now turn it over to Dan who will review the drivers of PSSI's fourth quarter financial performance.

Thank you, David. PSSI reported net income of $104 million in the fourth quarter, or $1.95 in earnings per share, for an annualized ROE of 11%. These results included $68 million of fair value declines on MSRs, net of hedges and costs. And the impact of these items on diluted earnings per share was negative 93 cents. PFSI's Board of Directors declared a fourth quarter common share dividend of 30 cents per share. Beginning with our production segment, pre-tax income was $78 million, down from $129 million in the prior quarter. Total acquisition and origination volumes were $36 billion in unpaid principal balance, up 13% from the prior quarter, as many loans originally locked in the third quarter were funded in the fourth quarter. Total locked volumes were $36 billion in UPV, down 7% from the prior quarter due to higher mortgage rates. Of total acquisition and origination volumes, $32 billion was for PSSI's own account, and $4 billion was fee-based fulfillment activity for PMT. PennyMac maintained its dominant position in correspondent lending in the fourth quarter, with total acquisitions of $28 billion, up from $26 billion in the prior quarter. Correspondent channel margins in the fourth quarter were 27 basis points. down from 33 basis points in the prior quarter. However, the revenue contribution was essentially unchanged as increased volumes offset the lower margins. Increased volume in the quarter was primarily due to PMT retaining 19% of total conventional correspondent production in the fourth quarter, a decline from 42% in the third quarter. In the first quarter of 2025, we expect PMT to retain approximately 15 to 25% of total conventional correspondent production, consistent with the fourth quarter. Of note, pursuant to a renewed mortgage banking agreement with PMT, beginning in the third quarter of 2025, all correspondent loans will initially be acquired by PFSI. However, PMT will retain the right to purchase up to 100% of non-government correspondent loan production. In broker direct, we continue to see strong trends and continued growth in market share as we position PennyMac as a strong alternative to channel leaders. Originations in the channel were up 22%, as many loans locked in the third quarter were funded in the fourth, while lock volume was down 17% given the reversal in mortgage rates. The number of brokers approved to do business with us at year end was over 4,600, up 21% from the end of last year, and we expect this number to continue growing as top brokers increasingly look for strength and diversification in their business partners. Broker channel margins were up slightly from the prior quarter, near normalized levels. Consumer direct was similar, with originations up 40% from the third quarter and loss volumes down 30%. Margins in the channel were up, given a higher mix of refinanced loans in the third quarter at lower margins. Activity in January was down due to higher mortgage rates and typical seasonality. Production expenses, net of loan origination expense, increased 12% from the prior quarter, due to higher funded volumes and increased capacity in the direct lending channels. It is our preference to hold a level of excess origination capacity in the current market environment, given our belief that volatility in interest and mortgage rates will provide pockets of opportunity from time to time and that we will need to be quick to react. Turning to servicing, the servicing segment recorded pre-tax income of $87 million. Excluding valuation-related changes, Pre-tax income was $168 million, or 10.3 basis points, of average servicing portfolio UPV. Loan servicing fees were up from the prior quarter, primarily due to growth in PFSI's owned portfolio, and earnings on custodial balances and deposits and other income decreased due to lower short-term rates. Custodial funds managed for PFSI's own portfolio averaged $7.3 billion in the fourth quarter, up from $6.9 billion in the third quarter, primarily due to increased prepayments. Realization of MSR cash flows decreased $10 million from the prior quarter due to lower prepayment expectations as a result of higher mortgage rates. Operating expenses were down $2 million from the prior quarter at $81 million, or five basis points of average servicing portfolio UPB. The fair value of PFSI's MSR increased by $540 million, driven by higher market interest rates. Pension losses and costs were $608 million, more than offsetting MSR fair value gains. As David mentioned, results from our investment management business are now included within corporate and other. Corporate and other items contributed a pre-tax loss of $36 million, compared to $39 million in the prior quarter. PFSI recorded a provision for tax expense of $25 million, resulting in an effective tax rate of 19.2%. The reduction in the effective tax rate from the prior quarter was primarily due to a decline in the provision rate from 26.85% to 26.7% and the resulting repricing of expected taxes on deferred income. We ended the quarter with $3.3 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged. We'll now open it up for questions. Operator?

Thank you. I would like to remind everyone we will only take questions related to Panama 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, you can press the star followed by the number one on your telephone keypad. And if you would like to require a question, please press the star one again. Your first question comes from the line of Doug Hunter with UPS. Please go ahead.

uh go into a little bit more about uh the hedge performance this quarter you know kind of what drove the larger hedge loss um and i know in in past quarters you had talked about uh changing the head strategy costs of it and just you know kind of give us an update on the strategy there sure

So, and sorry, you cut out a little bit, Doug. So, I'm going to answer a piece of the questions that I heard, and if there's some piece that I didn't answer, just let me know afterwards. In terms of the performance of the hedge in the fourth quarter, actually, the overall hedge performed more or less in line with how we expected in terms of our insulation from changes in market rates. One change that we did have during the quarter is that as interest rates increased significantly, when rates were at lower levels, we had discussed we were attempting to hedge in sort of an 80% to 90% area. As we moved up to higher rates where, again, in sort of near-term rallies, there's not as much of an impact to production, we moved that hedge ratio back towards 90% to 100%. as rates increased and that's where we started the quarter and how we are currently, what we're currently targeting today. What we did see impact the net hedge results during the quarter that, you know, departed from that 90 to 100% hedge ratio. We did see hedge costs since we do utilize options and the curve was still, you know, flat to inverted for a lot of the, or for part of the quarter. And then we did see some excess prepayments. We mentioned the prepayment fees were a bit higher in the fourth quarter due to the impact of of rates being lower in the third quarter, although that was baked into our model, the speeds were a bit in excess of what we had projected. And for us, that flows through into our changes in fair value. And so that had a little bit of a negative or a bit of a negative impact in the quarter as well. And so those components together account for most of the negative contribution on the hedge during the quarter. As we're going into the first quarter, we've seen the hedge perform fairly well thus far. As I mentioned, we're hedging more in the 90% to 100% range currently, given where we're sitting in the interest rate environment and the amount of production that we would see in just a, you know, in a near-term rally or in a close rally where we're not rallying very significantly.

Great. Appreciate that, Dan.

Your next question comes from the line of Michael Kay with Wells Fargo. Please go ahead.

A quick question on the 2025 ROE guidance. It looks like you downgraded it from prior. What kind of rate environment do you contemplate in that revised ROE guidance? Is that current rates on the low end, or is it some sort of improvement? Can you just flesh that out a little bit?

Yeah, that's really more or less assuming a rate environment that's pretty similar to where we are today. So we aren't really forecasting a significant decline in interest rates given with that mid-teens to high-teens operating ROE guidance. And so given what we're seeing and the production environment that we think is likely in that case, and especially the refinance environment that's likely in that case, that as you mentioned, sort of brings down our operating ROE expectations from what we had communicated a quarter ago. To the extent that we do see, you know, a meaningful rally or pockets of meaningful rallies from here, that would allow those operating ROEs to get back up into the 20s like we saw in Q3 or higher if there's a more sustained, you know, if there's a more sustained rally. operating ROE projection was really more contemplating the rates at levels that we're currently at.

Okay. A question on, you know, what's the impact to the PennyMac, you know, if the GSEs exit conservatorship, and just wondering how PennyMac is preparing for that potential, and maybe you could talk about how the benefit of having PMT benefits TFSI in that scenario?

Well, you kind of answered the question, Michael, so thank you. But let me kind of take it from the top here. How are you doing? Good, good. Good, good. So look, we from day one have managed this company to a range of outcomes. And I think, you know, in a period of time when the GFCs were 90 plus percent of the market, we are leading mortgage, you know, residential mortgage lender and producer of mortgages and servicer. And if the GSEs begin to retrace that, which we're starting to see parts of it, we're going to continue to operate better than anyone in the industry. I think that we, as you pointed out, we're uniquely positioned with P&T to have an investment vehicle to invest in credit-related investments. And I think, you know, in Q4, we had two securitizations of investor loan and second home loans that execute better in the private markets than they do delivering to the GSEs. We closed our first deal for 2025 today. We're on track to do a deal a month, which represents about 50% of that production, with the remaining production going whole loan to whole loan buyers like insurance companies. What's important there is you can begin to see how we think about distribution as the GFC footprint gets reduced. And look, guarantee fees, you know, if you listen to some people, they say they're going to go up, you know, with the new administration. But if guarantee fees were to go up, the ability to access all outlets in the market is a trademark of my career in this company. And so we'll continue to find whole-loan investors. We'll continue to do securitizations in PMT. And PMT is going to thrive in that opportunity. PMT is expanding the, you know, expanding the loans that they're looking to do securitizations. You know, there's opportunities in jumbo. There's opportunities less so in closed-end seconds. But I will tell you that I think that, PMT is going to, you know, PMT had a great quarter in the fourth quarter. You know, it's gone off to a really nice start in the first quarter. And that's something that we're going to leverage if we see the GSE retracement take place. In addition, you know, what's interesting about the Q4 results, and we're seeing it, you know, in January, it's strong, is the amount of jumbo volume we're doing. You know, in the fourth quarter, we did almost a billion dollars of jumbo production across all three channels. We are on pace to do more than that in the first quarter. And, you know, there were, you know, as I mentioned, we're looking to do a securitization in PMT in the, you know, before, in the first half of this year. But, you know, again, we're accessing the markets there as well, the HOLO markets there as well. And then, you know, on the consumer direct side, you know, we had a really nice quarter in terms of closed-end second production in the fourth quarter. And that kind of, again, plays into our ability to distribute loans away from the agency. And, you know, we're building a great operation to access pools of capital, to be able to put on trades, to be able to settle trades. And so, as we see, you know, if we see in a marketplace where loans move away from the agencies, we're going to continue to be the leader in the industry in being able to maximize the economics. And that really, you know, when you look at, you know, when I look at our organizations between PSSI and P&T, that's the differentiator is our expertise to be able to price and execute and find best execution for our customers, our correspondents, and our brokers.

Okay, thank you.

Your next question comes from the line of Terry Mao with Barclays. Please go ahead.

Hey, thank you. Good evening. I just had a follow up on the operating ROE range for 2025 of mid to high teens. I guess your exit rate for this year is kind of already in the mid teens. I'm just curious, what do you need to see to get to the high teens? Do you need to see many rate rallies or do you think you can continue to kind of grind higher on the ROE scale even if rates stay where they are right now?

I think, yeah, thanks. Terry, that's a great question. So as we see or if we see rates continue to stay at this high level, we do expect to continue to drift upwards in terms of operating ROE. I think the key aspect there is our efficiencies that we've gained over time in the servicing space and servicing portfolio. So, you know, We have a page in the deck that shows our decrease in operating expenses over time with respect to our servicing portfolio that's gone down by 30% over the past few years since 2019. We expect to be able to continue to drive that down on a per unit basis, both as a function of scale as well as continuing make our operations more efficient. And so on that basis, we would generally expect our, even if we stay in the current environment, our operating ROE to drift upwards. And so the mid to high, the mid to high teens, I think to your point, depending on what you consider mid and high, we would generally expect to be drifting upwards toward the high teens over the year if we stay up in this rate level. if we stay up in this rate environment where we're gaining further efficiencies as we go through the year.

You know, Terry, a couple things about 2024 that's really, I think, highlights the power of the company is that you look at the Q3 results when we had that brief rally, and you can see how quickly the ROE can climb to 20% and even higher if a rally is protracted. Similarly, to speak about the operating scale, historically, when you've had rallies, you recognize the lock when it's, you recognize the gain in the lock when you take it, but the expenses, a lot of the expenses hit when you close the loan. And so in Q4, we were closing out loans from the pipeline, and we still had a relatively very good ROE. And so I think that there's, it speaks to the leverage that we have in our production channels And I think as you continue to see growth in the non-agency products, combined with the continued efficiencies that our production teammates, you know, continue to to isolate and perfect that it's a lot of it is in our control. And then you take the piece that's not in control and that's the market. And we know one thing for sure, rates go up and rates come down. And so our ability to be able to seize on that opportunity is vitally important. And that's one of the reasons why we've brought in some excess capacity in our consumer direct channel. And so we have about additional 100 LOs at the moment that are really focused on, at the moment, working for our customers who want cash-out refinances or closed-end seconds or are looking to buy new homes. But likewise, as rates decline, we can pivot those LOs to focus on rate and term refis. And historically, when markets move, originators go out and they try to find additional capacity. But we're in a position, because of the strength of the organization, to be able to maintain that capacity and be able to do so while having products that they can offer our customer base.

Got it. That's very helpful, Keller. And then just to follow up, I mean, any color you can provide on what you're seeing with respect to just delinquencies in your portfolio, you know, 60 plus day delinquency rate increased sequentially, but it also the year over year increase also accelerated in the quarter. Thank you.

Excuse me, ladies and gentlemen, please stand by as it appears that the presenters got disconnected. One moment, please.

Excuse me, ladies and gentlemen, please continue to stand by. Thank you.

Hello?

Reconnected. You may proceed.

Thank you. Sorry about that, folks. We got disconnected here. And I believe the question was about delinquencies?

Yes, it was.

Okay. Sorry about that. So, look, I think that, you know, delinquencies continue to stay at low levels. We're seeing, as you can see, as you can see on slide 26, that they have gone up a little bit. Much of that is seasonality. And you saw that a little bit at the end of 23, where we saw delinquency numbers go up so slightly. And we expect those to return to more normalized levels in Q1 and Q2 as tax refunds come in and people get themselves current. I will tell you that we are very well positioned in the event that delinquency rates do show a spike. And a lot of that speaks to our expertise in servicing delinquent loans. There are a lot of forbearance programs out by FHA, VA, USDA, and the two GSEs. Programs offered by, there's a program offered by the VA to buy delinquent modified loans called the VAST program that we talked about in the past. And last quarter, we sold $800 million of unpaid principal balance of modified, once delinquent, VA loans back to the VA that had a negative servicing mark of a little over $11 million. And we were well over 50% of the participant in that program. And that just speaks to not only our expertise as a servicer, but also our servicing technology and the ability to quickly adopt and adapt to any program that's out in the marketplace. And so, you know, I'm looking at this number on a monthly basis, mindful of what's happened in the past. But generally speaking, I take comfort in the fact that we're in a marketplace right now where You know, over 50% of the loans, you know, are still below 5%. You still have housing constraints in the marketplace. Demand is still up. And I generally think that, you know, we're still in a good market for borrowers who want or need to sell their home. You know, but having said that, in managing the balanced business model and managing to a range of outcomes, you know, what we do on production, we also do on servicing. So, you know, we're looking at all the possible outcomes and make sure that we're ready to react to anything that we see take place in the market.

And your next question comes from the line of Crispin Log with Piper Sandler. Please go ahead.

Thank you. Good afternoon. I appreciate you taking my questions. First, just on origination and channels, most of your origination channels were down in the quarter, which makes sense. But I saw that conventional correspondent locks were actually up nicely in the quarter. Can you discuss how you're able to do that in this type of environment and what drove that?

Sure. So, I mean, one thing to note about correspondent generally, is that it typically lags a bit from the, or correspondent locks will typically lag a bit from the environment that we see presently since the correspondent locks that we take are generally after the, or a large portion of them is after the correspondence themselves has locked the loan and closed the loan. So take that 60 to 90 days from whatever the interest rate was. And so as we moved into the fourth quarter, We saw additional, you know, we saw additional or a lot of the volume from rates being lower in the third quarter sort of flow through into the fourth quarter in terms of locks and correspondence in our direct channels. Those have been locks really in the third quarter. And so that drove some of that increased lock activity in the fourth quarter. In addition to that, as David mentioned, we've also been, pretty active in terms of our sourcing of investor loans, which fall into that conventional correspondent, or a lot of that falls into that conventional correspondent camp. And so that has also been a place where we have been increasingly active and helped drive some of that lock share in conventional correspondent in the fourth quarter.

Great. Thank you. Appreciate that. And then just one last one. Can you just discuss your outlook for the level of mortgage rates and then what makes you think that you could see volatility in the near to intermediate term that could present opportunities for originations and refi, as you discussed? Or is it more just a possibility of rates rallying and being ready like you've added capacity that we may see something similar to the third quarter?

Look, right now we're in kind of unprecedented territory in terms of volatility. I mean, just the daily movements that you see in rates is pretty extreme from what I've seen throughout my career. And so it really kind of validates why it's vitally important to manage to a range of outcomes. And so if rates were to go higher, having our servicing portfolio is vitally important. Again, being a leading correspondent aggregator to continue to buy loans during periods of higher rates feeds the flywheel that we have in our consumer direct channel. And likewise, you know, regardless of where rates go, people are always going to be buying homes and there's always going to be a market for loan origination. And so in markets like that, being a well-capitalized enterprise with a with a great reputation only benefits us. And if rates were to go higher, you're going to continue to see consolidation take place in the industry. Likewise, in periods of time when rates do decline, the ability to offer refinances and be able to seize on the opportunity really is beneficial to us as a servicer, but also as an originator. And that's what you saw in the third quarter. And so you see as you see more consolidation taking place in the industry, that as an originator, that benefits those who are left originating because that just takes out capacity, which typically leads to higher margins in periods when rates do decline. And so by and large, I think I think, you know, to to your point, it's just it's really having a view of how you're going to operate in different rate environments and being prepared to do so in a very nimble fashion, which is how this organization is set up to operate.

And your next question comes from the line of Mark DeVries with Deutsche Bank. Please go ahead.

Yeah, thanks. I wanted to drill down a little bit more on kind of what gives you confidence in continuing to drive down that average cost of service to get you to that higher teams ROE. The rate of change has obviously been flowing in recent years. Are you expecting or still generating new ways to drive efficiency through your proprietary servicing platform or just benefiting from getting a lot more scale off that without having to add costs? What gives you the confidence there?

It's a little bit of both, right? So as we're continuing to grow the servicing portfolio, we're continuing to get economies of scale. If you look at the overall operating expenses in the servicing, in our servicing segment, have been roughly flat over the last few quarters. And so as we just continue to add servicing, we're getting the benefits of scale there. In addition to that, there are aspects of our of our servicing operation that we believe can continue, where we can continue to have process improvements and automation that can further drive down our unit costs. In particular, things related to delinquent loans, we believe that there's opportunity for a significant or for continued savings or additional savings with respect to automation and process improvements. where, you know, that haven't been fully addressed in our development plan thus far, our process enhancement plan thus far. And so, looking at both of those aspects, that gives us confidence that we can continue to drive down that per unit cost even as we go forward. And certainly, you can see that although we've had slower progress in more recent periods, there still is continued progress in terms of rationing down those costs.

Well, yeah, look, I think that, you know, they're that group is hyper focused on on really driving down the costs and, you know, having our technology to do so just allows us to implement it faster, quicker and smarter. I think that I know that we are going to be introducing a chat bot in the call center and servicing as well as the call center for consumer direct for that matter. in the not-too-distant future. We're looking to continue to enhance workflows and to move initiatives, you know, offshore. And so I think that, you know, you're going to continue to see that cost come down. And look, yes, of course some of it has to do with just the increased scoring portfolio and the scale that comes with it. but we wouldn't be where we are today if it weren't for the technology and the team that we have in place, and it's going to continue to decline. I know that.

Okay, great. That's really helpful. Dan, just one more question for you. Are there any accounting issues that we need to think about as you make that transition you mentioned in 3Q to at least initially retaining all of the conventional originations?

No accounting issues per se. You know, it would be, if you look at it, just slightly, a slight increase in inventory compared to other points in time or, you know, to preceding quarters. as we move forward if all else were being equal, although, you know, those loans are only expected to stay. The loans that would be going to PMT, assuming PMT retains the same amount of conventional loans that it otherwise would have been, will really only sit on PFSI's books for one to two days on average. So really the impact would probably be dominated by the fluctuations you know, other fluctuations in the market and so forth. So I don't, we don't expect any significant accounting changes. We still, as the contract stipulates, we'll charge a fulfillment fee. PFSI will charge a fulfillment fee to PMT for the loans that it, for the loans that will be passed through to PMT, or through PFSI to PMT and their, the corresponding loans that they will, elect to receive, and the gain-on-sale structure for PMT should remain the same because the economic terms at which they'll be acquiring the loans will be substantially the same as to what they were receiving previously. So, yeah, don't expect any meaningful accounting differences or changes versus what you see today.

Okay, got it. Thank you.

And your next question comes from the line of Ryan Shelley with Bank of America. Please go ahead.

Hey, guys. Thanks for taking the question. I have two quick ones. So first, on revenue margin, was the decrease in the quarter just attributed to mid-shift, or were you guys seeing anything else? And then I'll just drop the second one and let you guys answer. Just how are you thinking about the unsecured maturity coming up this October? Maggie.

Sure. So, yeah, with respect to the revenue margin and the production channel, we did see a lot of the change in the overall revenue margin is due, as you mentioned, to the mix shift. You can see that the overall correspondent locks remained pretty similar quarter over quarter if you include the PMT, or especially if you're looking at just the production before PMT, there's a significant shift towards correspondence given the change in overall percentage that PMT retained during the quarter. And so that was the major driver. The other, and while the locks and the direct channels with higher margins declined, The other driver is that there was also a reduction, if you look at the correspondent line, in terms of the margin on the correspondent loans. So that was a combination both of competitiveness in the channel in the fourth quarter, as well as really the mix within correspondent, where a greater proportion of the of the locks that were going in were conventional, which tends to be a little bit lower margin than the government loans.

The other thing about, you know, I would say Q4 is that, you know, we, of course, December is usually typically a slower month all the way around. The mix shift was a big component, you know, obviously, you know, quarter over quarter. But as we go, as we look at January, we're really seeing things back to a more normalized level in the three divisions. And January has been a really exciting month for us. I like, you know, we, as you can see in the earnings presentation, you know, that we had great share growth in broker direct, and we're continuing to see some really good headwinds in broker. In correspondent, we're seeing you know, there was some irrational pricing earlier, you know, in much of the first, you know, six to nine months of 2024 that we began to see that kind of relieve itself a little bit. And we're continuing to see that as we start the quarter here. My sense is we're getting some share benefit there. And then, you know, in the consumer direct channel, you know, obviously having the close end seconds, we're seeing more production there as well. And so it I think it's, you know, for the month of January, it's been an active month here, unlike December where we just felt, it just felt to me much more as though we were in holiday mode for most of the month.

With respect to the second question relating to the 2025 maturity, so we do have an unsecured debt maturity coming up later in the year. That is part of our capital planning that we're looking at as we go through the year in 2025, both to address that 2025 maturity later in the year as well as to sort of move forward on our objective that we've discussed previously to move our non-funding debt mix more toward unsecured, a bit away from the, you know, the funding secured by MSR. We are looking to enter into transactions in the unsecured market through 2025, trying to find what the best opportunities for that would be in order to achieve both of those objectives. But we do expect to be in the market in 2025 in the unsecured market to both address the maturity as well as increase our overall proportion of unsecured debt.

Thank you very much, guys. Very helpful.

And your next question comes from the line of Derek Summers with Jefferies. Please go ahead.

Good afternoon, everyone. Based on your approved broker count in the presentation, what percentage of the total broker market do you think you've penetrated so far?

I would say somewhere between 25% and 30%. And the nice thing is that the velocity of growth is accelerating as we're getting share growth and more people are seeing our performance and our pricing is kind of building upon itself. So I expect growth to continue at a very good pace in 2025. I think that we have We had good share growth for the year of 2024, but I believe we'll have even better share growth in 2025, as clearly brokers are understanding they need an alternative to the top two guys. And given our performance to date in terms of our product mix and our ability to adapt to changing markets and build a reputation in the broker community, It's building upon itself, and the momentum is really nice to see.

Got it. Thank you. And then just to pivot to escrow income, how should we think about, you know, kind of balancing portfolio growth as a tailwind versus the potential for declining short-term rates looking through 2025?

Sure. So, I mean, as you mentioned, a lot of it is dependent on what happens exactly with short-term rates, so I think we're still uh expecting or the forward curve or futures market is implying limited cuts you know additional cuts here in 2025 um i think still one to two cuts uh so not necessarily expecting a lot of movement on the rate uh that would sort of the short-term rates which would drive the placement fee the placement fee levels on those balances that we receive. In terms of the portfolio, still expecting pretty significant, you know, significant growth in the portfolio as we move through 2020, as we move through 2025. Very similar in terms of the amount that we're adding to the portfolio each quarter, especially at prepayment speeds. especially if repayment speeds remain contained. And so I think, you know, balancing those effects where we're not expecting a lot of short-term reduction but are expecting continued growth of the portfolios, we'd expect that overall dollar number in total from the, you know, from the run rate, if you will, that we have in Q4 to continue, you know, to increase overall through the year.

Thanks for taking my question.

And your next question comes from the line of Bruce George with KBW. Please go ahead.

Hey, guys. Good afternoon. Actually, I wanted to ask on the direct-to-consumer side, you know, your volume, I assume, is still largely recapture. Are there strategies you're thinking about to market to consumers outside of your servicing portfolio?

Absolutely. There's, you know, it's a huge part of our strategic plan this year to focus on our brand and And over the next quarter, you're gonna see a series of announcements from us that reflect that commitment. It's a reflection of a lot of time and work that Doug and the team have put in place to really start focusing on the brand. Similarly, there's marketing direct strategies to our portfolio on purchase transactions. And then finally, I think, you know, I'm generally pleased with just what I'm seeing in terms of the name recognition of PennyMac, and that's just going to grow as the brand strategy gets implemented. And so, you know, I think that, you know, as we sit here at higher rates, it's imperative for us to really focusing on the new customer acquisition part of our consumer direct channel, and Doug and the team are really hyper-focused on continuing to drive leads in from that part of our consumer direct channel.

Thank you. And your next question comes from the line of Eric Hagan with BTIG. Please go ahead.

Hey, thanks. Good afternoon and hope all you guys are okay following the fires in your area. I know that you don't typically give guidance around origination volume, but do you feel like the lower bound for your originations on a go forward basis will be, you know, call it at least 30 billion per quarter? And from the perspective of the correspondent sellers, I mean, how competitive is the alternative for them just being the opportunity to deliver loans into the cash window?

Yeah, I think as it pertains to correspondents, the cash window ebbs and flows. And look, Sandy and Freddie are important business partners of ours, and I think they're going to be increasingly distracted as the new administration begins to really look at alternatives for Fannie and Freddie. You know, do they come out of conservatorship? Nobody knows, but at a minimum, there's going to be a lot of focus on making sure that if they do come out, that they're ready to go. And I think it's going to be pretty quiet from my perspective in terms of new programs coming out of the agencies. And similarly, I just don't see the window. You know, from time to time, there'll be a competitor, but I see that you know, as one alternative. The other thing, the window becomes less of an issue in periods of time of higher interest rates because sellers don't want to retain servicing because they don't hedge that servicing. And so when rates were zero, there was a much better economic thesis to holding on to servicing. When rates, you know, when mortgage rates are 7%, eh, that's not so much the case. I think in terms of the competitive landscape and correspondent, Look, we've got great competitors out there. They're good people. But at the end of the day, we are the leading correspondent aggregator. You know, Abby and Alex and the team are going to continue to grow market share there. And that's something, and they're going to do so profitably. And that's something that they're very much focused on. And, you know, in markets like this, correspondent sellers want to make sure they're continuing to maintain a very strong relationship with us. You know, for when periods of time when rates do decline, they need to have an aggregator who can clear warehouse lines quickly and can buy loans quickly. So that is something that is, I think, really going to be the case, you know, for correspondence.

Thank you. And that is all the time we have for questions. I'd like to turn it back to David Spector for closing remarks.

Okay, well, listen, I want to thank everyone for the call. I'm really sorry about the interruption. That's not on our end. You know, we're great with technology. But if you have any questions or any follow-up, please reach out to our investor relations team. They're always available. I'll always make myself available. And thank you all for the great questions and the robust discussion. Bye-bye.

Thank you all for joining us this afternoon. We encourage investors with additional questions to contact our investor relations team by email or by phone. Thank you.