PFSI Earnings Call

OperatorGood afternoon and welcome to PennyMac Financial Services Inc.'s first quarter 2026 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, as well as an Excel file with supplemental information, are available on PennyMac Financial's website at pfsi.pennymac.com.

OperatorBefore 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 SpectorThank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. As shown on slide 3, PennyMac Financial generated net income of $82 million in the first quarter, or $1.53 in earnings per diluted share, for an 8% annualized return on equity. Excluding the impact of valuation-related changes and transaction expenses related to our acquisition of Cenlar subservicing business, Adjusted EPS was $2.19 per diluted share, or an 11% annualized adjusted return on equity. As Dan will expand upon, we continue to optimize our hedging strategies to converge GAAP and adjusted ROEs. While our adjusted return on equity this quarter remained below our longer-term expectations, we remain intensely focused on maximizing returns on invested capital over the near and long term. I am also optimistic regarding the underlying trends in our business, particularly higher recapture rates in consumer direct channel coupled with increasing revenue per loan.

David SpectorIn addition to these positive trends, I will also address initiatives we currently have underway later in this call. Our optimism is most evident in the production side, when we— where we are strategically growing in areas that will optimize returns on capital in what remains a dynamic and fragmented market. Specifically in the correspondent channel, we are leveraging our leadership position to exercise rigorous pricing discipline on the related MSRs while driving an increase in margins across various products. This pricing discipline, combined with continued growth in our consumer and broker direct channels, led to Production segment generating its highest level of pretax income in nearly 5 years. In addition, we have 3 distinct production channels: correspondent, broker direct, and consumer direct, all of which are operating at significant scale. This diversified platform provides us with multiple complementary avenues for sustainable growth and a unique ability to shift our focus and resources to the channel that offers the most attractive risk-adjusted returns.

David SpectorTurning to Slide 4, let's review a few additional business updates. During the quarter, we repurchased 560,000 shares, or 1% of our outstanding stock, for $50 million at a weighted average price of $89.28 per share, as we saw tremendous value in the stock at these price levels. I am also pleased to report that we remain on track to close the acquisition of Cenlar subservicing business in the second half of the year. Our teams are collaborating effectively to ensure a seamless integration of Cenlar Subservicing Business into our operations. As outlined in our investor update presentation in February, once fully integrated, we expect strong returns from this acquisition, and we are excited about the increase in scale and diversification that this transaction will provide. Turning to our consumer direct origination channel, the deployment of Vesta has been complete for new loan originations and has begun to drive operating efficiencies through the introduction of AI agents and the resulting reduction in previously manual tasks.

David SpectorOn recapture, I am also pleased with the meaningful progress we've already achieved with consumer direct origination volumes up meaningfully from recent periods. And conventional first lien refinance recapture rates up 5 percentage points from the prior quarter to 22%. This momentum has continued into the second quarter with conventional first lien recap— refinance recapture rates running near 30% in the month of April. Turning to slide 6, our mortgage banking operating pretax income was $190 million for the quarter. Up 100— up from $173 million in the fourth quarter. As we look ahead, we expect adjusted ROEs to remain near current levels in the second quarter before increasing to the low to mid-teens in the second half of 2026 as we realize the benefits of technology and efficiency enhancements. As just mentioned, we have lowered our ROE guidance from the mid to high teens to low to mid-teens in the second half of the year due to two main factors.

David SpectorFirst, we've decided to meaningfully accelerate our technology investment to drive significant operational efficiencies in both production and servicing. And second, we expect less origination demand with interest rates at current levels. Over the medium to long term, we continue to expect PFSI to achieve ROEs in the high teens to low 20% range which we expect to achieve through the realization of these technology investments and increasing scale. On slide 7, we highlight the future opportunity within our consumer direct channel when rates do decline, as well as our first lien refinance recapture rates over the 5 most recent quarters. As of March 31st, we serviced a combined $320 billion in UPB of loans with no rates above 5%, of which more than half had no rates above 6%. As you can see on the charts in the middle of the page, government refinance originations from our portfolio in the consumer direct channel are nearly double first quarter 2025 loans, and our first lien refinance recapture rates remain strong in the 50% range.

David SpectorWe are seeing even more success in conventional loans. Where volumes are up more than fivefold from levels reported in the first quarter of 2025, driven by the previously noted improvement in first lien recapture rates to 22% from 17% in the prior quarter. And as I mentioned earlier, in April, we achieved conventional first lien refinance recapture rates of nearly 30%.

David SpectorWe also completed the transition to Vesta, our new consumer direct loan origination system during the first quarter, and we are in the process of working through the pipeline of loans originated on the old system, which we have— expect to have completed in the second quarter. This new system has already substantially improved the customer experience. I am very pleased with these initial results and expect to realize material benefits of our new platform in the second half of this year. The early success we are seeing is a direct byproduct of our ability to reduce costs per loan and the days to close, as well as leverage real-time data to engage borrowers more effectively. We have also started the successful release of AI agents within our fulfillment process across multiple products. We are rapidly moving towards a model with exceptionally low manual intervention and in some cases will remove human touchpoints entirely, thereby improving the customer experience, further increasing recapture rates, and driving higher operating margins.

David SpectorFurthermore, we are focused on the implementation of additional specific tech-enabled solutions ranging from AI-driven lead prioritization to enhanced digital self-service. Turning to slide 8, you can see how our state-of-the-art technology platform is driving significant operating leverage and superior unit economics across the entire enterprise. By combining our technology foundation with our scale advantages, we are driving unit costs to historic lows. As noted on the charts, our direct expenses within the consumer direct channel dropped 26% compared to 2022 levels. Similarly, in our servicing segment, our operating expenses as a percentage of total servicing UPB have dropped 24% to 4.5 basis points as we continue to enhance workforce productivity and automate complex tasks through the, through the deployment of sophisticated technology. In our corporate and other segment, we are clearly achieving more with less.

David SpectorBy leaning into a unified technology foundation, we have reduced compensation as a percentage of adjusted revenue to 3.7% from 6.5% in 2022, a decrease of 44%. While these results are compelling, we are in a new stage of transformation and AI implementation with significant runway ahead to further optimize our platform reduce unit costs, and capture additional economies of scale. By combining our pricing and capital allocation disciplines with the best-in-class technology infrastructure that is already delivering record-low unit costs, we are building a more resilient and profitable enterprise. We have the team, the technology, and the scale necessary to drive toward our long-term target of high teens to low 20% ROEs. I will now turn it over to Dan, who will review the drivers of PFSI's first quarter financial performance.

Dan PerottiThank you, David. PFSI reported net income of $82 million in the first quarter, or $1.53 in earnings per share, for an annualized ROE of 8%. Adjusted net income was $118 million, or $2.19 in adjusted earnings per share, for an annualized adjusted ROE of 11%. The 66-cent difference between our GAAP and adjusted EPS was driven by two items. First, $44 million of fair value declines on MSRs net of hedges and costs. This includes principal-only stripped MBS valuation-related accretion changes and provision for losses on active loans. And second, $3 million of expenses related to our acquisition of Cenlar. PFSI's Board of Directors declared a first quarter common share dividend of $0.30 per share. And as David mentioned, we repurchased 560,000 shares of common stock for $50 million. On slides 10 and 11, beginning with our Production segment, pretax income was $134 million, more than double from the same quarter a year ago and up 5% from the prior quarter.

Dan PerottiAs David mentioned, the increase from the prior quarter was driven primarily by strong execution in Consumer and Broker Direct. Which combined represented 75% of PFSI's account revenues.

Dan PerottiTotal acquisition and origination volumes were $37 billion in unpaid principal balance, down 12% from the prior quarter. Of this, $34 billion was for PFSI's own account and $3 billion was fee-based fulfillment activity for PMT. Total lock volumes were $44 billion in UPB, down 4% from the prior quarter. PennyMac maintained its leading position in correspondent lending. Correspondent acquisitions were $24 billion in the first quarter, down 20% from the prior quarter. While our platform continues to drive profitable and sustainable growth, we are refining our production mix to better withstand market volatility and maximize the long-term value of our servicing portfolio. Correspondent channel margins were 28 basis points, up from 25 basis points in the prior quarter due to a shift in mix toward higher margin government loans given the increased levels of competition from the GSE cash window combined with a meaningful increase in average revenue per loan.

Dan PerottiUnder its fulfillment agreement, PMT retains the right to purchase all non-government correspondent loan production from PFSI. In the first quarter, PMT purchased 18% of total conventional conforming correspondent production, and 100% of nonconforming correspondent production, both percentages essentially unchanged from the prior quarter. In broker direct, we continue to see momentum as we position PennyMac as a strong alternative to channel leaders. Originations were up 3% and locks were up 26% from the prior quarter. The number of brokers approved to do business with us continues to grow, up 12% from the same time a year ago, reflecting the growing number of brokers who are increasingly leveraging our distinct value proposition. The revenue contribution from broker direct was up from the prior quarter due to higher volumes. So margins were down slightly, revenue per loan increased, reflecting an increase in our average loan balances.

Dan PerottiAdditionally, we recently launched a non-QM product within our broker direct channel and are already seeing strong initial takeup and positive traction from our broker partners, as they leverage our expanded product suite. Locks of non-QM loans in our broker channel were $151 million in UPB during the first quarter, and momentum continued in April with $157 million in UPB of locks. In consumer direct, volumes were up, with originations up 15% and locks up 24% from the prior quarter, driving revenue contribution 30% higher than in the prior quarter. While margins were down slightly, revenue per loan increased sequentially across our conventional, jumbo, and closed-end second products, indicating higher average loan balances for those loan types. Post-lock activities across the channels contributed $13 million to pretax income, down from $34 million in the prior quarter, which benefited from strong secondary market execution relative to initial pricing.

Dan PerottiProduction expenses, net of loan origination expense, increased 11% from the prior quarter, due to higher volumes in direct lending. Turning to servicing, on slides 12 and 13, our total servicing portfolio UPB ended the quarter at $720 billion, down only 2% from the prior quarter— from the prior quarter end, despite runoff in MSR sales, which were largely mitigated by additions from new production. Servicing segment recorded pretax income of $13 million. Excluding valuation-related changes, Pretax income was $57 million, or 3.1 basis points of average servicing portfolio UPB, up from $45 million, or 2.5 basis points, in the prior quarter. Earnings from custodial balances were down from the prior quarter, primarily due to lower short-term interest rates. Though realized prepayment speeds increased slightly from the prior quarter, realization of MSR cash flows was down 7% due to the expectation of lower prepayment speeds in future periods resulting from portfolio burnout.

Dan PerottiOperating expenses remain low at 4.5 basis points of average service— average servicing portfolio UPB, or $81 million in the quarter. EBO revenue increased due to higher initiation of modifications and redelivery margins as a result of lower rates in the beginning of the quarter. Including the provision for losses on active loans, the fair value of PFSI's MSR increased by $177 million. An increase of $201 million was due to changes in market interest rates and was partially offset by $24 million in declines from other model and performance-related impacts. Hedge fair value losses, including principal-only strip MBS valuation-related accretion changes and hedge costs, were $221 million. As we talked about last quarter, we increased our hedge ratio to near 100% to proactively manage prepayment risk. While agency MBS spread volatility and tightening of the primary-secondary spread drove a net fair value decline this quarter, our positioning reflects our disciplined approach to maintaining book value stability across a volatile interest rate environment.

Dan PerottiCorporate and other items recorded a pretax loss of $42 million, up from $30 million in the prior quarter, primarily driven by $9 million in marketing activations related to the Olympic and Paralympic Winter Games. Which are not expected to recur in upcoming quarters, as well as $3 million of transaction expenses related to our acquisition of Cenlar subservicing business.

Dan PerottiPrior quarter also included reduced expenses related to technology accruals. PFSI recorded a provision for tax expense of $22 million, resulting in an effective tax rate of 21.4%. Total debt-to-equity at quarter end was 4 times, and non-funding debt-to-equity at the end of the quarter was 1.7 times. The increase in total leverage was driven by higher direct lending production, and the increase in non-funding leverage was driven by higher interest rates, which drove increased utilization for our MSR credit facilities in addition to share repurchases. We expect these leverage ratios to remain near these levels as interest rates remain at current levels. Finally, we ended the quarter with $4.2 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?

OperatorThank you. I would like to remind everyone we will only take questions related to PennyMac Financial Services, Inc., or PFSI. We'd also ask you 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'd like to ask a question during this time, please press star followed by the number 1 to raise your hand and star 1 to withdraw your question.

OperatorOur first question comes from the line of Doug Harter with BTIG. Your line is now open.

Doug HarterThanks. Hoping you could talk about, you know, any impact the volatility had on revenue margins in the quarter, whether it was increased hedging costs or less effective execution.

Doug HarterSo on the—.

David SpectorHi, Doug, how are you? Congratulations on the new role.

Doug HarterThank you, David.

David SpectorSo on the production side, I am really encouraged by what I saw take place in the first quarter. You know, on the correspondence side, we saw margins, you know, up quarter over quarter from the fourth quarter, and we're seeing a continuation of that as we start the second quarter. In TPO, we're seeing margins, you know, currently holding near to the levels we saw in the first quarter. They're actually actually up a bit, and they're up from the fourth quarter. And our consumer direct channel, you know, we're seeing a consistent margin story there. Well, you know, the mix is gonna— you know, the mix in the second quarter will probably warrant a higher margin report. But I'll tell you that, you know, the— just the focus that we're seeing in the company and driving up the revenue per loan is really showing in our results that we saw in Q1. It's gonna continue to be a focus of the company.

David SpectorOn the hedge side, Dan, you wanna answer on the hedge side?

Dan PerottiSure, with respect to hedging, as we talked about in the call, there was a fair amount of interest rate volatility during the first quarter. As, you know, you saw in terms of the results and how we laid it out, we think we navigated that volatility, volatility well overall with respect to rate impacts, you know, fairly minimal impact, just $7 million difference between the MSR and hedge versus our rate impacts. Hedge costs we did see as a little bit elevated, particularly related to the increase in volatility toward the end of the quarter drove up our hedge costs in March, and that contributed the majority of the hedge costs that we saw, the $14 million in hedge costs that we saw during the quarter. But overall, pleased with our results and our navigation through what was a fairly volatile period in terms of interest rates during Q1.

Doug HarterGreat. Appreciate the answer. Thank you.

OperatorThank you. Your next question comes from Kyle Joseph with Stephens. Your line is now open.

Kyle JosephHey, good afternoon, guys. Thanks for taking my questions. I guess, yeah, as it pertains to hedging, I'd start— and I did hear the operator's warning, but just, you know, pending the acquisition, you know, how are you thinking about balancing hedging with how the business looks on a pro forma basis? Like, any changes we should expect there?

Dan PerottiNo real changes expected to our hedging strategy as we get through the acquisition.

Dan PerottiJust to refresh, the business that we're acquiring from Cenlar, their subservicing business is not the MSR. They have—. It's really a fee-for-service business and so equity light. They don't have any MSRs. Particular to speak of. And so our overall strategy in terms of hedging the MSR, we expect to be consistent with how we've operated to date and, you know, not really change with respect to the additional subservicing business that we're bringing on.

Kyle JosephGot it. Thank you. And then just to follow up, just been getting more and more questions on the Homebuyer's Privacy Protection Act. And how you're thinking about, you know, any potential changes to position the business to best address that?

David SpectorAre you referring to the trigger leads?

Kyle JosephYeah, exactly. Thanks, David.

David SpectorYeah, yeah, it's really early. You know, the law went into effect on March 5th, and we're just, you know, we're just starting to see loans come through that funded— you know, that locked at or after that date. We'll have a much better look-through, you know, in the second quarter. But, you know, from the little that we've seen, it's, you know, generally positive.

Kyle JosephUnderstood. Thanks for taking my question, guys. Appreciate it.

David SpectorYou bet.

OperatorYour next question comes from the line of Bose George with Keefe, Bruyette & Woods. Your line is now open.

Bose GeorgeHey guys, good afternoon. Actually, just in terms of your guidance, it looks like you removed the high teens part of the guidance. You know, now the high seems like it's the mid-teens. Is that a reflection of the smaller, you know, the mortgage market that's expected this year with the move up in rates?

David SpectorYeah. So, hi Bose. How are you? David, we are You know, I will tell you I've not removed the high teens from the long-term ROE guidance of this company. We believe we're a high teens to low 20 ROE company.

David SpectorIn the short to medium term, there's really two factors that led us to just kind of slow down the return to the historic levels that we've seen. One is the technology spend, and we are investing across both, both across our production channel and our servicing channel. On the production side, you know, we've deployed our new technology into our consumer direct channel, and now we are very busy, um, you know, introducing and implementing AI agents to help reduce not only the cost to fulfill, but also to continue to grow the efficiencies that we're seeing on Vesta for our sales associates. And so based on, based on the early results that we're seeing from both, we feel it's incumbent upon us to really, to really move quickly to take humans out of the loop and to be able to close loans faster and cheaper. And so that's, that's going to lead to just growing scale within our consumer direct platform.

David SpectorSimilarly, You know, based on the results we're seeing in our consumer direct channel, we are moving quickly to move our broker direct channel onto the same platform. There's work that needs to be done to be able to build a broker portal that, that is very similar in experience and feel to the portal that our brokers experience today. And so that work will be done in the second and third quarters. We expect to see the first broker loans coming on at the end of the year with, you know, the full migration taking place in, in 2027. But the exciting part about the move in broker is that the work we're doing on AI agents for our consumer direct channel are very relevant for our broker partners. And so I feel it's incumbent upon us to deliver the same experience for our brokers that we're seeing within our consumer direct channel. Similarly, on the consumer direct channel, we're doing work to create a human-out-of-the-loop mortgage origination process that I'm excited about, that I'm hopeful— you know, not hopeful, I know we'll see in the second half of this, of this year.

David SpectorAnd then, you know, we're always looking to reduce, you know, costs in our correspondent channel and in our shared service groups. But other than the technology shared service groups. The cost— the technology costs with those are pretty minimal. With what I'm seeing out of, you know, Gemini and Claude and, and the add-ins that they have to Excel, there's a lot of great work being done around the organization. On the servicing side, there's similar work we're doing to drive down the cost of service. Okay, and we have a, we have a long-term not long-term, a medium-term goal to bring that cost down to $55 a loan a year. It's what we call the Drive to $55. And, you know, we believe we can get there in 24 to 36 months. And so the benefit there is not only to our own servicing portfolio, but as we add capacity and scale to our servicing platform, we're going to get the benefits with the Cenlar loans. And so it's just, it's, it's It's a lot of good, exciting investment that I expect is gonna really deliver returns starting in the second half of this year, but into '27 and '28.

David SpectorAnd I feel it's incumbent upon us to make these investments to continue to retain our competitive advantage in the industry and hopefully widen the moat. On the origination side, I think to the point you raised there, You know, the Fannie MBA average, you know, for 2026 is at $2.3 trillion. But given where we're seeing rates today and given where it looks like they're going to be, you know, for the, you know, for the future, I suspect and I believe they will be lower. And so that will lead to lower production volumes. You know, some of that will be, will be offset by lower amortization on the the portfolio. But, you know, I think given the results we're seeing out of our, out of our production units, when rates do decline, I expect to see very good, very good recapture coming out of our consumer direct channel. I expect to see broker direct continue to grow share while growing revenues. And, you know, in our correspondent channel, they had a great first quarter.

David SpectorI mean, when you consider with the GSEs being more aggressive through the cash window and conventional, they really did a nice job at, you know, increasing margins, increasing revenue per loan, maintaining their leadership in the correspondent channel. And I would expect that to continue for 2026.

Bose GeorgeSo, okay, great. That's great color. Thanks. Actually, just a quick follow-up. The mix in the the product mix, just given what you noted in terms of the GSEs continuing to be competitive, do you feel like the mix is going to be similar where you're leaning more into the broker and direct-to-consumer?

David SpectorI think, look, we lean into all three channels, but we do so to do it profitably. Okay, we, you know, I often tell people around here, since 2023, you know, we've as an industry have under-executed to our cost of capital. And we as an industry have to meet, I mean, to make our cost of capital, we have to do what we need to do to increase margins, increase our returns, and to do so without being concerned about market share or being concerned about what the GSEs are doing. Obviously market share leads to scale and something, you know, as a byproduct of our leadership position. But I think that, you know, suffice it to say that what we're seeing in broker direct and consumer direct, and with that representing 75% of our loan production in Q1, I would expect to see something, something similar in, you know, in Q2 for sure. And then we'll see what happens after that.

Bose GeorgeOkay, great. Thank you.

OperatorYour next question comes from the line of Mark DeVries with Deutsche Bank. Your line is now open.

Mark DeVriesYeah, thanks, David. I was wondering if you could help us understand on that, that revised ROE guidance, you know, the— for the end of the year, kind of the high teens going down to the, you know, maybe the low to mid teens. How much of that is that pulling forward of, of the investment in technology versus just kind of the smaller market size?

David SpectorI would say it's about two-thirds technology, one-third smaller origination market.

Mark DeVriesOkay.

David SpectorAnd then I think, I think, I think that the returns we're seeing from the investment are really compelling. And so, to, you know, I think that to wait to invest one versus the other, I don't think it doesn't warrant waiting given the returns. And so I think that, you know, we feel very strongly convicted that we want, that we're gonna make the investment. And, you know, I think, well, as I said, we'll see tech at, you know, near peak levels. And believe me, starting in the second half of this year, we're going to see the returns from this spend as well as, you know, the decline of technology spend, you know, over the following, you know, 12 to 18 months. I know many people say tech spend doesn't go down, but we reduced our tech spend from '22 to '24 and we'll reduce it here as we deploy, you know, the finite amount of AI agents that we need to you know, in our production and servicing divisions.

Mark DeVriesOkay, that's, that's helpful context, and that may help answer the second part of my question. But when I just look back to, you know, excluding the last two quarters, the annualized operating ROE had been kind of more like the mid to high teens, and we're kind of guiding even in the back half of the year to kind of below that. Is that is kind of, despite a market size that probably wasn't any bigger then than what we're projecting now, is this just kind of a, you know, given this and maybe this investment imperative in tech, we're looking at some intermediate-term lower ROEs as you make these kind of essential investments with hopefully a much more significant longer-term payoff?

David SpectorI think that's right. Look, I'm always I'm always going to present to you what we think is the base case. Everyone on this call knows me well enough that, you know, if we can deliver the results faster, we're going to, and you'll see the results sooner. But, you know, I think, you know, it's going to be, as I said, in the second half of '26, we'll begin to see the results. And I think we will get into that mid to high teens. In the back half, in, I'm sorry, the mid-teens in the, in the back half of the year. But I just think that we want, we want to be very enthusiastic about the technology investments that we're making here. They're very meaningful. And that's something that we want to, you know, we want to see implemented given the fact that we work in a competitive environment and others are doing similar. I think we're, we're ahead of, of most, if not all of them. And I think it's something that we want to continue to maintain our competitive advantage.

Mark DeVriesOkay, great. Thank you.

OperatorThank you. Your next question comes from Don Fandetti with Wells Fargo. Your line is open.

Don FandettiYeah, David, I guess, you know, you talked a lot about the ROE and tech investments. I mean, if you look at the industry, there are some large players, a lot of investment going on, like What gives you the confidence that this is sort of a, you know, 4-quarter kind of situation? Why not take that longer-term ROE down? And I guess, is this incremental spend— it sounds like it's more offensive. I guess you've had some good improvement looking at the conventional loan, consumer direct recapture up to almost 30%. Like, is this offensive or defensive type incremental investment?

David SpectorI believe it's offensive, Don, and I'll, I'll tell you where we, where we get our confidence from is first, if you just started servicing and what we've done with our servicing technology and driving down our cost of service to industry-leading lows, and I'm not talking by a few dollars here, I'm talking by a lot, and our ability to be able to serve our customers and be able to react to market market anomalies. And what we've done in servicing gives me great confidence that we have, we have the culture to be able to identify what the business opportunities and needs are and the technology leadership to be able to deliver those on a low-cost basis. Similarly with AI, what we're seeing is a lot of ability for our business leaders to take ownership and control of developing and building and implementing the AI agents. And they have a staff in place that requires augmentation by moving people out of technology into the business units to build those agents.

David SpectorNow, over time, the demand for the agents and the other AI tools is going to lessen. But, you know, I believe our business leaders who are, who have been very tech-focused, you know, since we started the company, understand what needs to be done. And so I, I, I, you know, I, that's a factor, you know, in my decision-making here. And then finally, with what I'm seeing on Vesta in the platform and the way it's built and the, and the ease to which we can deploy the agents into our workflow is very meaningful. And that's work that is— that has to be done by the team here as well. And so I just— I generally believe that we're at a point in the market where we have to go on offense, and we're going to do it, you know, as we always do. You know, we're rows and columns folks. We're going to do it responsibly. We're watching the investment. But as I said, I believe we're at or near our peak levels. And, you know, given with what I'm seeing in the revenue per loan increasing gives me great confidence in terms of our ability to, you know, to pay for some of it, you know, to pay for some of it, but also with what I, with what I really expect to see in terms of the cost reduction is gonna be very meaningful.

Don FandettiOkay. Thank you.

OperatorYour next question comes from the line of Trevor Cranston with Citizens JMP. Your line is now open.

Trevor CranstonThanks. A bit of a follow-up on that last question. You know, when you think about companies across the industry, you know, investing pretty aggressively in AI and new tech, you know, with the goal of making it cheaper to originate loans and faster, you know, how do you guys think about the long-term impact of that in terms of, you know, do you think that ends up resulting in companies just sort of structurally competing down gain-on-sale margins to a lower level than they've been historically? I'm curious kind of how you guys think about that dynamic when you think about kind of long-term ROE guidance for the company.

David SpectorThanks. Look, I think that we have to compete based on cost to originate And ultimately on price, especially in our consumer direct channel. I think on broker direct, you know, I think that if you look at what's taken place in the marketplace and you look at the Q1 results, you know, we didn't see the, the, you know, perhaps margin expansion others may have expected to see. But at the same time, I think that, you know, we're investing in AI because we We believe here at the company that to increase the profitability and to consistently get to ROEs above 20%, we have to be the low-cost provider. And to be the low-cost provider, we have to make the investments in technology to reduce the cost to originate and also to reduce the days to close. And as, you know, as an industry, we haven't seen as much, as much movement on that as well. And so I just think that, you know, we're going to be competing on, you know, whether you want to call it, you know, gain on sale margins or net margins, we're going to be competing on profitability.

David SpectorBut that profitability is going to be more heavily weighted to what the cost is to produce the mortgage and how quickly can you close the loan, especially on a refinance. And so that's where That's where I see really the industry headed. And I think we're just in a really unique position to be able to be a first mover on this, just given the fact that we have scale in all 3 channels and we can quickly deploy technologies we created and to see meaningful results.

Trevor CranstonYeah. Okay. That makes sense. Appreciate the comments.

OperatorThank you. A reminder, if you'd like to ask a question, please press star 1. Our next question comes from Gengxuan— Gengxuan Qiu with Barclays. Your line is now open.

Gengxuan QiuHey guys, thanks for taking my question. Um, you know, leverage is at 1.7 times, which I think is above a historical target. Of 1.5x. I know you mentioned that your ROE guide is somewhat predicated on the two-thirds technology and one-third smaller market. How should we think about where you guys would let leverage run to as you're making these investments if we do perhaps see a smaller market than you currently are anticipating?

Dan PerottiOverall, we're very focused on leverage. As you know, going back historically, we've maintained our leverage at very responsible levels, and the 1.7 times, as you mentioned, is a bit above our historical target or historical run rate. You know, we— as we talked about in the earnings deck, we do expect to maintain our leverage at these levels. We are very focused on maintaining prudent levels of leverage in the business, and we do have the ability to, you know, adjust and reallocate our, our capital in order to maintain our leverage ratios, as we've shown in the past few quarters around optimizing our MSR portfolio and selling certain portfolios to ensure that we stay within leverage bounds. And so despite the increases, or the— our— what we projected for leverage, or what we put out as our projection for leverage at the 1.7 times, contemplates the, you know, the increase or the elevated technology spend that David, you know, that David went through.

Dan PerottiAnd it's also, you know, contemplating the the lower levels of activity with the smaller market. So it contemplates both of those, those factors already. But it is an element in our capital structure, and maintaining prudent levels of leverage is something that we are very focused on and will continue to, you know, to maintain in the business.

David SpectorYou know, I'm focused on this every day, and I, and I think we're at the— I know we're at the upper bounds of where we're we're comfortable running the company. And so, you know, we're going to do what we need to do to, you know, try to get that down more towards, you know, the historic levels that we've seen in the company.

Gengxuan QiuGreat. And then just follow up on the accounting. Can you comment on, you know, kind of what drove the changes in the breakout of the principal-only stripped MBS valuation related to accretion. I don't believe that was in prior quarters, so any comments on that?

David SpectorSure.

Dan PerottiThat, you know, we did make a change there or shift some of that geography, and that really relates to the placement of or some of the impacts to accounting from the principal-only bonds. Versus changes in value during the period. So, you know, not to get too far into the details, but a piece of the principal-only bonds change in value is captured in— and the changes in cash flows relating to interest rates is captured in interest income with changes in accretion. If you, you know, look in our 10-Q for this, you know, for this quarter, which was released this afternoon, you can see there was actually a— a negative impact to interest income due to basically changes in projected cash flows and sort of a reversal of the accretion. Those changes in accretion relating to future projected cash flows and the projected life of the bonds we really view as being associated with changes in fair value during the period due to changes in interest rates, which obviously is also what impacts MSR fair value.

Dan PerottiYou know, the change is typically, if you look at the past couple of quarters that are presented there on page 13 of the earnings deck, has typically been fairly small. But given the change in the volatility of interest rates during the quarter and some of the sell-off, it was, you know, a bit larger this quarter. And we thought that it made sense and was more appropriate to present associated with changes in fair value of the MSR as opposed to— and it is a is non-cash and based on future expected projected cash flows as opposed to in the pretax income excluding the valuation-related changes. And so we've made that change for this period and going back historically.

Gengxuan QiuOkay, thank you.

OperatorWe have no further questions at this time. I'll now turn it back to David Spector for closing remarks.

David SpectorWell, I want to thank everyone for joining us on the call today, and thank you for taking the time to ask your thoughtful questions. If you have any follow-up questions, I can make myself available. IR is available, and I look forward to ongoing results and good discussions taking place. Thank you very much.

OperatorThat concludes today's call. You may now disconnect your line.