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Date

Tuesday, May 5, 2026 at 5 p.m. ET

Call participants

  • Chairman and Chief Executive Officer — David A. Spector
  • Senior Managing Director and Chief Financial Officer — Daniel O. Perotti

Takeaways

  • Net Income -- $82 million, representing $1.53 in earnings per diluted share and an 8% annualized return on equity.
  • Adjusted Earnings -- $118 million in adjusted net income, or $2.19 per diluted share, equating to an 11% adjusted annualized return on equity, after excluding valuation-related changes and Cenlar transaction expenses.
  • Production Segment Pretax Income -- $134 million, more than double the prior year's quarter and up 5% from the fourth quarter.
  • Total Acquisition and Origination Volume -- $37 billion in unpaid principal balance, down 12% sequentially from the fourth quarter; comprised of $34 billion for proprietary accounts and $3 billion in fee-based activity for PMT.
  • Correspondent Channel Acquisitions -- $24 billion, a 20% decrease from the fourth quarter; margins increased to 28 basis points from 25 basis points due to a higher mix of government loans and increased average revenue per loan.
  • Broker Direct Originations -- Originations rose 3%, and lock volume increased 26% from the fourth quarter; approved brokers up 12% year over year.
  • Consumer Direct Channel -- Originations up 15%, locks up 24%, and revenue contribution up 30%; revenue per loan increased sequentially, despite slightly lower margins.
  • First Lien Conventional Refinance Recapture Rate -- Increased to 22% from 17% sequentially, and reached nearly 30% in April.
  • Technology Investment -- Accelerated spending in technology and AI-driven process improvements, with the Vesta origination system fully deployed to consumer direct; direct expenses in the consumer direct channel reduced by 26% compared to 2022.
  • Operating Expenses in Servicing -- Operating expenses as a percentage of average servicing portfolio UPB dropped 24% to 4.5 basis points versus 2022.
  • Servicing Portfolio -- Ended the quarter at $720 billion in unpaid principal balance, down 2% sequentially, largely reflecting offsetting new production versus runoff and MSR sales.
  • Servicing Segment Pretax Income -- $13 million; excluding valuation changes, $57 million, or 3.1 basis points on average servicing portfolio UPB, up from 2.5 basis points in the prior quarter.
  • Mortgage Servicing Rights (MSR) Fair Value -- Net increase of $177 million: $201 million from market interest rates, offset by a $24 million decline from other model and performance impacts.
  • Hedging -- Hedge fair value losses totaled $221 million; hedge costs for the quarter were $14 million, primarily attributed to elevated interest rate volatility in March.
  • Leverage -- Total debt to equity was four times and nonfunding debt to equity reached one point seven times, both elevated by higher direct lending production, increased MSR facility utilization, and share repurchases.
  • Share Repurchases -- 560,000 shares, or 1% of outstanding stock, repurchased for $50 million at an average price of $89.28 per share.
  • Liquidity -- Total liquidity stood at $4.2 billion, including cash and undrawn collateral facility availability.
  • Dividend -- A dividend of $0.30 per share declared for the quarter.
  • Cenlar Acquisition -- Integration of Cenlar’s subservicing business remains on track for closure in the second half of 2026, with management expecting "strong returns" and increased diversification.
  • Guidance Update -- Management lowered adjusted return-on-equity guidance for the second half to the "low to mid-teens," citing accelerated technology spending and reduced origination demand at current rates.

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Risks

  • Management explicitly lowered ROE guidance for the second half to the "low to mid-teens" due to increased technology investment and lower anticipated origination volumes at prevailing interest rates.
  • Correspondent acquisitions fell by 20% sequentially and overall production volumes declined 12%, reflecting market softness and increased GSE cash window competition.
  • Hedge costs rose to $14 million, with losses primarily driven by heightened interest rate volatility, resulting in $221 million of hedge fair value losses in the quarter.
  • Nonfunding debt to equity reached one point seven times, exceeding historical targets, with management acknowledging operation at the upper end of their comfort range for leverage.

Summary

PennyMac Financial Services (PFSI 0.47%) reported a sequential uptick in production segment pretax income and improved recapture rates in its consumer direct channel, but overall acquisition and origination volumes declined compared to the previous quarter. Management completed the deployment of the Vesta origination system in consumer direct, citing material efficiency gains and cost reductions, and revealed the transition of broker direct to this technology is planned by year-end 2026. The company’s servicing portfolio experienced a mild reduction in unpaid principal balance, with core operating expenses in servicing and corporate segments falling significantly as a percentage of the servicing base and adjusted revenues, respectively. Total hedge fair value losses and rising leverage metrics were directly linked to heightened interest rate volatility, along with share repurchase activity and increased technology spending related to growth and integration initiatives.

  • Management projected persistence of current adjusted ROE levels in the near term, with expectations for a return to mid-teens ROEs in the second half as efficiency initiatives deliver results.
  • PennyMac’s CEO confirmed, "we're a high teens to low 20% ROE company." in the medium to long run, reaffirming confidence in the impact of current technology investments and planned operational synergies.
  • The acquisition of Cenlar’s subservicing business is described as "equity light" and is not expected to alter existing hedging strategies or materially change MSR risk dynamics for the company.
  • AI-driven lead prioritization and mortgage origination process automation are advancing rapidly, with PennyMac experiencing "exceptionally low manual intervention" and aiming to eliminate human touch points in loan processing where feasible.
  • Direct expenses in the consumer direct channel and compensation as a percentage of adjusted revenue in corporate segments have dropped by 26% and 44%, respectively, compared to 2022 benchmarks.

Industry glossary

  • MSR (Mortgage Servicing Rights): The contractual right to service a mortgage loan and receive compensation for performing servicing tasks.
  • UPB (Unpaid Principal Balance): The remaining principal amount on mortgage loans, excluding interest, fees, or other costs.
  • Recapture Rate: The percentage of refinanced loans retained by the original servicer or lender when borrowers refinance existing mortgages.
  • EBO (Early Buyout): The process of purchasing loans out of Ginnie Mae pools when loans become delinquent, often for portfolio management or modification purposes.
  • Non-QM: Non-qualified mortgage; loans that do not meet the Consumer Financial Protection Bureau’s requirements for QM status, including certain documentation, DTI, or product type standards.
  • GSE Cash Window: A sales portal managed by government-sponsored enterprises (Fannie Mae and Freddie Mac) through which mortgage originators sell loans and receive cash.

Full Conference Call Transcript

David Spector: Thank 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 or an 8% annualized return on equity. Excluding the impact of valuation-related changes and transaction expenses related to our acquisition of Cenlar's 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. In 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 segment, 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. Turning 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's subservicing business in the second half of the year. Our teams are collaborating effectively to ensure a seamless integration of Cenlar's 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. On recapture, I am also pleased with the meaningful progress we have 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 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 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 2 main factors.

First, we have decided to meaningfully accelerate our technology investments 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 31, we serviced a combined $320 billion in UPB of loans with note rates above 5%, of which more than half had note 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. We 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%. We 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 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 cost 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, we will have removed human touch points entirely, thereby improving the customer experience, further increasing recapture rates and driving higher operating margins. Furthermore, 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 chart, 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 continued to enhance workforce productivity and automate complex tasks through the deployment of sophisticated technology. In our corporate and other segment, we are clearly achieving more results.

By 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 a 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.

Daniel Perotti: Thank 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 $0.66 difference between our GAAP and adjusted EPS was driven by 2 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. As 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. Total 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 accounts 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 towards 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.

Under its fulfillment agreement, PMT retains the right to purchase all nongovernment 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 continued 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. Though margins were down slightly, revenue per loan increased, reflecting an increase in our average loan balances. Additionally, we recently launched the non-QM product within our broker direct channel and are already seeing strong initial take-up and positive traction from our broker partners as they leverage our expanded product suite. Lots 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 blocks.

In consumer direct, volumes were up with originations up 15% and locked 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. Production 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 end despite runoff in MSR sales, which were largely mitigated by additions from new production. The 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 fees increased slightly from the prior quarter, realization of MSR cash flows was down 7% due to the expectation of lower prepayment fees in future periods resulting from portfolio burnout. Operating expenses remained low at 4.5 basis points of 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 stripped 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.

Corporate 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's subservicing business. The prior 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 4x and nonfunding debt to equity at the end of the quarter was 1.7x.

The increase in total leverage was driven by higher direct lending production and the increase in nonfunding 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?

Operator: I would like to remind everyone we will only take questions related to PennyMac Financial Services, Inc. or PFSI. [Operator Instructions] Our first question comes from the line of Doug Harter with BTIG.

Douglas Harter: Hoping you could talk about any impact the volatility had on revenue margins in the quarter whether it was increased hedging costs or less effective execution.

David Spector: Congrats on the new role.

Douglas Harter: Thank you, David.

David Spector: So on the production side, I am really encouraged by what I saw take place in the first quarter. On the correspondent side, we saw margins up quarter-over-quarter from the fourth quarter, and we're seeing a continuation of that as we start the second quarter. In GPO, we're seeing margins currently holding near to the levels we saw in the first quarter. They're actually up a bit, and they're up from the fourth quarter. In our consumer direct channel we're seeing a consistent margin story there, while the mix is going to -- the mix in the second quarter will probably warrant a higher margin of course.

But I'll tell you that just the focus that we're seeing in the company in driving up the revenue per loan is really showing in our results that we saw in Q1. It's going to continue to be a focus of the company. On the hedge side, Dan, do you want to answer on the hedge side?

Daniel Perotti: Sure. 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 saw in terms of the results and how we laid it out. We think we navigated that volatility well overall with respect to our rate impacts, 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.

Operator: Your next question comes from Kyle Joseph with Stephens.

Kyle Joseph: I guess, yes, as it pertains to hedging, I'd start, and I did hear the operator's warning, but just pending the acquisition how are you thinking about balancing hedging with how the business looks on a pro forma basis? Like, any changes we should expect there?

Daniel Perotti: No real changes expected to our hedging strategy as we get through the acquisition. Just to refresh, the business that we're acquiring from Cenlar, their subservicing business is not the MSRs. They have -- it's really a fee-for-service business and so equity light. They don't have any MSRs in 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 not really change with respect to the additional subservicing business that we're bringing on.

Kyle Joseph: Got it. And then just to follow up, just been getting more and more questions on the Homebuyers Privacy Protection Act and how you're thinking about any potential changes to position the business to best address that?

David Spector: Are you referring to the trigger leads, Kyle?

Kyle Joseph: Yes. Exactly. Yes.

David Spector: Yes. It's really early. The law went into effect on March 5, and we're just starting to see loans come through that funded that locked at or after that date. We'll have a much better look through in the second quarter. But from the little that we've seen, it's generally positive.

Operator: Your next question comes from the line of Bose George with [ KBW ].

Bose George: Actually, just in terms of your guidance, it looks like you removed the high teens part of the guidance. Now it seems like it's the mid-teens. Is that a reflection of the smaller -- the mortgage market that's expected this year with the move up in rates?

David Spector: We are -- 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. In the short to medium term, there's really 2 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 across our production channel and our servicing channel. On the production side we've deployed our new technology into our consumer direct channel.

And now we are very busy 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 the early results that we're seeing from both, we feel it's incumbent upon us 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 going to lead to just growing scale within our consumer direct platform. Similarly 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 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 the full migration taking place 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 -- not hopeful, I know we'll see in the second half of this year. And then we're always looking to reduce costs in our correspondent channel and 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 Gemini and Claude 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 to service., okay? And 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 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 a lot of good exciting investment that I expect is going to really deliver returns starting in the second half of this year, but into '27 and '28. And 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 the Fannie MBA average 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 for the future, I suspect and I believe they will be lower. And so that will lead to lower production volumes. Some of that will be offset by lower amortization on the portfolio. But I think given the results we're seeing out of our production units, when rates do decline, I expect to see very good recapture coming out of our consumer direct channel. I expect to see broker direct continue to grow share while growing revenues. And in our correspondent channel, they had a great first quarter.

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

Bose George: Okay. Great. That's great color. And 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 there's -- you're leaning more into the broker and direct-to-consumer?

David Spector: I think, look, we lean into all 3 channels, but we do so to do it profitably, okay? We -- I often tell people around here since 2023, we, as an industry, have underexecuted to our cost of capital. And we, as an industry, have 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 it's something -- is a byproduct of our leadership position.

But I think that 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 similar in Q2 for sure, and then we'll see what happens after that.

Operator: Your next question comes from the line of Mark DeVries with Deutsche Bank.

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

David Spector: I would say it's about 2/3 technology, 1/3 smaller origination market. I think that the returns we're seeing from the investment are really compelling. And so 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 we feel very strongly and convicted that we want -- that we're going to make the investment. And I think, as I said, we'll see tech at 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 the decline of technology spend over the following 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 will reduce it here as we deploy the finite amount of AI agents that we need to in our production and servicing divisions.

Mark DeVries: Okay. That's helpful context. And that may help answer the second part of my question. But when I just look back to -- excluding the last 2 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 the market size, it probably wasn't any bigger then than what we're projecting now.

Is this just kind of a -- given this -- 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 payoffs?

David Spector: I think that's right. Look, I'm always going to present to you what we think is the base case. Everyone on this call knows me well enough that if we can deliver the results faster, we're going to, and you'll see the results sooner. But I think 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 -- I'm sorry, the mid-teens in the back half of the year. But I just think that 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 see implemented, given the fact that we work in a competitive environment and others are doing similar. I think we're ahead of most, if not all of them. And I think it's something that we want to continue to maintain our competitive advantage.

Operator: Your next question comes from Don Fandetti with Wells Fargo.

Donald Fandetti: Yes, David, I guess 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 4-quarter kind of situation? Why not take that longer-term ROE down? And I guess 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 Spector: I believe it's offensive, Don. And I'll tell you, 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 to 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 anomalies. And what we've done in servicing gives me great confidence that 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. Now over time, the demand for the agents and the other AI tools is going to lessen. But I believe our business leaders who are -- who have been very tech-focused since we started the company understand what needs to be done. And so that's a factor 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 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 as we always do. 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 peak levels.

And given with what I'm seeing in the revenue per loan increasing, gives me great confidence in terms of our ability to pay for some of it. But also what I really expect to see in terms of the cost reduction is going to be very meaningful.

Operator: Your next question comes from the line of Trevor Cranston with Citizens JMP.

Trevor Cranston: A bit of a follow-up on that last question. When you think about companies across the industry investing pretty aggressively in AI and new tech with the goal of making it cheaper to originate loans and faster, how do you guys think about the long-term impact of that in terms of -- 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 the long-term ROE guidance for the company.

David Spector: 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 I think that if you look at what's taken place in the marketplace and you look at the Q1 results we didn't see the perhaps margin expansion that others may have expected to see. But at the same time, I think that we're investing in AI because 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 an industry, we haven't seen as much movement on that as well. And so I just think that we're going to be competing on -- whether you want to call it gain on sale margins or net margins, we're going to be competing on profitability. But 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 the refinance. And so 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.

Operator: [Operator Instructions] Our next question comes from Shanna Qiu with Barclays.

Gengxuan Qiu: Leverage is at 1.7x, which I think is above historical target of 1.5x. I know you mentioned that your ROE guide is somewhat predicated on the 2/3 technology and 1/3 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?

Daniel Perotti: Overall, we're very focused on leverage. As going back historically, we've maintained our leverage at very responsible levels. And the 1.7x, as you mentioned, is a bit above our historical target or historical run rate. 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 adjust and reallocate 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 bound.

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 1.7x contemplates the increase or the elevated technology spend that David went through. And it's also contemplating the lower levels of activity with the smaller market. So it contemplates both of 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 maintain in the business.

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

Gengxuan Qiu: Great. And then just a follow-up on the accounting. Can you comment on 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?

Daniel Perotti: Sure. That -- we did make a change there or shift some of that geography, and that really relates to the placement of some of the impacts to accounting from the principal-only bonds versus changes in value during the period. So not to get too far into the details, but a piece of the principal-only bonds change in value is captured in the changes in cash flows relating to interest rates is captured in interest income with changes in accretion.

If you look in our 10-Q for this quarter, which was released this afternoon, you can see there was actually 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. 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 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 noncash 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.

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

David Spector: Well, 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.

Operator: That concludes today's call. You may now disconnect.