Shanna Chee

Shanna Chee asked about PennyMac Financial Services' (PFSI) strategy for increasing Consumer Direct capacity and managing excess origination capacity, particularly in light of higher-than-expected MSR amortization and competitive refinance markets in Q4 2025. She also inquired about the company's ROE guidance, the drivers behind faster prepayment speeds, margin dynamics across channels, the potential for structural changes in the industry due to technology, and competition in the correspondent channel. Additionally, she questioned the benefits of Vesta technology, Q1 2026 activity, the trajectory of ROEs throughout the year, MSR cash flow realization, recapture targets, FHA delinquency trends, hedging strategy impacts from Q1 rate volatility, unsecured debt strategy, and the remaining share buyback authorization.

Answer

Chairman and CEO David Spector and CFO Dan Perotti explained that Q4 saw increased MSR amortization and intense refinance competition, impacting production margins. PFSI is accelerating Vesta implementation, adding capacity, and refining recapture strategies to improve Consumer Direct performance and achieve mid-to-high teen ROEs by mid-2026. They detailed the ROE forecast, including expected origination market size, channel growth, and margin expectations (without significant expansion). Management acknowledged market-wide surprise at prepayment speeds, noting competition on higher-balance loans and the lack of margin expansion. They clarified that Vesta will both reduce costs and increase capacity, with AI tools further enhancing efficiency in 2026. January 2026 showed good production and increasing recapture, with margins holding. FHA delinquency increases were attributed to a policy change requiring trial payments for modifications, expected to be a temporary lag. The hedge ratio is near 100%, with only slight Q1 impacts from basis movements. PFSI manages debt via Non-Funding Debt to Equity, with potential for more unsecured debt tied to equity and MSR growth. The company has over $200 million in buyback authorization.

Shanna Chee inquired about the significant increase in PennyMac Financial's FHA delinquencies in Q4, seeking context on the drivers, and asked about the impact of Q1 rate volatility on the company's hedging strategy given its increased hedge ratio.

Answer

CFO Dan Perotti attributed the FHA delinquency increase primarily to a Q4 FHA policy change requiring trial payments for modifications, creating a temporary lag, and expects EBO redeliveries to recover in Q1. He acknowledged a slight, non-substantial impact on Q1 hedging results from basis movements related to GSE buying announcements. Chairman and CEO David Spector added that the hedge performed well in Q3 and Q4, and despite recent basis changes, continues to perform as expected.