PennyMac Financial Services - Q2 2023 (Q&A)

Transcript

Operator (participant)

Good afternoon, welcome to the PennyMac Financial Services Inc. second quarter 2023 earnings, live earnings Q&A session. Additional earnings materials are available on PennyMac Financial's website at pfsi.pennymac.com. Before we begin, let me remind you that this Q&A session may contain forward-looking statements that are subject to certain risks and identified on slide two of the earnings presentation, that you 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 material. I would like to remind everyone that we'll only take questions related to PennyMac Financial Services Inc., or PFSI. The live Q&A session for PennyMac Mortgage Investment Trust, or PMT, will begin on our webcast at 5:45 P.M. Eastern Time. For additional materials related to PMT's earnings and live Q&A session, please visit pmt.pennymac.com.

We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we would like to ensure that we answer as many questions as possible. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, it's star one. Now, I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial Chief Financial Officer.

David Spector (Chairman and CEO)

Thank you, operator. I'd like to welcome everybody to PennyMac Financial's first live earnings Q&A session. As you all know, historically, we've not done a live earnings call, we believe strongly in the continued evolution of our strong and accessible Investor Relations team, and we believe that now is the appropriate time to introduce this live call. We believe these Q&A sessions will give stakeholders increased transparency into our business in a timely manner. Although we are introducing a live call, you can rest assured that we'll maintain our strong ongoing commitment to investors and analysts via conferences, non-deal roadshows, phone calls, and other industry events. Now, we'd like to begin taking questions. Operator?

Operator (participant)

As a reminder, if you would like to ask a question, simply press star, followed by one on your telephone keypad. We'll now take your first question. Your first question is from the line of Kevin Barker with Piper Sandler.

Kevin Barker (Managing Director and Senior Research Analyst)

Great, thank you. Thanks for doing this call. I think, I think it's important to have that disclosure with everybody. I, I wanted to address, page seven of the presentation. You know, you make a, a guidance in there that PFSI's ROE is projected to trend towards the pre-COVID range, for during 2023. Could you, you know, just maybe add a little more color around that on what your definition is of the pre-COVID range? Then when you say trend towards it, does that mean attain it, or get close to that level, and potentially or, or reach it in 2024? Thank you.

David Spector (Chairman and CEO)

Look, hi, Kevin. How are you doing? Look, I think that, as, as we know, pre-COVID, we ran an ROEs of just slightly under 20%, about 19%. We had the two COVID years, and since then, you know, we've, we've been in single digits. To try to put an exact time on when we're going to get, you know, to a certain point is not what we're trying to address here. What we're saying is that we believe that we bottomed out sometime in the prior quarter, and last quarter, you know, we were at 4% ROE. This quarter, we are at a 7% ROE, and we see ROEs continuing to move up.

A lot of that, most of it has to do with the fact that, you know, the question is what's going to happen with mortgage rates? We've spent a lot of time over the last year, you know, buying a lot of high note rate loans through correspondent to support. The consumer direct channel has. When rates decline, that will provide refinance opportunities. It, you know, the question is: When do, when do rates start moving down? You know, we're in an excellent position to seize on that. You know, there's also, I think, growth opportunities that we see in our production channels, particularly in correspondent and in broker. I think, I think it's, it's, it's, it's a lot of positive feeling here in terms of the, the, the, the acceleration of the ROEs.

Where, where and when, I think is the, is the, is the unknown.

Kevin Barker (Managing Director and Senior Research Analyst)

Okay, just to follow up on that, do you think it's attainable to return back to pre-COVID levels if rates were to remain near current levels? You know, I say that because it's, there's potential where we could have a, a yield curve steepener, the Fed starts to drop rates, and the long end stays elevated for an extended period of time, and we could have mortgage rates, you know, within our range here. Now, obviously, there's a lot more mortgages being produced at a higher rate, but do you feel like lower rates are required to get back to that pre-COVID range?

Dan Perotti (CFO)

Hey, Kevin, this is Dan. I think that, you know, rates declining would be an accelerant to getting back up, you know, higher into, into pre-COVID range. But I think your, your point is a good one, and certainly, you know, in line with our, with our strategy here, where we're adding significant amounts of higher note rate loans, you know, as we, as we move forward in time, you know, we've built that up to about, you know, in terms of loans with note rates above 5%, comprises about 15% of our servicing portfolio, as of the end of Q2. As we continue to do that, that puts more and more of those loans into play for refinance.

You know, you can say something similar about the industry generally, although, not everyone is adding at that, you know, at that same clip. That opportunity, you know, sort of grows just if there's regular interest rate volatility to drive, you know, some amount of refinance volume, increasing amount of refinance volume. While rates declining is would be a sort of accelerant to moving our ROEs back up toward our, our, you know, pre-COVID levels or our, our pre-COVID range, which really to remind folks, you know, the bottom of our pre-COVID range was 11%, so effectively getting back up into double digits. It's not, it's not necessary. It would probably just take, you know, a little bit longer, to the extent that rates stay higher for an extended period of time.

Kevin Barker (Managing Director and Senior Research Analyst)

Okay. Thank you. Thank you, Dan. Thank you, David.

Dan Perotti (CFO)

Thanks, Kevin.

Operator (participant)

Your next question is from the line of Michael Kaye with Wells Fargo.

Michael Kaye (Equity Research)

Hi, you had a very strong pickup in production margins this quarter. Could you just talk about, I mean, do you think that's sticky? Was there any sort of one-time dynamics in there? Could we, could we continue to see the momentum into Q3?

David Spector (Chairman and CEO)

I think, I think that, you know, the margin story was a really good one in the second quarter, and, you know, we're seeing an, a continuation of that in, in this month. I think that, you know, we're seeing in the broker side, we're seeing pricing holding in where, where it was in the second quarter. We're seeing a return to the rational pricing that we expected. Similarly, in the consumer direct channel, we're seeing good margins there. I think that that gives us a lot of, a lot of, you know, strong, strong belief that, you know, we'll continue to see it. On the correspondent side, you know, we've seen margins come back into correspondent in a nice way.

You know, in the, in, you know, in the second quarter, in PFSI, in the correspondent sector, we saw, you know, margins go up from 25 basis points to 33 basis points, and we're continuing to see them hold in nicely for our correspondent as well. I like the margin story. Still, I think there's a little bit more room in correspondent, you know, especially as, as, as you see, you know, with the banking regulations that have come out and how MSRs are being treated, I suspect that we'll continue to see some, you know, some good margin opportunity or margin increase opportunity in correspondent, especially.

Michael Kaye (Equity Research)

Okay. That's glad to hear. I know there's a lot of talk with the, the, the consumer direct segment, you know, originating these high note rate MSRs for, you know, when eventually we do get a rate dip. In the meantime, is there any initiatives in the consumer direct channel to try to gain a foothold in the purchase market as you wait for the refis to eventually rebound?

David Spector (Chairman and CEO)

Look, we have a really, I think, a really good product introduction that we introduced about a year ago in closed-end seconds. We're seeing an increasing amount, of course, of closed-end second originations. They're running about, you know, at the moment, we current run rate about $50 million-$60 million a month, at profitable levels. What that's allowing us to do is a few things. Number one, it's allowing us to offer our current existing servicing customers the ability to take cash out of their properties. It's also keeping them from doing cash out refinances, which I just, I can't, you know, see why anyone with a low note rate first, which is, you know, which is a lot of our portfolio, [refiing] out of their low rate first just to take out cash.

Having that fixed-rate second product is really important, and it's been, been really powerful. The other thing about the fixed-rate second program is it's allowing us to keep capacity in place, and that capacity can, can then, as rates decline, offer rate and term refinances, in addition to cash out refinances, in addition to closed-end seconds. It's, it's very much, you know, allowed us to keep, you know, capacity in place, such that when rates decline, we can, we can pivot over. We, you know, we had some, you know, earlier in the year, we had a brief period when rates got low, and we were able to pivot to take advantage of that opportunity.

The closed-end second product is a good one, and I think, what I like about the closed-end second product is you can have first lien rates decline, but still have demand for closed-end seconds, given, given the sheer number of, of low interest rate first that we have in the portfolio. That's, that's been a really, a really great product for us. You know, I also think that given the banking regulations that were just announced this morning, and we had a brief review of them, I think there's going to be an opportunity for a return to of some securitization. I think that, you know, there's going to be a lot, a lot of discussion and changes that, that I think potentially can take place.

Suffice it to say, I think given, given what happened with the regional banks last quarter, given these banking regulations, there's going to be a need for non-bank capital to support, you know, jumbo loan originations, in particular. I'm encouraged by that as well. We have a jumbo product out, you know, in all three channels that I think is, I think, gonna be very valuable to us as things settle down here.

Michael Kaye (Equity Research)

Okay. Thank you.

Operator (participant)

Your next question is from the line of Doug Harter, Credit Suisse.

Doug Harter (Director)

Thanks. Hoping you could talk a little bit more about the hedging strategy and, you know, some of the comments that, you know, kind of the cost in July has, has, has come down. You know, just, you know, how you're thinking about hedging the portfolio differently given the yield curve and, and kind of given how far out of the money, you know, 85% of your servicing portfolio is?

David Spector (Chairman and CEO)

Yeah. So look, I think, I think we, we have historically, you know, from the day we started this company, we've hedged our servicing portfolio, and I think we have a, we have a tremendous track record in doing so. I think that we have now- you know, we've seen over the last year, a, a really unique environment where, you know, we've gone from a pretty steep yield curve to an inverted yield curve, and we've seen a lot of volatility in the market. What that's meant is that the cost to hedge has gone up to levels that we have not, that we have not seen. In, you know, in the process, we've had to really look at our hedging program and ask ourselves: how do we want to think about what it is we're hedging, and what are we hedging for?

Historically, we've had a bias to rising rates, and that bias to rising rates has been primarily because as rates, as rates increase, we have loans in the pipeline we have to close out, we have infrastructure that we need to right-size, and there's a cost to that. Given the levels we're at today and given the levels of activity, that need is nowhere near what it was, you know, two years ago. The need to have gains in a sell-off, are largely, you know, have largely dissipated. Similarly, when we look at our rally profile, you know, we have a lot, as Dan pointed out, we have a lot of high-rate loans that in a rally, we believe that we can seize on the refinance opportunity faster than anybody, and that means we would have, you know, profitability in that rally.

That allows us to open up a little bit more exposure in a rally. In looking at that, combined with the fact that volatility was at historic highs, we said to ourselves, "Okay, we need to adjust our hedge for that." That cut down the hedge cost down tremendously, you know, from, call it, the beginning of April to the beginning of June. You know, in June and July, we, you know, I'm really, I'm really happy with what I'm seeing in terms of the hedge costs associated with hedging the portfolio, the performance of the hedge, as well as, you know, is it providing what we need it, what we need it to provide for?

I think, I think we're gonna, you know, we're gonna continue to see those levels maintain. Look, volatility to buy, you know, to put on the hedges were pretty much at an all-time. They were at an all-time high at one point, even higher than when COVID hit, at one point in the second quarter. You know, it's, it speaks to the nimbleness of, you know, Will and Dan and the team to be able to adjust accordingly and, and, you know, react to those high hedge costs.

Doug Harter (Director)

I guess in, in addition to the, the lower hedge costs, is there any capital or liquidity that's freed up by, you know, kind of the new, you know, hedging, you know, strategy you have in place?

Dan Perotti (CFO)

Not, not in particular, freeing up, you know, capital or liquidity. We do have, you know, really significant amounts of liquidity. You know, at this point, we have, you know, $1.5 billion of cash on the balance sheet. We have the ability to draw down, significant amounts more from our, secured financing lines, up to nearly, you know, $3 billion if the, if the need came. This doesn't really change, significantly our, you know, our liquidity pro or the hedging change doesn't really significantly change our liquidity profile, and similarly, you know, really similarly on, on the, on the capital side. You know, that wasn't, necessarily the primary focus of those changes.

It was really more around, you know, constraining some of the costs while, you know, still keeping a prudent hedge, you know, sensitivity profile, allowing for potentially, as David said, not, not as great a gains in a sell-off, and still keeping, you know, limitations on the, the exposure that we could see in a rally in terms of the net change on the MSR.

Doug Harter (Director)

Great. Appreciate it. Thank you.

Operator (participant)

Your next question is from the line of Bose George with KBW.

Bose George (Managing Director)

Hey, guys. Good afternoon. Just wanted to ask about the bulk market. You know, obviously, historically, you haven't done much there, but it seems like returns are very attractive. So just curious if you have any possibility of dipping a toe in there?

David Spector (Chairman and CEO)

Yeah. I'll let Dan go into what we're seeing, in particular in the bulk market. Generally speaking, when we think about investing in servicing both, investing through correspondent is at the top of our list of, you know, what is our economic best execution. Number one, we, you know, we can go through all the diligence of the loans, we can review the loans, we know the counterparties, we can price and correspond to create the servicing portfolio that we wanna own.

Then similarly, when we create the MSR, there's a, there's a tax benefit that makes owning all MSRs much more economically attractive to us than own, than owning bulk MSRs. Having said that, we do look at, we do look at all the bulk MSR packages that come out. Look, I think, I think there's a lot, there's a lot of discussion about the yields in the bulk MSR market that are being thrown around. You know, our, I think that, you know, we're not going to be the counterparty that's going to price a bulk MSR with, with the longest higher for longer, you know, scenario. You know, we, we're not going to price bulk MSRs just on a marginal basis. As we look at the bulk MSR market, we do see some attractive packages.

In PMT, by the way, we bought a small package, you know, last month or this month, I should say. You know, it meets the, it met the PMT required returns. You know, I generally am of the view that, you know, there will be more bulk MSRs coming out, and we'll be looking at the packages, and we will, we will opportunistically, if, if the, if the opportunity arises, we will, we will, purchase such a package.

Dan Perotti (CFO)

Right. Yeah, in terms of, in terms of the, the returns, that we see on the MSR packages, I think, you know, we don't see it, I, I think, in the exact same way as others. Really more probably on the conventional side, closer, you know, to high single digits. You know, as David sort of alluded to, that may be related to what, what's the expectation for rates that are, you know, built into those assumptions. Because there's a, you know, a lot of other assumptions that can drive what you estimate the returns to be over time. As, as David said, they, they, they can be attractive. In some cases, we did, for PMT, purchase a small bulk, MSR portfolio on the conventional side.

On the government side, you know, the availability of those packages has been, or the flow of those packages has been, you know, significantly lower, and we haven't seen any, you know, any opportunities that really we thought made sense to, to, to hit on. You know, we'll, we'll continue to, to evaluate them, but really, as, as David said, we think there are a lot more advantages to deploying our capital by investing, you know, into the correspondent, into MSR via the correspondent channel at higher note rates, where we have control around the specific loans that we're bringing on, as opposed to via bulk packages.

Bose George (Managing Director)

Okay, great. That's very helpful. Thanks. I just wanted to go back to the, you know, the bank regulatory stuff again. I mean, you noted that it could bring back the non-bank loan securitization. Specifically on, just on the MSR side, I mean, do you feel like that could trigger more activity? It looks like, I guess, more banks will have a restriction on, or I guess, hit that 10% sooner as well, so, like a bigger pool of banks there.

David Spector (Chairman and CEO)

I do. I do. I think that, I think, I think it's going to create opportunity, you know, for, for banks that want to sell MSRs. I think that, you know, it's going to, it's going to attract. On the flip side, it will attract probably some more capital to the space, which is, which is, which is not the worst thing. I think that it's, you know, there's a lot of, there's a lot of questions that really, really need to, need to be answered. Look, it could have, it could have its effect also in the correspondent space, because remember that there are, that there are bank-owned correspondents or bank correspondent divisions that, you know, end up. They're in that business basically to own servicing.

Bose George (Managing Director)

Mm-hmm.

David Spector (Chairman and CEO)

So that, that, that could, that could help in correspondent, and that's why I'm generally bullish. I think in the long run, margins will, you know, find their way up in correspondent.

Bose George (Managing Director)

Yeah. Okay, great. Thanks a lot.

Operator (participant)

Your next question is from the line of Henry Coffey with Wedbush Securities.

Henry Coffey (Managing Director)

Yes, good afternoon, and thanks for taking my call. I was just looking through the, the deck, and you know, the uptick in PFSI correspondent, I assume lots of that's Ginnie Mae-related government products. Is, is that more, you know, we'll call it, cyclical and, and tied or, or just tied to the housing wave that sort of comes in the summer? Or is that reflect gains in market share on your part into the correspondent business?

David Spector (Chairman and CEO)

Look, I think the, I think the, I think, I think the correspondent story in the, in the, in the second quarter is a really interesting one, and there's a lot that went on there. First up, we, we moved a lot of the bulk business that we have been purchasing in PMT. PMT sold those loans to PFSI as a way for PMT to further diversify its investments between MSRs and credit-related debt, credit-related investments. We saw more of that business move over to PFSI. We saw more conventional business come into correspondence. Having said that, you know, the, the, the increase in correspondent quarter-over-quarter was about 5%. I think that there's a, there's a, there's a, there's a lot going on behind that number.

First of all, with the regional bank crisis in the first quarter, we saw, you know, bank-owned correspondent divisions, really pull back from the market. We had a really big Q1, so in Q2, we saw them come back, which I think brought, you know, it back more in line to what we had, to the pace that we've been running before the regional bank crisis really, really hit. In addition, in corresponding Q2, on the conventional side, we saw the GSEs implement pricing changes that, you know, felt to me that they weren't necessarily given to everybody, and in the, you know, in the process, it had some adverse impact on results.

We've begun to see those ease up in July, and we're starting to see that in the pace of activity on the conventional side. On the government side, look, as you all know, we have a very well publicly stated strategy of using correspondent, in particular, to deploy capital to buy high rate loans to preserve the opportunity for our consumer direct channel to refi those loans when rates decline. The trend in the government market has been to retain larger servicing strips, which corresponds to a higher investment in the servicing. That kind of reduces the effect that the refinance provides at the loan level in terms of a return.

We began to look at some of the, some of these pricing strategies that others were implementing in the market. We, we kind of took down our share a little bit on the high servicing strips. We're seeing that kind of also return to kind of normalized levels in July. I think, look, I think it validates and shows how this management team thinks about running these businesses. While we've, two years ago, had some stated market share goals for correspondent broker, consumer direct, and servicing, the big one was 20+, and that's the ROE that we're trying to guide this company to. That's something that, you know, will always, will always be at the top of my list of issues. Look, share is important.

It provides scale, it provides pricing power, it provides halo effects in the multi-channel strategy between correspondent and retail and broker. Though, you know, we're going to have, we're going to have, you know, quarters like we had in correspondent, where we have some anomalies come up. We had a similar one in broker last year when we had irrational pricing, and we kind of stepped aside. I'm generally pleased with the production segment that returns this quarter. Look, in our broker direct channel, we were up 37%, and our consumer direct channel, we were up 47%. You know, we're, we're the number three broker direct originator now, so I'm, I'm really pleased with what came out of our production segment.

Henry Coffey (Managing Director)

With the, the pricing that you talked about with the GSEs, was that favorable to large independent originators like yourself, or was that more of a pricing penalty?

David Spector (Chairman and CEO)

Look, I, I don't, I don't, nor can I really go into what the GSE, the specific pricing, changes that they put in. Suffice it to say, I, I don't think it advantaged us. I know it didn't. I think.

Henry Coffey (Managing Director)

Mm-hmm.

David Spector (Chairman and CEO)

I think the more, the, the more, I would say, frustrating part was the fact that they didn't provide pipeline protection. They just implemented immediately. Any loans that we were waiting to, to ship or any loans that we had given out interest rate lock commitments to, were affected by it. Now, we've changed our pricing methodology, so, you know, the borrower has to sort of bear that option cost now. That's, that's kind of what, what the pricing changes are that I'm referring to.

Henry Coffey (Managing Director)

Mm-hmm. Great. Well, thank you very much for taking my question and holding this call.

David Spector (Chairman and CEO)

Thank you, Henry. Nice hearing your voice.

Operator (participant)

Your next question is from the line of Kyle Joseph with Jefferies.

Kyle Joseph (Analyst)

Hey, good afternoon, guys. Thanks for taking my questions. Sorry, I've been, been on and off, so apologies if this has been asked. Just, and I think you touched on it briefly on Henry's question, but just, in terms of the broker, I know you guys have moved up, moved up to number three there, but kind of outlook for margins. Obviously, they recovered again in this quarter, but, you know, going, going forward, is this going to run rate, or is there potentially some more upside there?

David Spector (Chairman and CEO)

Look, I like where I, you know, we always want more margin. I'm always trying to convince Doug and the team to get margins up. Look, we had really good margins last quarter, but, you know, in the mid-80s. I think there's a little bit of room there, you know, smidge, you know, but I don't. I think we're at a really good level there. I think that it's giving us the opportunity to, you know, increase the number of brokers that we're dealing with, provide a strong number two alternative to those who sell to the top two broker originators.

You know, we're, we're making really good, really good progress, in terms of the tools that we are deploying into, into Broker.

Kyle Joseph (Analyst)

Got it. That's it for me. Thanks for answering my questions.

David Spector (Chairman and CEO)

Thank you.

Operator (participant)

Your next question is from the line of Eric Hagen with BTIG.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

Hey, thanks. How we doing, guys? Got a couple questions here. As the MSR portfolio maybe continues to grow, how much room do you have to borrow more on your MSR lines? How do you think about maybe using secured leverage versus possibly coming back into the market with unsecured debt, to finance that portfolio if, if credit spreads continue to tighten?

David Spector (Chairman and CEO)

Sure. We've got a pretty significant amount of, you know, of borrowing capacity versus, versus our MSRs. Yeah, on page, you know, on page 22 of, of the, of the deck.

Dan Perotti (CFO)

You can see it, our secured, revolving bank financing lines for MSR, we have about $3 billion, we only have $400 million drawn. We have a fair amount of capacity there, more than that, that allows for some room for growth and some room for appreciation if interest rates were to go up further as well. In terms of how we're thinking about going forward and financing our balance sheet, our preference, our preference generally is to move toward more unsecured, more unsecured debt over time. I think that'd be supportive of ratings and the ratings profile and sort of lead to better financing costs on the unsecured side.

There are also, you know, benefits in terms of reduction of any exposure to, you know, margin calls, because although we do have term debts, for, you know, for the MSRs, a lot of that is based on the total collateral base and can require margin calls. Our hedging program helps to insulate against that, but we do believe that unsecured debt over time would be preferable. We're continuing to, you know, look for opportunities, where we might enter, you know, enter into the unsecured debt space again. Really, in some sense, also depends on the, you know, the differential between funding cost of the secured debt and the unsecured debt.

You know, we have seen in recent periods there be fairly, you know, fairly attractive pricing in terms of some of the secured debt we have issued, secured term loans. You know, in, in PFSI, and it was really in, in Q1 at a, an attractive spread, 300 over SOFR. You know, I think that the, the depth of that market is somewhat limited. So, but continuing to look at what the balance is between being able to issue that unsecured debt and what, an attractive entry point might be in the current market versus, you know, where we can finance, on a secured basis.

David Spector (Chairman and CEO)

Look, I think, I think we've done a really nice job in, in, you know, plumbing out different avenues for us to raise debt. You look at the, you know, the term loan debt that we've issued, we have our VFN structure that we have with Wall Street banks that you can issue term notes off of. We've issued almost $2 billion of unsecured debt, kind of laid the groundwork for us to issue more unsecured debt. I really think that, you know, we're going to and we're going to try to keep all avenues available to us, but I think to Dan's point, you know, the unsecured debt route has, has some really good effects for us as we think about ratings and we think about liquidity and driving down those costs.

You know, I think, we'll continue to look to access all those markets.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

That's really helpful. Thank you, guys, for that. I think, I think just one more for me. I know we're trying to wind down here, but lots of discussion around loan modifications, even the structure for FHA loan mods and how effective those can be at higher interest rates. Like, how many loan mods are you guys doing right now? You know, what kinds of things are you maybe looking for to control the credit risk in the FHA portfolio, even, even though the health of the consumer, you know, on, on many levels, looks relatively, you know, good and strong right now? Thank you, guys.

David Spector (Chairman and CEO)

Yeah, look, I think, I think, I think the, the FHA has done a tremendous job in, you know, in the loan modification programs that they do offer. We're seeing an uptick in the 40 year program. You know, I think that, you know, that's, that's, you know, I think only going to grow as a, as a way to, you know, extend out the term of a, of the loan. Look, our portfolio, our, our delinquency numbers are really strong. I think that that's something that, you know, we're watching like a hawk, like everybody is who owns servicing. I think that that's, that's really one of the best, really one of the best stories about, about the investment servicing.

You know, there was, there was an ever so slight increase, but still well below what we've, you know, historically seen in servicing. Advanced balances were down as well. So I just, you know, I think that we are, you know, we're set up that if there is a turn in the economy or the market, we do see delinquencies increase, we have the capacity in place in our servicing division to be able to meet the customer's needs. More importantly, we have the technology in place to be able to meet the demand. If you recall, during COVID, we had a tremendous usage of our, of our website and using of electronic means to provide forbearances. That's something that we'll continue to expect.

You know, we're, we're, we're enjoying the performance now, but we're also, you know, prepared for whatever comes our way.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

Really helpful. Thank you, guys, very much.

Operator (participant)

Your next question is from the line of Trevor Cranston with JMP, JMP Securities.

Trevor Cranston (Managing Director)

Hey, thanks. Most of my questions have been addressed, maybe just one quick one on the Consumer Direct margins. You noted, I think that a lot of the improvement this quarter was from a, a lower mix of streamlined refis. Can you comment generally, sort of if you've seen any organic improvement in Consumer Direct margins and sort of the, the trends you're seeing within that channel? Thanks.

David Spector (Chairman and CEO)

Look, you're right. We, we did, we did, as I said, in the, you know, in the first quarter, we had a period of time where rates got low. We were very efficient, on our streamlined refis. For those of you who saw it, our prepayment speeds came in higher than the rest of the market. So, you know, we put some controls in place, to make sure that, you know, we deal with the issue now, which we have been, and, and we're starting to see a normalization of those prepayment speeds. And look the interesting part of that is, as you can see from the increase in the margin, we were willing to work for a little less margin.

It's a little bit less cost to originate, but it was able, you know, if we'd been able to continue it, we could have kept capacity in place. Suffice it to say, I think, I think that, you know, we, we, we value, you know, the Ginnie security, and we want to be very careful that we don't do anything to put that at risk. Look, I think it's, I think in the process, we've been able, as I said, been able to increase our penetration in the portfolio on closed-end seconds, and that's been very advantageous. I think we're starting to see. You know, look, we have a team that's focused on new customer acquisition, and I think that they're, they're starting, I'm starting to see some green shoots there.

Our purchase percentage, you know, was up a little bit last quarter, and I continue to see that growing. So it's, you know, there is. I wouldn't, you know, just say, "Okay, it's just a rate and term opportunity in consumer direct." It's a lot more than that. That's, you know. I think that we have a great team in place that's focused on all of those channels. It's just, you know, I think we'll continue to see the upward progression of their hard work and effort.

Trevor Cranston (Managing Director)

Got it. Okay. Appreciate the comments. Thank you.

Operator (participant)

Your next question is from the line of Courtney Bahlman with Barclays.

Courtney Bahlman (Senior High Yield Credit Analyst)

Hi, David. Hi, Dan. Thanks for the question. Just a really quick one from me. With regards to leverage, I know you guys are on the lower end of the spectrum, about 1.2 times non-funding debt-to-equity. How should we think about the leverage target in the longer term and the opportunity for bond buybacks and where that kind of sits in capital allocation priorities? Thanks.

Dan Perotti (CFO)

Sure. Yeah, as you mentioned, in terms of the non-funding debt at 1.2 times, you know, which is within the range that we've typically targeted. We've, you know, typically been around 1 time or a little bit over 1 time in recent periods. You know, we would expect to be in a similar vicinity, potentially, you know, potentially increasing a little bit, really, we would expect to be around the vicinity, you know, the vicinity that we have been historically or the vicinity that we're, that we're currently at. And that's, that's, roughly, you know, what the level that we're targeting. With respect to, to bond buybacks, you know, something that, that we've looked at from time to time.

In terms of allocating capital to it, you know, we do see those, you know, long-term, you know, those, those long-term unsecured debt as, as, you know, as I, as I had been talking about, is something that we want to continue sort of adding to. It seems sort of, you know, counterintuitive there to, to, to retire it.

Courtney Bahlman (Senior High Yield Credit Analyst)

Yeah.

Dan Perotti (CFO)

It's not something that's high on our, you know, on our capital priority list. That being said, as we're moving through time, if there are certain, you know, certain opportunities that really present themselves, it's something that we would consider, but not, you know, not something that's high on the, on the, on the, list of capital priorities for us.

Courtney Bahlman (Senior High Yield Credit Analyst)

Understood. Thank you so much. That's helpful.

David Spector (Chairman and CEO)

Well, I'd like to.

Okay. Oh, okay, perfect. 'Cause I don't like cutting things short, but we have our PMT call beginning in five minutes. I'd like to thank everybody for joining us in this introductory call. That was really helpful, and it was, it was good, and I appreciate you taking the time to join. Obviously, if you have any questions, please don't hesitate to reach out to us. I look forward to speaking with all of you sometime in the near future. Thanks again.

Operator (participant)

Thank you for joining. You may now disconnect your line.