PennyMac Mortgage Investment Trust Stock

Thank you. Thank you. Thank you. All right, so we'll get started. I'm very pleased to have PennyMac Financial Services join me on stage. With me today, I have David Spector, Chairman and Chief Executive Officer. Welcome, David.

Thank you, Terry. Great to be here, and thank you all for joining us.

All right, so we'll get right into it. You guys filed a quarter-to-date update yesterday. Maybe just give us some color on that. What are you seeing around third quarter trends?

Yes, so clearly as we sit here today, we're seeing rates at a much higher level than we saw at the beginning of the quarter. Mortgage rates are up about 50 basis points and so, like you would expect in a rising rate environment, we're seeing production taper off as a result of that and that's leading to some, um, you know, obviously reductions in our forecast for originations on our, in all three channels. Consumer direct channel, you know, we're seeing margins hold in, you know, which is good news. Obviously, with the increase in rates, we'll see a higher percentage of closed-end seconds getting originated. So the weighted average margin at a consumer could go up in the second quarter. But with originations down, though, we're seeing a lot of closed-end seconds, revenues will be down.

Similarly, in our broker direct channel, we're seeing, you know, a little bit of margin pressure there, um, with production going down, and we'll be talking a little bit more about broker in a few minutes. And in the correspondent channel, we're seeing, you know, again, production down a bit there. Margins are holding in really nicely there.

So there's good news there. On the servicing side, look, we continue to see a great story out of servicing. Our servicing portfolio continues growing to run at very low delinquency levels. Um, it's a portfolio that has, you know, close to $530 million of revenue or servicing fees every quarter, um, and we're seeing good results there. And on the corporate side, you know, we had some headwinds in Q2 from credits from AWS and some revaluation of incentive compensation. But, uh, you know, we should run flat to a year ago. And so it's a, you know, it's a story that given the increase in rates, you know, we're again going to be at a, what I call a post-COVID trough level, operating ROE, but again, it's going to be in that single, mid to high single digits, probably mid in Q3.

It's helpful color. Forgot to mention we're going to be mostly discussing PFSI on this chat and then we'll address PMT a little bit at the end, right? So again, like helpful color, lots of impact there, but maybe like just taking a step back, the macro has been tough this year. Mortgage activity has remained pressured for most of this year. As you look across the balance of 2026 and 2027, what are your expectations for industry volumes? And what do you see as the biggest drivers of upside or downside? From here.

Yes, so as I mentioned earlier, being that we're at the higher rates, I think volumes are going to come in on the kind of the lower end of forecasts. I think that we, um, from an internal point of view, I think there's tremendous opportunity within the company. We're seeing a lot of good results coming out of our consumer direct channel on the deployment of our new technology, but more exciting about that is the fact that we're really beginning to see the benefits of having legacy-free technology and being able to build AI agents on top of it. And so on the mortgage fulfillment side, you know, which is our processing group, we're seeing processing costs down approximately 50% on a marginal loan basis. And on the loan origination side, we're seeing loan officer efficiencies is up about 20% and that's only going to grow.

And so today as we sit here at the higher rates, you have the benefit on what you're originating. But in many ways, what's more exciting to me is the fact that we've been carrying a lot of excess capacity over the last few years to be able to really seize on an opportunity of lower rates.

And what we're seeing with the technology, the need to maintain the levels of excess capacity that we've been holding have been greatly, if not eliminated, greatly diminished, if not eliminated. And that's what led to our reduction of production expenses of $60 million that took place in July. And so we really reduced that the capacity. And that should reduce the volatility of the earnings in our consumer direct channel. In our broker direct channel, we're doing the work rather quickly to use the technology that we deployed in our consumer direct channel to deploy it in our broker direct channel.

Now there's a little bit more work on top of that, that we need to do in the fact that when you run a broker direct business, there's a broker portal that has to go along with that, that's being built. But that's something that I think is going to be a real exciting opportunity for our brokers. And the brokers that we deal with typically deal with the #1 in the market or the #2 in the market. And I think as we continue to be competitive with price while be offered to be -- being able to offer a better product, that's going to lead to share growth within our broker direct channel. In our correspondent channel, we've been the leading correspondent aggregator for many years. That lead has shrunk a bit, and we're going to get into the reasons why momentarily. But we're going to continue to be the leading correspondent aggregator.

And so there, it's just a matter of when you're in the correspondent business, you're in it to buy servicing to really support the flywheel that we've created. And so as we see opportunities to participate in that market and we like the servicing values that are -- that we're seeing in that market and how those are being constructed, we're going to continue to see growth on the correspondent side. On the servicing side, it's with great pride, I'd say there's not a lower-cost servicer than us. And I think that's with our servicing portfolio at $700 billion and the cost to service that we have for that with the technology that we have in place and the work we're doing with our technology called Plaisse, we're going to continue to drive down the cost to service. And that's something that I'm really excited about. And then with the Cenlar acquisition, look, we're going to add scale to our portfolio, and that's only going to help us drive down costs further while equally as important, grow the capital-light part of our business model. And that's something we're very focused on as we look out into the future.

And then finally, across what I call our shared services groups, technology, finance and capital markets, the benefits we're getting from AI and AI tools like Claude and Cursor and others are meaningful. And so the technology investments that we're making within the company, which I expect to crest in the third quarter are really going to start coming down as we finish a lot of the work that we undertook at the beginning of the year. So for all things considered, if you think about the beginning of the year, we walked in expecting 3 interest rate cuts. As we sit here today, we're expecting 3 interest rate increases. But by and large, I'm really happy and excited about what I'm seeing in the organization.

Got it. Super helpful. So I want to talk about returns. Last quarter, you revised your operating ROE target to the mid-teens by year-end 2027. Can you maybe just walk us through the glide path from here and the major building blocks required to achieve that outcome? Maybe just more specifically, how should investors think about the relative contributions from technology-driven cost saves, just overall operating leverage and then the market recovery piece?

Yes. So look, the glide path is, I think, one that we believe is very much achievable, and it is going to be achieved. With the increase in rates, that could get pushed out a quarter, but let's not get into the quarter-by-quarter gyrations. From where we started, if you look at the Q2 results, number one, you had this issue with the mortgage pipeline that had about a $20 million, $25 million loss that's not going to be repeated because as you start to see changes we've made along with some normalization that's taken place in the MBS market, we will eliminate that. But more importantly, in mortgage banking, you have this phenomenon when you take an interest rate lock, you recognize the revenue, but the expense associated with that lock gets recognized at the time that loans close.

So as you see rates generally increasing, what happens is, number one, you -- as I mentioned, you recognized your lock earlier, and so you have your expense later. But more importantly, as production slows down, your revenues are slowing down while you're incurring the expense. And then furthermore, your amortization is running higher than the current run rate that you're seeing from your locks. And so as you get a normalization or more of a true-up of revenue and expenses happening roughly at the same time, you're going to see an increase in ROE of a couple of points. And so right off the bat, you're going to get the benefit of the increase there. Then as we start to see the -- as we see the continued improvement of efficiencies in our consumer direct channel and our broker direct channel, in our broker direct channel, we forecast to continue to see growth. Our market share is going to continue to grow there, then you can start to see a couple of points of ROE coming out of that.

Then you layer in the fact that our technology expense right now is running at elevated levels because of the work we're doing in our production channel, in our servicing channel and our drive to 55 as we'll be talking about shortly, working on the Cenlar acquisition and really taking advantage of the -- of all of the AI tools that, that cost is going to come down meaningfully. And so you can start -- you can see a couple of points taking place there in improvement in ROE. And then finally, as you start to see a normalization of the mortgage market, that's going to -- that will get it from the mid-teens to 20% and above just based on the size of the market. I believe that you're going to continue to see this company get more and more efficient and you'll continue to see our costs, whether it's in production or servicing or everything that an organization of the complexity of ours is required to run as efficiently as it runs, you'll see the costs come down in a very meaningful way.

Got it. That's helpful. Maybe just drilling down to the channel aspect. You've spoken in the past about being more selective in correspondent, just given the competitive pressures and elevated GSE activity. Can you provide an update on how you're approaching the channel today and what the optimal channel mix looks like just given the current macro?

Yes. So look, I think as you all know, correspondent is the key strategic initiative we have to really load the flywheel up when rates decline, we have loans that we can refinance into our portfolio. The issue around correspondent is that there are certain parts of the market that we believe are a little bit too aggressive in how they're viewing recapture and the recapture opportunity in MSRs. And so we saw this especially take place at the end of last year. And so we've made the strategic decision that we want to be very precise as we have a reputation for being in terms of how we look at loans in the correspondent market, okay? Are these loans coming from correspondents that have slow prepayment speeds or maybe perhaps we recapture better out of brokers or loan characteristics surrounding the loan.

And so we've just been a little bit more particular and been much more focused in our capital allocation views in terms of bringing on new MSRs. And so that's what's led to the market share dip that you've seen. Having said that, we see in correspondent certain market participants following our lead in terms of how we view servicing and how we view, in particular, the value of recapture of certain loans. And I expect the market to follow suit very -- clearly by the end of the year. And all it's going to take is one little rally and people see how quickly certain loans run off that they're going to wake up and they're going to understand how to -- how they should be viewing the loans. Having said that -- we are a leading government correspondent aggregator.

We're growing our non-QM aggregation business. We're growing our jumbo business. And even on the GSE front, we're making a lot of inroads in terms of the loans that the GSEs don't want to buy. And so we are an active buyer of loans that are typically executing better outside the GSE footprint, and that's business that we're continuing to grow and accelerate in our correspondent channel.

Got it. That's helpful. Turning to broker. That continues to be a focus and the eventual transition onto Vesta remains an important milestone.

Absolutely.

How should investors think about the market share opportunities and competitive positioning in that channel?

Yes. So look, I think that in the broker channel, we all understand what's happening in the channel today. But it's very early to tell what effect that's going to have come 3 and 6 months from now. I do think that we've established ourselves as a clear #2 to the 2 market leaders in the broker channel. And that channel is an interesting one because as a broker, you have to choose which one of those leaders you want to deliver to or you want to originate your loans. And so we're in a very good unique position to be able to really have an opportunity to do business with all of our brokers. We have great technology that will be fully deployed by the middle of next year to the broker channel that is going to give brokers the opportunity to achieve the efficiencies that we ourselves are seeing in our consumer direct channel. And that's something that's going to be a meaningful effect.

And as I talked about on the glide path, we expect to continue to grow share over the next 2 to 3 years in a very, very meaningful way. I think the broker direct channel is one that has been a little bit under a little bit of stress at the moment. But I think that it's too early to tell in terms of what that's going to mean. I believe that margins are going to have to come up in broker. And that's something that we'll see over time. I also think that some of the phenomenon that we saw in broker that we saw in correspondent with how people were thinking about MSR values and recapture, we're starting to find their ways into the broker channel. And I think that, that's getting mitigated rather quickly. But by and large, we're really bullish on the broker channel. And I think it's something that you're going to see us play a more meaningful role in as time goes on.

Got it. And just to be clear, 10% market share is still the goalpost?

Well, yes, it is. I don't think we'll -- I think suffice it to say, we have 4 months left of this year, so we're not going to get there this year. But we're not going to -- look, market share from my perspective, is a guidepost for all of you to think about as you're building your models where we're going to be. I will tell you internally, for me, the most important and only driving factor is return on equity and the amount of return we're achieving. And so I think that we're going to get to 10% share. I know that it's just going to -- we've got to get through this little blip here.

Got it. So you've been reporting improving recapture rates across conventional and also government. How much of that improvement is being driven by tech? And are you seeing any early impacts from the trigger lead bill?

Yes, so, um, the recapture numbers are really good. Um, they're the best I've ever seen in my career. And, you know, under the leadership team that we have in our consumer direct channel, they're hyper-focused on recapping the portfolio. Um, you know, we're seeing conventional recapture rates approaching 30%, which I've never seen in my career, and on the government side were north of 50%. And so the recapture numbers are really strong. I think it starts with leadership, and then it starts with the, you know, the workflows that we have in place and the marketing initiatives you have in place to get the recapture. Then, then you layer in what's happening with the technology. And as I pointed out earlier, just being able to be more efficient as a loan officer allows you to be able to go after more loans.

And so that's the benefit of the Vesta and the loan origination technology that we have in place.

Then, you know, we've introduced our natural language virtual assistant, or NLVA, that's allowing borrowers to self-serve. And that's leading to increased activity, you know, in nights and weekends and holidays. And that's something that we introduced in our consumer direct channel 60 days ago, uh... and that's something that we're already seeing some exciting results and that the goal, and we're going to get there, is to be able to have a, we call the driverless mortgage where borrowers can just self-serve and be able to originate a loan without dealing with a loan officer. And that's something that is going to be is going to be more and more prevalent throughout the industry. But I think, you know, look, I think there is something that, you know, we have in the fact that our technology that we're using is legacy-free. And it was built to allow for quick adoption of AI, and most importantly, that AI is being built and driven by the business.

And that's something that throughout my 20 years, close to 20 years at PennyMac, I've always felt that the business should drive technology and they should own the building of it, and this AI is allowing us to do it.

And so there we're seeing real good results. And look, the trigger lead bill has helped. Okay, we shouldn't ignore that. And it's given us a little bit more value in terms of owning an MSR as opposed to when you when you pull credit, you have 60 different lenders calling the borrowers and hassling them. And so we're seeing good results coming out of that. And look, that's contributed to these historically high recapture rates.

Got it. Just turning to technology. You've highlighted significant improvements in cycle times, also targeted 80% automation by year-end 2027. What are the most important benefits investors should expect as these initiatives scale, both from cost and a growth perspective?

Okay. I think from your position out there, the exciting part should be the volatility associated with the staffing up and laying off of human capital is getting greatly reduced and very quickly. And that should lead to more stable earnings in the company, okay, and reduce some of the volatility around the move in interest rates. And so as I talked about earlier, we were keeping excess capacity for potential rallies and the need for holding that has been greatly, greatly diminished. And so as we look at what our needs are going to be for a 50 basis point rally and 100 basis points rally, it's come down a big, big number.

So right off the bat, I think that's the -- that, to me, is one of the most exciting parts about the technology that we're building in the organization. I think that, look, from a technology expense standpoint, as I talked about, we walked into the year with a lot of initiatives. And I think as we see those initiatives complete, we're going to get real benefits as a company. Obviously, we'll be spending less on technology. But more importantly, we're going to be getting the benefits of the technology that's being built that will lead to greater profitability in the company.

Got it. So you targeted a reduction in servicing costs to $55 per loan from north of $80 today. Where are you today relative to that goal? And also, what are the most important drivers remaining?

Yes. So we started the year at $89 a loan. We expect to finish the year at $80. I expect to be at $70 by the end of 2027. And so sometime by the, call it, end of '28, beginning of '29, I'm really hopeful that we'll be at the $55 a loan. And look, when you have a portfolio of 4 million loans, you can do the simple math for every dollar we save, it's really meaningful to the company. The drivers of the $80 to 55 are really around a few things. Number one, there's a heavy focus on default. And so there's a lot of work being done on the AI front to give the distressed borrower the opportunity to get solutions, to get questions answered and to help deal with their default in a much faster, more efficient way. I believe that there's many cases where a borrower in distress would rather deal with a natural language virtual assistant or deal with something AI-related as opposed to dealing with a human.

And I think that there are opportunities. We saw during COVID, 90% of our borrowers took forbearances without speaking to a customer service representative. And so building technology solutions and building the alternatives is something that we're very focused on. And the natural language virtual assistant is, in many ways, more powerful in servicing, but it's very prescriptive what you need to do in servicing. And so if you get into a period of high distress, the need to add more people or the distress it puts on our servicing people are going to be greatly diminished. Furthermore, I expect the technology that we're -- the AI that we're deploying on our own technology is going to benefit our customer service representatives. So whether it's the in-line QC when they're on the phone with the borrower or whether it's just the ability for the borrower to self-serve is going to allow the more simple issues to be dealt with through automated means and allow our customer service representatives to deal with the more complex issues in a faster, more efficient way.

And then finally, there's a lot of work that goes into the investor accounting function, the compliance function, the complaint functions that have a lot of people decked against it that we're quickly deploying AI that will help drive down cost as well.

Got it. That's helpful. Just maybe switching to credit. There's been some headlines regarding government loan delinquencies trending upward this year. What's your outlook on government loans and the broader mortgage credit? And anything PFSI is doing on the servicing side to help performance?

Yes. So our look, our delinquency numbers are continuing to hold in really nicely. And on the government side, the government servicing is naturally going to print higher delinquency numbers. We have always taken the position that we want to price servicing at the loan level. And what that means is that we've had a tendency to lean in correspondent more in the direction of higher FICO, a little lower DTIs, a little lower LTVs and really try to focus on giving attribution on what we perceive is going to be the better performing servicing. As a result, we have a servicing portfolio that is a little bit less credit sensitive than the market as a whole. And so that leads to better delinquency numbers coming out of our government servicing portfolio.

On the conventional side, that portfolio continues to operate very strongly. We're seeing delinquency numbers pretty low there. And it's something we're very focused on, but I'm not, as I sit here today, really, really concerned about a credit event as we sit here today. Now if you see unemployment increase or you see other things take place in the market, that could change. But as I sit here today, the portfolio continues to perform strongly. And as I said, at $530 million a quarter of servicing fees, it really speaks to the value of the balanced business model that from when we started this company in 2008, we've set out to create what I think is today the gold standard of the balanced business model.

Got it. So at this point, we'll switch to PMT for a few minutes. Can you just talk in general around the strategy there and what excites you about what PMT is doing?

Yes. So PMT, as many of you know, is a really unique REIT that has been set up to really take advantage of the synergistic relationship it has with PFSI. And so over the years, we've been able to use that synergistic relationship to create really unique mortgage-related investments. As we started the year, we looked at PMT and we said, okay, a couple of things. Number one, PMT has a lot of mortgage servicing rights. And the returns that they were achieving on the mortgage servicing rights when you looked at it versus returns of securitizations of owner-occupied loans or securitizations of agency-eligible investor loans and second home loans or even securitization of jumbo loans, those latter investments look to provide better returns than investments in mortgage servicing rights. And so what we've done in PMT is deemphasize the creation of new MSRs, and we've actually sold some MSRs.

We had a $13 billion sale that closed this quarter. And we are taking the capital and we're redeploying it into credit investments. And the credit investments that we're creating in PFSI are mid-teens returns in the base case. In a stress case, they're still high single digits. And we believe that as we repurpose capital out of what was going to go into MSRs into credit-related investments, we'll continue to see the returns in PMT go up. And that's something that we're really excited about. And look, there are things we can do to speed that along. There are things we can do to continue to look to grow the returns in PMT. But suffice it to say, we are moving with great urgency to get the returns in PMT back up to double digits.

Got it. How do you view the current dividend of $0.40 -- and how should investors think about dividend coverage gap over the past few quarters?

Yes. So look, as a REIT, we have to pay out taxable income. And so a lot of times, you'll have a mismatch of sorts between taxable income and GAAP income. It has been our dividend policy since we started the REIT to try to hold the dividend as close to GAAP income as we can, giving consideration to the requirement to pay out taxable income. And so we've had this issue over the past few quarters where the dividend has been higher than GAAP income. I -- we will -- we continue to look at this, and it is my stated goal to get the GAAP income and the dividend closer to one another. And then -- so as we work through this period where the taxable income gets paid out as a dividend, the dividend itself should migrate closer to GAAP income.

Now that doesn't necessarily mean the dividend is coming down, okay? Or if it does, it's not going to come down to where the GAAP income has been to the last quarter or 2 because at the same time, as we redeploy our capital into mortgage servicing rights, we're starting to see the GAAP income go back up. And so I think that the final thing that I'm really mindful of is we like to maintain a stable dividend. So as we look out over the next 4 quarters, we're going to look to really establish a dividend that we -- as I said, is reflective of GAAP income that we believe can be a stable dividend, and it's something that's reflective of the performance of the company.

Got it. That's helpful. At this point, we'll just pivot back to PFSI. I just want to get your thoughts on just capital allocation priorities, how you're thinking about capital allocation, whether or not you can do a buyback.

Yes. So look, I think that we have a robust capital allocation framework within the company. Buybacks are on the menu of capital allocation. But having said that, we're very focused on our non-funding debt leverage. And we're sitting today at 1.8x, and I'd like to get that number down a bit. There's natural ways, obviously, that will come down with increased profitability or in a rally, it will naturally come down because of the way we run the servicing hedge. But I don't want to see the leverage go up. And by the way, we -- I would expect that leverage number to come down over the next 12 months just based on what I'm seeing from our financial forecast. But leverage is at the top of my list. I then say, okay, from a capital allocation standpoint, and we're seeing it in our -- in how we think about correspondent, do we want to invest in the MSRs? Do we want -- do we believe the MSRs can give us the returns, the mid-teens returns that we've been very vocal in saying is our cost of capital.

And so even if it's at the risk of foregoing a little bit of gain on sale, we're going to be very focused on making sure that we run this company with a culture and a desire and a need to deliver mid-teens returns to investors. And that's something that is a part of our capital allocation methodology. And then finally, the investments in technology plays into it as well. And so as we look at where we started the year, as I talked about, we had a lot of technology initiatives that just from a return standpoint made a lot of sense that we opted to sign up for, and we did so with very clear view that we felt production was going to stay strong. We expected, if you think about it, an element of rate cuts to come into play, and we felt that we could get through the year in '27 and be able to afford the technology while reaping the benefits. And as we sit here today, we're already seeing the benefits of it. And as that technology investment comes down, that should give us even more capital to invest in the company.

That's super helpful. We have a few minutes left. I'll open it up for any questions.

There we go.

I'll just repeat the question. What's the primary method for increasing recapture rates?

So there's a few things. Number one, it's how do you market to the consumer, okay? And you need to be really careful that you're not inundating them with e-mails and phone calls and you're just -- and you're creating a negative experience for that borrower. Secondly, you have to create a user experience for the borrower that comes to you that meets their needs. So what is that? Do they want to speak to a loan officer? Do they want to originate the refinance through chat? Do they want to come online and be able to do it without a human in the loop? Do you offer them one -- kind of a single thread user experience, whether they're in the servicing, whether they're coming in through servicing or through consumer direct.

So if you call in to find out if your taxes have been paid and you can refinance your loan and save $300 a month, I want to be able to make it a seamless experience for you. And then if you want to do it with a human out of the loop or with a human, then you have that opportunity. Mortgage banking historically has been very siloed between production and servicing. And further to that point, we run 2 call centers. There's no reason for that. And so as we merge kind of -- or we've not merged as we blur the lines between are you a servicing customer or are you a production customer, that's going to lead to higher recapture rates. And then finally, I think that you want to market the company to your servicing portfolio to help them understand that although they may have originated their loan with a correspondent or a broker that you are a top producer that you offer refinance capabilities and you can close a closed-end second within 7 days. You can close a rate and term refinance within 10 to 14 days. And so the marketing of that is vitally important. And those are the marketing initiatives that we speak about.

One question over here.

Yes. So that's been the benefit -- look, I think that historically, mortgage banking, in particular, has struggled with the variable cost structure. And in particular, when you see rates come down, there's a lot of time and effort that goes into hiring people and getting more space and having to deal with the infrastructure you need to meet the demands of the market. The really exciting part of what we have done in our consumer direct channel is created a cost structure that we can staff up very quickly through just increasing the amount of AI agents that we need to meet the demands of the borrower -- okay? And those AI agents, both are on the front end and on the fulfillment side. And so just to give you some raw numbers, on a 100 basis point rally, we were forecasting we would need 450 LOs.

That number is down to 280 right now. And that's not because we're going to do less recapture or less loans, we're just going to become that much more efficient. And that's what we're seeing out of our technology, okay? Similarly, on the mortgage fulfillment side, the amount of people we needed to process loans is coming down materially, okay, in a 100 basis point rally because of the AI agents that are getting developed on the technology. And so what that means is you just have just a lot more efficient operation that is going to reduce the earnings volatility of the company.

Okay. I think we're out of time, and we'll just end it there. Thank you very much.

Thank you, Terry. Thank you all for your time today.

Thank you. Good afternoon and welcome to PennyMac Mortgage Investment Trust's second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. [Operator Instructions] Additional earnings materials, including the presentation slides that will be referred to in the call, as well as an Excel file with supplemental information, are available on the PennyMac Mortgage Investment Trust's website at pmt.pennymac.com.

Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on slide 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 their earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Mortgage Investment Trust Chief Financial Officer. Please go ahead.

Thank you, Operator. Good afternoon, and thank you to everyone for participating in our second quarter 2026 earnings call. Starting on slide 3, PMT's second quarter net income was $20 million, or $0.23 per diluted common share, representing a 6% annualized return on common equity. Next slide. These results were impacted by a lower contribution from our credit-sensitive strategies, driven primarily by market-driven value declines, as well as lower contributions from our aggregation and securitization strategies, primarily due to lower volumes. These impacts were partially offset by improved results in our interest rate-sensitive strategies.

PMT paid a quarterly dividend of $0.40 per share, and book value per share at June 30th was $14.83, down 1% from the end of the prior quarter. Turning to slide 4, during the second quarter, PMT acquired $2.6 billion in UPB of loans through correspondent production activities, for which PMT pays fulfillment fees to PFSI. This number was down 8% from the prior quarter and 17% from the second quarter of 2025.

PMT also acquired $2.2 billion in UPB of loans from PFSI production for inclusion in private-label securitizations, up 44% from the prior quarter and 123% from the second quarter of 2025. In total, during the second quarter, PMT acquired $4.8 billion in UPB of loans. Beginning in June, PMT elected to stop acquiring agency-eligible, conventional-conforming loans through correspondent production, but will continue acquiring 100% of all non-agency loan volume.

This strategic decision allows us to optimize our capital allocation by pivoting away from MSR investments, which have faced return headwinds in recent periods, and accelerating the redeployment of our capital into higher-yielding, credit-sensitive investments created from our private-label securitization program. Consistent with this objective, I am pleased to announce that after quarter-end, we entered into an agreement to sell $13 billion in UPB of low-coupon agency MSRs, with a close expected at the end of August.

Slide 5 highlights the continued success of our organic investment creation engine. During the quarter, we completed 6 private-label securitizations totaling $2.2 billion in UPB. This activity resulted in the retention of $120 million of new subordinate bond investments in the credit-sensitive strategies. We also generated $31 million of new MSR investments. Our momentum has continued after quarter-end, with 2 additional securitizations completed, totaling $692 million in UPB.

We remain on pace to complete approximately 30 securitizations in 2026. In total, through 2026, we expect we will have added more than $600 million of retained investments, building a substantial foundation of investments with returns on equity in the low- to mid-teens to support future earnings. On slide 6, we provided a snapshot of high-quality investments we are creating through our private-label securitization program. At quarter-end, the fair value of retained bonds from this program totaled $936 million.

63% of this portfolio is comprised of bonds from non-owner-occupied loan securitizations. 21% is comprised of bonds from jumbo loan securitizations, with the remainder from agency-eligible owner-occupied loan securitizations. As you can see, these investments feature exceptional credit characteristics, including a weighted average FICO at origination of 774, a weighted average LTV at origination of 72, and negligible delinquencies. The credit quality of these organically created assets underscores our ability to produce attractive, high-yielding investments in the current market.

On slide 7, approximately half of PMT shareholders' equity remains deployed to longstanding investments in MSRs, and 13% is comprised of our unique GSE credit risk transfer investments. Mortgage servicing rights provide stable cash flows from a portfolio with a low weighted average coupon of 3.9%. And our organically created GSE CRT investments consist of seasoned loans with a weighted average current loan-to-value of 45%.

Turning to slide 8, while our diversified portfolio has constructed investments with strong underlying fundamentals, we acknowledge our earnings, excluding market-driven value changes, have been below our dividend level for the past several quarters. As you can see, we are showing an average run-rate return of $0.33 per quarter for the next year, up from the $0.31 projection in the prior quarter. With credit-sensitive strategies, return dynamics are similar to the prior quarter.

The improvement of the overall run rate versus the prior quarter is driven by reallocation of equity to subordinate bond investments and higher expected returns of our MSR assets in a higher rate environment. As is our standard practice, we continue to monitor our portfolio mix and allocate capital towards investments with the most attractive return potential. Our momentum in organic investment creation remains strong, and we have successfully positioned PMT as a leader in the private-label securitization market.

Given the success of our securitization program, we are shifting our equity allocation towards creative credit-sensitive strategies. And I am confident this realignment of our balance sheet will bolster PMT's return profile to deliver attractive total returns over the long term. Now I'll turn it over to Dan to review the second quarter financial performance.

Thank you, David. Net income to common shareholders was $20 million, or $0.23 per diluted common share in the second quarter, or a 6% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $11 million to pre-tax income, generating an annualized return on equity of 11%. The contribution to pre-tax income from organically created CRT investments was $6 million, which included $7 million of realized gains in carry and $1 million of market-driven value declines.

Investments in subordinate MBS from our private-label securitizations generated gains of $5 million, down from $6 million in the prior quarter, primarily due to lower valuation-related gains. The interest rate-sensitive strategies contributed pre-tax income of $9 million for an annualized ROE of 3%. Income excluding market-driven value changes for this segment was $20 million, up from $11 million in the prior quarter, as decreased prepayment speeds during the quarter, particularly on higher note rate MSRs, drove slower runoff of our MSR asset.

During the quarter, we purchased $486 million of agency floating-rate MBS, and the fair value of our MBS portfolio increased to $4.1 billion at June 30th, up from $3.8 billion at March 31st. Regarding market-driven fair value changes, our hedging activities during the quarter effectively mitigated our interest rate risk exposure, as the $18 million MSR fair value increase was offset by $18 million of net declines in fair value of MBS and interest rate hedges, including the related tax benefits.

The aggregation and securitization segment reported pre-tax income of $11 million, down from $16 million in the prior quarter. Net gains on loans acquired for sale declined by approximately $8 million from the prior quarter, primarily due to lower volumes. In total, PMT reported $32 million of net income across its strategies, excluding market-driven value changes, up from $28 million in the prior quarter, primarily due to an increased contribution from the interest rate-sensitive strategies.

I want to address our dividend in the context of our current results and the updated run-rate return potential. While projections for income excluding market-driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend at $0.40 per share. This is supported by our taxable income, which we expect to be sufficient to fully cover the dividend at its current level in coming periods.

Turning to slide 12, we highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. And finally, on slide 13, we continue to believe that debt-to-equity excluding non-recourse debt is the best metric for measuring our core leverage. This ratio increased to 6.2x at quarter-end from 5.6x at the prior quarter-end due to growth in loans held for sale and remains in line with our expected levels.

PMT's total debt-to-equity increased to approximately 12:1 from 11:1 at March 31st, as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in non-recourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private-label securitization, mitigating any additional exposure to PMT. We expect the divergence between these 2 metrics to continue increasing as our securitization program continues to grow.

We'll now open it up for questions. Operator?

[Operator Instructions] Your first question is from Bose George from KBW. Your line is now open. Please go ahead.

Hey, guys. Just in terms of the move we've had in rates since quarter-end, can you just talk about the impact of that on the run-rate earnings? Does that help with the MSR returns? Just color, that would be great.

Yes, overall, thanks for the question, Bose. Overall, as interest rates move higher, and in particular long rates, and we talked about this a little bit before, it's beneficial to the expected earnings and run rate, especially with the MSR. So we mentioned it in the context of the run rate that as interest rates have moved higher, it's driven up our expectation for the returns of the MSR portfolio. As rates, as or if rates continue to move higher, longer rates and mortgage rates, that further dampens the prepayment speeds on the MSR and could drive additional increases in the MSR returns, which would help to further bolster the MSR returns.

I would say a little bit of an offset to that is that to the extent that short rates increase meaningfully or the Fed increases short rates meaningfully, that has a bit of a dampening effect on the overall returns as that would drive up our financing costs for any of our longer-dated fixed-rate assets, in particular in the interest rate-sensitive strategies and with respect to our subordinate bonds. You know, we have some of our investments in recent periods, we've invested those in assets that are less sensitive to that, in particular CMO floaters, but those are the 2 sort of offsetting potential impacts from interest rates increasing.

Okay, but net-net, could we be a couple of pennies higher than the $0.33 that you showed?

Our concentration in mortgage servicing rights and the fact that we've generally seen the long rates, I'd say, move up a bit faster than we expect short rates to, it would generally be beneficial to the run rate.

Okay, great. And then just on the MSR sales, could we see more MSR sales? It seems like the market for low-coupon MSRs at least is very strong. And would it make sense to potentially do that, maybe park some in agency MBSs if it happens?

Look, as you know, Bose, we've become much more active in terms of managing the portfolio. And I think as we look at the opportunities and we see the returns in securitizations combined with the fact that there is a very robust bid for MSRs with low note rates, that's something that we're clearly looking at. So, okay, great. Thank you.

The next question is from [ Marissa Lobo ] of UBS. Your line is open. Please go ahead.

Okay, thank you. Just on the shift and the relationship to PFSI on the shift to 100% non-agency acquisition, I mean, how does that alter the economic relationship or the management agreement with PFSI?

So it doesn't, it doesn't alter the management agreement really. Overall, the impacts that that would have is that there are less loans flowing through the correspondent arrangement or the fulfillment agreement. So PMT does pay a fulfillment fee to PFSI for all of the loans that come through that correspondent loan arrangement or correspondent loan channel directly to PMT. So to the extent that there's a lower number of loans, you know, none of the agency-eligible conventional loans flowing through that correspondent arrangement, that would be a bit lower gain and revenue on sale being generated at PMT from those loans, but lower fulfillment fees flowing back to PFSI.

Just to emphasize, the reason or rationale for that change is really getting back to the allocation of equity to reduce the amount of capital that continues to be invested, in particular higher-rate MSRs, where we believe PMT has a better allocation of equity into the subordinate bonds that it's generating from its private-label securitizations. And so that drives, we expect to drive more beneficial and increased run rate over time through the reallocation of that.

Okay, got it. And on rate sensitivity, following the sale of the MSR and your capital redeployment, I mean, how should we think about PMT's interest rate sensitivity and book value volatility versus today?

Overall should be very similar. Our hedging practices remain the same as the hedging practices they have been, and our overall strategy at PMT has generally been to insulate it from significant book value changes due to interest rate movements. As you can see from this quarter's hedge results, in particular, been successful in accomplishing that, and we expect that to continue as we reallocate equity away from MSRs and into the private-label securitizations. You know, those holdings from the private-label securitizations, those are also included in our global interest rate hedging and management, and so are considered in terms of our hedging positions.

Appreciate the answers. Our next question is from Trevor Cranston of Citizens JMP. Your line is open. Please go ahead.

Okay, thanks. As we think about the pace of capital transition going forward, it seems like broadly speaking, kind of non-agency securitization activity has been fairly robust recently. Are you guys finding any opportunities to potentially deploy capital into third-party securitizations, or should the expectation be more so that you guys will continue to focus on your own organically created investments?

So, you know, we look at a lot of bonds being offered by street desks. We buy smaller pieces here and there, not because we have any bias necessarily to wanting to do the organic creation, but we believe in the economic value of it. I think given the fact that our manager is servicing the loans and we have the investment in the loans and our manager has done the diligence on the loans, we feel very, very comfortable with the underlying assets in the securitization versus buying in the secondary market from other originators for loans that are being serviced by others. But it's not a policy we won't do it. And you know, for what we believe an appropriate return, we have bought in the past and we will buy in the future, but it's just, you know, from a best execution standpoint, the best path to redeploying the capital is to redeploy it into the securitizations that we've been doing.

Okay, thank you. Our next question is from Doug Harter of BTIG. Your line is open. Please go ahead.

Thanks, and good afternoon. Can you talk about the pacing of securitization activity? To the extent that you're able to free up more capital through MSR sales, do you think that could accelerate, or is the pace that you've been operating at kind of the pace that the market, you know, that you see the opportunity as today?

No, look, this is the advantage that PMT has given its synergistic relationship with PFSI. And look, I think that as we have capital to deploy, I can see us doing the larger securitizations, right, to create larger investments. You know, we've been able to redeploy some of the capital into the floaters, but I think that we have, look, with the leading, PFSI is the leading correspondent aggregator. There's securitization activity around, call it 25% to 30% of the owner-occupied loans that go to the GSEs. There's securitization activity around the investor and second homes that go to the GSEs. We in PMT could do jumbo securitizations.

And given the pace of activity of non-QM that we're doing in PMT, combined with the fact that PFSI is doing a robust amount out of its broker division and is selling in the secondary market for which PMT could buy, we could do a non-QM securitization, which I'm hopeful we can get one done in the second half of the year. And so there is a lot of opportunity for us to deploy capital into the securitization market. So it's not necessarily a function of redeployment as we sell assets. It's understanding that if we're going to sell servicing, what the servicing landscape looks like, and identifying that, are we maximizing the capital upon the sale in addition to maximizing the return upon the redeployment?

David, can you just briefly talk, what impact, if any, do you think the move higher in rates that we've seen will have on kind of securitization execution?

Look, any time you move higher in rates, it does have an effect on production. But I will tell you, we've been running at, I would say, slower levels over the past, call it, 2 months. And I think that you're going to continue to see things slow down. There's still a lot of activity, you know, on the origination side, and the non-QM space, there's a lot of activity on the investor and second home space. And there's a good amount of activity in cash-out refinances, but there's no escaping the fact that mortgage is a cyclical endeavor, and as rates go up, activity does slow down.

With respect to the execution, a bit of the offset to that too, though, when we're talking about execution, is that to the extent that there's less supply flowing into the market, that can help in terms of investor demand for the securitization, just because there's less overall supply. And so to the extent that there's still a good amount of loans, as David was talking about, sort of raw material to generate the securitizations coming through from PMT's partnership with PFSI, it does give a little bit of tailwinds with respect to the securitization execution.

Great, appreciate it. Thank you. There are no further questions at this time. I will now turn the call back to David Spector for closing remarks.

Thank you, Operator, and thank you all for joining us. If you have any additional questions, please don't hesitate to reach out to our investor relations team. Thank you.

Thank you so much.

Good afternoon, and welcome to PennyMac Mortgage Investment Trust's First Quarter 2026 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call as well as an Excel file with supplemental information are available on PennyMac Mortgage Investment Trust's website at pmt.pennymac.com.

Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 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 Mortgage Investment Trust Chairman and Chief Executive Officer; and Daniel Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. Starting on Slide 3. PMT's first quarter net income was $14 million or $0.16 per diluted common share, representing a 4% annualized return on common equity. These results were impacted by a lower contribution from our interest rate sensitive strategies primarily due to a decrease in servicing fees as a result of seasonality and a larger-than-expected MSR runoff related to higher note rate loans. These impacts were partially offset by improved results in our aggregation securitization segment.

PMT paid a quarterly dividend of $0.40 per share and book value per share on March 31 was $14.98, down 2% from the end of the prior quarter.

Turning to Slide 5. I would like to note we have renamed what was previously the Correspondent Production segment to the aggregation and securitization segment. We believe this name more accurately captures the breadth of PMT's participation in the mortgage ecosystem, specifically our focus on aggregating high-quality loans for execution in the secondary market to drive organic asset creation.

In total, during the first quarter, P&T purchased $4.3 billion in UPB of loans from PFSI. $2.8 billion in UPB was through its correspondent purchase agreement with PFSI, for which PMT pays fulfillment fees. The remaining $1.5 billion represented loan sales from PFSI to PMT outside of their loan purchase agreement where PMT's private label securitization platform provided optimal secondary market execution for PFSI.

Slide 6 highlights the continued success of our organic investment creation engine. Similar to last quarter, we completed 8 private label securitization totaling [ $2.8 ] billion in UPB. This activity resulted in the retention of $190 million of new subordinate bond investments in the credit-sensitive strategies and $12 million of new senior bond investments in the interest rate-sensitive strategies. We also generated $40 million of new MSR investments. Our momentum has continued after quarter end, with 2 additional securitizations completed and another 1 priced totaling $1.1 billion in UPB, and we remain on pace to complete approximately 30 securitizations in 2026, which we expect will build a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings.

On Slide 7, we provided a snapshot of the high-quality investments we are creating through our private label securitization program. At quarter end, the fair value of subordinate bonds within our credit-sensitive strategies totaled $744 million. 66% of this portfolio is comprised of bonds from nonowner-occupied loan securitizations. 20% is comprised of bonds from general loan securitization with the remainder primarily from agency eligible owner-occupied loan securitizations.

As you can see, these investments feature exceptional credit characteristics. including a weighted average FICO origination of 774 of weighted average LTV and origination of 72 and negligible delinquencies. Within our interest rate-sensitive strategies, as of quarter end, we held $94 million in fair value of senior mezzanine bonds. These investments are diversified across our jumbo non-owner occupied and agency eligible owner-occupied loan securitizations. And similar to our credit-sensitive bonds, these investments are backed by high-quality collateral with weighted average original FICO scores in the 770 range and original loan-to-value ratios in the low 70s. This consistent credit quality across these organically created assets underscores our ability to produce attractive, high-yielding investments on Slide 8, approximately 60% of PMT's shareholders' equity remains deployed to long-standing investments in MSRs and our unique GSE credit risk transfer investments.

Mortgage servicing rights account for nearly half of shareholders' equity, providing stable cash flows from the portfolio with a low weighted average coupon of 3.9%. Our organically created GSE CRT investments represent 12% of shareholders' equity and consists of seasoned loans with a weighted average current LTV of 46%.

Turning to Slide 9, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings, excluding market-driven value changes have been below our dividend level for the past several quarters. As you can see, we are showing an average run rate return of $0.31 per quarter for the next year. And focusing on the interest rate-sensitive strategies, increased amortization on higher coupon loans as well as reduced expectations for declines in short-term interest rates, which drive financing costs have lowered expected returns on MSRs in the near term.

As is our long-standing practice, we continue to actively evaluate our overall equity allocation and investment opportunities to refine and optimize our returns on a go-forward basis. We are working diligently to reposition PMT to capture the opportunities more aligned to our long-term return hurdles. Our momentum in organic investment creation remains strong. and we have successfully positioned PMT as a leader in the private label securitization market. By leveraging our unique ability to create credit-sensitive, high-quality assets, and drive our overall returns higher through disciplined capital allocation, I remain confident in our strategy to support our dividend and create long-term value for our shareholders.

Now I'll turn it over to Dan to review the first quarter financial performance.

Thank you, David. Net income to common shareholders was $14 million or $0.16 per diluted common share in the first quarter. or a 4% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $16 million to pretax income, generating an annualized return on equity of 17%. Gains from organically created CRT investments were $10 million, which included $7 million of realized gains in carry and $3 million of market-driven value gains from credit spread tightening.

Investments in subordinate MBS from our private label securitizations generated gains of $6 million, $2 million of which were market-driven volumes. Interest rate-sensitive strategies contributed pretax income of $8 million for an annualized ROE of 3%. Income excluding market-driven value changes for the segment was $11 million, down from $21 million in the prior quarter, impacted by increased prepayment speeds during the quarter, particularly on higher note rate MSRs, which drove higher runoff of our MSR assets. as well as lower servicing fees from seasonality and lower placement fees on custodial balances as a result of lower short-term interest rates.

Regarding market-driven value changes, our hedging activities during the quarter yielded a small net decline as the $40 million MSR fair value increase was more than offset by $46 million of net declines in fair value of MBS and interest rate hedges, including the related tax expense. Additionally, during the quarter, we sold $477 million of agency fixed rate MBS to capitalize on intra-quarter spread tightening, resulting from the GSE MBS purchase announcement. and we redeployed the capital into retained investments from our private label securitizations. The aggregation and securitization segment reported pretax income of $16 million compared to a pretax loss of $1 million in the prior quarter.

The prior quarter amount was primarily driven by spread widening on jumbo loans during the aggregation period and lower overall margins. In total, PMT reported $28 million of net income across strategies, excluding market-driven value changes. up from $21 million in the prior quarter, primarily due to an increased contribution from the aggregation and securitization segment. I want to address our dividend in the context of our current results and the updated run rate return potential.

While projections for income, excluding market-driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend of $0.40 per share, which is supported by our taxable income and which we expect to be sufficient to fully cover the dividend at its current level.

Turning to Slide 13. We highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. During the quarter, we redeemed $345 million of exchangeable senior notes originally due in March 2026 using capacity from existing financing lines. And finally, on Slide 14, we continue to believe that debt to equity, excluding nonrecourse debt is the best metric for measuring our core leverage and that ratio declined to 5.6x at quarter end from 6x at the prior quarter end. within our expected range.

PMT's total debt to equity increased to approximately 11:1 from 10:1 at December 31 as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in nonrecourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization mitigating any additional exposure to TMT. We expect the divergence between these 2 metrics to continue increasing as our securitization program grows.

We'll now open it up for questions. Operator?

[Operator Instructions] And our first question comes from the line of Trevor Cranston with Citizens JMP.

Question related to your comments on Slide 9 about actively evaluating the asset allocation of the company and some new investment opportunities. Can you elaborate on what you guys are looking at in terms of kind of new investments if that includes things like non-QM or home equity. And also was curious if sales of maybe some lower returning assets are part of the valuation that's on your end?

Well, I think it's all the above would be my response. I think first of all -- if you look at Slide 9, when you look at the annualized return on equity, you can see that the -- in terms of achieving that minimum will far return of, call it, 13%, 14%. The sector that's really under delivering and has been -- has been the net interest rate sensitive strategies and, in particular, CMSs. And so as we look across our MSR portfolio, I mean, clearly, there's parts of that -- that have real value and there's demand in the marketplace for it. And there's others that has real value that perhaps there isn't as much demand in the marketplace.

So we're strategically evaluating the MSR portfolio to help accelerate perhaps the weighted average equity allocation down in that operating strategy and moving more to the credit-sensitive strategies. The point you raised in the credit-sensitive strategies, of course, there's more opportunity to do additional securitizations in nonowner-occupied loans and agency-eligible loans even jumbo loans. But given what we're seeing in the non-QM originations, both in correspondent and over a PFSI in their broker division, the ability to aggregate for securitization is very apparent to me. So I wouldn't be surprised to see us do a non-QM securitization over the next year.

And to your point, there's other assets that we see in the marketplace that you can create investments that achieve our return target. And so as we've done in the past, we're going in and we're evaluating how to -- where can we recycle out of lower returning assets in the higher returning assets.

And your next question comes from Bose George with KBW.

So first, just the change in the ROE expectation that you gave for the $31 million down from $40 million, it looks like it's mainly on the Agency MBS, but can you just walk through the drivers of that change.

So the -- so really, the bigger driver of those is on the MSRs, which -- where the return came down a few percentage points in the allocation, weighted average equity allocated there. is a larger proportion. The Agency MBS also did decline. That was really related to -- if you look at the expectations for short-term rates going back from last quarter versus this quarter, there was obviously a sharper decline and thus a greater expected carry from the agency MBS in that -- in the prior run rate scenario. But the bigger impact is related to really the prepayment speeds and expectations that we see in the short to medium term on the MSRs.

Okay. That makes sense. And -- the -- and in terms of the bridge now from the $0.16 you guys did this quarter up to the normalized. Can you sort of walk through just the bridge there?

Well, certainly, obviously, rates have increased a bit, and so we are expecting slower prepayments on the MSRs. But still below -- still elevated from what we saw earlier in prior quarters or in earlier quarters in 2025. And then as David has mentioned -- there is we mentioned some allocation out of MSRs and into -- if you look at the allocation here, for example, some ability to ramp up other investments as we move through the next few quarters.

And your next question comes from Jason Weaver with Jones Trading.

In your prepared remarks, you mentioned the sale of roughly $0.5 billion of MBS on tightening to redeploy towards retained securitization, which looks like a material rotation, the interest rate-sensitive book. All else equal, is this a sort of glide path we should think about for the remainder of 2026? Or was this more of a tactical rotation?

I think that was really more opportunistic or tactical. We wouldn't necessarily expect to continue to wind down that portfolio, especially, although we will adjust as we're looking at rotating out of certain portions of the portfolio. But given the returns that we expect from the Agency MBS portfolio and what we -- what we have here overall, we wouldn't expect to drawdown necessarily further on the MBS portfolio, but it's something that we'll continuously evaluate based on where spreads are in the market.

Got it. And I think you redeemed about $350 million of exchangeable senior notes from the existing financing book. What is the unsecured corporate debt stack look for the next 24 months, if you can just guess. And are you targeting any sort of opportunistic refinancing or extension given current spreads?

So we issued about $150 million of additional convertible debt towards the end of Q4 last year. We additionally in 2025 issued a few unsecured baby bonds. That was effectively a free refinancing of the convertible debt that was retired in Q1 of this year. So we don't have a need to necessarily raise additional unsecured debt. It is something that we will continue to look at and see if there are opportunities. but no immediate plans necessarily, but it's something that we will be opportunistic with to the extent that we see opportunities.

[Operator Instructions] Your next question comes from the line of Doug Harter with BTIG.

As you think about the opportunity in the non-agency securitization, do you view it as more opportunity limited today or more capital constrained and as you think about the ability to scale -- continue to scale that business?

I think it's really capital more than opportunity. I think the great story about PMT is obviously, the synergistic relationship it has with PFSI and the ability to source the underlying assets, the ability to underwrite and process the loans on the front end and where we have the ability to actively select the loans that we want in our investments is a really important feature that we have in PMT. And so the -- whether it's investor or non-owner securitizations where we create subordinate bonds or general loan securitizations and even the agency eligible loans where we're not securitizing just for best execution purposes, we're securitizing to create investments for PMT.

And so I think that it's really -- a really more of a capital issue for us. And I think that's why we're focused on opportunistically getting out of lower returning assets and most likely reinvesting the capital into our credit-sensitive strategies sector, which, by the way, from the very beginning of PMT is what the -- is what the investment thesis was for PMT looks to be a credit-sensitive strategy vehicle. And so that's really the regarding the kind of the guiding force here. We're -- I think we've done a great job in being the preeminent securitizer of these non-agency loans and creating the investments behind them. And you look at the performance of these, and they're really remarkable.

And I think that we've done a nice job when CRT was discontinued to be able to move to figure out, okay, how do we create a like investment without the CRT opportunity, and that's how we ended up where we are today. But I think you're going to continue to see us grow the equity allocation and the credit sensitive strategies over time.

And David, as you mentioned, you're seeing increased non-QM volume, how much crossover is there in your traditional agency originator that that's a correspondent partner versus non-QM or some of these other products that you haven't necessarily gotten as large in yet?

I'm really -- I've been really pleasantly surprised -- and I think it's a function of the size of the market that we're seeing a good amount of our correspondence getting into non-QM lending. And so I think that they are -- they're recognizing that they need to expand their product -- expand their product base. And so this is where being the leading correspondent aggregator with over 700 plus correspondence is really an advantage to us and being really good, meaningful deliveries of noncurrent correspondent. And I expect that to meaningfully grow. I think the important part of Non-QM, like all non-Agency products, you have to keep an eye on the fact that you don't want to get caught in a market disruption or with spreads widening.

And so we're being really diligent at least initially in selling and forward selling the non-QM product to really lock in the margin until such time as we want and we decide to do a securitization. And that's where again, the synergistic relationship with PFSI to be really valuable because similar to the correspondent side on the PFSI side, we're seeing really good receptivity to non-QM with our broker partners. And so I think when we decide that we want to do a securitization and really deploy capital there, we'll be able to do so. But by and large, I think there's part of the non-QM market that we're participating in is getting more readily accepted in the broker and correspondent communities has more akin to their credit profile and their risk management framework than when it was originally -- when a vision was born some 10 years ago and people thought of it as maybe a little less than prime. But I've been pleasantly surprised by this.

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

Well, I'd like to thank everyone for joining us on our call today. If you have any questions, please don't hesitate to reach out to me or our IR team, and I look forward to [indiscernible].

Good afternoon, and welcome to PennyMac Mortgage Investment Trust's Fourth Quarter 2025 Earnings Call. Additional materials, including the presentation slides that will be referred to in the call are available on PennyMac Mortgage Investment Trust's website at pmt.pennymac.com.

Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 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.

I'd like now to introduce David Spector, PennyMac Mortgage Investment Trust's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our fourth quarter and full year 2025 earnings call. Starting on Slide 3, PMT generated strong financial results in the fourth quarter with net income to common shareholders of $42 million or a 13% annualized return on common equity. Diluted earnings per share was $0.48 in excess of PMT's $0.40 per share quarterly dividend, increasing book value per share to $15.25 at year-end from $15.16 on September 30. Dan will talk about PMT's fourth quarter financial results in more detail later on in the presentation.

Turning to Slide 4, I'd like to highlight the significant progress we made in 2025, accelerating our organic investment creation activities resulting from private label securitizations. As you can see, over the course of the year, we successfully completed 19 securitizations, totaling $6.7 billion in UPB, a substantial increase from just 2 securitizations in 2024. Retained investments from these securitizations grew to $528 million, up nearly tenfold from just $54 million in 2024. This consistent cadence of securitization, actively -- activity firmly established PMT as a top 3 issuer of prime non-Agency MBS in 2025.

At the same time, we rotated capital to better optimize PMT's return profile. This included the purchase of $876 million of agency floating rate MBS, and the sale of $195 million of opportunistic GSE-issued CRT investments, where we had realized significant gains. We decided to sell these GSE-issued CRT investments as their forward-looking expected returns fell below our targeted return requirements, and to free up capital for PMT to invest in newly created assets with higher expected returns from our ongoing private label securitization activity.

Turning to Slide 6, our synergistic relationship with PFSI remains a unique and proven competitive advantage. First, PMT leverages PFSI's best-in-class operating platform, including its deep and experienced management team, scaled servicing operations, and its large and agile multichannel origination business, which provides PMT with a consistent and high-quality pipeline of loans for investment.

Second, PMT is able to efficiently deploy capital into long-term mortgage assets without the operational burdens associated with origination and servicing. And third, PFSI's deep access to the origination market, coupled with PMT's ability to execute private label securitizations provides PMT with the unique opportunity to invest in organically created investments with attractive risk-adjusted returns. And as PFSI further grows its overall share of loan production, PMT is expected to have even more opportunities to organically grow its portfolio.

Turning to Slide 7, approximately 60% of PMT's shareholders' equity is deployed to seasoned investments in MSRs and our unique GSE credit risk transfer investments. Mortgage servicing rights account for 46% of shareholders' equity, providing stable cash flows as the loans underlying this investment at a weighted average coupon of 3.9%, far out of the money. Our GSE credit risk transfer investments represent 13% of shareholders' equity and consists of seasoned loans originated from 2015 to 2020. With a weighted average current LTV of 46%, we continue to expect realized lifetime losses on this portfolio to be limited.

Slide 8 highlights our robust securitization activity in the fourth quarter and our ability to rapidly grow this business. We completed 8 securitizations totaling $2.8 billion in UPB and retain $184 million of new investments. Our fourth quarter activity included 3 nonowner-occupied deals, 3 jumbo deals, and 2 agency eligible owner-occupied deals. Our momentum has continued after quarter end, with 3 additional securitizations completed totaling $1.1 billion in UPB. Looking ahead and at this pace, we currently expect to complete approximately 30 securitizations in 2026, with targeted returns on equity for these retained investments in the low to mid-teens.

The pie charts on Slide 9 highlights our active management of the portfolio to maximize risk-adjusted returns. As strong managers of capital, we expect to optimize returns by recycling capital into assets that maximize risk-adjusted returns, transitioning from lower-yielding assets and the high-quality investments with superior return profiles. We remain focused on optimizing our allocation towards investments with targeted ROEs in the 13% to 15% range. And as we strategically redeploy capital into these higher returning assets, we are successfully driving the long-term return potential of our overall portfolio higher.

Turning to Slide 10, you can see the average quarterly run rate return potential expected from PMT's investment strategies over the next 4 quarters. PMT's current run rate reflects a quarterly average of $0.40 per share, down slightly from $0.42 per share in the prior quarter. As I noted earlier, we expect increased investments in accretive non-agency subordinate and senior bonds, primarily through organic securitization activity. Our expected returns from the interest rate-sensitive strategies remains unchanged from the prior quarter as lower return potential from MSRs due to higher prepayment expectations was offset by a decrease in projected hedge costs. In correspondent production, margins have declined, and our expectations for returns from the strategy are down from the prior quarter.

Our legacy investments provide a stable foundation for continued strong performance, and we have succeeded in repositioning PMT as a leader in the private label securitization market, where we are organically creating new investments and driving our overall returns higher. As we look ahead, I am confident that this comprehensive and diversified investment platform will drive our ability to continue generating earnings that more than support our dividend and drive long-term value for our shareholders.

Now I'll turn it over to Dan to review the fourth quarter financial performance.

Thank you, David. Net income to common shareholders was $42 million or $0.48 per diluted common share in the fourth quarter or a 13% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $24 million to pretax income, generating an annualized return on equity of 27%. Gains from organically created CRT investments were $12 million, which included $8 million of realized gains and carry, and $4 million of market-driven value gains from credit spread tightening. Investments in subordinate MBS from our private label securitizations generated gains of $11 million, including $9 million of market-driven value gains.

The interest rate sensitive strategies contributed pretax income of $28 million, generating an annualized ROE of 10%. The returns in this segment were impacted by increased prepayment speeds during the quarter, driving higher runoff of our MSR assets. Income excluding market-driven value changes for this segment was $21 million, down from $36 million in the prior quarter. However, our hedging activities during the quarter yielded net favorable results as the increase of $26 million in MSR fair value was partially offset by $7 million of net declines in fair value of MBS and interest rate hedges, including the related tax benefit.

Our MSR asset at year-end was valued at $3.6 billion, down slightly from the prior quarter as gains from changes in fair value inputs and new MSRs from production were offset by the higher levels of runoff. Overall mortgage delinquency rates for PMT's primarily conventional MSR portfolio remains steady.

Servicing advances increased to $97 million from $63 million in the prior quarter due to seasonal property tax payments. No principal and interest advances are outstanding. The Correspondent Production segment reported a pretax loss of $1 million. The negative result was due primarily to spread widening on jumbo loans during the aggregation period, as well as lower overall channel margins as competition increased during the quarter.

The UPB of loans acquired from PFSI's Correspondent Production through our fulfillment agreement totaled $3.7 billion. Of this, $2.9 billion in UPB was conventional conforming correspondent volume and $800 million in UPB was non-agency-eligible correspondent volume. PMT purchased 17% of total conventional conforming Correspondent Production and 100% of non-agency eligible Correspondent Production for PFSI in the fourth quarter.

In the first quarter of 2026, PMT expects to purchase 15% to 25% of conventional conforming Correspondent Production and 100% of correspondent non-agency eligible loan volume, consistent with levels reported in recent periods.

PMT also acquired $1.8 billion in UPB of loans from PFSI's production outside of their fulfillment agreement for inclusion in private label securitizations. The weighted average fulfillment fee rate was unchanged from the prior quarter at 18 basis points. In total, PMT reported $21 million of net income across its strategies, excluding market-driven value changes, down from the prior quarter, primarily due to a decreased contribution from the Correspondent segment and increased runoff from MSRs as discussed earlier.

Turning to Slide 15, we highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. During the quarter, we raised $150 million of new unsecured financing through opportunistic reopenings of our exchangeable senior notes due in 2029. We currently expect to retire the $345 million in exchangeable senior notes due in 2026 using capacity from existing financing lines.

Finally, on Slide 16, PMT's total debt-to-equity ratio increased to approximately 10:1 from 9:1 at September 30, as we continue to retain investments from securitizations. The increase in our total debt-to-equity reflects growth in nonrecourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT.

We continue to believe that debt to equity, excluding nonrecourse debt is the best metric for measuring our core leverage, and that ratio remained within our expected range at 6:1. We expect the divergence between these 2 metrics to continue increasing as our securitization program grows.

We'll now open it up for questions. Operator?

I would like to remind everyone, we would like to only take questions related to PennyMac Mortgage Investment Trust, or PMT. [Operator Instructions] Your first question comes from Doug Harter from USB (sic) [ UBS ].

Just hoping you could talk about the return expectations for the interest rate strategy. I would expect that prepayments probably stay elevated, kind of how do you offset the decline in that profitability to kind of get back to the target range?

So overall, in terms of the MSRs, there's a limited portion of the MSRs that have that responsiveness to higher level interest rates. And so there's -- it's really a combination of both -- a combination of both additional recapture, which we expect to grow on those loans, which we expect to grow through the year from PMT's recapture provider, which is PFSI. As well as we expect the impact of those prepayments to dilute a bit through the year as well just based on the percentage of the portfolio that they represent and the fact that we are adding at a slower pace and that overall portion of the portfolio is generally not expanding at a rapid pace.

But I would note that overall, in terms of the -- in some sense, those -- the MSRs need to be viewed in the context of the entire interest rate sensitive strategy, which if you look at our -- which if you look at our run rate on Page 10 of the earnings presentation, remained at that 12.5% annualized ROE overall. And so there is some complementarity between those MSRs and the offsetting interest rate exposure that they have versus the agency MBS, which, generally speaking, have had over the past few quarters, elevating returns on equity.

Your next question is from Bose George with KBW.

Can you talk about competition in the non-agency space on the production side?

Yes. So I think it's -- it's what you'd expect. I think on the jumbo side, we're seeing very healthy activity from the likes of Rocket Mortgage on the retail side and EWM on the broker side. I think that we have been outperforming both as a percentage of our originations, which speaks to the dynamic nature to how we manage our secondary marketing efforts. But I do think that, for now, we don't see a lot of bank competition. We do see -- the third name I should mention is Redwood Trust. I mean, they are active in the jumbo market from time to time. But by and large, it's really those -- those are the shops that we're seeing as our competition.

Great. That's helpful. And then in terms of the equity allocation to the non-agency securitization, where do you see that trending, say, by year-end?

Overall -- I mean, overall, if you again look at the run rate, our weighted average allocation reflects the -- basically the average through the next 12 months. So we have it at 9% as an average through the next few months. As we get to the end of the year, it's a few percentage points higher than that. So pressing above to probably 11% or 12% by the end of the year.

Bose, what I think in doing non-agency securitizations, one of the things that we balance, of course, we like the returns on the investment, but there's an aggregation risk in terms of holding the loans until securitization. And so we're trying to manage that risk in keeping in mind, especially on jumbo securitization just kind of trying to dimension and monitoring what that risk is. So that's why we're -- we've grown our production and securitizations in a meaningful, meaningful way. But I do think that, that's something that we're going to look to find exciting and alternative solutions to do more while not taking on the incremental risk of growing an aggregation pipeline to $2 billion, $3 billion.

Your next question is from Jason Weaver with Jones Research.

As it pertains to the securitization opportunity, can you comment on financing costs you've seen for investor jumbo and [ HC ] eligible deals as of late. And also, is there any possible deals that -- legacy deals that you might look at to call and resecuritize near term?

I think that as it pertains the -- on the financing side, it's a robust competitive market for financing. And so 1 of the things that we've been very -- we've been the beneficiaries of this taking advantage of that. Having said that, in Q4, we implemented a facility that doesn't have a mark-to-market feature, and that's very important from a risk management standpoint. It's something, if you recall during COVID, we had similar type structure in place where we did have mark-to-market -- we didn't have the mark-to-market risk. And so this is it. It doesn't take away all of the mark-to-market risk that would take a very dramatic event and then the ability to work out of a major event is contemplated. And so there's a bit of a trade-off in terms of the cost versus the risk. But suffice it to say, and the IR team could get back to you on the absolute levels. But it's a pretty competitive market out there. There's a lot of capital flowing to finance these assets.

All right. And then so under some of these affordability driven initiatives that the administration is floating, can you talk a bit about the origination capacity of the correspondent chattel, which is PFSI inclusive and it's bill to expand under what could be greater demand going forward?

Yes. Look, I think that there is a good amount of capacity in the system to deal with any program that the GSEs put out. Obviously, if you put out something that's along the lines of a streamlined refi program in the conventional space, that's going to introduce a level of demand for refinances. It's going to outstrip the capacity. But ultimately, that will take care of itself. And as I mentioned on the PFSI call, 1 of the issues that we're observing in the marketplace is there's actually excess -- more excess capacity in the sector than I thought there would be. And I think it's basically because there's been such -- there's been talk about rates coming down now for upwards over the last 12 months that has given people the opportunity to grow their capacity.

Now as I said, if something meaningful gets deployed and all of a sudden, you go from 20% of the market being refinanced with the 50% of the market, that's going to change this dynamic. But I think that we as an industry and our correspondence, I know are in pretty good shape for, call it, $2.4 trillion, $2.5 trillion market. Much beyond that, we would require to bring up more capacity.

[Operator Instructions] Our next question comes from Eric Hagen with BTIG.

I think I just have one. I can't recall if PMT has ever sold any MSRs, but would you ever consider that as an option either opportunistically or for risk management purposes to delever the balance sheet?

We would consider it. I think that one of the things that I'm really pleased about in 2025, and this is the theme throughout the years, we've been much more agile and dynamic in terms of managing the portfolio. And so as we've been fortunate enough to raise capital to focus on being able to pay off the convert and do other things. As we find ourselves in a position where we can see higher returning assets versus MSRs, of course, we would look at it. And as evidenced by the MSR trade that we did out of PFSI, this management team knows how to sell and close and transfer servicing. And so that's something that we would clearly contemplate.

Our next question comes from Trevor Cranston with Citizens JMP.

Can you guys talk about what you've seen in terms of spread behavior in the non-agency market in January, given the significant amount of tightening that's happened within the agency space? And if that's flowed through to any meaningful change in securitization execution?

Yes. Overall, I think in the non-agency space, spreads have been stable to a tightening in sympathy with the agency spreads. Overall, we've continued to see fairly robust demand for securitizations in January. And so overall, it's been supportive of our continued securitization activity. We noted our securitization activity in January, we completed 1 of each of the types of deals that we are -- that one deal under each collateral type that we've been issuing under thus far nonowner-occupied jumbo and agency eligible owner-occupied, as I said, saw robust demand for each of those. And so overall, we continue to see the market as being supportive of the securitization activity.

Got it. Okay. And then looking at the prospective return slide, the returns on the CRT position look like they're pretty competitive with what you guys are expecting on the new subordinate retention. Would you expect to find more opportunities to opportunistically sell within the CRT book? Or do you think that's kind of reached a point where it's likely to be kind of -- and more of a stable runoff mode at this point?

So the -- what we had sold from the CRT book was actually CRTs that were not specific to PMT collateral that we had acquired opportunistically when spreads were wider. Basically, spreads tightened in significantly and the returns on those had fallen below our threshold. And so we sold entirely out of that third-party CRT opportunistic position. We have retained all of our -- all of the credit risk transfer that was based -- that's based on our lender credit risk share that came directly from our production, from PMT's production. We would expect to continue to retain that. Some of that has been on our books for quite a long period at this point. We actually had 1 of our deals, which had a 10-year maturity, mature late last year. We have a few of the smaller deals maturing as we move forward. Given the return profile and the really high-quality nature of the underlying loans that have really significant home price appreciation, low mark-to-market LTVs, high FICOs, low expected future credit losses, we'd expect to maintain that position as we go forward.

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

Thank you all for joining us. We are very proud of the transformation PMT has undergone this year and look forward to all the opportunities ahead in 2026. If you have any additional questions, please reach out to our Investor Relations team, and thank you very much for the time and thoughtful questions.

The call has ended. You may now disconnect.

Good afternoon and welcome to PennyMac Mortgage Investment Trust's Third Quarter 2025 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call, are available on PennyMac Mortgage Investment Trust's website at pmt.pennymac.com.

Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 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 and the earnings materials.

Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer.

Thank you, operator. In the third quarter, PMT produced outstanding results and growth in book value per share with a 14% annualized return on common equity. Net income to common shareholders was $48 million, and earnings per share was $0.55, with strong performance across all investment strategies. PMT declared a third quarter common dividend of $0.40 per share and book value per share on September 30 was $15.16, up from $15 at June 30. Dan will talk about PMT's third quarter financial results in more detail later on in the presentation.

On Slide 5, I want to start by reminding everyone about the synergistic relationship with PFSI and how important that is to providing PMT with unique and competitive advantages. First, PMT leverages PFSI's best-in-class operating platform, including its deep and experienced management team, scaled servicing operations and its large and agile multichannel origination business, which provides PMT with a consistent and high-quality pipeline of loans for investment.

Second, PMT is able to efficiently deploy capital into long-term mortgage assets without the operational burns associated with origination and servicing. And third, PFSI's deep access to the origination market coupled with PMT's ability to execute private label securitizations provides PMT with the unique opportunity to invest in organically created investments with attractive risk-adjusted returns. And as PFSI further grows its overall share of loan production, PMT is [Technical Difficulty]

ladies and gentlemen, please stand by.

I want to apologize for the technical difficulties. Why don't I start from the beginning?

In the third quarter, PMT produced outstanding results and growth in book value per share with a 14% annualized return on common equity. Net income to common shareholders was $48 million and earnings per share was $0.55, with strong performance across all investment strategies. PMT declared a third quarter common dividend of $0.40 per share and book value per share at September 30 was $15.16, up from $15 at June 30. Dan will talk about PMT's third quarter financial results in more detail later on in the presentation.

On Slide 5, I want to start by reminding everyone about the synergistic relationship with PFSI and how important that is to providing PMT with unique and competitive advantages. First, PMT leverages PFSI's best-in-class operating platform, including its deep and experienced management team, scaled servicing operations and its large and agile multichannel origination business, which provides PMT with a consistent and high-quality pipeline of loans for investment.

Second, PMT is able to efficiently deploy capital into long-term mortgage assets without the operational burdens associated with origination and servicing. And third, PFSI's deep access to the origination market, coupled with PMT's ability to execute private label securitization provides PMT with the unique opportunity to invest in organically created investments with attractive risk-adjusted returns. And as PFSI further grows its overall share of loan production, PMT is expected to have even more opportunities to organically grow its portfolio.

As can be seen on Slide 6, the increasing volume of nonowner-occupied and jumbo loans generated by the PennyMac platform underscores the potential for future investment. And this growing pipeline of loans provides us with flexibility and optionality, allowing us to strategically invest in assets that align with our long-term return objectives.

In the third quarter, we successfully completed 3 securitizations of agency-eligible investor loans totaling $1.2 billion in UPB, retaining $93 million of new investments. We also completed our second consecutive quarterly jumbo loan securitization with a total of UPB of $300 million and retained investments of $45 million. After quarter end, we completed one additional investor and one additional jumbo securitization.

And finally, we priced our inaugural securitization of agency-eligible owner-occupied loans. This securitization is particularly significant as it effectively mirrors the strategy of our historical GSE lender risk share transactions. In those prior risk share transactions, we invested in the credit risk associated with high-quality conventional loan production delivered to Fannie Mae. Similarly, in our most recent transaction, we are investing in the credit risk on the same type of high-quality conventional loans. All of these transactions highlight our ability to leverage our production and securitization capabilities to create high-quality assets for PMT's portfolio consistent with its long-term investment strategy.

The graphic on the right side of the slide highlights our rapid ascent to become a leading issuer of private label securitizations. In recent periods, we've been a top 3 issuer of prime non-agency MBS. In fact, since the fourth quarter of 2024 through today, we successfully completed 16 securitizations totaling $5.7 billion in UPB with retained investments of more than $460 million. This consistent cadence of securitizations underscores our commitment to leveraging our organic investment creation abilities and remaining a leader in the private label securitization market.

Targeted returns on equity for these investments are expected to be in the low to mid-teens. And we believe that, over time, these new investments will continue to improve PMT's overall return profile.

Turning to Slide 7. Approximately 60% of PMT's shareholders' equity is currently invested in a seasoned portfolio of MSRs and the unique GSE lender risk share transactions we invested in from 2015 to 2020. These are highly stable and seasoned assets with strong underlying fundamentals. Our MSR investments account for approximately 46% of our deployed equity, down from a high point of 56% late in 2022. The majority of these mortgages underlying these MSRs remains far out of the money with a weighted average coupon of 3.9%, meaning borrowers have little incentive to refinance.

Borrowers underlying these MSRs also have a low weighted average current loan to value of approximately 53%. As a result, we expect the MSR asset to continue producing stable cash flows over an extended period of time. Furthermore, PMT's MSRs continue to benefit from the higher interest rate environment as the [ pro ] fee income PMT receives on custodial balances is closely tied to short-term interest rates.

Similarly, PMT's unique credit risk transfer investments representing 14% of shareholders' equity are backed by seasoned loans with strong fundamentals that were originated during periods of low interest rates. Delinquencies have remained low on this portfolio as well. This positive borrower performance can be attributed to the overall credit strength of the consumer combined with the substantial accumulation of home equity in recent years due to continued home price appreciation, as evidenced by the low weighted average current loan-to-value ratio below 50%. As a result, we expect that realized losses on these investments will be limited and that these core investments will perform well over the foreseeable future.

The pie charts on Slide 8 highlight our active management of the portfolio to maximize risk-adjusted returns. Our strategy is to recycle capital into assets that maximize risk-adjusted returns, transitioning capital from lower-yielding assets into high-quality investments with superior return profiles. As an example, this quarter, we sold $195 million of opportunistic investments in GSE-issued CRT and had appreciated significantly as since being purchased and where our projected go-forward returns fell below our return requirements.

The sale of these investments freed up capital for PMT to invest in newly created assets with higher expected returns from our ongoing private label securitization efforts. We have also identified and acted upon opportunities to deploy capital into higher returning assets available in the market. This quarter, we identified agency floating rate MBS as an attractive investment with limited interest rate risk and purchased $877 million of these investments.

We remain focused on optimizing our allocation to these investments with target ROEs in the 13% to 15% range. By strategically redeploying capital into these higher returning assets, we are successfully increasing the weighted average return profile of our overall portfolio.

Turning to Slide 9. You can see the run rate return potential expected from PMT's investment strategies over the next 4 quarters. PMT's current run rate reflects a quarterly average of $0.42 per share, up from $0.38 per share in the prior quarter and higher than our $0.40 quarterly dividend. Overall, we expect increased returns in the credit-sensitive strategies given the sale of our opportunistic investments in GSE CRT, which had lower projected go-forward returns and increased activity in accretive investments from our private label securitizations as mentioned earlier.

In the interest rate-sensitive strategies, expected returns on equity increased slightly as we deploy capital into agency floating rate MBS. As the yield curve steepens, we expect PMT's overall run rate would increase further driven by higher overall spread of long-term asset yields to short-term financing rates.

Finally, correspondent aggregation activities, particularly in jumbo loans had positive momentum, driving improved execution and an overall increase to our Correspondent Production segment's return potential. In closing, we are executing on a very clear value-enhancing strategy for PMT. Strong results this quarter, combined with our improved outlook, are a direct result of the competitive power of our platform. This success is rooted in the unique advantages derived from the synergistic relationship with PFSI, which fuels our proprietary investment engine and enables us to be a leader in the private label securitization market. By leveraging this integrated structure, PMT is exceptionally well positioned to substantially grow its earnings potential and deliver superior risk-adjusted returns to our shareholders.

Now I'll turn it over to Dan, who will review the drivers of PMT's third quarter financial performance.

Thank you, David. PMT reported net income to common shareholders of $48 million in the third quarter or $0.55 per diluted common share. Let's start with the credit-sensitive strategies with a $19 million contribution to pretax income.

Gains from organically created CRT investments were $10 million, including $8 million primarily consisting of realized gains in carry and $2 million of market-driven value gains from credit spread tightening. Opportunistic investments in CAS & STACR bonds generated gains of $2 million for the quarter. As David mentioned, we sold $195 million of these investments as the expected go-forward returns were below our return hurdles, and we see more attractive investments resulting from our private label securitization program.

Investments in PMT's non-agency subordinate MBS generated gains of $7 million. The interest rate sensitive strategies had strong results with pretax income of $32 million. Income excluding market-driven value changes in the segment was $36 million, primarily driven by higher income from MSR investments due to increased placement fee income on custodial balances and lower realization of MSR cash flows.

Net fair value losses in the segment were $4 million. The fair value of MSRs declined by $27 million, and the fair value of our interest rate hedges also declined by $27 million. These declines were mostly offset by $51 million of fair value gains on agency MBS, agency-structured products and non-agency senior MBS primarily due to the active addition of exposure to mortgage spreads, which tightened during the quarter.

In the third quarter, PMT reported an income tax benefit of $11 million driven primarily by fair value declines on MSRs and interest rate hedges held in PMT's taxable REIT subsidiary. The fair value of PMT's MSR asset at the end of the quarter was $3.7 billion, down slightly from June 30 as newly originated MSR investments were more than offset by runoff in fair value declines.

Delinquency rates for borrowers underlying PMT's MSR portfolio remain low and servicing advances outstanding decreased to $62 million from $70 million at June 30. No principal and interest advances are currently outstanding.

Under the renewed mortgage banking services agreement with PFSI, correspondent loans are now initially acquired by PFSI. As part of the agreement, PMT retains the right to purchase up to 100% of nongovernment correspondent production from PFSI.

Loans acquired from PFSI's correspondent production through this agreement totaled $3 billion, essentially unchanged from the volume of correspondent production retained by PMT in the prior quarter. PMT purchased 17% of PFSI's total comp conventional conforming correspondent production and 100% of PFSI's correspondent jumbo production in the third quarter, similar to the amount PMT retained. [Technical Difficulty]

Please stand by. The event is currently paused. Please stand by. The event will resume shortly.

All right. Apologies again for the interruption. Get back into it. I want to take a minute to comment on PMT's overall leverage ratio, which is -- we show on Slide 15. The increase in total debt to equity in recent quarters is primarily a reflection of growth in nonrecourse debt related to our increased private label securitization activity and the related accounting treatment for these transactions, which requires us to record the transactions as the financing of the loans rather than retained interest in the securitizations.

The source of repayment for this nonrecourse debt is limited to cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT. We believe that the best metric to measure the leverage of our balance sheet is debt to equity, excluding the nonrecourse debt related to the securitizations, which we have shown on Page 15. We expect the divergence between total debt to equity and debt to equity, excluding nonrecourse debt to continue increasing in future periods as we continue our retention of investments from our securitization program.

Excluding nonrecourse debt, our debt-to-equity ratio at September 30 was 5.8x, within the range of our expected and historical levels.

We'll now open it up for questions. Operator?

[Operator Instructions] Our first question comes from Doug Harter of UBS.

Hoping to talk a little bit more about the conventional securitizing the conventional loans. How are you thinking about sizing that opportunity? How are you kind of deciding what loans get securitized versus delivered to the GSEs? Just if you could walk through that process, that would be great.

Sure, Doug. Thanks so much for the question. Look, we -- as we pointed out in our opening comments, we have tremendous familiarity, knowledge and success with our investment in lender CRT. And when that program was discontinued in 2020, we really took the time to understand how do we create a similar opportunity. And fortunately, the non-owner occupied securitization really provided the greatest opportunity for us. And so we seized on that opportunity and began the securitization process there. But out of that, we began to look at owner-occupied loans and really through a combination of credit spread tightening and the GSEs raising guaranteed fees or loan level price adjustments, certain owner-occupied loans became eligible or executed better into an owner-occupied securitization. And so while we cannot create investment in a private label securitization at the pace that we did in CRT, clearly, over time, we can increase the pace, and we can create a similar investment. And so that's what's exciting about this opportunity.

Overall, the execution was superior to delivering the loans to the GSEs, and so there wasn't any gain on sale hits. And likewise, it provided us with an investment in the kind of the mid-teens range for the long term. So from my perspective, is a win-win. It's not going to replace delivering to the GSEs. I mean it's -- if we were to do a deal a month through securitizations and whole loan activity, we probably would end up delivering 15% of our loans outside the GSEs. So it's not meant to say that we don't need the GSEs because we do need the GSEs. They're an incredibly important business partner of ours. But what's important for me is we're creating meaningful investment for PMT and delivering the results to our shareholders.

So I guess as this opportunity continues to grow, does that ultimately change the level of the conventional correspondent business that PMT would look to buy from? Or does it change the type that you're buying from PFSI? I just wanted to know how those 2 kind of pieces put together.

Yes. So look, if what the level of correspondent activity is from the correspondent business is a function of what PMT wants to invest in on both credit and interest rate sensitive assets overall. If it needs some additional owner-occupied loans for securitization, it can go into the marketplace to buy those loans or it can go to PFSI to buy those loans. And obviously, going to PFSI to buy those loans is the easier path. So I think you have to think about it as there's going to be an allocation of correspondent loans to PMT and allocation to PFSI. But to the extent that PMT wants more loans to do more securitization that knows that it can go to PFSI and whether those loans come through their allocation of correspondent loans or through their broker originations or their own direct-to-consumer originations is just going to be a byproduct of the types of loans that PMT wants.

And I think, Doug, just as a -- to add on to that a little bit, we don't necessarily expect in terms of the percentage of loans that's going to PMT currently the 17%. As we said in the -- some of the comments, we don't expect that to change for the fourth quarter. And that's -- we think that that's a level at least in terms of our current outlook pretty consistent with where we expect to be as we're going into future periods at the moment.

Your next question comes from Frank Lietti of KBW.

Can you hear me?

Yes.

This is Bose. Sorry, glitch in the system there. Yes, actually, a couple of questions. One, just in terms of the normalized run rate earnings that you guys discussed in the slide, just given the steeper curve driving that, should we think of the time line for that, just when the Fed is further along in that process like get there by the middle of next year? Or is that kind of a good cadence?

It's a relatively good cadence. We do -- there are some seasonal variations, both in volumes and in escrow balances, et cetera. But really, if you look at the earnings, excluding market value changes for this quarter, it's -- if you exclude that, it's around $0.40 already, and as we're moving into the next few quarters, we'd expect to be pretty close to that $0.42 level on a core basis.

And then we can have some changes that come in through the market value changes in a given period. But our core -- on the core basis, we're expecting to generate around that $0.42 sort of out of the gate.

Okay. Great. And then just in terms of the -- just going back to Doug's question about this, the transaction, the securitization. How much of that is driven by the GSE pricing versus obviously the spreads in the market are extremely tight as well that's supporting that. Yes, just kind of the different pieces of kind of making that work now.

Yes. So I think that as it pertains to nonowner occupied, I think that's just a market -- I think it's markets and demand for that product. Spreads are tight and I expect it to continue to remain tight. And the execution versus GSE deliveries is pretty significant. So I don't expect to change there.

On the owner-occupied side, that's a little bit more sensitive. And I think that as we see spreads where they are, we see opportunities to do more owner-occupied deals. Sure, spreads were to widen out, we probably would take a pause and deliver those to the GSEs. Obviously, we're going to look at everything in its totality in terms of gain on sale versus long-term investment, but by and large, it's just more -- the owner-occupied transaction is a lot more sensitive to spread movement as it pertains to where the loans ultimately get delivered.

Your next question comes from Trevor Cranston of Citizens JMP.

Question with mortgage rates coming down a fair amount over the last few months. Can you talk about what you guys are seeing in terms of prepay speeds, particularly, I guess, on the jumbo loan securitizations you guys have done over the last year or so and maybe more generally, if you could also comment on kind of how sensitive projected returns are on those investments to changes in prepay speeds.

Sure. So overall, in terms of the prepay fees, I think a little early yet on the jumbo securitizations. We really only started doing those in earnest in the middle of this year and so -- and this is really, I'd say, the first -- probably the end of September here, part of September is where some of those may have had a potential to start refinancing. So I think the reactiveness to that, still have yet to see in full. But with respect to our sensitivity to those prepayments since we own the subordinate tranches, generally speaking, prepayments on -- from the jumbo loans are beneficial to those investments. Typically, we own them at a discount. And so as prepayments increase, it increases the accretion of those over time or basically shortens the life. So overall, in terms of prepayment speeds, is not a significantly negative impact or it's not a negative impact to our investment.

And this is the -- the MSRs that we own back in these deals, obviously, having the hedge in place to be able to counter the prepayment speed issue's vitally important. I think the hedge results this quarter were really very good. Marshall and the team have done a great job in getting us set up to be able to really see the benefit of an active hedge process in the portfolio. And so hedging those assets helps mute a lot of the prepayment risk associated with owning MSRs.

[Operator Instructions] Your next question comes from Crispin Love Piper Sandler.

First, can you just speak to where you're seeing the best opportunities for risk-adjusted returns right now just between the interest rate sensitive and credit-sensitive strategies and where you're most focused on allocating capital in the near term?

Yes. Crispin, I think from my perspective, the best opportunity right now is in the credit-sensitive strategy sector, whether it's doing owner-occupied securitizations or nonowner-occupied securitization. We are getting long-term really stable investments in subordinate tranches at the mid-teens levels.

The MSRs are slightly less than that. But I think what's -- and maybe a little bit more than slightly, but they're probably lower teens. But what's driving our motivation there is to get more balanced between interest rate-sensitive investments and credit-sensitive investments. And so as I mentioned, historically, we've been closer to 50-50. We got as high as 55% interest rate-sensitive assets back in 2022. So I'm really focused on being able to invest in credit-sensitive strategies. I think that our vehicle has proven to be very valuable in investing in credit-sensitive strategies. And I think given the underwriting and the due diligence and the servicing behind it, the ability to manage the outcomes in a more active way is something that we've shown ourselves to be able to do, is really, if you think about during COVID, our losses were much lower on CRT than other CRT investments.

And so I think for the time being, we're very excited about the opportunities it's presented to us. And I think that this is something you're going to continue to see us participate in. And as we produce the results, I'm really hopeful that we'll be able to grow the REIT to be able to deploy even more capital.

And the one thing I'd add on to that is that if we do -- when we do see opportunities in the interest rate-sensitive strategies, although over time, we do think the best deployment is in credit, and that's really what we see as the best use of our synergy with PFSI and all of the things that David mentioned, but to the extent that we see opportunities in the interest rate-sensitive strategies as we did with floater -- floating rate MBS or CMO floaters in this quarter, we will deploy those to take advantage of the opportunities for returns that we see and returns on a basis that we think is fairly insulated from changes in interest rates. But that -- really, over time, that credit-sensitive opportunity I think is the best deployment of our capital.

Okay. Great. Appreciate that. And then just big picture, can you just share your latest thoughts on potential changes to the GSEs? Any thoughts on timing, the potential impact of PMT just based on what we've heard so far from the administration, the FHFA?

Sure. Look, I think that, obviously, there's a lot of discussions going on as it pertains to the GSEs. And so from my perspective, when again, I get asked the question, any action shouldn't harm consumers of the mortgage market. Housing is just too big a part of GDP to really disrupt it. I think that as it pertains to PMT, we've got a tremendous relationship with the GSEs. Having the relationship with PFSI is vitally important. But also the platform between the 2 companies is on its way to delivering 15% of its production outside of the GSEs. And that's what we need to continue to do, is to be able to be agile that if there is a disruption in the marketplace, that we can continue to operate and grow in that period of disruption. And that's why doing these securitizations and engaging in outright whole loan sales is vitally important.

Under the heading of just focus on what you can control, and that's what we're trying to do here, quite successfully, might I add. And I think it's really a credit to the team that you're just seeing more active management of the portfolio, and that's what we need to do in a period of uncertainty.

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

Thank you, operator, and thank you all for joining us this afternoon. Again, apologies for the technical difficulties. We'll work it out with our business partner here. But we encourage investors or any of you as well with any additional questions to contact our Investor Relations team by e-mail or phone. Thanks again.

This concludes today's call. Thank you for attending. You may now disconnect.

All right. I think we'll get started. So good afternoon. Thank you, everybody, for joining. My name is Terry Ma. I cover mortgage finance at Barclays. Pleased to have with me on stage PennyMac Financial. We have David Spector, CEO; and Dan Perotti, CFO. So welcome, gentlemen.

Thank you, Terry. Thanks for hosting us today, and thank you all for joining us today.

Yes. Great. So I think we'll jump right into it. So maybe let's start with the mark-to-market. You released an update this morning with volumes and margins quarter-to-date. Can you maybe just talk about what you're seeing across your business and also the competitive landscape?

Yes. So I'm -- as indicated by our release this morning, we're very pleased with what we're seeing after the first 2 months of the quarter. In our correspondent space, we're seeing some nice margin expansion taking place. We've been coming off a low of around 23 basis points, making our way to 30 basis points and we're pleased with the margin increase.

Volumes are off a little bit, but with the rally here in the market over the last -- since the beginning of the month, I expect volumes to start increasing in our correspondent and are definitely in our best efforts business.

On the bulk business, we probably will not see the increase really until Q4. But suffice it to say, we're pleased with what we're seeing in correspondent. We also announced this morning that we're going to be introducing non-QM into correspondent.

We introduced that last week. We're primarily focused on -- not primarily, we're focused on investor loans and bank statement underwriting, which is about half of the addressable market. So with the addressable market at $70 billion to $80 billion, that's about $35 billion to $40 billion of non-QM production that we believe we can offer to our correspondents. And the initial strategy is to buy the closed loans through correspondent and then sell those as whole loans to investors. And we'll talk about PMT a little bit later, but there could be a role for PMT a little later on.

And turning to broker in our broker direct channel, I'm really excited with the -- with what we're accomplishing in broker. Our market share is above 5% now. Clearly, there's an opportunity -- there's been an opportunity for us to grow share to be a meaningful correspondent originator. We're doing that. We've been very good at leveraging our expertise in distribution and pricing and capital markets, and we're doing a lot of jumbo originations in broker direct.

We'll be introducing broker -- non-QM into broker later this year. And that's where I expect to see a good amount of the activity to take place of non-QM. As I mentioned, our share goal is to be at 10% by the end of '26, and I'm confident that we'll get there at least by then, if not sooner. And it's a function of the fact that, that market has a very -- it has a leader in the market space who's been very successful in building out the broker direct channel. I believe that we have the #2 broker originator, which has its own challenges and distractions, and I think we can continue to operate to be a strong #2 to #1, and that's been our strategy.

On the consumer direct side, there, we're seeing a lot of great activity. By the way, in broker direct, we've seen margins -- I failed to speak about margins, but margins have been holding steady, if not going up in broker direct, while volumes have been going up. On the consumer direct side, there we're seeing a lot of good activity, especially over the past couple of weeks, by the time we got to August, we saw end of August, we saw volumes up a bit, while margins were down a little bit, but revenues are up and over the past couple of weeks, it's been very -- the activity has been what you would expect it to be given the decline in rates.

And so really, if you think about our balanced business model, really delivering recapture -- the recapture opportunity off of our servicing portfolio is key. And that's really -- we'll get to it in a minute, what's been behind the hedge, the hedge benefit that we've seen this quarter. But really, we're seeing the capacity we put in place at the end of last year being put to use as rates are declining, and we're seeing the recapture coming in quite nicely. So we're generally very pleased on the production side.

On the servicing side, we are in a market where delinquencies are low, and they continue to remain low. And that lends itself to growing servicing profitability. And so I'm really enthusiastic with what we're seeing on the servicing side as well. So it all adds up to something that I've been saying for the past couple of quarters in that -- look, we're in a sector of the market where we've been working tirelessly over the last 3 years to achieve some strategic initiatives, and we're now starting to see the success of those initiatives.

And while others in our space are distracted for various reasons, and I have tremendous respect and fondness for those that we compete against, but they all have their distractions, we are in a really good position to continue to just execute.

Great. Helpful color. And then the update it seems the hedge is performing a lot better than previous quarters. Maybe just take a step back, remind investors what your overall hedging strategy is? I mean maybe just talk about some of the changes.

So when we think about our hedge strategy, stepping back and thinking of what's the overall objective of the hedge strategy to really to provide book value stability and earnings stability through time. And we can see going back a number of years that the primary case for that is really at the onset of the pandemic. We had a really sharp drop in interest rates, a sharp drop in the value of our mortgage servicing rights but because we had our hedging program in place, both from a book value perspective as well as a liquidity perspective, we avoided some of the issues that others fell into. We had a few in the mortgage industry that had near-death experiences.

Obviously, once we got past that initial volatility production kicked in and the tail of the rest of the 2020 and 2021 was a little bit different, but ensuring that we are always protected against those types of moves. As we've gone through the past few years, we've had some issues given the shape of the yield curve and the price of options that we use to hedge in terms of balancing the cost of the hedge versus how we would, as well as positioning ourselves as interest rates moved up and down in order to ensure that we were continuing to have enough ample coverage when we saw interest rates or if we saw interest rates move further. And that led to some underperformance over the past several years.

Really what we've changed now at the end of the third -- at the end of the second quarter as we've gotten through the second quarter, as David mentioned, we brought on more capacity in our consumer direct channel. And we view that capacity in the consumer direct channel as really, a, the best hedge of -- against additional prepayments if interest rates decline and also the cheapest hedge against prepayments if interest rates decline because that additional capacity that we brought on is less costly than the options that we were otherwise using to hedge.

We had to get that capacity into place first before we made these changes. And so having that capacity in place has given us and incorporating that capacity into the way that we view our hedging program has allowed us to shift the instruments that we use to hedge relying less on the costly options that we've traditionally relied more upon and using more of futures and mortgage-backed security forwards, which tend to have actually positive carry contributing value in terms of having those hedges on.

So that also -- so that overall has allowed us to shift our hedge cost profile to be lower. So versus the 1% to 2% that we've typically mentioned as a range, we believe that will be closer to the lower end as we move forward or potentially below the lower end, as well as the changes that we've seen in the market with the shorter end of the yield curve coming down, as well as interest rate volatility or implied volatility coming down. In other words, the cost of options coming down. All of that plays into lower expected hedge costs going forward. And our shift into those other instruments, we believe we'll have greater -- we'll see greater tracking of our net hedge performance versus the way that interest rates move as we go forward. And what we've seen thus far in the quarter has really beared that out. And I think the results that we mentioned this morning, $20 million in terms of the hedge -- negative hedge impact versus for what we've seen in the quarter thus far really shows the reduction that we've seen over the past implementing this strategy in this quarter.

Got it. That's helpful. And then maybe just more broadly, can you talk about how you expect servicing to perform? And also just give us an update on where we are in the subservice effort?

Yes. So look, the servicing performance for the third quarter is really strong, and it's really a function of the fact that borrowers are continuing to make their payments and delinquency rates continue to remain low. And we're not seeing any indication to date that that's going to change. And I think that, that's been the value of being an investor in servicing for the last 3-plus years. We're continuing to see cost improvements in terms of the servicing.

Our servicing technology continues to evolve and continues to impress. And we've driven down the cost of service by close to 40% over the last 5 years, and there's still room for more. And so you really -- what we're able to do with servicing really gives us a real competitive advantage as we look out into the future and the ability to continue to grow the servicing portfolio.

As it pertains to subservicing, we're really seeing some really good opportunities in the marketplace. Clearly, there's -- I would say, rational pricing returning to the sector. There's been a lot of competition over the past couple of years to grow servicing, but to a lot of work. We're able to build the value proposition that can compete in the marketplace as well as we're starting to see a major market participant speaking about perhaps stepping back from subservicing.

And I believe that we can continue to make a value proposition not just to our core responder aggregators, but also to owners of servicing who've been buying it as a financial asset. There's been big demand for low rate servicing in the marketplace, and we can provide a very competitive suite of products to people who are looking for our subservicers. So I would expect our subservicing business to grow over the next 12 months and really to be able to step in where others may be looking to step out.

Got it. Maybe just to switch gears. You -- this morning, you also announced an equity investment in Vesta. You're switching over to Vesta's LOS for consumer direct specifically. Can you maybe just talk about the partnership, why you're making a change? And then we think about broker and correspondent. Is there the opportunity to go over there?

So I'm really excited about the Vesta opportunity. We have been looking to enhance our direct origination LOS technology for -- we've been looking at doing it for a few years. And about 2 years ago, we had to make a decision of whether to -- you really to develop proprietary technology or work with a technologist who is looking to create LOS technology, and we're very fortunate to meet Mike Yu, who runs Vesta. Vesta was an existing technology that wasn't as sophisticated as it is today, but it did have some direct direct-to-consumer clients.

And in working with Mike and the Vesta team, we've built out what we believe to be a next-gen system really, really -- and it really comes about in terms of the configuration of the technology. And we're very workflow oriented. We are very process-oriented and the system has proved itself to be incredibly nimble to meet the demands and needs of a sophisticated originator like us.

So we're -- we went on their system. We started in mid-August, we've put on about 100 loans out of the system. We're seeing tremendous benefits already. The amount of time it takes from when a borrower calls in, do we get the information until we either lock the loan. That's been reduced by 50%. On the processing of a loan, we're seeing improvements of minimum 20%. I expect to be 100% on their system by Q1 of next year, and it's really only the beginning.

There's a lot of AI initiatives in place that we have for our consumer direct division. And I believe that it's only going to lend itself to produce results like we're seeing with our servicing system where you're going to see our costs coming down and our efficiency is going up in terms of loans per employee -- locks per employee and the process improvements.

Being that it's a system built for direct originations, the logical next step is to move it into broker direct. We're going to be looking to get it into broker direct and our correspondent system just so we're on one system. There's a lot of synergies we can get by being on one system. And obviously, having the investment in Vesta has the correct alignment of interest. The investment is I would say it's about a $10 million investment. We have an ownership stake in Vesta. And clearly, one of the biggest benefits of this is it gives us a system that was built for customer number one. But we also believe it's a system that can be offered out to our own correspondent sellers. And it's a system that we can that we can help Mike and the team be able to move into other correspondent sellers because it is built for a correspondent seller who does this little 100 loans a month or in our case, 5,000 to 10,000 a month.

And so we believe -- and look, finally, it's a legacy-free system. And building something legacy free is a lot easier than configuring and trying to adapt to an existing system. So all in all, I'm really excited about the Vesta opportunity, and I think it's going to be really beneficial as we not only become more efficient running a status quo system, but also as we adapted to all of the AI initiatives that we do have on the horizon for our consumer direct team.

Got it. And then maybe just staying with consumer direct. You've been talking about the portfolio you've built the recapture rates. And last year, you spoke about focusing more on brand marketing and brand recognition. So maybe just update us on that and how the progress with the Olympic partnerships are going.

The Olympic partnership is exceeding my expectations on many fronts, right? I will tell you that the ability to have a partner of the magnitude of the U.S. Olympic Committee is really important to as it allows us to hang our brand with a gold medal, no pun intended organization like the U.S. Olympics and LA28 is really vital. It's been instrumental in allowing us to bring on capacity. The ability to bring on leaders and key hires and meet the capacity needs that we have today and that we're going to have is really enhanced and we hear this directly from people we're hiring.

It's really important in terms of marketing to our portfolio of existing customers and prior customers. And it just has this halo effect in terms of just when you listen to recorded calls and you listen to our LOs speak to customers, it's clearly part of the routine that they use to be able to get customers to lock and close a loan with us. It's having huge benefits in our broker direct channel. The ability to call on brokers and get brokers to sign up for us has really picked up since we brought on the partnership of the Olympic Committee. And so that's been vital.

And then just working with our other key stakeholders, whether it be government agencies or our banks, it's just something that adds brand equity to us. And so I'm really pleased with what I'm seeing, and it's an appropriate way for us to market PennyMac, and it's something that as we get closer to the Winter Olympics and certainly the Summer Olympics of 2028, we'll be doing more with the Olympics. But by and large, having those rings, having the flag and having the Olympics with PennyMac is really noticeable.

Got it. That's helpful. PennyMac remains a leader in correspondent. You have about 20% market share. You've mentioned your desires to grow your broker share to 10% -5% today. What's the competitive landscape look like across third-party lending channels? And how has PennyMac been strategically investing and positioning itself to gain share?

So let me start with the broker channel. We have a market leader who I have tremendous respect for, and they represent about half the broker market. And I think that we've done a really nice job positioning ourselves as a strong number two to number one. We continue to offer new products, quite frankly, offer more than competitive pricing. I believe that we are the best in the broker channel at being able to price and execute. And that gives us a competitive advantage.

If you think about what we've done in correspondent in terms of being in the market every single day with our correspondent aggregators with a competitive price, that's something we're doing in the broker channel. The brokers are seeing it. And so that's really a competitive advantage that we have, both to number one and number two.

As it pertains to number two, look, they are distracted with the closing of the transaction that's going to be taking place. And I just think that given the -- in terms of what the Rocket, Coop enterprise is going to be, it's going to be a heavy retail-focused enterprise and I think that the broker direct channel is one that doesn't really lend itself for what they're going in for.

And furthermore, given what the FHFA came out with in terms of caps on the portfolio sizes, there are things that they're going to be looking at, whether it be the broker channel or whether it be subservicing or buying bulk servicing all those advantages.

On the subservicing side, it advantages us and the fact that we're trying to build a subservicing business. On the broker side, it advantages us for the reason I just stated. And then on the bulk servicing side, it advantages us and correspondent. Because many, many sellers of bulk servicing either sell loans to the Fannie, Freddie cash window or they securitize loans themselves and then bulk up the servicing and sell it.

On the absence of bids, which both Rocket and Coop have been very strong bulk service saying, you're going to see more loans going whole loans. And that's where I think we'll be able to use our market leadership in correspondent to continue to do more correspondent business and do so while at the same time not having to lead with margin. Raising margin correspondent is my top priority and correspondent, and I believe we can raise margin and grow share. We're the leading correspondent aggregator. Everyone who is -- who originates loans and sells to a correspondent wants to do business with PennyMac.

And the fact that we're introducing non-QM gives us the final set of products that have been missing from our product, our product makeup and designed. And so I'm really encouraged by that. I think from a -- to your point about competitive landscape and correspondent, on the government side, we continue to see the likes of AmeriHome, Freedom and Planet Home.

On the government side on the conventional side, our competitors are really the Fannie, Freddie Cash windows. But by and large, with all that, we're still north of 20%, and we'll see what happens. But when we get to 25%, look, if we can do so and continue to raise margin, we should all be very glad. I don't see us on below 20%. And we're going to do so without sacrificing margin or our credit guide line.

Got it. That's helpful. So you touched on non-QM a bit. Maybe just talk a little bit more about that opportunity. And then in terms of how impactful it can be to PFSI, maybe just talk about that?

Yes. So when we look at the non-QM market, from our perspective, the addressable market is $70 billion to $80 billion of total production. When we then put on our credit overlays that we want to participate in. And those credit overlays primarily are, we want to deal with ESGR investor loans and bank statement underwriting. That cuts the addressable market to about $30 billion to $40 billion.

The other overlay by the way, is FICO. And we really don't want to participate in FICOs below 700. So we start there. We believe that these programs are meaningful enough and in demand and speaking to our correspondent sellers as well as our broker originators as well as the call center that we believe that we can be meaningful in terms of our participation in the market.

As history has shown, we typically are a little bit slower out of the box than we'd like, but we want to make sure, one, we got it right. And furthermore, we -- as we introduce the product, we'll be -- the distribution will be to other non-QM aggregators or to the stream.

Obviously, as we were in correspondent today, we'll be in broker by the end of the year and consumer direct by Q1 or at the latest April Q2. But as we see the velocity increasing, then we'll be in a position of do we think about securitizing or selling the loans and securitizing those with TMT, how do we think about the distribution. But for now, it's about getting it right and making sure that we're focused on the prime part of the market as opposed to the non-prime part.

Got it. Got it. So maybe just switching gears and taking a closer look at tech. I know this year, PFSI has launched 35 AI tools, which could save about $25 million annually. I think that number may be updated now. Can you maybe just touch upon what investments or technology you're most excited for as you -- and where you continue to see additional opportunities?

We are, as a senior management team, really, really focused on what the AI opportunity means for each and every one of us in the organization. It's not just the loan -- it's not just the loan origination business or the servicing business, it's all of our businesses. I will tell you that we've always been a tech-focused organization. When we built the correspondent business, we had, for example, we have the OCR technology in place when we started it. It's not something that's new to this team.

I will say that we are very fortunate in the fact we're spending a lot of time with a business partner in AWS, who has been incredibly valuable to us and will continue to be valuable to us. We're working with Google to see where we can work with them on initiatives.

Having said that, on the AI front, we have a really exciting group of initiatives in our consumer direct channel. We have -- just to give you just a flavor, we've introduced chatbot in our consumer direct channel to really help our LOs online deal with customer issues. We have -- we record all of our consumer calls. There's call summaries that are created with AI after every call and tagged with the loan.

So when the borrower calls in, again, the LO who is on the call can see what has been discussed to better meet the borrowers' needs. We're doing a lot of work in terms of agentic AI in our consumer direct channel. And all of this, to me, lends itself to making our LOs more efficient, reducing the cost to originate a loan and making the customer experience that much better and you can do all 3 with AI.

And it goes without saying a lot of the AI tools that we're creating for our consumer direct channel will also be used in our broker direct channel. And that's the power of being on the same loan origination system. And so we're going to continue to introduce AI tools that over the next few quarters, we'll be introducing to you and the investor community, but it's something that I'm really excited about.

In terms of the greatest payback of sorts for AI, what we're seeing with copilots and other tools in our technology area is truly remarkable. We are doing more with technology with the same amount of people, and it's only going to grow. And so the needs for junior coders has diminished. The ability to use technology that records meetings that lays out what the initiatives are and turn that into the first round of coding, that's in place.

And so there's just a lot of sophisticated AI technology that we're going to be using and developing as tools that I think is going to show itself that it shouldn't surprise anyone in the room. This is something we've always led with if you think back to what I've been saying over the last 10 years to everybody, and it's only going to just be more of the same.

Got it. Maybe just drilling down to servicing expenses, right? That's come down pretty meaningfully over the last few years as a percentage of UPB. Maybe just talk about where this could kind of ultimately go as we kind of look out maybe in the long term?

So as David mentioned, the technology that we have in place, our proprietary technology has really been a great platform for us to be able to decrease our servicing expenses over time. You look back to our pre-pandemic years, which is when in 2019 is when we implemented our technology. We've been able to drive down our costs by over 40% through that period of time, including in some years where we had elevated delinquencies.

And so as we look out further enhancing our technology platform, further adding AI tools of the sorts that David was talking about into the platform that allow each of the participants in the platform or our staff being able to work more efficiently, either handle calls more efficiently through having chatbots that give them some of the answers to their servicing inquiries as they're on the phone, having our customers be able to self-service more efficiently and being able to handle certain reconciliations in investor accounting and so forth in a more automated manner. All of those lead to further decreases in costs all else being equal.

Now if we do see an increase in delinquencies over the next few years, on an overall unit basis, we may see a bit of an increase in the cost of service. But on a like-for-like basis, certainly, we expect to be able to continue to drive down costs in a meaningful way with further double-digit increases in efficiency as we move forward. There's really no -- this is not a stopping point for us. And especially as we continue to grow the portfolio and implement these efficiency measures, we'll expect -- we will continue to see our cost to service our operating cost to service drive down.

Great. So maybe just to tie all this together, if we kind of think about ROE or normalized ROE, how should we kind of think about it as it pertains to PFSI, obviously, the origination market is a bit constrained today, but maybe just talk about the current environment and what kind of normalized...

In a constrained origination market, our ROE target should be 15% to 18%. And we've done a lot of work over the past 2 to 3 years to get us to this point. And I feel very confident that, that, that is the target ROE. Obviously, as we move into a higher origination market, whether it be $2.2 billion, $2.3 billion, $2.4 trillion, getting above 20% is, from my point of view, where we should be.

And that's a function of just doing more consumer -- direct-to-consumer originations, margin expansion and correspondent as well as growth of broker margins and broker share. And so that's really where I'm leading the organization. And I feel as evidenced by what we issued this morning, I feel very good and really happy and proud for the team for the work that they've done over the past couple of years to get us to this point.

Great. At this point, we're going to switch gears and maybe just talk about PMT for a little bit. Can you just remind everyone what the significance of PMT is in the -- within the PennyMac complex? Just talk about why PMT is beneficial to PFSI and why investors should be looking harder at PMT?

The PMT, as we all know, is a tax-efficient REIT. It was established back in 2009, really with an eye if -- one was on the road show with an eye to a return, a private label securitization to invest in subordinate tranches. And we -- back in 2009, thought we'd be there in a year or 2, but it took us about 11 to 12 years to get there, but we are there.

And we have in PMT some real core competencies in terms of the ability to aggregate and securitize loans and understanding what that means and what it takes to be able to do so. And we've got a great team in place that's doing it. And really, the advantage to PFSI, first off, as the manager of PMT, it obviously gets paid in incentive, a management fee with capital under management as well as an incentive fee.

And obviously, as we -- as we grow the profitability of PMT, PFSI will be a beneficiary. PMT over the last year has been transitioning to doing more private label securitization. It's been -- it's gone from 0 to now being a top 3 securitizer of loans. And by the end of the year, it will be the top non-bank securitizer only behind Chase.

It gets its loans through the loans that buys through correspondent as well as of sales of loans at market rates from PFSI to PMT. And having that synergistic relationship with PFSI allows us to confidently be able to say they're going to be able to do an investor securitization every 3 weeks and be able to do a jumbo loan securitization once a month.

And when it adds excess capital to say, we'll be able to do a non-QM securitization. And I think the transition into the investing in securitizations is very much akin to what it did in CRT from 2015 to 2020, albeit they can't do it with the same size and velocity and the same needs, but suffice it to say it has a real competitive advantage. And I expect PMT to be able to continue to grow profitability and ultimately to be able to raise capital.

Great. Looks like 3 or 4 minutes. Maybe I'll just pause here and open it up to the audience if there is any Q&A. Back row, Ravi.

I'm sorry, I just walked in, so I apologize if you addressed this. But I just wonder if you could talk about competitive conditions in the wholesale channel, in particular?

Yes. So as I mentioned earlier that the wholesale channel is dominated by two players, really one in particular, so you have United wholesale that's clearly the market dominator. I think of them as a 50-plus percent market share participant. They built a great -- they've built a great company. They're really focused on delivering service and speed at a low cost.

Secondly, we have Rocket who's been number two, probably around 15% to 20%. my belief is they're not going to -- that they're not going to be as committed to the broker channel as they have been. It's a function of the fact that if you look at what they do in the channel, they originate loans for brokers, then they turn around and they sell the servicing.

And given the market share caps that we're hearing about coming out of FHFA, I just see it as an unnecessary nuisance for them or distraction versus really executing on the combination of the two companies, meaning Coop and Rocket as well as the integration of Redfin into this company. So I generally think of it as a -- ultimately a 2-player market with UWM and PennyMac.

And look, we've said we want to be a 10% market share by the end of 2026 and is my belief and all things I'm seeing, we're going to get there, if not sooner. But really, it's about leveraging what we're doing in the consumer direct channel with our technology and the tools we're building and combined with leveraging what we've built in correspondent. And that's really giving to the brokers much of the service and products and pricing that we make available as being the leading correspondent aggregator.

Could you maybe talk about the impact of the recent trigger leads bill on your recapture rate and how you think about kind of that impact?

So the -- look, what's going on with the consumer, you're talking about trigger leads, what's going on with the consumer and trigger leads is really -- it's really unfortunate. When we lock a borrower, we tell them you're going to be in data with calls because the credit reporting bureaus will sell the fact that we've had a pull credit on you.

And as a result, they sell that to other mortgage originators, and that's what's known as a trigger lead. And we have customers who will get 50, 60, 70 calls within 15 minutes. And it's really unfortunate, and it -- look, as a servicer, it bothers me because we invest in servicing and part of owning servicing is getting the recapture. So obviously, I don't like it. It's made its way into Congress and there's a bill that is inches away from being signed that will preclude those leads from being sold.

It can be sold to the originator. So if we buy the loan from a correspondent, that correspondent can get notified that credit has been pulled. It can get sold to, I believe, the bank that the customer banks at. We'll take that. Okay?

That we'll take. And I think it's going to lend itself to not only increasing recapture, but perhaps doing so with greater margin. And that's what's driving our motivation in support of this bill. And I think it's a great question and a great point as we think about the profitability of our direct lending business.

Great. I think we're out of time with that. So thank you.

Thank you, Terry. Thank you, everyone, for your time today.