Good afternoon and welcome to PennyMac Financial Services, Inc.'s first quarter 2026 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call, as well as an Excel file with supplemental information, are available on PennyMac Financial's website at pfsi.pennymac.com. Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on slide two of the earnings presentation that could cause the company's actual results to differ materially, as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now, I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Financial's Chief Financial Officer.

Thank you, Operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. As shown on slide three, PennyMac Financial generated net income of $82 million in the first quarter, or $1.53 in earnings per diluted share, for an 8% annualized return on equity. Excluding the impact of valuation-related changes and transaction expenses related to our acquisition of similar subservicing business, adjusted EPS was $2.19 per diluted share, or an 11% annualized adjusted return on equity. As Dan will expand upon, we continue to optimize our hedging strategies to converge GAAP and adjusted ROEs. While our adjusted return on equity this quarter remained below our long-term expectations, we remain intensely focused on maximizing returns on invested capital over the near and long term. I am also optimistic regarding the underlying trends in our business, particularly higher recapture rates and consumer direct channel coupled with increasing revenue per loan. In addition to these positive trends, I will also address initiatives we currently have underway later in this call. Our optimism is most evident in the production sector, where we are strategically growing in areas that will optimize returns on capital in what remains a dynamic and fragmented market. Specifically in the correspondent channel, we are leveraging our leadership position to exercise rigorous pricing discipline on the related MSRs while driving an increase in margins across various products. This pricing discipline, combined with continued growth in our consumer and broker direct channels, led to production segment generating its highest level of pre-tax income in nearly five years. In addition, we have three distinct production channels, correspondent, broker-direct, and consumer-direct, all of which are operating at significant scale. This diversified platform provides us with multiple complementary avenues for sustainable growth and a unique ability to shift our focus and resources to the channel that offers the most attractive risk-adjusted returns. Turning to slide four, let's review a few additional business updates. During the quarter, we repurchased 560,000 shares for 1% of our outstanding stock for $50 million at a weighted average price of $89.28 per share, as we saw tremendous value in stock at these price ups. I am also pleased to report that we remain on track to close the acquisition of Sennelar subservicing business in the second half of the year. Our teams are collaborating effectively to ensure a seamless integration of Sennelar subservicing business into our operations. As outlined in our investor update presentation in February, once fully integrated, we expect strong returns from this acquisition and we are excited about the increase some scale and diversification that this transaction will provide. Turning to our consumer direct origination channel, the deployment of VESTA has been complete for new loan originations and has begun to drive operating efficiencies through the introduction of AI agents and the resulting reduction in previously manual tasks. On recapture, I am also pleased with the meaningful progress we have already achieved with consumer direct origination volumes up meaningfully from recent periods, and conventional first-thing refinance recapture rates of five percentage points from the prior quarter to 22%. This momentum has continued into the second quarter, with conventional first-thing refinance recapture rates running near 30% in the month of April. Turning to slide six, our mortgage banking operating pre-tax income was $190 million for the quarter, up from $173 million in the fourth quarter. As we look ahead, we expect adjusted ROEs to remain near current levels in the second quarter before increasing to the low to mid teens in the second half of 2026 as we realize the benefits of technology and efficiency enhancements. As just mentioned, we have lowered our ROE guidance from the mid to high teens to low to mid teens in the second half of the year due to two main factors. First, we have decided to meaningfully accelerate our technology investment to drive significant operational efficiencies in both production and servicing, and second, we expect less origination demand with interest rates at current levels. Over the medium to long term, we continue to expect PFSI to achieve ROEs in the high teens to low 20% range, which we expect to achieve through the realization of these technology investments, and increasing scale. On slide seven, we highlight the future opportunity within our consumer direct channel when rates do decline, as well as our first lien refinance recapture rates over the five most recent quarters. As of March 31st, we serviced a combined $320 billion in UPB of loans with note rates above 5%, of which more than half had note rates above 6%. As you can see on the charts in the middle of the page, government refinance originations from our portfolio in the Consumer Direct Channel are nearly double first quarter 2025 loans, and our first lien refinance recapture rates remain strong in the 50% range. We are seeing even more success in conventional loans, where volumes are up more than five-fold from levels reported in the first quarter of 2025, driven by the previously noted improvement in first lien recapture rates to 22% from 17% in the prior quarter. And as I mentioned earlier, in April, we achieved conventional first lien refinance recapture rates of nearly 30%. We also completed the transition to VESTA, our new consumer direct loan origination system during the first quarter. And we are in the process of working through the pipeline of loans originated on the old system, which we expect to have completed in the second quarter. This new system has already substantially improved the customer experience. I am very pleased with these initial results and expect to realize material benefits of our new platform in the second half of this year. The early success we are seeing is a direct byproduct of our ability to reduce costs per loan and the days to close, as well as leverage real-time data to engage borrowers more effectively. We have also started the successful release of AI agents within our fulfillment process across multiple products we are rapidly moving towards a model with exceptionally low manual intervention and in some cases will remove human touch points entirely thereby improving the customer experience further increasing recapture rates and driving higher operating margins furthermore we are focused on the implementation of additional specific tech enabled solutions ranging from AI-driven lead prioritization to enhanced digital self-service. Turning to slide A, you can see how our state-of-the-art technology platform is driving significant operating leverage and superior unit economics across the entire enterprise. By combining our technology foundation with our scale advantages, we are driving unit costs to historic lows. As noted on the charts, our direct expenses within the consumer direct channel dropped 26 percent compared to 2022 levels. Similarly, in our servicing segment, our operating expenses as a percentage of total servicing UPB have dropped 24 percent to 4.5 basis points as we continue to enhance workforce productivity and automate complex tasks through the deployment of sophisticated technology. In our corporate in another segment, we are clearly achieving more with loss. By leaning into a unified technology foundation, we have reduced compensation as a percentage of adjusted revenue to 3.7% from 6.5% in 2022, a decrease of 44%. While these results are compelling, we are in a new stage of transformation and AI implementation. With significant runway ahead to further optimize our platform, reduce unit costs, and capture additional economies of scale. By combining our pricing and capital allocation disciplines with a best-in-class technology infrastructure that is already delivering record-low unit costs, we are building a more resilient and profitable enterprise. We have the team, the technology, and the scale necessary to drive toward our long-term target of high teens to low 20% ROEs. I will now turn it over to Dan who will review the drivers of PFSI's first quarter financial performance.

Thank you, David. PFSI reported net income of $82 million in the first quarter, or $1.53 in earnings per share, for an annualized ROE of 8%. Adjusted net income was $118 million, or $2.19 in adjusted earnings per share, for an annualized adjusted ROE of 11%. The $0.66 difference between our GAAP and adjusted EPS was driven by two items. First, $44 million of fair value declines on MSRs, net of hedges, and costs. This includes principal-only stripped MBS valuation-related accretion changes and provision for losses on active loans. And second, $3 million of expenses related to our acquisition of CEMAR. PFSI's Board of Directors declared a first quarter common share dividend of 30 cents per share, and as David mentioned, we repurchased 560,000 shares of common stock for $50 million. On slides 10 and 11, beginning with our production segment, pre-tax income was $134 million, more than double from the same quarter a year ago and up 5% from the prior quarter. As David mentioned, the increase from the prior quarter was driven primarily by strong execution in consumer and broker directs, which combined represented 75% of PFSI's account revenues. Total acquisition and origination volumes were $37 billion in unpaid principal balance, down 12% from the prior quarter. Of this, $34 billion was for PFSI's own account, and $3 billion was fee-based fulfillment activity for PMT. Total lock volumes were $44 billion in UPB, down 4% from the prior quarter. PennyMac maintained its leading position in correspondent lending. Correspondent acquisitions were $24 billion in the first quarter, down 20% from the prior quarter. While our platform continues to drive profitable and sustainable growth, we are refining our production mix to better withstand market volatility and maximize the long-term value of our servicing portfolio correspondent channel margins were 28 basis points up from 25 basis points in the prior quarter due to a shift in mix towards higher margin government loans given the increased levels of competition from the gfc cash window combined with a meaningful increase in average revenue per loan under its fulfillment agreement pmt retains the right to purchase all non-government correspondent loan production from pfsi in the first quarter pmt purchased 18 percent of total conventional conforming correspondent production and a hundred percent of non-conforming correspondent production both percentages essentially unchanged from the prior quarter in broker direct we continue to see momentum as we position penny mac as a strong alternative to channel leaders originations were up three percent and locks were up 26 from the prior quarter the number of brokers approved to do business with us continues to grow up 12% from the same time a year ago, reflecting the growing number of brokers who are increasingly leveraging our distinct value proposition. The revenue contribution from BrokerDirect was up from the prior quarter due to higher volumes. Though margins were down slightly, revenue per loan increased, reflecting an increase in our average loan balances. Additionally, we recently launched a non-QM product within our BrokerDirect channel and are already seeing strong initial take up and positive traction from our broker partners as they leverage our expanded product suite lots of non-qm loans in our broker channel were 151 million dollars in upv during the first quarter and momentum continued in april with 157 million dollars in upv blocks in consumer direct volumes were up with originations of 15 and locks up 24 from the prior quarter driving revenue contribution 30% higher than in the prior quarter. While margins were down slightly, revenue per loan increased sequentially across our conventional jumbo and closed-end second products, indicating higher average loan balances for those loan types. Post-lock activities across the channels contributed $13 million to pre-tax income, down from $34 million in the prior quarter, which benefited from strong secondary market execution relative to initial prices. Production expenses, net of loan origination expense increased 11% from the prior quarter due to higher volumes in direct lending. Turning to servicing, on Slides 12 and 13, our total servicing portfolio, UPB, ended the quarter at $720 billion, down only 2% from the prior quarter end, despite runoff in MSR sales, which were largely mitigated by additions from new production. The servicing segment recorded pre-tax income of 13 million dollars excluding valuation related changes pre-tax income was 57 million dollars or 3.1 basis points of average servicing portfolio upv up from 45 million dollars or 2.5 basis points in the prior quarter earnings from custodial balances were down from the prior quarter primarily due to lower short-term interest rates though realized prepayment speeds increased slightly from the prior quarter, realization of MSR cash flows was down 7% due to the expectation of lower prepayment speeds in future periods resulting from portfolio burnout. Operating expenses remain low at 4.5 basis points of average servicing portfolio UPD, or $81 million in the quarter. EBO revenue increased due to higher initiation of modifications and redelivery margins as a result of lower rates in the beginning of the quarter. Including the provision for losses on active loans, the fair value of PFSI's MSR increased by $177 million. An increase of $201 million was due to changes in market interest rates and was partially offset by $24 million in declines from other model and performance-related impacts. Hedge fair value losses, including principal-only strip MBS valuation-related accretion changes and hedge costs, were $221 million. dollars. As we talked about last quarter, we increased our hedge ratio to near 100% to proactively manage prepayment risk. While agency MBS spread volatility and tightening of the primary-secondary spread drove a net fair value decline this quarter, our positioning reflects our disciplined approach to maintaining book value stability across a volatile interest rate environment. Corporate and other items recorded a pre-tax loss of $42 million, up from $30 million dollars in the prior quarter primarily driven by nine million dollars in marketing activations related to the olympic and paralympic winter games which are not expected to recur in upcoming quarters as well as three million dollars of transaction expenses related to our acquisition of send large subservices the prior quarter also included reduced expenses related to technology improvements pfsi recorded a provision for tax expense of 22 million dollars resulting in an effective tax rate of 21.4 percent total debt to equity at quarter end was four times and non-funding debt to equity at the end of the quarter was 1.7 times the increase in total leverage was driven by higher direct lending production and the increase in non-funding leverage was driven by higher interest rates which drove increased utilization for our msr credit facilities in addition to shared purchases we expect these leverage ratios to remain near these levels as interest rates remain at current levels. Finally, we ended the quarter with $4.2 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged. We'll now open it up for questions. Operator?

Thank you. I would like to remind everyone we will only take questions related to PennyMac Financial Services, Inc., or PFSI. We'd also ask you that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure we can answer as many questions as possible. If you'd like to ask a question during this time, please press star followed by the number one to raise your hand and star one to withdraw your question. Our first question comes from the line of Doug Harder with BTIG. Your line is now open.

Thanks.

Hoping you could talk about any impact the volatility had on revenue margins in the quarter you know whether it was increased hedging costs or you know less effective less effective execution so on the hi doug how are you congratulations on the new on the new role thank you david um so on the on the production side i i am really encouraged by what i saw um take place in the first quarter um you know on the correspondence side we saw margins um you know up quarter over quarter um from the from the fourth fourth fourth quarter and we're seeing a continuation of that as we as we start the second quarter um in tpo we're seeing margins, you know, currently holding near to the levels we saw in the first quarter. They're actually up a bit, and they're up from the fourth quarter. And our consumer direct channel, you know, we're seeing a consistent margin story there. While, you know, the mix is going to, you know, the mix in the second quarter will probably warrant a higher margin report. But But I'll tell you that the focus that we're seeing in the company and driving up the revenue per loan is really showing in our results that we saw in Q1, it's going to continue to be a focus of the company. On the hedge side, Dan, you want to answer on the hedge side? Sure.

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

Appreciate the answer. Thank you. Your next question comes from Kyle Joseph with Stevens.

Your line is now open. Hey, good afternoon, guys. Thanks for taking my questions. Yeah, as it pertains to hedging, I'd start – and I did hear the operator's warning – but just pending the acquisition, how are you thinking about balancing hedging with how the business looks on a pro forma basis?

Any changes we should expect there? um no real changes expected to our hedging strategy as uh you know as we get through the acquisition uh the just to refresh the business that we're acquiring um from similar their subservicing business is not you know the the msr there they have uh it's really a fee for service business and so equity light they don't have any msrs uh in particular to speak of and so So our overall strategy in terms of hedging the MSR, we expect to be consistent with how we've operated to date and not really change with respect to the additional subservicing business that we're bringing on.

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

Are you referring to the trigger? Yeah, exactly. Thanks, Dave. It's really early. You know, the law went into effect on March 5th, and we're just starting to see loans come through that funded, you know, that lost at or after that date.

We'll have a much better look through, you know, in the second quarter. but uh you know you know from the little that we've seen it's you know generally positive understood thanks for taking my question guys appreciate it you bet your next question comes hey guys good afternoon um actually just in terms of your guidance it looks like you removed the high teens part of the guidance um you know now the height seems like it's the mid-teens Is that a reflection of the smaller, you know, the mortgage market that's expected this year with the move up in rates?

Yeah, so, hi, Boz, how are you?

Good, David.

We are, you know, I will tell you I've not removed the high teens from the long-term ROE guidance of this company. We believe we're a high teens to low 20 ROE company. In the short to medium term, there's really two factors that led us to just kind of slow down the return to the historic levels that we've seen. One is the technology spending. We are investing both across our production channel and our servicing channel. On the production side, we've deployed our new technology into our consumer direct channel And now we are very busy, you know, introducing and implementing AI agents to help reduce not only the cost to fulfill, but also to continue to grow the efficiencies that we're seeing on Vesta for our sales associates. And so, based on the early results that we're seeing from both, we feel it's incumbent upon us to really move quickly to take humans out of the loop and to be able to close loans faster and cheaper. And so, that's going to lead to just growing scale within our consumer direct platform. Similarly, based on the results we're seeing in our consumer direct channel, we are moving quickly to move our broker direct channel onto the same platform. There's work that needs to be done to be able to build a broker portal that is very similar in experience and feel to the portal that our brokers experience today. And so that work will be done in the second and third quarters. We expect to see the first broker loans coming on at the end of the year with the full migration taking place in 2027. But the exciting part about the move in broker is that the work we're doing on AI agents for our consumer direct channel are very relevant for our broker partners. And so I feel it's incumbent upon us to deliver the same experience for our brokers that we're seeing within our consumer direct channel. Similarly, on the consumer direct channel, we're doing work to create a human out of the loop mortgage origination process that I'm excited about, that I'm hopeful, you know, not hopeful, I know we'll see in the second half of this year. And then, you know, we're always looking to reduce, you know, costs in our correspondent channel and our shared service groups. But other than the technology-shared service groups, the technology costs with those are pretty minimal. With what I'm seeing out of, you know, Gemini and Claude and the add-ins that they have to Excel, there's a lot of great work being done around the organization. On the servicing side, there's similar work we're doing to drive down the cost to service, okay? and we have a long-term, not long-term, a medium-term goal to bring that cost down to $55 alone a year. It's what we call the drive to 55. And, you know, we believe we can get there in 24 to 36 months. And so the benefit there is not only to our own servicing portfolio, but as we add capacity and scale to our servicing platform, we're going to get the benefits with the SEMLA lines. And so it's a lot of good, exciting investment that I expect is going to really deliver returns starting in the second half of this year, but into 27 and 28. And I feel it's incumbent upon us to make these investments to continue to retain our competitive advantage in the industry and hopefully widen the mode. On the origination side, I think to the point you raised there, the Fannie MBA average for 2026 is at $2.3 trillion. But given where we're seeing rates today and given where it looks like they're going to be for the future, I suspect and I believe they will be lower. And so that will lead to lower production volumes. Some of that will be will be offset by lower amortization on the portfolio. But I think given the results we're seeing out of our production units, when rates do decline, I expect to see very good recapture coming out of our consumer direct channel. I expect to see broker direct continue to grow share while growing revenues. And in our correspondent channel, they had a great first quarter. When you do consider with the GSEs being more aggressive through the cash window and conventional, they really did a nice job at, you know, increasing margins, increasing revenue per loan, maintaining the leadership in the correspondent channel, and I would expect that to continue for 2026.

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

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

Okay, great.

Thank you.

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

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

I would say it's about two-thirds technology, one-third smaller origination markets.

Okay.

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

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

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

Okay, great.

Thank you. Your next question comes from Don Fandetti with Wells Fargo.

Your line is open.

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

I believe it's offensive, Don. And I'll tell you What we get our confidence from is first, if you just started servicing and what we've done with our servicing technology and driving down our cost of service to industry leading lows, and I'm not talking by a few dollars here, I'm talking by a lot, and our ability to be able to serve our customers and be able to react to market anomalies. and what we've done in servicing gives me great confidence that we have. We have the culture to be able to identify what the business opportunities and needs are and the technology leadership to be able to deliver those on a low-cost basis. Similarly, with AI, what we're seeing is a lot of ability for our business leaders to take ownership and control of developing and building and implementing the AI agents. And they have a staff in place that requires augmentation by moving people out of technology into the business units to build those agents. Now, over time, the demand for the agents and the other AI tools is going to lessen. But, you know, I believe our business leaders who have been very tech-focused, you know, since we started the company, understand what needs to be done. And so, you know, that's a factor, you know, in my decision-making here. And then, finally, with what I'm seeing on Vesta in the platform and the way it's built and the ease to which we can deploy the agents into our workflow is very meaningful. and that's work that is that has to be done by the team here as well and so i just i generally believe that we're at a point in the market where we have to go on offense and we're going to do it you know as we always do you know we're rose and columns folks we're going to do it responsibly we're watching the investment but as i said i believe we're at or near our peak levels And, you know, given with what I'm seeing in the revenue per loan increasing, gives me great confidence in terms of our ability to, you know, to pay for some, you know, to pay for some of it, but also with what I really expect to see in terms of the cost reduction is going to be very meaningful.

Okay, thank you. Your next question comes from the line of Trevor Cranston with Citizens JMP. Your line is now open.

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

Thanks.

Look, I think that we have to compete based on cost to originate and ultimately on price, especially in our consumer direct champ. I think on broker direct, you know, I think that if you look at what's taken place in the marketplace and you look at the Q1 results, you know, we didn't see the, you know, perhaps margin expansion others may have expected to see. But at the same time, I think that, you know, we're investing in AI because we believe here at the company that to increase the profitability and to consistently get to ROEs above 20%, we have to be the low-cost provider. And to be the low-cost provider, we have to make the investments in technology to reduce the cost to originate and also to reduce the days to close. And as an industry, we haven't seen as much movement on that as well. And so I just think that we're going to be competing on, whether you want to call it gain on sale margins or net margins, we're going to be competing on profitability. But that profitability is going to be more heavily weighted to what the cost is to produce the mortgage and how quickly can you close the loan, especially on a refinance. And so that's where I see really the industry headed. And I think we're just in a really unique position to be able to be a first mover on this, just given the fact that we have scale in all three channels, and we can quickly deploy technologies we created and to see meaningful results.

Yeah. Okay. That makes sense. Appreciate the comments.

Thank you. A reminder, if you'd like to ask a question, please press star one. Our next question comes from Shanna Kui with Barclays. Your line is now open.

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

Overall, we're very focused on leverage. as you know you know going back historically we've maintained our leverage at uh very responsible levels um and the 1.7 times as you mentioned is a bit above our uh historical target or historical run rate um you know we as we talked about in the in the earnings deck we do expect to maintain our leverage at these levels we are very focused on maintaining prudent levels of leverage in the business. And we do have the ability to adjust and reallocate our capital in order to maintain our leverage ratios, as we've shown in the past few quarters around optimizing our MSR portfolio and selling certain portfolios to ensure that we stay within leverage bounds. And so despite the increases or the are what we projected for leverage or what we put out as our projection for leverage at the 1.7 times contemplates the you know the increase or the the elevated technology spend that David you know that David went through and it's also you know contemplating the lower levels of activity with the smaller market so it contemplates both of those those factors already um but it is an element in our capital structure and maintaining freedom levels of leverage is something that we are very focused on and will continue to uh you know to maintain

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

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

Sure. We did make a change there or shift some of that geography, and that really relates to the placement of or some of the impacts to accounting from the principal-only bonds versus changes in value during the period. So, you know, not to get too far into the details, but a piece of the principle only bonds change in value is captured in the changes in cash flows relating to interest rates is captured in interest income with changes in accretion. If you look in our 10Q for this quarter, which was released this afternoon, you can see there was actually a negative impact to interest income due to basically changes in projected cash flows and sort of a reversal of the accretion. Those changes in accretion relating to future projected cash flows and the projected life of the bond, we really view as being associated with changes in fair value during the period due to changes in interest rates, which obviously is also what impacts MSR fair value. You know, the change is typically, if you look at the past couple of quarters that are presented there on page 13 of the earnings deck, has typically been fairly small, but given the change in the volatility of interest rates during the quarter and some of the sell-off, it was, you know, a bit larger this quarter, and we thought that it made sense and was more appropriate to present associated with changes in fair value of the MSR as opposed to, and it is a, you know, it is non-cash and based on future expected projected cash flows as opposed to in the, you know, the pre-tax income excluding the valuation-related changes, and so it made that change for, you know, this fair period and going back historically.

Okay, thank you.

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

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

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