Earnings Call Transcript
PennyMac Financial Services, Inc. (PFSI)
Earnings Call Transcript - PFSI Q1 2025
Operator, Operator
Good afternoon and welcome to PennyMac Financial Services Inc., First Quarter 2025 Earnings Call. Additional earnings materials, including presentation slides that will be referred to in this call, are available on PennyMac Financial 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 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 now like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Financial's Chief Financial Officer.
David Spector, CEO
Thank you, operator. Good afternoon, and thank you to everyone for participating in our first-quarter earnings call. For the first quarter, PFSI reported net income of $76 million or diluted earnings per share of $1.42 for an annualized return on equity of 8%. Excluding the impact of fair value changes, PFSI produced an annualized operating ROE of 15%, driven by continued strength in our servicing business and a solid contribution from our production segment despite elevated mortgage rates. In total, loan originations and acquisitions were $29 billion in unpaid principal balance, driving the continued growth of our servicing portfolio to $680 billion in unpaid principal balance with 2.7 million households. Before reviewing our quarterly results in greater detail, I would like to highlight our newly announced partnership with Team USA and the LA28 Olympic and Paralympic Games. In recent periods, we have made significant investments in technology and capacity. And given our market position as the second-largest producer of mortgage loans and the sixth-largest servicer in the country, we are well-positioned for sustained investment in our brand. This strategic four-year partnership is a powerful catalyst for our business. We will elevate our brand with our customers, business partners, and employees while connecting PennyMac with the shared values of respect and excellence embodied by the US Olympic and Paralympic movement. Team USA has a massive fan base, offering unparalleled reach and brand association with the Olympic and Paralympic Games drives increased engagement, memorability, and ultimately greater customer consideration. This marks the first significant investment in our brand, building upon our established success in performance marketing. We expect the partnership to boost both portfolio recapture and non-portfolio customer acquisition with integrated campaigns and athlete partnerships that deliver the message of the importance of home and homeownership. Additionally, this partnership is a key driver in our strategy to expand our market share in broker direct. Our association with Team USA will also foster a stronger sense of pride and purpose among our employees. And as we look to grow our employee base, this partnership increases PennyMac's value proposition as an employer of choice. It is important to note that this partnership is a strategic four-year investment that we've structured to align with our financial discipline. The related expenses will be lower in the early years of the partnership, gradually building into the culmination of the LA28 games. This phased approach allows us to strategically build brand relevance, awareness, and engagement without significant upfront costs. We are incredibly enthusiastic about the opportunities this partnership presents and its potential to drive significant value across all facets of our business. Now, turning to the origination market. Current third-party estimates forecast total originations of $2 trillion in 2025, reflecting projections for growth in overall volumes with moderate contributions from both refinance and purchase. Despite broader economic volatility, industry consolidation, and regulatory change, we remain intensely focused on the organic growth of our servicing portfolio and the continued development of our balanced business model, and we are committed to successfully navigating this economic landscape without distraction. As we've highlighted on Slide 7, our synergistic relationship with PennyMac Mortgage Investment Trust, or PMT, continues to provide us with a unique competitive advantage. Our deep and experienced management team has built a best-in-class operating platform that includes a large and agile multichannel origination business and the scaled servicing operations, both supported by industry-leading technology and processes we've thoughtfully developed over our long history. As we have demonstrated, this strategically built platform provides us the ability to generate strong returns for our stockholders across different market environments. As a mortgage REIT, PMT provides a tax-advantaged balance sheet to hold and invest in long-term mortgage assets. This model enables PFSI to generate capital-light recurring revenue streams in the form of servicing fees, fulfillment fees, and management fees. PFSI's deep access to the origination market, combined with PMT's ability to execute private label securitizations and retain the related investments, provides both entities the opportunity to capitalize on the evolving landscape for secondary market execution should the GSEs reduce their overall footprint. We have repeatedly demonstrated that our balanced and diversified business model with leadership in both production and servicing and our dynamic hedging program enables strong financial performance and a foundation for continued growth as an industry-leading mortgage company, regardless of the direction of interest rates. As you can see on Slide 8 of our presentation, we have produced operating returns on equity in the mid-teens during periods of higher rates with the potential for increased returns when mortgage rates decline, as evidenced by our performance in the third quarter of last year. Our large servicing business provides ongoing revenue and cash flow contributions in this higher-rate environment and continues to provide the foundation for strong financial performance in the future. The unpaid principal balance of our servicing portfolio increased 2% from the prior quarter and 10% from March 31, 2024, as production volumes more than offset runoff from prepayments. Because we retain the servicing rights on nearly all mortgage loan production and have been one of the largest producers of mortgage loans in recent periods, we are uniquely positioned in the industry. Our large and growing portfolio of borrowers who recently entered into mortgages at higher rates stands to benefit from a refinance in the future when interest rates decline, positioning our Consumer Direct lending division for strong future growth. On Slide 9 of our earnings presentation, you can see that as of March 31st, $240 billion in unpaid principal balance or 35% of the loans in our portfolio at a note rate above 5%. Approximately $107 billion were government loans and approximately $133 billion were conventional and other loans. The opportunity for earnings growth is highlighted on this slide, along with our historic refinance recapture rates, which have improved significantly from five years ago as a result of our ongoing technology enhancements and process improvements. We expect these recapture rates to continue improving, given our multi-year investments combined with the increased investment in our brand as mentioned earlier and use of targeted marketing strategies. Slide 10 illustrates the advantages of growing our servicing portfolio organically via our own production, a key differentiator for PennyMac Financial. We can consistently source loans through different channels, depending on the market environment, and our servicing portfolio growth has been more consistent than others that grow primarily through bulk acquisitions. Loan-by-loan processing gives us the ability to perform diligence and compliance reviews for all of the loans we produce and ultimately service, leading to increased fraud detection and minimal defect rates versus bulk MSR purchases. This is evidenced by the strong historical performance of our MSR assets with lower delinquencies, especially in recently originated loan vintages relative to the broader industry, which validates the efficacy of our prudent credit strategy. As I briefly discussed, our large and growing servicing portfolio is a key asset, anchoring our core operational results in this higher interest-rate environment and driving low-cost leads to our Consumer Direct division. On Slide 11, you can see the strong revenue contributions from our servicing portfolio in recent periods, with growth driven by our portfolio expansion and the higher proportion of owned servicing in recent periods, as well as increased placement fees due to elevated short-term interest rates. Throughout our history, we've been focused on deploying new and emerging technologies to drive efficiencies and lower costs, as evidenced by the chart on the right, which highlights the continued decline in our per-loan servicing expenses in 2019. We continue to demonstrate the ability of our Servicing workflows and technology to scale efficiently with our growth, while also providing our Servicing associates with the tools they need to best serve our customers. Given our best-in-class proprietary technologies with advanced capabilities and our unmatched excellence in Servicing, we are committed to expanding our subservicing business beyond PMT, and we deliver a compelling value proposition to MSR owners. This includes superior capabilities for both performing and non-performing loans, powered by our proprietary technology and extensive customer self-service capabilities, and MSR owners that utilize PennyMac as a subservicer can leverage our robust marketing and recapture tools to generate leads and best support their origination efforts. On Slide 12, you can see we've signed our first three clients with one already onboarded and we are actively engaged with 20 additional prospects that represent approximately $65 billion in UPB. Beyond that, we estimate our correspondent sellers collectively own approximately $465 billion in unpaid principal balance of Servicing, and that the total addressable market for sub-servicing is approximately $4 trillion. Given consideration to changing market dynamics, we expect further market penetration, aiming to capture a broader share of MSR owners, who are seeking a best-in-class low-cost sub-servicer. This strategic focus on subservicing is a testament to our commitment to diversifying our revenue streams while maximizing the value of our servicing platform. It is for all of these reasons that I am confident in our ability to continue driving strong financial performance in this volatile environment, no matter the direction of interest rates. I will now turn it over to Dan, who will review the drivers of PFSI's first-quarter financial performance.
Daniel Perotti, CFO
Thank you, David. PFSI reported net income of $76 million in the first quarter, or $1.42 in earnings per share for an annualized ROE of 8%. These results included $99 million of fair value declines on MSRs net of hedges and costs, and the impact of these items on diluted earnings per share was negative $1.35. PFSI Board of Directors declared a first-quarter common share dividend of $0.30 per share. Beginning with our Production segment, pretax income was $62 million, down from $78 million in the prior quarter. Total acquisition and origination volumes were $29 billion in unpaid principal balance, down 19% from the prior quarter and consistent with the decline in the overall market. Of total acquisitions and origination volumes, $26 billion was for PFSI's own account and $3 billion was fee-based fulfillment activity for PMT. Total lock volumes were $34 billion in UPB, down just 6% from the prior quarter. PennyMac maintained its dominant position in correspondent lending in the first quarter with total acquisitions of $23 billion, down from $28 billion in the prior quarter. Correspondent channel margins in the first quarter were 27 basis points, unchanged from the prior quarter. Fallout adjusted locks for PFSI's own account were down from the prior quarter, which drove a lower revenue contribution. PMT retained 21% of total conventional conforming correspondent production, up slightly from 19% in the prior quarter. In the second quarter, we expect PMT to retain approximately 15% to 25% of total conventional conforming correspondent production, consistent with first-quarter levels. Of note, pursuant to our renewed mortgage banking agreement with PMT, beginning in the third quarter of 2025, all correspondent loans will initially be acquired by PFSI. However, PMT will retain the right to purchase up to 100% of non-government correspondent loan production. In Broker Direct, we continue to see strong trends and continued growth in market share as we position PennyMac as a strong alternative to channel leaders. Originations in the channel were down 21% from the prior quarter, as many of the loans locked when rates declined in the third quarter of 2024 funded in the prior quarter. Lock volumes in the first quarter were up 23% from the prior quarter as we continue growing our market position and as we enter the spring and summer home buying season. The number of brokers approved to do business with us at year-end was over 4,850, up 19% from the end of last year, and we expect this number to continue growing as top brokers increasingly look for strength and diversification in their business partners. Broker channel margins were down slightly from the prior quarter as lower industry volumes resulted in more competitive pricing. We saw similar volume trends in Consumer Direct with origination volumes down 24% from the prior quarter, but lock volumes up 6%. Margins in the channel were up due to a larger mix of higher-margin closed-end second liens during the quarter. Activity across our channels in April has been up, reflecting lower mortgage rates in the beginning of the month and typical seasonality. Production expenses, net of loan origination expense, increased 5% from the prior quarter, partially due to seasonal compensation impacts. It is our preference to hold a level of excess origination capacity in the current market environment, given our belief that volatility in interest and mortgage rates will provide pockets of opportunity from time to time and that we will need to be quick to react. Turning to Servicing. The Servicing segment recorded pretax income of $76 million. Excluding valuation-related changes, pretax income was $172 million or 10.2 basis points of average servicing portfolio UPB, down slightly from 10.3 basis points in the prior quarter. Loan servicing fees were up from the prior quarter, primarily due to growth in PFSI's owned portfolio. Custodial funds managed for PFSI's own portfolio averaged $6.2 billion in the first quarter, down from $7.3 billion in the fourth quarter due to seasonal impacts and lower prepayments. As a result, earnings on custodial balances and deposits and other income decreased. Realization of MSR cash flows increased from the prior quarter due to continued growth in the owned portfolio and expectations for higher prepayment activity in the future. Operating expenses were essentially unchanged from the prior quarter at $81 million or 4.8 basis points of average servicing portfolio UPB, down from 5 basis points in the prior quarter and representing an all-time quarterly low level. We seek to moderate the impact of interest-rate changes on the fair value of our MSR asset through a comprehensive hedging strategy that also considers production-related income. For example, when refinance volumes and production-related income are highly responsive to changes in interest rates, our targeted hedge ratio can decline to as low as 60%. And when refinance volumes and production-related income are less responsive to changes in interest rates, our targeted hedge ratio can increase to as high as 100%. The fair value of PFSI's MSR decreased by $205 million in the first quarter. Of that, $183 million was due to lower market interest rates, which drove expectations for higher prepayment activity in the future, and $23 million was due primarily to prepayments that were faster than modeled and other factors. Excluding costs, hedging gains were $131 million. Hedge costs were $24 million. Our targeted hedge ratio moved lower during the quarter as interest rates declined and other factors, such as the change in the shape of the yield curve, had a slightly negative impact. Each of these two factors decreased our hedge effectiveness during the quarter by about 10% versus the 90% to 100% range previously communicated. At current rate levels, our targeted hedge ratio is in the 80% to 90% range. Thus far in the second quarter, interest rates have been extremely volatile. As a result, our hedge target ratio has varied, and it may change throughout the quarter if this level of volatility continues. Additionally, hedge costs thus far in the second quarter have been elevated. Corporate and other items contributed a pretax loss of $34 million compared to $36 million in the prior quarter. PFSI recorded a provision for tax expense of $28 million, resulting in an effective tax rate of 26.8%. In February, we successfully issued $850 million of unsecured senior notes due in 2033 and used proceeds to reduce the outstanding balance of our secured revolving bank financing lines. Regarding the upcoming maturity of $650 million in unsecured senior notes due in October of 2025, we have ample liquidity to retire the notes with additional flexibility to draw on our available revolving bank financing lines. We ended the quarter with $4 billion of total liquidity, which includes cash and amounts available to draw on facilities, where we have collateral pledged. We'll now open it up for questions.
Operator, Operator
I would like to remind everyone that we will only take questions related to Financial Services, Inc., or PFSI. We also ask 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. Your first question comes from the line of Michael Kaye with Wells Fargo. Please go ahead.
Michael Kaye, Analyst
Good afternoon. There has been an uptick in M&A in the sector, particularly Rocket's acquisition of Mr. Cooper. I wanted to see if you felt this was a greater competitive threat, perhaps in a correspondent channel, and maybe perhaps on the contrary, it could create some more subservicing business. Maybe just some thoughts on that?
David Spector, CEO
Yes. Hi, Michael. How are you doing today?
Michael Kaye, Analyst
Great. Thank you.
David Spector, CEO
There have been many discussions in the industry regarding this transaction. I have immense respect for both management teams and the businesses they have developed. I find reassurance in our earnings stability over the years, which showcases the strength of our balanced business model. Although this transaction may seek to replicate that, I believe what we have established is so robust that it may not be easily duplicated. We will continue to prioritize the organic growth of our Servicing portfolio and advance our balanced business model. Our company is not facing any distractions, which may not be the case for others in the industry. We intend to maintain our position as the number one correspondent aggregator and continue our leadership in that area. Our dominance stems from our ability to process at a cost structure that I haven't encountered elsewhere in the industry, and this advantage is difficult to replicate. We also see significant opportunities in our brokered direct channels; our market share has grown from 3.5% to nearly 5% year-over-year, and we are on track to reach our goal of 10% market share by the end of 2026. Regarding subservicing, we are well-equipped to address any issues that have emerged in that segment over the past three years, as some players have exited, stagnated, or altered their business models. We consider ourselves to offer a strong value proposition in the subservicing channel. Subservicing is a capital-light business, and we aim to emphasize it across our organization. Through our relationships with correspondent aggregators and our reputation as a management team, I believe we will continue to be one of the leading subservicers in the industry.
Michael Kaye, Analyst
Okay. Thank you for that. I wonder if you could talk about the impact on your unit economics with some of the changes in the FHA loss mitigation programs, including through partial claims and payment supplements.
David Spector, CEO
Sure. I’ll begin by saying that the new loss mitigation waterfalls align largely with our expectations and have been thoughtfully designed. We’ve been in discussions with FHA and previous administrations on this, which has continued with the current administration. The changes are manageable. The limitation for modifications is now set at one in 24 months instead of 18. This adjustment is quite workable for borrowers, servicers, and the FHA. I believe it will enhance redefault rates and help eliminate bad actors in the industry. There is now a greater emphasis on modifications compared to partial claims. Therefore, any potential loss in modification income will be compensated by increased EBO activity, which positions us strongly in the industry. As experienced during COVID, we had great success with EBO activity, which begins with strong risk management, the ability to hedge EBOs, and the capacity to buy out loans and make them reperform. Our expertise in default servicing really becomes evident in these situations. Having the necessary infrastructure for handling EBOs is critical, including capital markets expertise, available credit facilities, and knowing the right time to buy out or redeliver loans. I see this as a positive development from a P&L standpoint. While I don’t find comfort in borrowers losing their homes, I do not view the accounting impact negatively. As I mentioned, it will reduce loss mitigation while signaling a return to a more systematic process of property disposition, akin to how the market has historically functioned. Lastly, for borrowers unable to secure modifications, the current market environment is markedly different from the past two decades. Borrowers possess substantial equity, and there are housing supply challenges. Given the strong housing demand, if a borrower has to settle for a deal in lieu of foreclosure, a short sale, or foreclosure, the process of property disposition will be more orderly.
Michael Kaye, Analyst
Okay. Thank you so much.
Operator, Operator
Your next question comes from the line of Doug Harter with UBS. Please go ahead.
Doug Harter, Analyst
Thanks. Can you discuss your outlook for ongoing cost efficiencies in servicing and origination? Also, how do you see technology, including AI, contributing to the scaling of these businesses?
David Spector, CEO
Yes. Look. Doug, I'm really excited about the work that's being done in both Servicing and our Loan Production divisions, really with the sole goal of driving down the cost. Okay? I think AI is clearly where the focus is. We're working with business partners like Google and Amazon to realize efficiencies. We've set up an AI team in our technology group to really provide bandwidth to our business leaders to help identify opportunities where AI can be deployed, as well as we can work with our third-party vendors, who are investing in AI. I'm seeing more and more deployment of chatbots across the organization that will increase productivity, and I have no doubt that we're going to see benefits. We're already seeing them. I'll give you a few examples shortly. But we're going to see a shortened timeline for getting loans originated and sold in the capital markets. We're currently focused on loan originator efficiency and in our fulfillment area. This will also create a better customer experience. On the Servicing front, we are uniquely positioned. Having SSC gives us the ability to customize and integrate AI into our system. We have automated 20 different processes in servicing. Just to give you an example, in Servicing, we have a servicing customer interaction system called Mac Chat that allows customers to engage with PennyMac 24/7. Its annualized savings for us has been over 45,000 hours a year, roughly translating to $2 million a year in savings. In Servicing, we also have a Servicing document processing and process automation system that has saved us over $2 million a year, or 130,000 hours. In TPO, our broker direct channel, we've instituted a document processing system that allows us for full indexing and creation of loan closing document package that saves out-of-pocket expenses to the consumer of $7 alone. So we'll be exposing more and more of this activity going forward. I am really enthusiastic and proud of the work that's being done.
Doug Harter, Analyst
Thanks, David.
Operator, Operator
Your next question comes from the line of Crispin Love with Piper Sandler. Please go ahead.
Crispin Love, Analyst
Thank you, and good afternoon, everyone. In recent quarters, you've been pretty vocal about expecting episodic rate moves, and we've seen that with rate volatility driven by the macro. As you mentioned, April volumes started off strong, but have you seen a significant drop-off in recent weeks relative to earlier in the month in volumes or loss just following the recent moves in rates?
David Spector, CEO
We've observed declines in activity, but they haven't been as significant as anticipated. Specifically, in the correspondent sector, there's typically a delay of about 45 to 60 days. Consequently, the rise in activity we noticed earlier in the month will manifest later in the month or at the beginning of May regarding correspondent activity. For our Consumer Direct and Broker Direct channels, we have many loans in the high-6s to low-7s range. In the marketplace, as highlighted in our earnings materials, several of these loans exist. Given the volatility in rates, borrowers with loans that can be refinanced and meet their goals are not inclined to wait for rates to drop further. There is more clarity in the market about what the breakeven point is for borrowers, leading them to decide to refinance their loans. If rates decrease again, they will consider refinancing once more.
Crispin Love, Analyst
Great. Thank you, David, for that. And then just also related to the rate volatility that we've seen in April to date in the last few quarters. Can you just discuss the MSR hedge in a little more detail? On Slide 19, you do call out that the hedge ratio can decline to around 60% when refi volumes are highly responsive to rates, but you are targeting 80% to 90%. So can you dig a little bit deeper into near-term expectations and the key sensitivities you'd expect to impact hedge effectiveness?
Daniel Perotti, CFO
Sure. Through the quarter thus far, we've obviously had a pretty significant amount of interest rate volatility. I think in one of the weeks earlier in the quarter, we were up and down over 70 basis points within a week. So obviously, that has some impacts in terms of; a, what our targeted hedge ratio is that accompanies our expected production income as well as the hedge costs that we experienced. The increasing volatility did increase our hedge costs here earlier in the quarter from what we experienced in the first quarter, given the significant increase in overall moves as well as the impact on option costs. So that has run a bit higher than we saw in the first quarter. Overall, in terms of the rate moves and the significant whippiness we've seen, the team has really done a good job in insulating us from that and minimizing the overall rate impacts that we've experienced quarter-to-date, apart from, as I mentioned, the increased hedge costs that we've had through the first part of the quarter.
Crispin Love, Analyst
Great. Thank you. I appreciate all the color.
Operator, Operator
Your next question comes from the line of Bose George with KBW. Please go ahead.
Bose George, Analyst
Hey, guys. Good afternoon. Just wanted to follow up on the MSR hedging question. I mean, I can understand why certain backdrops create a lower hedge ratio. But it seems like in the past, there were some times where hedge ratios would be lower, sometimes it would be over 100%, and it would kind of net out over time. Now based on the commentary on that slide, it seems like the hedge ratio is probably ranging between 60% and 100%, which suggests that the GAAP ROE is going to be somewhat lower than the operating over time. So can you just talk about that? Has something changed in terms of how you view the hedging or how you do it? Or, yes, just any commentary on that would be great.
David Spector, CEO
So no, we're just really trying to lay out since we discuss this on a regular basis, how our hedging velocity is? In periods where rates are, I'd say, generally lower, the mortgage market is bigger and there's more variability and more overall refinance volume. Typically, we would allow our hedge ratio with respect to rates to be lower. So, what that really means is that we would see increases in overall value when interest rates go up, as we saw in 2022, where we had a positive contribution from the increase in MSRs versus our hedges. Commensurately, if interest rates decrease, we'd see more of an overall decline. What we've really sought to do here on Page 19 and we'll give a bit more clarity to this going forward is talk about our hedging effectiveness versus what our target has been. The hedge costs that are impacting us during the quarter do have some relevance. In the current environment, where the yield curve has been flat to inverted and overall volatility has been high, that would lead to some negative hedge costs as we had in the first quarter and, as I alluded to in the second quarter. As the yield curve normalizes somewhat or becomes steeper with respect to short rates versus longer rates, and as overall volume declines, we would expect those hedge costs to decrease. We could potentially see periods where they're positive, and that would be reflected in your ROE.
Bose George, Analyst
Okay. Great. But when I think over an extended period, is it fair to say you expect your GAAP ROE to equal your operating ROE over a multi-year period? Is that fair?
David Spector, CEO
Yes. It would depend a bit on the shape of the yield curve and volatility. If we look back just historically over at least recent periods, we've seen that there's been a negative hedge cost impact. If we look over longer periods of time and the way that we've positioned ourselves, there are opportunities for both positive impacts and negative impacts, as you said.
Bose George, Analyst
Okay. Great. And let me just actually one more on mortgage volumes. I mean to the extent that interest rates stay where they are with mortgage rates closer to 7%, do you think there's any risk to estimates or do you feel like there's probably enough volatility where you'll get those periodic refi waves, and maybe that's kind of the way to get to the $2 trillion that the MDA is forecasting?
David Spector, CEO
Yes. The $2 trillion that the MDA is forecasting, I think, most likely requires some amount of interest-rate volatility, as we've seen in periods we saw earlier this month that drives some episodic refinance volume. I'd say the other piece that should drive higher over time is also related to housing turnover, where, as David noted, there's a pretty significant demand. I think that there's continued pent-up demand for housing as well as for folks to move out of whatever house they may have outgrown. There’s some upward lift from that even at current rate levels. Still, I think there will need to be some contribution from refinances related to dips in rates during the year to reach that $2 trillion mark.
Bose George, Analyst
Okay. Makes sense. Thanks.
Operator, Operator
Your next question comes from the line of Eric Hagen with BTIG. Please go ahead.
Eric Hagen, Analyst
Hey, thanks. It looks like a really healthy recapture rate, but a couple of questions there. Are most of the loans that you're currently recapturing because of rate and term refinances? Or are they purchase recapture because borrowers are moving from one home to another? And on the loans that you're not recapturing, what is the explanation for that?
David Spector, CEO
Look, Eric, do you point out recap rates have improved meaningfully? I will tell you most of the loans are coming from rate and term. This speaks to the lead-gen technology and processes that we put into place to give us better capability to categorize mark-to-market be in-the-money customers to recapture the loans. We're working harder and harder on the purchase recapture front. I mean that's one of the drivers to investing in the brand. I think it's important that we continue to impress upon our customers and non-customers to have our name associated with the mortgage loan origination process to get purchase recapture, as well as purchase-money transactions. We'll be keeping an eye on increasing the percentage of non-port originations and increasing recapture. But it is mostly rate and term, and I think given the volatility in the market, you're going to see more and more of this improvement in recapture.
Eric Hagen, Analyst
Yes. Okay. That's helpful. Can you also say how you deploy the proceeds from the unsecured debt that you raised in February? And how much flexibility or the appetite that you have to pay down the bilateral MSR financing lines from this point? And then, can you maybe also remind us, are all of these secured MSR lines subject to margin calls? Or does the margin call only apply to some of the funding there?
Daniel Perotti, CFO
Sure. The proceeds from the $850 million unsecured debt raise were used to pay down the bilateral MSR financing lines. That gives us great flexibility. We can redraw on those lines once we've repaid them because the collateral is still outstanding. All of those lines are subject to mark-to-market. But as we've noted, based on the collateral that we have today, we have over $3 billion of capacity to draw against those lines. So on a practical perspective, even if we had significant interest rate volatility today, we wouldn't face a margin call at this point in time because we have so much excess collateral. We're in a very good position with respect to our overall financing capacity. As we approach the maturity that's coming up later in the year, we will be looking for opportunities in the market to potentially issue additional unsecured debt. But to the extent that the market is not conducive, we have significant capacity on our financing lines to pay down that maturity. One other item too, as interest rates rally, we do see a decrease in the value of our MSR asset. We are hedging the MSR, and so we do have offsetting hedge gains against that. So even if we were more fully advanced, that is a component of our hedge program that would allow us to pay down that debt with those hedge proceeds.
Eric Hagen, Analyst
Yes. Okay. That's helpful. Thanks. Really helpful detail on the volume in April, but how have margins trended this month? It sounds like maybe there's been some hedging noise, but if you strip out that pipeline hedging, like on a gross basis, if you will, can you say how margins have stacked up?
Daniel Perotti, CFO
Overall margins thus far in the quarter have been tighter than in the first quarter. There's been significant volatility, and it has been more competitive on the correspondent side than in the full first quarter. The Direct channels have remained similar. In Consumer Direct, due to the refinancing during the interest-rate rally, margins, on a basis-point basis, tend to be lower compared to some of our second liens. Since we've had more refinance locks than we did proportionately in the first quarter, our overall basis-point margin is lower, but our dollar-per-loan margin is higher. These have been the dynamics we've experienced so far this quarter.
Bose George, Analyst
Got you. Helpful. Thank you guys so much.
Operator, Operator
Your next question comes from the line of Shanna Qiu with Barclays. Please go ahead.
Shanna Qiu, Analyst
Hi, guys. Thanks for taking my question. You just mentioned the mid to high-teens ROE guidance, but it contemplates stable delinquencies. Can you quantify where you would need to see delinquencies rise to make an impact on the ROE guidance?
Daniel Perotti, CFO
Yes. We need to see a pretty significant or concentrated increase in delinquencies to have a meaningful impact on the ROE guidance, and that would really have to be in the absence of any accompanying decrease in interest rates. A decrease in interest rates would drive up additional production income and EBO income, which would offset potential increases in costs from delinquencies. But overall, we would need to see delinquency increases pretty meaningfully outside the ranges that we've seen for the last few years or quarters, which have ranged up if you look over the past year, have been within, call it, a 1% range. So we need to see really multiples of that to get to impacting in a meaningful way the ROE guidance.
Shanna Qiu, Analyst
Thanks. And I guess you know that EBO, you guys, obviously, did pretty well in that during COVID, but we saw massive rate declines. In this environment, where you have changes in the loss mitigation programs and rates potentially staying higher for longer, how should we think about your EBO income or your ability to modify the potential increases in the delinquencies in that environment?
David Spector, CEO
In a higher-rate environment, you don't have as much flexibility with the rates offered to borrowers. However, with programs like the 40-year modification, there are still opportunities to increase EBO volume. If delinquencies rise, it usually coincides with a drop in rates, which could create more EBO opportunities. We're also seeing data indicating that when rates decline, borrowers with higher note rates who default will need modification programs, leading to more EBO opportunities.
Shanna Qiu, Analyst
Thank you, guys.
Operator, Operator
We have no further questions at this time. I'll now turn it back to David Spector for closing remarks.
David Spector, CEO
I just want to thank everyone for joining us today. If you have any questions, please don't hesitate to reach out to our IR team. And again, thank you for your time.