Earnings Call Transcript
PennyMac Financial Services, Inc. (PFSI)
Earnings Call Transcript - PFSI Q4 2025
Operator, Operator
Good afternoon, and welcome to PennyMac Financial Services, Inc.'s Fourth Quarter and Full Year 2025 Earnings Call. Additional earnings materials, including presentation slides that will be referred to in this call 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 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 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 fourth quarter and full year 2025 earnings call. As shown on Slide 3, PFSI finished the year with a solid fourth quarter, generating net income of $107 million or $1.97 per share. To refresh, in the third quarter, we capitalized on higher lock volumes driven by an initial decline in interest rates to generate an 18% annualized return on equity. While our previous guidance was for annualized operating ROEs in the high teens to low 20s, the sustained rally continued into the fourth quarter and drove market prepayment speeds significantly higher than what both we and the market expected. This activity resulted in a meaningful increase in realization of MSR cash flows and accelerated runoff of our servicing asset. While we generally expect production income to act as a natural hedge to this runoff, the benefit in the fourth quarter was impacted by competitive dynamics. Many industry participants have also added significant capacity in anticipation of lower rates, and this excess capacity has created a more competitive origination market, limiting expected production margin increases and revenues typically associated with an interest rate rally. As a result, the growth in our production segment income did not fully offset the higher level of runoff in our MSR portfolio, leading us to generate a 10% annualized return on equity in the fourth quarter. I will speak to the strategic actions we are taking to improve overall production income later in my presentation. Turning to Slide 4. You can see that for the full year 2025, our results were very strong. Pretax income was up 38% and net income was up 61% from their respective 2024 levels. We generated a 12% return on equity and grew book value per share by 11%. These results highlight our ability to consistently deliver stockholder value through disciplined execution, driven primarily by the strong operational performance of both segments, which you can see on the right side of the slide. In our Production segment, total volumes increased 25%, driving a 19% increase in pretax income. Similarly, in our Servicing segment, we grew the total unpaid principal balance of our portfolio by 10%, which, along with improved MSR hedging results helped drive a 58% increase in pretax income from the prior year. Turning to Slide 6. You can see the financial impacts of the dynamics I described earlier. While production segment income was approximately double the levels reported in the first two quarters of this year, the growth from the third quarter to the fourth quarter did not offset the runoff of the portfolio's prepayment speeds increase. However, we've taken strategic and targeted actions to drive improvements over the course of this year. By accelerating the deployment of new technologies such as Vesta, quickly ramping our capacity and continuing to enhance efficiencies, we are positioning ourselves to better capture the significant opportunities presented by lower mortgage rates and further increase production income in comparison to MSR runoff. In January, total volumes have been consistent with those reported in the fourth quarter, but with a mix shift towards the higher-margin direct lending channels. This is driving our expectations for production segment income in the first quarter to be higher. Channel margins remain at similar levels. On Slide 7, we highlight the significant opportunity for our consumer direct channel as mortgage rates decline. As of year-end, we serviced a combined $312 billion in UPB of loans with note rates above 5%, of which $209 billion in UPB of loans had a note rate above 6%. As rates decline, these borrowers tend to benefit financially by refinancing their loans. While our recapture rates have improved, we see significant upside potential from current levels. To that end, we are making targeted investments in AI and other technologies to drive these recapture rates higher and ensure we capture the value embedded in our portfolio. The cornerstone of our technological investment is shown on Slide 8. We previously discussed the early stages of our transition to Vesta, the modern and next-generation loan origination system we invested in to improve and grow our consumer direct lending operations. We are on track to have Vesta fully implemented across our consumer direct channel in the first quarter and completing this migration on time is a key driver of our 2026 outlook, ensuring that for the bulk of the year, we are operating on our most efficient AI-enabled platform in order to capture the production income improvements we expect. We are already seeing the power of this technology transform our workflow. By deploying AI-driven automation for tasks that were previously performed manually, we are experiencing an immediate impact, unlocking efficiency gains of approximately 50% for our loan officers. Walking a loan with a borrower on the phone, which took over an hour on our legacy system has been cut to just 30 minutes with Vesta. The impact also extends to our fulfillment operations, where intelligent workflows are streamlining the loan manufacturing process. We are seeing a reduction in the average end-to-end loan processing time by approximately 25%. When multiplying the sales and fulfillment time savings across the number of loans originated on our consumer direct channel in 2025, it represents approximately 240,000 hours of time saved. This operational velocity has a direct financial impact with a corresponding 25% decrease in our operational cost to originate, creating another lever in our pricing strategy and giving us the flexibility to be even more competitive in the market. It represents a transformative shift in our unit economics, increases our capacity without substantially increasing operational costs and unlocks new levels of scalability. This enhanced operational scale will be a huge benefit in an interest rate rally. If we see a continuation of the rate decline and volume increase, this AI forward infrastructure will allow us to rapidly scale in order to absorb an increase in recapture volume. Looking ahead, this modern architecture allows for rapid iteration and integration of new AI processes and technologies to deliver meaningful improvements in the customer experience while unlocking significantly more efficiency gains throughout 2026 and beyond. Finally, on Slide 9, you can see how Vesta fits into our broader customer retention strategy. Our customer relationships are our most important asset, and we are driving strategies to retain those customers for life. A faster and more efficient origination and processing workflow is just a part of our synchronized effort. We are beginning to utilize artificial intelligence to drive greater customer service and using deeper servicing integrations to anticipate borrower needs with real-time data. By combining this technology with our growing brand presence, we are transforming single transactions into lifetime partnerships. We believe these investments will allow us to achieve greater efficiencies and drive recapture to new heights. And we expect PFSI's operating return on equity to move into the mid- to high teens later in the year. As we look ahead, PennyMac is uniquely positioned to continue leading the mortgage industry. Our balanced business model and cutting-edge technology provide a powerful foundation for our continued growth, and we remain focused on the continued advancement of our strategies to drive sustained long-term value for our stockholders. I will now turn it over to Dan, who will review the drivers of PFSI's fourth quarter financial performance.
Daniel Perotti, CFO
Thank you, David. PFSI reported net income of $107 million in the fourth quarter, which translates to $1.97 in earnings per share, resulting in an annualized return on equity of 10%. This included $1 million in fair value gains on mortgage servicing rights after hedges and costs, contributing $0.01 to diluted earnings per share. PFSI's Board of Directors declared a common share dividend of $0.30 per share for the fourth quarter. In our production segment, pretax income reached $127 million, a slight increase from $123 million in the previous quarter. Our total acquisition and origination volumes were $42 billion in unpaid principal balance, reflecting a 16% increase from the prior quarter. Of this volume, $38 billion was for PFSI's own account, while $4 billion was from fee-based fulfillment for PMT. Total lock volumes stood at $47 billion in unpaid principal balance, up 8% from the previous quarter. PennyMac maintained its strong position in correspondent lending with total acquisitions exceeding $30 billion in the fourth quarter, a 10% increase from the previous quarter. Correspondent channel margins decreased to 25 basis points from 30 basis points in the third quarter due to heightened competition. Under the fulfillment agreement, PMT retains the right to purchase all non-government correspondent loan production from PFSI. In the fourth quarter, PMT acquired 17% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, both consistent with the previous quarter. For the first quarter of 2026, we anticipate that PMT will purchase between 15% to 25% of total conventional conforming correspondent production while maintaining 100% of non-agency eligible production, similar to recent quarters. In broker direct, we are witnessing consistent momentum, positioning PennyMac as a strong option compared to market leaders. Originations rose by 16% from the previous quarter, although locks fell by 5% as we upheld our pricing discipline in competitive market segments. The number of brokers approved to work with us has steadily increased to nearly 5,300 by year-end, marking a 17% rise from year-end 2024 and indicating more brokers are recognizing and taking advantage of our distinctive value proposition. The revenue from Broker Direct remained stable compared to the previous quarter, with lower fallout-adjusted lock volume being counterbalanced by higher margins. Consumer direct volumes have also increased, with originations up by 68% and locks growing 25% from the prior quarter. However, surpassing growth in volumes was the impact of reduced margins due to intensified competition, along with a higher proportion of first lien loans versus closed-end second lien loans, as well as a targeted effort to recapture higher balance, lower-margin conventional loans. We experienced favorable outcomes from a strong secondary market performance against our initial pricing, contributing $34 million to PFSI's account revenues during the quarter. Production expenses excluding loan origination costs increased by 3% from the prior quarter due to higher volumes. As we transition to Servicing, our Servicing portfolio expanded to $734 billion in unpaid principal balance. This included $470 billion in owned servicing, $227 billion subserviced for PMT, and $12 billion subserviced for other non-affiliates. An interim subservicing of $24 billion linked to an MSR sale has since been transitioned to a third party. The Servicing segment had pretax income of $37 million. When excluding valuation-related changes, pretax income amounted to $48 million, which represents 2.6 basis points of average servicing portfolio unpaid principal balance, down from $162 million or 9.1 basis points in the previous quarter. Loan servicing fees remained roughly unchanged from the previous quarter due to MSR sales balancing out the growth from the owned portfolio. Earnings from custodial balances also remained stable compared to the prior quarter, as declining earnings rates negated the advantages from higher average balances. Custodial funds managed for PFSI's portfolio averaged $9.1 billion in the fourth quarter, up from $8.5 billion in the third quarter. The realization of MSR cash flows rose by 32% from the prior quarter, corresponding with increased prepayment speeds in our owned portfolio as lower mortgage rates prompted higher prepayment activities. Operating expenses stood at $82 million for the quarter, equivalent to 4.5 basis points of the average servicing portfolio unpaid principal balance, down from the prior quarter. EBO revenue saw a decline as the reintroduction of FHA's trial payment plans lengthened modification timelines and delayed redeliveries into future quarters. Similar to the previous quarter, we noticed the operating and GAAP return on equity converge as gains from changes in fair value inputs on MSRs were offset by declines in hedge costs. The fair value of PFSI's MSR increased by $40 million, with $35 million attributed to changes in market interest rates and $5 million from other assumption and performance-related factors. Excluding costs, hedge fair value losses were $38 million and hedge costs amounted to $2 million. As mentioned earlier, we expect hedge costs to stay contained, allowing us to consistently achieve results aligned with our targeted hedge ratio moving forward. Our hedge ratio is currently close to 100%, an increase from 85% to 90% last quarter. Corporate and other items reflected a pretax loss of $30 million, down from $44 million in the previous quarter, mainly due to lowered expenses associated with technology initiatives and performance-based incentives. PFSI recorded a tax expense provision of $28 million, resulting in an effective tax rate of 20.5%. This provision included a $4 million tax benefit related to a repricing of deferred tax liabilities and an adjustment to the 2025 tax accrual. The expected tax provision rate for PFSI in upcoming periods is 25.1%, a slight decrease from 25.2% in recent quarters. Additionally, we sold approximately $24 billion in unpaid principal balance of low note rate government MSRs to a third party on a servicing release basis. This sale represented a strategic capital rotation. By monetizing these lower-yielding assets at a strong valuation, we are unlocking capital to strategically reinvest in the continued growth of our servicing portfolio with new originations at current market rates and significantly enhanced recapture potential while maintaining prudent leverage levels on our balance sheet. Our total debt to equity at year-end was 3.6 times, and non-funding debt to equity at the end of the quarter was 1.5 times, both within targeted levels. We completed the quarter with $4.6 billion in total liquidity, which encompasses cash and amounts accessible through facilities with pledged collateral, providing us with ample liquidity resources for strategic deployment or to manage adverse market conditions. We'll now open the floor for questions.
Operator, Operator
I would like to remind everyone that we will only take questions related to PennyMac Financial Services, Inc. or PFSI. Your first question comes from the line of Terry Ma with Barclays.
Terry Ma, Analyst
So, I guess to start, you guys have kind of talked about increasing capacity in consumer direct all year long. You guys have kind of talked about holding excess origination capacity, kind of stacked your servicing book with more current coupon. It seems like almost obviously to plan for kind of like a moment like this. So maybe kind of just talk about what went wrong? And then on a go-forward basis, maybe just talk about what you're doing to kind of address the issue and your level of confidence.
David Spector, CEO
Thank you for the question. After Q3, we felt optimistic about our ability to leverage the portfolio and take advantage of the recapture opportunities from the rate decrease. However, as Q4 began, we noticed increased amounts of amortization, indicating that while we thought we were adding capacity, the rest of the market was also doing the same. In a typical declining rate environment, we would expect to see rising margins, but that was not the case this time. The competitive landscape for refinances was stronger than I have seen during previous interest rate declines. We quickly adapted our approach throughout the quarter. First, we accelerated our transition to Vesta to enhance our capacity. Second, we added even more capacity beyond what we already had in place, as the current market rallies require us to be prepared for significant shifts in a short time. We also adjusted a few strategies to boost our recapture efforts, and some of those strategies yielded positive results through the quarter and into January. I am very confident in our team’s ability to continue increasing our recapture and growth in consumer direct. This is a key reason why we anticipate achieving mid- to high mid-teen ROEs by mid-year. I believe you will continue to see progress in that direction.
Terry Ma, Analyst
Got it. That's helpful. Maybe just a little bit more on the ROE guide of low double digits to kind of mid- to high teens. Like any more color on kind of what's contemplated in that expansion? Like maybe just some more color on that, please.
David Spector, CEO
Yes, we expect the origination market to grow between $2.3 trillion and $2.4 trillion this year. If interest rates rise, that could change our projections. We anticipate growth in consumer production and recapture in consumer direct, as well as an increase in our market share in volumes and TPO. For our correspondent segment, we're aiming to maintain our current market share levels, which have been impacted by heightened competition on the conventional side as the two GSEs move forward in purchasing more mortgages. We expect our margins to remain consistent with what we saw in the fourth quarter, despite some margin compression experienced among brokers due to aggressive competition for the top loan production spot. We plan to remain disciplined, but there is potential for margin expansion, which could provide additional upside. We also expect cash flow realizations to stay aligned with the MSR values we observed in the fourth quarter. Efficiency gains in servicing should lead to higher pretax income, and we foresee scale benefits from our deployment of Vesta technology and growth in TPO share. Overall, I am confident we can achieve mid- to high operating ROEs, though it may not occur as quickly as we would like.
Operator, Operator
Your next question comes from Mark DeVries of Deutsche Bank.
Mark DeVries, Analyst
David, I think you indicated that the prepayments you saw in your servicing book were even faster than you would have thought. Any insight as to kind of what happened there? Or is it just how rapidly the market responded to rate incentives you kind of alluded to in prior comments?
David Spector, CEO
I'm sorry for interrupting. Did you want to continue?
Mark DeVries, Analyst
And then just a follow-up. Did I hear you right? Do you expect realization of cash flows, at least in the guidance you kind of provided or at least the high-level guidance to be consistent with what you saw in 4Q?
David Spector, CEO
In the fourth quarter, yes.
Mark DeVries, Analyst
Yes.
David Spector, CEO
The market has been caught off guard by the rise in prepayment speeds. Although there were forecasts, the levels we've experienced were unexpected. This sentiment has been echoed in discussions across the industry. We're seeing this trend broadly, particularly in higher balance loans where competition is more intense, as brokers and some correspondents tend to focus there. While prepayment speeds for lower balance loans are fast, they are not as rapid compared to high balance loans. The VA segment remains competitive, and we are capturing the market share we expected. However, from my viewpoint, the lack of margin expansion is concerning. As you know from our history, we strive to improve margins, and we will continue to explore possibilities in that area. The competition has been more fierce than what we've typically experienced during rate increases. Although margins have increased slightly, they haven't reached the levels we anticipated given the recent rally.
Mark DeVries, Analyst
Okay. Got it. And are you seeing some different margins across all the channels in purchase versus refi? Or was it refi that really was under pressure? And also, any thoughts on rates really kind of the decline we've seen kind of reducing some of the lock-in effect and starting to stimulate more purchase activity as well?
David Spector, CEO
I think that since everyone is operating at full capacity, we are observing that both purchase and refinance activities are not showing significant differentiation. However, we are concentrating on our consumer direct channel, where we have a dedicated purchase team focused on driving purchase activity. For refinancing, we have adjusted our strategy by reallocating some of our focus from closed-end seconds to conventional loans. This shift is reflected in the overall margin changes in the consumer direct segment from quarter to quarter, which is primarily influenced by the mix of loans rather than anything else. Overall, I believe that there is a strong competition for loans across the board.
Operator, Operator
The next question is from Bose George with KBW.
Bose George, Analyst
I just wanted to follow up on the same themes here. Is this kind of a structural change in the industry where historically runoff happens, originations pick up and margins pick up because of capacity constraints. And now with technology and is it a scenario where people can run with excess capacity, so you don't see that offset to runoffs?
David Spector, CEO
I'm not ready to say there is a structural change in the industry. The administration and others in the industry have been warning us for over a year that they would take steps to lower rates, which has given people the confidence to maintain capacity. On the flip side, refinancing loans is going to become increasingly easier as we see technologies being implemented to shorten the refinancing process, allowing borrowers to achieve lower payments. This is why we are focusing more on metrics like revenue per loan and net income per loan instead of just margin, as margin is a gross figure. As we anticipate these expenses to decrease, we expect the gross margin to remain stable, but the net income per loan to ultimately increase. This is something we are discussing internally. Overall, we have observed that volumes have increased while margins have decreased in this quarter. I believe this reflects the fact that people were prepared for this initial decline in rates. If rates were to decline by 75 or 100 basis points, we would definitely see an expansion in margins, without a doubt.
Mark DeVries, Analyst
Okay. Great. That's helpful. In terms of the competition in the different channels, in the correspondent channel, was it primarily driven by the GSE cash windows, or did other participants play a role as well?
David Spector, CEO
Yes. On the conventional side, it was mainly the cash windows, and I believe that will continue to be the case in 2026. With the recent announcement from Washington, D.C., the GSEs are expected to be very active. I don’t anticipate a decline in our market share, but I also don't expect us to reach 25% by year-end. We will maintain our discipline and won’t focus solely on volume and market share. On the government side, we had a strong December. In October and November, we saw other market players become very aggressive, but our market discipline led us to wait for better conditions. As a result, we had a very successful December.
Operator, Operator
Your next question comes from Doug Harter with UBS.
Douglas Harter, Analyst
As you were talking about the benefits from Vesta, do you envision that of actually taking costs out of the origination business or just continuing to build capacity and as volume comes back, lowering the cost per loan?
David Spector, CEO
The answer is both, okay? I will tell you, first off is with the deployment that will be in place in Q1, we will get the benefits of just a more modern system that will lead to just greater efficiency gains on both the sales side and the fulfillment side. Throughout 2026, and this is what's very exciting for us. We're going to see more and more deployment of AI tools and AI agents that's really going to have a meaningful effect on our ability to originate a loan in as inexpensive as anyone else in the industry, as quickly as anyone in the industry and most importantly, to be able to close the loan when the borrower wants to close the loan. And so that's something that is very exciting to us. And I think that's something that I'm really looking forward to sharing with you all as it gets deployed.
Operator, Operator
Your next question comes from Trevor Cranston with Citizens JMP.
Trevor Cranston, Analyst
A follow-up on some of the earlier questions. I guess as we think forward for this year, if we were to see an additional leg down in mortgage rates, whether it's driven by reduction in G fees or some of the other things that have been discussed a little bit. How should we think about the net impact on the company if that were to happen? Would you expect to see the production offset kick in pretty well if there is an additional rally? Or how should we think about kind of the net impact on the returns of the company?
David Spector, CEO
I want to emphasize that I am the one in this company most focused on increasing our capacity. We aim to ensure we have sufficient capacity to handle a significant market rally, which will come in two ways. First, we will need to increase our headcount to meet regulatory requirements for loan officers interacting with customers. At the same time, I anticipate gaining more capacity benefits from our technology. My goal is to avoid a situation where our amortization exceeds the recapture needed to maintain balance. We are committed to improving this, and it is not just a future aspiration; we will achieve it this year, well before the end of the year. I believe we will be well-positioned to take advantage of a market rally.
Daniel Perotti, CFO
The other thing that I'd add is that we talked about it a little bit earlier, is that we continue to increase our hedge ratio as well. So as or if interest rates decline further from here, we have even greater protection from our financial hedges that we put into place and our hedging discipline.
Trevor Cranston, Analyst
Got it. Okay. And I guess as a second part to that question, can you maybe talk about how you're thinking about the likelihood of something coming through like a significant reduction in G fees or a change to loan level pricing or sort of other levers that could be pulled in an attempt to lower mortgage rates?
David Spector, CEO
Of course, I read everything you're reading. I don't necessarily see a reduction of guarantee fees coming. While the administration is hyper-focused on affordability and doing what they can to drive down rates, I think the usage of the portfolios to buy mortgages is the logical place for them to continue to lean on. And the $200 billion number is a big number, but that's not to say it couldn't get bigger. I think that as it pertains to loan level price adjustments between the capital rule and other rules that they have, changing those would take some time. And so I generally think that they're going to continue to focus on keeping mortgage spreads tight to treasuries, and they're going to continue to try to job loan rates down. But look, we manage the company to a range of outcomes. And so I generally believe, of course, if GPs comes down, that's better, and we'll have the capacity in place to take advantage of that. And likewise, at times we hear loan level price adjustments are going to be going up. And that speaks to the work we've done to distribute close to 15% of our agency collateral outside of the agencies to insurance companies and whole loan investors. And so managing to the range of outcomes and continuing to build and enhance the customer journey is something that we'll be able to react to.
Operator, Operator
Your next question comes from the line of Crispin Love with Piper Sandler.
Crispin Love, Analyst
Can you talk a little bit about first quarter activity thus far, what that means for near-term ROEs just you have spreads tighten and mortgage rates got pretty close to 6%? Are you experiencing an episodic rate and pickup in refis? Just kind of curious how purchase is trending and then the momentum through January, the trajectory there? And then kind of bigger picture, how you'd expect ROEs to trend throughout the year as you add capacity and invest? Is it a ramp higher? Just curious on how you're thinking about it.
David Spector, CEO
Yes, Dan will discuss the ramp shortly. January has been a positive month for us. Although January typically tends to be slow after the holidays, we have seen good production results. Production levels are on the rise. However, we are observing an increase in demand statements, and I anticipate that prepayments in February will return to December levels. I expect January to be somewhat slower. One area I am focusing on is our recapture numbers, which are improving. Naturally, I would like to see even more growth, and everyone in the organization shares that sentiment, which relates to the ramp. Overall, our margins are stable, which is encouraging. In the TPO space, we experienced intense competition in Q4, but I believe we are starting to see more rational pricing emerge. I am confident that our growth in TPO, which may have been slightly hindered in Q4 due to pricing pressures, will continue to pick up at higher margins.
Daniel Perotti, CFO
And with respect to the trajectory through the year, I think consistent with the way that David described it in our implementation of these initiatives and continued build of capacity and so forth, we are expecting basically a ramp through the year, consistent with the guidance that we gave during the prepared remarks. So starting out in the lower double digits and then ramping up to the mid- to high double digits as we get later in the year.
Crispin Love, Analyst
Great. And then just a little bit deeper into that, kind of what's baked into the ROE guide for realization of MSR cash flows and recapture beyond the first quarter? It seems that 1Q should be similar to 4Q. I think the MSR prepay rate was about 16% in the fourth quarter. So, curious on how you think about that through the year. I completely understand it's just a point in time now, very rate dependent, but just curious on that and kind of where you are on recapture today and what kind of levels you might be targeting?
Daniel Perotti, CFO
Overall, we anticipate cash flow realization to remain at a similar level in the first quarter and as we progress throughout the year. There has been some initial responsiveness, but we expect a slight pullback in borrower responsiveness as the year goes on. However, we believe that the dollar realization of cash flows will stay relatively close to what we experienced in the fourth quarter and first quarter. Regarding recapture, we foresee incremental gains that align with David’s descriptions, which will help boost production income, along with an increase in our share in TPO or broker, further enhancing our production income and offsetting some declines in the servicing segment.
Operator, Operator
Your next question comes from Shanna Qiu with Barclays.
Gengxuan Qiu, Analyst
So just looking at the FHA delinquencies, it looks like it ticked up to 7.5% this quarter from 5.9% sequentially. I think it was roughly 6% last year. So, can you comment on what you're seeing in the FHA loans? I think previously, you guys had shown some slides that showed your FHA delinquencies substantially below the industry level and it feels like quite a jump there. Any context or color there?
Daniel Perotti, CFO
Sorry, we weren't able to hear your question very clearly, but I know that it was on delinquencies and specifically FHA delinquencies. So we do see delinquencies increase seasonally in the fourth quarter. We look at our overall delinquency profile or our overall delinquencies for our book increased marginally year-over-year, had a similar sort of slope in terms of delinquencies through the year. Overall, with respect to FHA delinquencies, as we mentioned as in part of the prepared remarks, the FHA did change its policy around modifications during the latter half of the year, moving from allowing streamlined modifications that required no trial payments to requiring trial payments. And really, what that is going to result in is a bit of a lag in terms of loans that had been delinquent, getting those modifications implemented and coming back to current. And so that is generally what is driving some of those increases in delinquencies that you're seeing specifically in FHA. We do expect that, that's primarily a lag and not something that is going to dramatically change the performance overall of the FHA book. We also saw that impact our revenue from EBO redeliveries during the quarter, that went down by about 1/3 from last quarter. Again, we expect that to be just a lag. And our current expectation is that will come back up to levels that we had seen over the past few quarters to come back up by that 1/3 as we get into the first quarter, and we see those folks move through the trial and receive those modifications and come back to current.
Gengxuan Qiu, Analyst
Okay. I know you mentioned that your hedge ratio is now over 100%, an increase from last quarter. There has been some rate volatility in the first quarter, and we heard that it could lead to basis hedging issues. Can you provide any insights on the rate changes and whether they have affected your hedging strategy?
Daniel Perotti, CFO
Overall, during the first quarter thus far, as you said, there has been specifically some basis movements really related to the announcement around the GSE buying. We did see some of that volatility did have a slight impact thus far on our hedging results. Obviously, we're still early in the quarter and a lot of things can change. Overall, I would say it had a slight impact, but not anything substantial.
David Spector, CEO
The hedge performed really well in the fourth quarter.
Daniel Perotti, CFO
In the third quarter. And I will tell you that absent this one change when they announced that the GSEs are going to be buying mortgages and everything stayed flat with the exception of mortgages, which rallied, which really had a very small effect on us. The hedge continues to perform along the lines that we've seen in the third and fourth quarters.
Operator, Operator
Your next question comes from Eric Hagen with BTIG.
Eric Hagen, Analyst
A lot of good discussion here. I think I just have one. Lots of debt raised over the last couple of years, unsecured debt. I think a good portion of that has been used to pay down the secured term notes that you guys have. I mean, how do you guys think about the asset liability match on the balance sheet right now if prepayment speeds are picking up, right? And if the macro backdrop is for faster speeds, is there a limit to how much unsecured debt that you keep on the balance sheet? Or do you think there's room to raise more?
Daniel Perotti, CFO
We generally assess our total debt in relation to our balance sheet, primarily looking at our nonfunding debt-to-equity ratio, which has remained around 1.5x for the last couple of years. As we continue to grow our equity and expand our MSR portfolio, despite any runoff or sales, we expect to increase both our overall MSR assets and our equity. This positions us to potentially take on additional debt, including unsecured debt, as we progress. Concerning our balance sheet, we typically prefer to issue unsecured debt, as it provides greater liquidity flexibility and allows us to access secured facilities tied to our MSR when necessary. We believe there is potential to issue more unsecured debt as we approach 2026 and beyond, depending on the growth of our equity and MSR assets while ensuring our leverage ratios remain at prudent levels.
Operator, Operator
Your next question comes from Ryan Shelley with Bank of America.
Ryan Shelley, Analyst
Most of might have been answered. I just want to touch back on recapture. It sounds like it's going to be a theme here. So you've talked about investments you're making in AI, other technologies to improve. And then you also, in the deck here, talk about implementation of specific solutions. Can you just run through what those solutions might be? And then I might as well try for it. Anything you could do to quantify that potential upside that you see remaining?
David Spector, CEO
Thank you, Ryan. I want to emphasize that our solutions begin with expanding our capacity and increasing our workforce, as well as ensuring our technology is fully implemented throughout the organization. Meanwhile, as I mentioned earlier, we've adopted some strategies in the fourth quarter, shifting our focus from closed-end seconds to conventional recap efforts and overall recap initiatives. On the fulfillment side, we're continuously adding capacity, and we're seeing positive results from our technological advancements. Overall, our approach combines ongoing evaluation to enhance margins, which are crucial for increasing recapture in a profitable manner. It's essential for us to achieve profitability in the most efficient way alongside our production efforts.
Operator, Operator
Your next question comes from Bose George with KBW.
Bose George, Analyst
In terms of the areas where you saw the increased prepayments where the offset on the margin wasn't as expected. Was that more on the Ginnie Mae side versus the conventional? Or was that kind of across the board?
David Spector, CEO
So, look, I think it's generally across the board. I will tell you, and your question indicates you understand this, there are loans with the varying servicing strips in Ginnie servicing. And obviously, when you have 69 basis points of servicing, your basis in the loan is much greater than when you have 19. And so with the proliferation of 69 basis point strips in the market over the last three years, that's something that obviously is just provides a bit of a headwind when you're running a balanced business model. But having said that, this is one of the reasons why we brought the hedge ratios up, and this is something that we continue to focus on getting the recapture on those loans. But obviously, I think on the Ginnie side, the fact that there's more 69 basis point strips in the portfolio just lends itself to this issue. On the conventional side, there, I think it's really, as I mentioned, on the higher balance product. And there, we're just seeing a lot of activity, a lot of competition from those who are buying trigger leads, which, by the way, that goes away at the end of Q1. But that's something that the last her for that activity. And so I think that had a little bit of play. When we looked at our runoff that we didn't recapture at the top of the list with broker originators. And I generally think that they're going to be hard-pressed to duplicate that once this trigger law comes into play.
Operator, Operator
Your final question comes from Eric Hagen with BTIG.
Eric Hagen, Analyst
The stock has done so well, but can you refresh us on how much room you have on your buyback authorization right now?
David Spector, CEO
We have a little over $200 million available for buybacks. Historically, we've had no issues utilizing this resource. In our approach to capital allocation and deployment, buybacks are one of the tools at our disposal. We briefly used it in Q3, and we evaluate this option regularly.
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 on this call today. Great questions, good robust discussion. And if anyone has any follow-up questions, I'm available, Dan is available. Isaac and Kevin are available. Please don't hesitate to reach out. Thank you all for the time, and have a good day.
Operator, Operator
This concludes today's call. Thank you for attending. You may now disconnect.