Q4 2023 PennyMac Financial Services Inc Earnings Call

Participants

David Spector; Chairman & CEO; PennyMac Financial Services Inc

Dan Perotti; Senior MD, CFO; PennyMac Financial Services Inc

Kevin Barker; Analyst; Piper Sandler Comapnies

Michael Kaye; Analyst; Wells Fargo Securities LLC

Eric Hagen; Analyst; BTIG

Bose George; Analyst; Keefe, Bruyette & Woods North America

Mark DeVries; Analyst; Deutsche Bank

Kyle Joseph; Analyst; Jefferies

Trevor Cranston; Analyst; JMP Securities

Shana Xiao; Analyst; Bank of America

Presentation

Operator

Good afternoon, and welcome to PennyMac Financial Services Inc's fourth quarter and full year 2023 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.
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.
Gentlemen, I'll turn the call over to your.

David Spector

Thank you, operator. Good afternoon, and thank you to everyone for participating in our fourth quarter earnings call. PFSI reported a net loss of $37 million and an annualized return on equity of negative 4% in the fourth quarter. These results included a nonrecurring accrual of $158 million relating to our long-standing arbitration with Black Knight and $76 million of net fair value declines on MSRs and hedges, given significant interest rate volatility during the quarter.
Excluding the impact of these items performance was very strong with an annualized operating return on equity of 15%, marking the culmination of another outstanding year for the company and highlighting the strength of our balanced business model 2023 was one of the more challenging origination markets in recent history, with industry volumes down approximately 40% from 2022 and Unit originations at their lowest levels since 1990.
However, PennyMac through its multichannel production platform generated $69 million of production pretax income and produced nearly $100 billion in UPB of mortgage loans down only 9% from 2022. This demonstrates both our strong access to the purchase market and our ability to profitably support our customers and business partners.
These production volumes continued to drive the organic growth of our servicing portfolio, which ended the year with more than 2.4 million customers and over $600 billion in UPB, up 10% from the end of last year. Our servicing business generated $268 million in pretax income, excluding the Black Knight accrual.
As the second largest producer of mortgage loans in the country and the fifth largest servicer, we have achieved significant scale in our mortgage banking platform with the capacity for continued growth and profitability in the years to come.
This management team's ability to effectively manage capital has always been a competitive advantage for PFSI, and I am extraordinarily proud of the work we accomplished in 2023. Not only did we return more than $110 million to stockholders through share repurchases and dividends.
We took meaningful steps to further strengthen the balance sheet, issuing more than $1.5 billion in new long-term debt at attractive terms in redeeming $875 million in debt with upcoming maturities.
I would like to provide a brief update on our long-standing litigation with Black Knight has outlined on slide 5 of our earnings presentation. In January, the arbitrator issued a final award of $150 million plus interest to Black Knight down from the interim award determined in November.
PFSI recorded the related expense accrual in the fourth quarter as previously noted. While we disagree with the ruling, we are very pleased with the arbitrator's affirmation that SSE remains our own proprietary technology as well as providing PennyMac the ability to utilize it as we see fit to benefit our customers and stakeholders.
Since we've launched the system in 2019, it has performed extremely well, meaningfully enhancing our capabilities while helping to drive down costs. With this technology now free and clear of any restrictions on used or development, we believe there's potential for additional opportunities for the Company and stakeholders over time.
Turning now to the origination market, we believe the overall market troughed in 2023 as mortgage rates have declined from their recent highs and anticipated future rate cuts have increased third-party estimates for industry originations in 2024 to approximately $2 trillion.
Much of this anticipated growth is based on expectations for interest rate reductions later on in the year. And we expect volume in the loan origination market to remain seasonally low in the first quarter of 2024 before moving into the spring and summer homebuying season.
With a balanced business model and scale in both production and servicing, we remain very well positioned if interest rates remain high or declined further.
As you can see on slide 7 of the earnings presentation, operating returns on equity have increased throughout 2023, returning to the double digits and consistent with our goals at the beginning of the year. The servicing segment continues to drive earnings and operating pretax income has improved in recent quarters due to the growth in the size of PFSI's own portfolio and increased earnings from placement fees on custodial balances due to higher short-term rates.
Operating expenses remain low given our growing operational scale and continued low delinquencies. In production while the market is expected to remain competitive, margins have improved over the course of 2023, and we estimate we have gained a considerable amount of market share, especially in the correspondent and broker direct channels, which provides strong access to the purchase market.
As we add these higher note rate mortgages to our portfolio, we are creating additional opportunities for our consumer direct business to offer our customers a new lower rate mortgage when interest rates do decline. At year end, 22% of our servicing portfolio consisted of mortgages with note rates in excess of 5%.
In the fourth quarter, production pretax income was $39 million. And while we expect some seasonality in the first quarter. We expect to build on this profitability in future quarters as the origination market improves.
As I said earlier, I am extraordinarily proud of what we accomplished in 2023 and I'm even more excited about PennyMac Financial's future.
Our long track record of strong operational and financial performance is unique in the mortgage industry and has been driven by the resilience of our balanced business model with industry leading positions in both production and servicing, as well as our strong capital and risk management discipline.
I believe we are the best positioned company in the industry with a fully scaled balanced business model, proprietary industry-leading technology, a strong balance sheet and a growing number of servicing customers that stand to benefit from the products and services we offer to fulfill their homeownership needs.
I will now turn it over to Dan, who will review the drivers of PFSI's fourth quarter financial performance.

Dan Perotti

Thank you, David. PFSI. reported a net loss of $37 million in the fourth quarter or negative $0.74 in earnings per share for an annualized ROE of negative 4%. As David mentioned, these results include a nonrecurring expense accrual of $158 million before income taxes were $2.20 per diluted share after income taxes related to the final award of our long-standing arbitration with Black Knight.
PFSI's Board of Directors also declared a fourth-quarter cash dividend of $0.2 per share. Book value per share was $70.52 down from the end of the prior quarter, primarily due to the net loss.
Turning to our production segment, pretax income was $39 million, up from $25 million in the prior quarter. Total acquisition and origination volume were $26.7 billion in unpaid principal balance, up 6% from the prior quarter, despite a decrease of more than 20% in the size of the origination market from the prior, quarter. $24.2 billion was for PFSI's own account and $2.5 billion was fee based fulfillment activities for PMT.
PennyMac maintained its dominant position in correspondent lending with total acquisitions of $23.6 billion in the fourth quarter and margins similar to levels reported last quarter. We estimate that in 2023, PennyMac represented more than 22% market share in correspondent lending, up from 15% in 2022.
We attribute this market share growth, not only to the retreat of certain market participants, but also to our consistency and execution and industry-leading technology.
Acquisitions in January are expected to total approximately $6.6 billion and locks are expected to total $6.9 billion. In Broker Direct, we see strong trends and continued growth in market share as we position PennyMac as a strong alternative to the channel leaders.
Both locks and fundings for the quarter were down in the single digit percentages from last quarter, less than the overall market and margins were down due to higher levels of fallout as mortgage interest rates declined.
The number of approved brokers at year end was over 3,800, up 42% from the end of the prior year, and we estimate that we represented approximately 3.6% of originations in the channel in 2023. In January, broker direct originations were $600 million and locks were $1 billion.
In Consumer Direct volumes remain low. But as David talked about, we remain well positioned given the number of customers we have added to the portfolio with higher mortgage rates. Production expenses net of loan origination expense were 8% lower than the prior quarter, primarily due to lower compensation accruals related to financial performance.
Turning to servicing the Servicing segment recorded a pretax loss of $96 million, primarily driven by the nonrecurring expense accrual mentioned earlier. Excluding the accrual servicing contributed $63 million to pretax income down from $101 million in the prior quarter, primarily due to higher net MSR valuation related declines.
Excluding valuation related changes and non-recurring items servicing had very strong results with pretax contribution of $144 million or 9.6 basis points of average servicing portfolio UPB, up from $120 million or 8.6 basis points in the prior quarter.
Loan Servicing fees were up from the prior quarter, primarily due to growth in PFSI's own portfolio as PFSI has been acquiring a larger portion of the conventional correspondent production in recent periods. Operating expenses declined also due to lower compensation accruals related to PFSI's financial performance.
As expected earnings, our custodial balances and deposits and other income decreased $10 million from the prior quarter as balances declined due to seasonal property tax payments. Realization of MSR cash flows decreased $14 million from the prior quarter due to higher average interest rates for the majority of the quarter.
[EBO] income remained relatively unchanged and we continue to expect its contribution will remain low for the next few quarters, while interest expense increased from the prior quarter due to higher average balances of debt outstanding.
The fair value of PFSI's MSR decreased by $371 million during the quarter, driven by a decline in mortgage rates, which drove expectations for increased prepayment activity in the future. Hedging gains were $295 million, offsetting 80% of the decline in the MSR fair values.
The net impact of MSR and hedge fair value changes on PFSI's pretax income was negative $76 million and the impact on earnings per share was negative $1.5. The investment management segment contributed $1.9 million to pretax income during the quarter, and assets under management were unchanged from the end of the prior quarter.
Finally, on capital last quarter, we noted the October issuance of a five year $125 million term loan secured by Ginnie Mae MSRs and servicing advances. In December, we successfully raised $750 million six year unsecured senior notes and subsequently retired $875 million of secured term notes due in 2025.
We'll now open it up for questions. Operator?

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Kevin Barker, Piper Sandler.

Kevin Barker

Good afternoon. And thanks for taking my questions. I just want to follow up on your comments about SSE. and with the technology being free and clear from any restrictions on you also made the quote, some believe there's a potential for additional opportunities and benefits for the company.
Could you maybe expand upon what you can do with this technology, whether it's utilize it within PennyMac or maybe expand upon the use of that technology within PennyMac or outside of PennyMac?
Thank you.

David Spector

Sure, Kevin. First of all, SSE has been a great system for us as a servicer come. We adopted at the end of 2019. We were tested very not tested, but we put it to use with COVID in 2020. And it performed very, very well in terms of being able to meet the needs of our borrowers and offering forbearances and modifications.
And it's a system that we believe gives us a tremendous amount of competitive advantage. It's cloud based on minutes with full integration from front end back end and middleware components, customers are able to access our advanced web, our mobile and IVR solutions easily with high satisfaction rates.
It's got unique workflow attached to it with state of the art technology. And look, I think it gives us a competitive advantage in the marketplace and so in and of itself with some of the I think, you know, we've continued to see our servicing expenses get driven down since we adopted it.
And it's something that has been meaningful to us in our evolution as a top five servicer on as it pertains to unfortunate litigation, look, we're very happy for the lawsuit to be in the rearview mirror on why? And while I disagree with the final rule for length, suffice it to say the ruling clearly had some more positive and negative were we were happy to retain ownership of our servicing system.
We own SSE free and clear to use out as we see fit in terms of other opportunities. It's been 60 days since the really came out we've been we've been working to get this to really get this behind it. And I've been very encouraged by opportunities that presented themselves and people approaching us.
And we're beginning the exploration evaluation process. And we don't feel any hurry to do something. We want to do something that's best for all stakeholders. But suffice it to say it's something that is very unique in the industry and gives us a real advantage.

Kevin Barker

And thank you for those comments. And then you produced a 15% operating return on equity this quarter and it seems like you have quite a bit of momentum going into 2024, not only within the origination channel, but also in the servicing side. Do you feel that the 15% ROE is the run rate now and there's potential for significant upside in '24, particularly if we were to see a picture of a bigger origination market.

David Spector

So look, I think that as you pointed out, the operating ROE was 15% in the fourth quarter, which was up 13% from the third quarter. I'm expecting us to continue to build on the on the core Q4 results, there's going to be some seasonality in the first quarter.
But as you know, the servicing has just been unbelievable for us on profitabilities, continuing to remain strong in this high interest rate environment. Consumer is continuing to perform in and stay current on it. We have continuing higher servicing fees and the growth in our own portfolio.
I look on the production side, we were very profitable in '23 as if it were more profitable in '23 than we were in '22 on the production side and given and given the trends I'm seeing in margins first and foremost, but then also trends that we're seeing in correspondent broker direct and really encourage that if we do see rate declines, especially in the back half of the year as the markets are projecting and we can see are our production business. Greg growth profitability.

Dan Perotti

Yes, just to add onto that a little bit. I mean, to echo what David said, we saw we saw those Our lease operating ROE increased through 2023 on Putnam move upwards, consistent with how what we had. So for put forth some at the beginning of the year where we really did see Q1 of last year as that sort of trough, and it's not necessarily going to be in a totally straight line.
There is some seasonality to this business if we're looking at Q1, but we do think there is enough there's upside potential from that 15% ROE and in 2024 overall, especially as you noted, if the if and as people expect the market becomes larger the mortgage market.

Kevin Barker

Thank you David, thank you Dan.

Operator

Michael Kaye, Wells Fargo.

Michael Kaye

I'm not the 2021 Investor Day. You said 20% ROE in a more normalized environment. Just wondering what's been some of the pluses and minuses in that analysis back then? I know you bought out of back a lot of stock during the pandemic period. It was like 20% of your share count.
Correspondent broker direct are likely ahead of plan servicing doing great, too. Our consumer direct price pushed out the opportunity a little bit. What I'm trying to figure out is 20% is still, is that still the right goalpost, considering you just did 15% in a very challenging mortgage market.

Dan Perotti

I think the that still is the goalpost that that we have, obviously, we're generally striving to do a 20% plus. That's part of David's mantra comments what we have our focus on, but we do think and we certainly think that 20% is achievable in a more normalized market. If we're looking at 2024 and specific, it's probably still under what we would consider a totally normalized market.
To your point, if we're looking at sort of the positives, what's changed since that since that projection on the repricing, we outperformed even what we expected in correspondent, especially given the market size. And but in terms of some of the growth of the servicing portfolio over that period, of time and over the total period of time is probably a little bit lighter than what we had expected just because the market's been smaller.
And then on, you know, on the growth of the direct lending channels has just been a bit more constrained because of the overall the overall size of the market and especially the refi market in terms of consumer direct.
And so we still we still think 20% is a is a reasonable goal and that achievable goal. We still have our balanced business model where we have servicing as sort of the core and then production on top of that, which helps drive up those overall our lease.
But that's we think that the overall balanced business model is what led us to that 15% are we here in the fourth quarter? We think we can continue to build on that. But 20% is still sort of our target.

Michael Kaye

I'm wondering talking about the competitive landscape in correspondent. Looks like things slowed down a little bit in January, and I've been hearing some other large non-banks like Crete. I'm talking about getting more competitive to raising large amounts of corporate debt was just looking for an update on what's happening correspondence so far this year.

David Spector

And look, I think that on look, we have a we have a dominant position in correspondent. We have very deep relationships. And I would start off by saying that the market in January is going to be smaller and then you know, then can even increase.
And I think that we're foreseeing good activity in correspondent, specifically with builders on a lot of our share growth on that in the latter part of the years because of the activity coming out of builders where we have very deep relationships.
And that's something that really helped drove a lot of the share growth and as you know, banks have been stepping back and we're just about at the point where you are going to not be able to say that because they're going to be at home sellers are not retaining servicing.
And one of the things that we're also winning, it seems there's a flight to quality, and we're seeing more and more sellers on delivering a disproportionate amount of their loans to sell it to us.
Interestingly enough in correspondent, we saw a decrease in the number of sellers on it here. It is down to 812 from 830. And so we're seeing a little bit of consolidation taking place. But we I think I think I think that our value proposition is pretty is pretty tried-and-true.
We're in the market every day. We get value for that. And I think when others are in and then they're out there in the route that that that creates some consternation with sellers. And so this is why I continue we saw some really good margin growth in correspondent.
We were at 21 basis points in the fourth quarter of '22. We were at 34 basis points in the fourth quarter of '23. And it's a combination of increasing pricing power, but also we're able to find executions away from the GSEs that provided some additional margin.
But I think I think that I like I like the correspondent is so core to our franchise and it's something that I continue to expect to expect it to be. But yes, I mean, as people raise more capital and get more aggressive on the margin, you may have someone sell loans to them because they have a little better bid, but where we're the industry leader for reasonable and will continue to be their architecture.

Michael Kaye

Okay thank you.

Operator

Thanks for your question.
Eric Hagen, BTIG.

Eric Hagen

Your line is live as things come up, you guys are well, yes, not the hedging results were good, but what do you feel like maybe prevented you from hedging even more of the fair value mark during the quarter? And is there a sense maybe for how much sensitivity you feel like there is to call the next 50 basis points lower in mortgage rates with respect to the fair value mark, thanks. Sure.

Dan Perotti

So we were pretty pleased with our hedging performance in the fourth quarter. As you know, interest rates were all over the map in the fourth quarter. We were up the 10-year was up as high or a little bit over 5% and down below 4%. So really pretty significant pretty significant swing in terms of the directions and the direction that mortgage that interest rates and mortgage rates went through the quarter.
We were able to cover 80% of the of the move from and that included the costs of that that we have to hedge, which ate up a little bit as well. And we have been in this in this environment targeting a tighter hedge ratio than we have historically.
But overall, overall, given the volatility of interest rates, we're pretty pleased with the performance to your point as we move our as interest rates or interest rates move down further. And we have the asset has increasing sensitivity, but part of that is also because we've been adding a fair amount of loans at those higher interest rates.
That's been part of our strategy so that those loans on, you know that we have a greater portfolio of loans that could move into refinanceable territory when if and when interest rates do decline. And so the sensitivity of the servicing asset has increased a bit as we've moved lower and interest rates. And we've continued to we continue to hedge that, Tom.
But what we've also seen consistent with our strategy is an uptick in refinances here in the first quarter. You can see that in terms of some of our on our January locks in the in our book, consumer direct channel, for example, were up pretty meaningfully from the run rate that we had in Q4.
And we've just taken another sort of leg lower here in interest rates that really, again, gets back to the balanced business model and how to the extent that we see potential slightly faster prepayment speeds on the servicing side on with our hedge and with the refinance ability to support that it serves to offset that.

Eric Hagen

Yep, no, that's helpful. Thank you. So how are you guys in a separate question? I mean, how are you guys thinking about the secured financing for MSRs versus maybe replacing some of that balance with unsecured debt? And do you see any risk that banks could pull back from supporting the market for MSR funding? And does that in any way kind of drive your appetite for unsecured?

David Spector

So we've talked about in the past that really our strategy generally is to move more toward unsecured financing on our issuance in Q4, $750 million of unsecured debt. We used to pay off some of our some of our secured financing. Our MSR financing, although really are a really term notes there as opposed to bilateral from banks.
Overall, we expect to continue to move more toward the unsecured financing really be the reasons for that. Other than that continuing to sort of bolster our credit position and move toward a more favorable position with the rating agencies where that unsecured debt is sort of more stable is subject to margin call on margin calls if we have a significant interest rate rally.
For example, and so had some benefits on that side. We think we can drive down the cost over time as we move more toward towards unsecured. And that has a more favorable sort of ratings and capital profile of stability in terms of the.
But flipping to the other side on the secured. We have not seen a pullback in MSR financing from banks. In fact, it's really been the opposite. We've seen more banks. I'm really willing to lend on a on MSRs and in different MSR structures.
So and we've been over time adding banks to come to our MSR facilities. And so we don't see that we don't see that as an issue. We want to continue to diversify. And the number of banks that we have that are that are that are financing our MSRs just for risk management purposes. But we don't see a pullback there. And that's really not that's not really a major driver of our move toward unsecured debt. It's really all of the other motivations that I discussed previously.

Eric Hagen

Yes, that's really helpful. Thank you guys very much.

Operator

Bose George, KBW.

Bose George

Good afternoon. Can you give us just your updated thought on share buybacks? I'm just given the current valuation.

Dan Perotti

Sure. So in terms of share repurchases, we didn't have any share repurchases come in the fourth quarter as the share prices has moved up pretty significantly from a from a few quarters ago, as I'm sure you're aware. And so anytime we're looking at you look at our capital deployment, we're looking at what the relative what the relative return and relative value is in deploying it in shares versus really back into our business and continuing to acquire MSRs through correspondent and add to add to the servicing portfolio.
And so we really see that as the sort of the optimal path currently. And the other piece that plays into this is our overall management of the leverage ratio of the company. And so continuing to manage our leverage ratio and that a bit above 1.1 times in terms of our non funding debt to equity is where we've been and we're looking to manage in that in a similar range there.
So we obviously share repurchases on a puts a little bit of pressure on that. So those are the those are the factors that we're balancing. But in the current environment, certainly in the fourth quarter and have given how everything is currently situated, we'd expect to continue with our capital deployment really into back into the business and MSRs as opposed to share repurchases.

Bose George

Makes sense. And then actually just switching over a up on the MSR hedging question from earlier, you noted that you're going to run a tighter hedge ratio. I think you said 100% last quarter on the call, if volatility abates some it should be you have a bit of sort of a more match sort of hedging result, assuming we don't see sort of a big pickup in prepayments and so in in the in the first quarter.

Dan Perotti

So I said we are, you know, we are seeking to manage to a bit of a tighter hedge ratio what we've seen so far in the first quarter, again, a fair amount of volatility and that inverted yield curve, both of which are negative in terms of our hedge costs, on.
And as we continue to get further down into on into lower territory with a higher percentage of our portfolio in in higher and higher mortgage rates won't necessarily be hedging quite as close to on to 100% on like in the fourth quarter, we were at about 80%.
And so I think you could expect us to be we won't necessarily be right at 100% in terms of our hedge ratio, I'm still higher than we've been historically. But in terms of the costs and spend and where the portfolio is positioned on a little bit a little bit potential for us. First, some differences between the MSR and hedge in the first quarter.

Bose George

Okay. Makes sense. Thanks.

Operator

Thanks for your question.
Mark DeVries, Deutsche Bank.

Mark DeVries

Thank you.
First, a question for Dan on the margin.
I heard your comment on the quarter over quarter decline in the margin and Broker Direct being attributable to the fallout effect, didn't hear whether you commented on the decline in Consumer Direct was it the same fall effect or is there something else that it pushed again sell lower and consumer direct?

Dan Perotti

Sure. In Consumer Direct to really what was influencing the margin there is a shift toward more refinances as opposed to a second lien originations. So second lien originations on have a smaller balance and so on a per unit basis.
And although the dollar, but the dollars of revenue per loan for a refinance is higher. The basis points are lower because the loan size is larger. So it really that's really what's driving the margin decline in basis points from Q3 to Q4. But given the interest rate rally that we saw toward the end of Q4, we started seeing a pickup of each of the refinances.
And we've seen that continue in the comp during the first quarter with a further decline in interest rates. But it's really on a unit basis, actually, we're seeing the revenue per unit go up. But on a basis points basis, we're seeing those declines.

Mark DeVries

Okay. Got it. And then then a follow-up for David. On the new opportunities are around your servicing platform. How do you think about the trade-offs between potentially sharing a source of competitive advantage with competitors versus the incremental revenue that you might be able to generate off of that.

David Spector

I think if you look from our perspective, these are all the questions we're asking ourselves on as we come out of the litigation, I think that there's there is demand in the marketplace for more competition on. It's not good or healthy for the industry to have reliance on any one person.
And given the market share of the leader out there know, there are many in the industry who share my point of view. I think from our perspective, we have to answer that question from an economic value, we are best served by continuing to maintain the competitive advantage that we're seeing in our servicing platform.
And in terms of driving down costs and increasing productivity versus well, we can get by you know other meat. But as I said earlier, this is very early on in the normal process. And this is something that, you know, we're going to have where we're working. I'm already on it. And this is something that we're just going to continue, though, to work on is and as we always do, we're going to get to the right place.

Mark DeVries

Okay. Makes sense. Thank you.

Operator

Next question.
Kyle Joseph, Jefferies.

Kyle Joseph

Yes, hey, good afternoon, guys. Thanks for taking my questions. I just wanted to pick your brain a little bit more on the correspondent channel. So the number of sellers obviously went down, but what do you see that doing to margins over time, obviously that impacts supply and not necessarily demand, but some move-ins was just curious to get your thoughts on how that impacts your margins in that segment.

David Spector

Yes, I don't think it I don't think that, you know, really any impact on margins that it's really it's really sellers who weren't selling a lot of a lot of loans and who weren't active in the marketplace. And I think I think margins or margins have been pretty stable over the over the past couple of quarters.
And even in January with volumes down, we're seeing margins stable, albeit they were up very nicely from where they were a year ago. And look, I think that, of course, we always like higher margins and more I'm always reminded people to get more margin.
But I think it's I think that Doug and having the team on to have just a phenomenal job on a continuing to you know, to support the operation in terms of the value propositions they provide to our correspondent sellers and look where from the form bond or loan prices are today, sellers can't really, I can't afford to keep servicing.
And so a lot of the alternative execution over the years has been to the GSEs cap cash window where the ability to retain the servicing for a lengthy period of time or ultimately sell it. And so I think we're getting more loans coming in through the whole loan channel.
And as I said, there's just a natural flight to quality when you see a marketplace where there's we have people going in and out and get people getting out of the business. And we've been at this every day since we got into it almost 15 years ago. And it's a it's something that that gives us a halo effect in correspondent. And it allows us to maintain it both margin and share.

Kyle Joseph

Got it.
Very helpful. And then on just expenses, the outlook for 2014, obviously, you guys have been doing a good job getting more efficient in a tough market but would you expect those to kind of the same parallel with volumes or how much variability is there in that line item?
Sorry, particularly on the production segments.

Dan Perotti

On the production segment sales here to your point, we did a lot of our forte even going back to '22 in terms of bringing down the expense base that served us really well and in '23. But yes, as David noted on the production side, we actually have higher pretax income in the production segment in '23 than we did in '22.
And that was really due to getting our expense base right-sized. And as we see in most of the rest of the business, if we're talking about sort of the core functionality of the corporate and shared services as well as the on the servicing side, we expect those to be fairly stable as the servicing portfolio grows.
There'll be some additional expense but to the extent that we see the sort of soft landing and not significant increases in delinquencies, and we expect those to grow really relatively slightly given some of the efficiencies that we have in that business and on the corporate side to be very contained.
And then on the production side, to the extent that we see an uptick in production there will be some uptick in the production expenses that goes along with that. And that will really be determined by the size of the market and the in particular in the interest rate decline on the refinance side. And if that expands, that would necessitate some additional growth in those expenses.

Kyle Joseph

I've got it very helpful. Thanks for answering my questions.

Operator

Trevor Cranston, JMP Securities.

Trevor Cranston

One more question on the hedging of the servicing side of things on the earnings on the custodial balances obviously become pretty significant over the last several quarters. And can you talk about any hedges you guys have put in place to sort of protect that earnings stream as Fed funds potentially start to move lower? And also just talk in general about how we should sort of think about the impact of lower Fed funds on the economics of the servicing business? Thanks.

Dan Perotti

Sure. Brazil are the sodium bound. The earnings on the custodial balances on our servicing portfolio are projected to really follow the forward curve. So to the extent that rates today are projecting a decline in short-term interest rates, which they are not our projection for those cash flows that's embedded in our MSR value reflects lower earnings on those custodial balances as we move forward as we move forward in time.
And that's just that those changes since the forward curve on a forward curve would change at huge shock interest rates up or down. Those changes in the earnings on the custodial balances are also incorporated into our hedge on. That's part of what we see changing in the value of servicing if we were to see an interest rate shock down.
And then that's part of what we're that's what we're hedging. We're hedging for hedging against. If you look at and we've sort of, I think, put that put out there in our in our earnings materials that our or custodial balances, our earnings, our facility balances are generally tied to short term interest rates or Fed funds.
To the extent that we see Fed funds go down, we'd expect that the rate that we're earning on those custodial balances to follow to some extent for to you have to follow relatively closely the same way that it followed our interest rates increased. We'll also see some of our financing costs have decreased as the portion of our portfolio.
The portion of our financing that's really secured by MSRs is generally floating rate. And so you have a bit of an offset there as well in terms of the on the revenue versus the expense side, but on the hedging side, so those will be somewhat offsetting. But on the hedging side, that's part of what we are hedging against for a decline in interest rates. Is that the decline in that in those earnings on custodial balances.

Trevor Cranston

Okay, appreciate. Thank you.

Operator

Thanks for your question. [Shana Xiao] Bank of America.

Shana Xiao

Good afternoon, guys. Thanks for taking my questions on previously on the call, you mentioned the margin calls on your secured debt. Yes. Like how should we think about how much rates need to decline before you see any impact of margin calls on your secured facilities, and we're pretty over-collateralized at the moment.

Dan Perotti

So the current we at the end of Q4, we had a little under $1 billion of cash on the balance sheet, and we have the ability to draw against our secured facilities for around $2 billion of additional value. And as I mentioned, we paid down some of our secured facilities during the quarter with our with our unsecured debt issuance.
So we really have a pretty significant actually a pretty significant reduction in value to get to a point where we would have a margin call on our unsecured debt. Additionally, on the hedges that we have in place, if we have a decline in interest rates generate cash and that cash can then can then be used to pay off any margin calls that we might have.
And so we're really both from an overcollateralization point of view as well as from sort of the performance of the hedges, we're pretty significantly covered off against the risk of a margin call.

Shana Xiao

Great. That's helpful. And then I think we've heard from some third parties that even for seasoned books there's been delinquencies for certain pools and Jennie Mae on over 10%. Looks like the 60-day delinquency increased 40 and sequentially from the USDA, but still relatively low at 5.2%. Can you just comment on what you're seeing and then January delinquencies and expectations going forward?

Dan Perotti

Overall, we've seen our Ginnie Mae delinquency. It's fairly stable. There's always some amount of seasonality as you're going through the fourth quarter, I'm especially in the Ginnie Mae book will have an uptick toward December. And usually there's a pretty meaningful downtick in there in February and March as folks receive their income tax refunds.
And so we saw a bit of that overall on the portfolio overall in the portfolio, the delinquencies have been pretty contained they were through the through the whole year. We publish our overall delinquency profile for the MSRI. in the deck were up slightly from the prior year in terms of delinquencies overall delinquencies.
And so it's not something that we see as a significant issue. I agree that in certain pockets there has been there has been some pressure and we have seen you have some in certain areas, some delinquencies uptick similarly that we've seen probably better than expected performance in others. It may be the other piece that I'd mention which is where the delinquencies impact us.
And you may have seen that our servicing advances increase and quarter over quarter really that was not driven very significantly by delinquencies. That was really driven by us seasonal property tax payments. A lot of that increase was really from current borrowers where just property values have appreciated pretty significantly over the past few years.
Property tax amounts change that impacts the amount that's being escrowed. And there may be a shortage for us, as you know, a payment or two, while the S-curve analysis is redone and the yes, the escrow account sort of catches up. And if you actually look at our servicing advances year over year on day, they went down slightly year over year and in terms of looking at Q4 to Q4?
So yes, the summary of all that is just that delinquencies, we have not seen a significant shift. And our in terms of the how it impacts us on a cash basis has been very contained and very similar to last year.

Shana Xiao

Yes. Thank you, guys.

Operator

Thank you. Kevin Barker, Piper Sandler.

Kevin Barker

Very, thank you. I just wanted to follow up on the amortization, the realization of cash flows line that came down pretty meaningfully. And we also saw a prepay speeds drop quite a bit this quarter. Now, obviously, seasonality plays a big part in that, but you feel that the realization of cash flows remain fairly low as we go through first half of 2024, given the portfolio is producing very low prepay speed at this time.

Dan Perotti

And to your point, the realization of cash flows declined a bit going from Q3 to Q4 as interest rates were higher for most of the fourth quarter. And we have seen that a decent interest rate decline as we go into Q2 as we go into Q1, as I mentioned there, we have been seeing an uptick, some uptick in refinances.
And that will flow through to some uptick in prepayment speeds. And so I think we do expect some uptick in the realization of cash flows as we're going into the going into the first quarter. Given those dynamics. But overall, overall, we expect that there's a so the servicing portfolio and servicing profitability will still be significant and meaningful as we're going through a path through the next year.

Kevin Barker

And then could you just I'll provide maybe a little bit more depth on the demand for refinances versus closed end seconds. Now I realize that the demand is very low relative to the overall market, what it has been in the past, but just given your customer base and the servicing portfolio, are you seeing your customers start to lean in more towards refinances in less, yes, a month or two or are you seeing the closed end?
Second still now starting to garner more attention next book.

David Spector

As rates decline we do see more customer lean in and closed in seconds, primarily on the servicing that we that we added in 2023, and that's in that's high excuse me, pre 2023 for closed-end seconds on cash out, you know, I think look, I think I think that as rates as rates decline, you'll see more borrowers lead in to cash outs versus close-in seconds.
And as rates stay higher, they're going to be on leaning into closed-end seconds. It's for us, it's a product, it's the appropriate product mix that we have. As you know, it gives borrowers the opportunity to take cash out of their proper, take equity out of their property, typically to pay down lower cost debt on.
But we're in a position right now where the rallies in the marketplace still have, you know, have a not as meaningful effect on as the majority of the mortgage market is, as you know, in kind of 3% and 4% mortgages. And so I think that you will see an increased amount of rates.
You're going to see an increased amount of refits as rates do decline, but look the cause and second product for us has been great for Consumer Direct in terms of maintaining capacity in place. And we've launched it to our non port customers, which allows us to do profitable closed-end seconds and maintain capacity in place for when we do see a significant decline in rates in Consumer Direct. We've also introduced it in Broker Direct.
And I think that that's something that I'm encouraged. And look, the brokers have the need to maintain capacity just like we do in Consumer Direct that it's a it's a product that best serves their customers. It also adds to the broker direct value proposition that we have.
And I'd be remiss if I didn't bring up that, look, we're continuing to gain share and Broker Direct. And I think we're starting to see more and more brokers saying PennyMac has a strong alternative to the top two participants. And in addition, we know, we've invested a lot in technology to support the brokers.
And so I think that we would like what we're seeing and Broker Direct and margins are maintaining their levels and so on this is closed-end second versus cash out refi versus rate and term refi. We got it covered in our in our production divisions, and we're going to participate on it no matter what the what the what the rate environment is.

Dan Perotti

And just to add on or to what David said and to address one part of your question. So it was the refinances that we're seeing in that shift and that I talked about is really on shifting our really our resources to addressing rate and term refinances primarily and kick in at the end of Q4 and Q1 from as opposed to as opposed to the second liens.
Because that is really a more on a more profitable product for us and also something that isn't necessarily persistent depending on what happens to interest rates. And so to David's point to the extent interest rates go up, we have the second-lien products and the expanding breadth of that to be able to move into the extent interest rates decline.
We have the ability and the balance will be refinanced, but it wasn't it isn't a shift. I want to make sure that I didn't get the impression that we were shifting from second doing second liens to doing cash out refis. We didn't kind of cross over that threshold. It's really rate and term refinances are where we saw the uptick in Q4 and now in Q1.

Kevin Barker

Thanks again for taking my questions.

Dan Perotti

Thanks, Kevin.

Operator

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

David Spector

Thank you, and I want to thank everyone for joining us this afternoon and we went over a lot of good information and we had a we had what I felt was a really outstanding quarter. I want to thank everyone for the thoughtful questions. If anyone has any and if anyone has any additional questions, feel free to reach out to our Investor Relations team by e-mail or phone. And again, thank you all for joining the call.