So I think we'll get started here. So welcome everyone, to the twenty-second Annual Barclays Global Financial Services Conference. My name is Terry Ma. I'm the Consumer Finance Analyst at Barclays. I'm very pleased to have PennyMac Financial Services here with us. We're joined by David Spector, CEO, and Dan Perotti, CFO. So welcome, gentlemen.
Thank you, Terry, and thank you for having us here today. Thank you all for being in attendance. We appreciate it.
So with that short intro, let's just jump right into it. Maybe let's just start with a mark-to-market on the third quarter. Across the industry, it seems like volumes are trending in the right direction. So can you maybe just talk about the current market environment thus far and what that means for margins? Obviously, you guys put out your August update today, so thank you for that.
Well, thank you. And look, I think you can see in the August update that we are, you know, we're seeing an increase in production, and we're seeing it, you know, really in August, we saw it in broker direct and consumer direct. Correspondent lagged a little bit, but I expect to see an increase in, you know, September and October. But look, I think there's a lot of good robust activity out there. We've been operating the company, really for, you know, since we started to see rates increase, that through our correspondent network, we wanted to continue to bring on high rate mortgages. So when rates do decline, we have the opportunity to ease on that opportunity to refinance those mortgages.
As we sit here today, we have a very healthy portfolio of loans that are, you know, above 6% and 7%, about 20% of our portfolio. In our consumer direct channel, we're seeing increased activity there. That's with you know, the great story of the consumer direct increase in August; it's really a validation of a lot of the efficiency that we've been working to build into that channel. We're starting to now bring on additional capacity in our call center, as well as our fulfillment center, to be able to continue to grow the amount of consumer direct origination. I'm really encouraged by you know, the increase from $1.3 billion in July to $1.9 billion in August.
As you can do the math, you can start to see a run rate that's going to be meaningful, a meaningful increase versus what we saw in Q2 and Q1. On the broker direct side, we're continuing, you know, to grow share, and that's a great story of the work that we did there. We've spent a lot of time in, again, creating technology efficiencies and tools. And we saw a lot of market participants get out of broker when rates started to increase. So while we're the number three broker direct originator, our market share is, you know, between 4% and 5%, and I'm really encouraged that we're going to continue to see growth there as brokers look for alternatives to the top two market participants.
And in addition, we're seeing margins in broker really holding nicely. And, you know, obviously, as rates come down and capacity constraints begin to enter the equation, margins are going to continue to inch up a bit. And so I'm encouraged. I'm really encouraged on the broker side. On correspondent, we're the leading correspondent aggregator. We're going to remain the leading correspondent aggregator. And while we have market participants coming in and out, all that really does is create a little bit disruption on the margin front. And in this case, we have a market participant on the government side who's really pricing and participating in a really meaningful way.
But look, I think that you know, clearly we you know, we've done a you know, we're approaching $9 billion in correspondent originations, and that's going to continue to grow, and we're going to continue to get our share back up to where it was. And suffice it to say, you can see just the sheer quantum of new servicing we bring on every month, which really allows us to just get current non-agency production. As rates decline, we'll have the refinance opportunity on that production as well.
Great. Maybe, just to take a step back, I think the big question is, you know, maybe what the 2025 origination market looks like. I think Fannie and MBA are at about $1.7 trillion for this year and $2.1 trillion for 2025. What's PFSI's view?
Let's say, look, I think we share the $2.1 trillion view. That's how we're composing our strategic plans as we speak, and that's a good number to go in at. I tend to, you know, see that after the election, we'll see what happens with rates, but if they continue to bring them down, obviously that will go up. You know, one of the big stories in terms of market size, and I caution everyone to think about this, is the fact that when you're looking at comparable periods, you have to take into account that the average balance has gone up considerably. And so in many cases, on a unit's basis, a more normalized mortgage market is closer to 2.3-2.4.
And that's something that I see us getting back up to, you know, if not, you know, in 2025, and, you know, in 2026. But that's, that's on a more... That's a more normalized way that we think about things.
Got it. Maybe this is a good time to just pause for the first audience response question. Can you cue that up? Relative to Fannie and MBA forecast for total originations of 1.7 trillion in 2024 and 2.1 trillion in 2025, what do you expect 2025 total market mortgage originations to be?
Didn't know it was popcorn, sorry.
So 43% expect $2-$2.2 trillion, and then fairly evenly split between the other three options. So everyone's kind of agreeing with your view. So you spoke a little bit on the last earnings call about how you have three classes of loan officers in queue already. So it seems like you're gearing up for a rebound refi. Can you maybe just tell us more about where you stand in terms of capacity and what you're seeing across the industry?
Yeah. So look, as we look at our organization and our servicing portfolio, clearly, recapture is a key component. We've had this balanced business model, and it's really unique in the industry, where we invest in servicing, and we've been the beneficiaries of having a really solid servicing investment throughout our history. But really, over the last three years, if you look at the servicing performance, that's been a meaningful driver of earnings for the organization. Now that we're starting to see rates decline, we want to then really focus on the other part of the balance, and that is the production side.
Clearly, correspondent, you know, feeds the servicing portfolio, but really, the recapture of this, of the economics associated with refinance is something that we want to get the lion's share of. That's, you know, there are a few different avenues that we're going down, and that is, you know, obviously, we want to be more efficient. I'm really pleased that the increase in production that we saw, really in July and August, was the result of us being more efficient. Now that we're starting to bring on more loan officers, I expect us to get even more of the opportunity.
And look, some of this is a little bit of timing on our part that, you know, obviously, the Fed, we believe, is going to decrease rates in September, whether it's a, you know, I personally think it's a quarter, but whether it's a quarter or a half, it's. They're going to come down. I think after the election, you may, you know, I kind of think you'll see additional Fed activity, but I think we need to have the capacity in place. And further to that point, you know, I think on the hedge front, we all know the story in terms of, you know, we have a lot of current note rate servicing. That's a lot of volatility.
The cost of hedging continues to remain high, albeit we're starting to see it, you know, get a little bit of relief with the yield curve getting a little bit more normalized. But the cost to keep the additional capacity in place is, to me, more than justifiable versus the cost of the hedge and integrate it into the hedge expense, or how we think about hedging, is something that, you know, we're doing organizationally.
So whether it's, you know, the additional 200 call center people we're going to add, or additional, call it, you know, 200 to 400 loan fulfillment people we're going to add, I think it's going to be really important as we see rates decline, that we're able to get the lion's share of the recapture. The final piece I just want to highlight for people is that, you know, in a more normalized mortgage environment, rates come down, rates go up. It's not like 2020, 2021, and 2022, where they just went to zero, basically. And so, you know, with that volatility in rates and with that volatility in refinance opportunities, you have to have the capacity in place.
That's the final piece that's driving the decision to really focus on having even more capacity than we perhaps have historically had.
I think another piece to put in context, too, is just given where we've come from, right? We go back a couple of months when interest rates were near 7%. Basically, none of the portfolio or even the mortgage universe was refinanceable at all. So now we've moved, you know, down to 6.5%, a bit below 6.5%. The percentage of our portfolio, as well as the overall mortgage universe, that is refinanceable, still well below averages, but is multiples of what it was a few months ago. So adding this capacity on and, you know, we take down another leg of a 25-50 basis points, that percentage of our portfolio continues to multiply, to actually be multiples of what it is today.
So adding these loan officers in this capacity from, you know, where we've come from is, you know, the amount that's there to be recaptured is a meaningful distance from what we've been doing up to this point.
Got it. That's helpful. Can you maybe just provide more color on how you've constructed the portfolio? You're a top producer of mortgage loans. You have a large portfolio with more current note rate mortgages of loans between 6.5% and 7.5%. So maybe just talk about that strategy.
Sure, so as David mentioned, we're the largest correspondent aggregator, and it's really been our thought and strategy over the past few years that we have a significant amount of our servicing portfolio already at low note rates, those have fairly stable prepayment speeds that are less likely to feed into our recapture, into our consumer direct channel, so really, we've been focused on adding loans at the higher end of mortgage rates through our correspondent channel. Our correspondent channel is generally going to be at current market rate loans that we're adding to the portfolio, and so as we've been doing that over the past few years, as David mentioned, the percentage of our portfolio that's above 6% is around 20% of our total portfolio, with another 10% from 5%-6%.
The idea behind that is that it both will generate current period income through our servicing portfolio, continue to add scale on the servicing platform, but then as interest rates decrease, it gives us a significant opportunity to be able to recapture those borrowers. We have all the information on the borrowers. We're able to reach out and market to them through our consumer direct channel, bring them back into the portfolio, and gain the origination income through the consumer direct channel at a very efficient manner, given the leads that come in through that channel from that higher note rate section of the portfolio.
And that really is what we viewed as our best deployment of capital, bringing those MSRs in through the correspondent channel over the past few quarters, with a view to generating that origination income through the consumer direct channel as interest rates decline.
Got it. Maybe just to switch gears. Servicing has been really strong, particularly last quarter, with a margin at nine and a half basis points of UPB. Can you just talk about what this environment means for the servicing profitability and whether or not there's any additional upside to margins longer term?
As we look at servicing profitability currently, it has, it has been strong, strong recently. A lot of that has been driven by our efforts to drive down the servicing costs over time. That's both a function of the scale of the servicing portfolio, as I'd mentioned, as we continue to grow the overall platform, as well as our proprietary technology, SSE, which we've had in place since 2019, and that has given us further ability to scale and get more efficient, drive down overall costs. We've driven down the cost of servicing, the operational cost of servicing from ten basis points to actually under six basis points in this most recent quarter. A really significant decrease in our overall cost to service. We think that we have further ability to drive down those costs.
There are certain areas of our servicing operation that we think that we can continue to gain efficiencies, at least in a stable delinquency market, and so we think that we can continue to drive that spread higher. Additionally, if you look over the past few quarters, a component of our servicing income from early buyouts, where we take loans out of the portfolio that are delinquent in Ginnie Mae securitizations, get them to reperform and then redeliver those into securitizations. That's been a fairly small component of our income over the past few quarters, with interest rates being higher.
As interest rates decline, that opens up some additional opportunity there to be able to redeliver those loans, and so that could also be something that helps to drive that margin a bit wider as we go forward.
Look, I think I just want to add, this is one of the reasons that we are looking to get into subservicing. The ability to grow the platform and add capacity to that platform. Our existing servicing is going to be the beneficiary of that. One of the biggest issue of subservicers have is replenishment, like, you know, and so but we have that in place through our correspondent business and our other two direct lending channels. So really, I think that, you know, the market sees what we've seen as we've driven down costs 30% over the last five years in servicing, and that's a credit to the servicing team, as well as the technology that we've created.
And that technology has been incredibly valuable to this story of driving down costs to make servicing more profitable. And to Dan's point, I expect that organization to continue to drive down the costs of servicing. And look, there are things that when you're a servicer, you know, there are things you can't control, like you know, the macroeconomic environment. But even in that case, I look at the forbearance programs that FHA, VA, USDA, and Fannie and Freddie have come out with, and there's just a whole shelf of modification programs that are available to borrowers that are going to make the cost of servicing less if we get into a period of distress.
That's what makes the servicing even more valuable, even before you get into the discussions of the capacity issues or the lack of supply in the marketplace. So, you know, I feel really confident about the servicing story, and I expect it to continue to shine, even as we see rates inch back down here.
Got it. So you've spoken a fair amount in the past about PFSI's technology investments. Could you just expand more on the SSE platform and explain why you think it could be a competitive advantage?
Look, I think as I jumped the gun on your question, but the SSE story is a great story for this company. It came with some unfortunate outcomes in terms of, you know, sort of, the legal and arbitration issues that we face with. But having said that, we have this really beautiful technology that's performing, that has performed great for us. You saw it during COVID when we implemented the CARES Act very quickly, and over 90% of our borrowers were able to self-serve. If you had any doubt about the system, you can see that we've driven down the costs on the servicing side. So you've seen in just running the servicing platform, what we've done.
You then look at, you know, we just had an issue where the VA came out with a program that's really advantageous to servicers. It's called the VASP program. And we were able to implement it on August first, while the rest of the industry struggled to get it implemented by the end of the year. And there's real economics for us as a servicer to be able to implement that. And so what this all adds up to is, the marketplace can see that we have something that's a real competitive advantage for us, and that's why we do want to now get into subservicing, to be able to deliver that advantage, while obviously to get the economics associated with it.
And so we're going to be, you know, in Q4, we're looking to have a couple subservicing clients on our platform, that we look to grow and expand. It's going to be a co-branded product, but then sometime in mid-2025, we look to get a white label product out, where we can service in the name of others. And then we're going to see where else interest lies. But suffice it to say, we have something really, really valuable in the marketplace, and it's a marketplace that you know really lacks mortgage leadership running the technology, which is something that we have. We have the best servicing management team in the industry who understands how to service mortgages.
They understand workflow, they understand technology, and they understand driving down costs. And so I'm really enthusiastic about what we're going to move forward with as we move into 2024 and 2025 and beyond.
Helpful. I just wanted to touch on hedging for a moment. You touched on it already, but the hedging results have been a bit volatile, the last few quarters. Maybe just take a step back and talk about your approach to hedging and, what you seek to accomplish, what and how you seek to accomplish it.
With respect to hedging, you know, hedging is a practice that we've had in place really since the beginning of the company, and we think it's really important from a risk management point of view. To your point, philosophically, you know, what are we trying to do with the hedging? It's really reduce the risk to the book value of the company, the equity of the company, and changes that could result from that due to changes in the fair value of the MSR, as well as to have a more stable stream of earnings over time.
And so when we look at the risk of the mortgage servicing rights changes with respect to changes in interest rates, we don't necessarily seek to hedge out the entirety of the change in value of the MSR. At different points in time, we will have different, effectively, hedge ratios that we seek to achieve on the change in value of the MSR, and that's really driven by what we see as the change or the short-term upside from production. So we won't necessarily hedge. Hedging has a cost.
That's something that we focus on, on a daily basis, around what is it that we're willing to spend in terms of the cost of the hedge, for that, you know, protection from the change in rates and with respect to the change in the value of the MSR. You know, what are we willing to spend there, versus the risk that we're willing to take from a book value perspective on the MSR and the upside that we see, or downside in the case that interest rates increase, in terms of our production earnings in the short term. So when interest rates were lower back, you know, pre-pandemic or during the pandemic, typically, we used a hedge ratio that was closer to 60% or 70%.
As interest rates increased, you know, in 2022 and through 2023, and a lot of this year, where there was not as much of a significant upside to interest rates decreasing, there just weren't that many loans that were close to being in the money. We were attempting to hedge close to a 100% hedge ratio. Talked about on the last earnings call that we moved that down to 80%-90% in the most recent quarter.
And we would probably expect that to decrease a little bit as we get more and more loans that are in the money, where we see the upside from production as we decline, or the incremental upside in the short term more or less offsetting some of the losses that we might see from a change in value of the MSR. And so that's how we really think about it, you know, think about it philosophically.
To your point, around the last few quarters, as we've been attempting to hedge around 100%, as well as with hedge costs being fairly high, David mentioned, with the yield curve being inverted, drives up hedge costs, due to the fact that the carry on a lot of the instruments that we use that are not options, is minimized, or in some cases, even negative. As well as with option volatility being very high in the market, interest rates being uncertain, overall cost of options has been elevated, and that's another component that we use in our hedging.
And so with both of those being somewhat more difficult, there's certain exposures that we've you know opened up in order to maintain a somewhat stable level of hedging costs in the past couple of quarters that led to some of the volatility that you mentioned. As the yield curve begins to de-invert, that should drive our hedging costs down to more normalized levels, although the short rate's still pretty high. That's driving continues to keep the hedge costs somewhat elevated in the current period. But as the yield curve overall, and the short end of the yield curve comes down, we'd expect those hedging costs to become more normalized.
As we get further down in interest rates and see greater variation, or expect greater variation in our production income as interest rates move up and down, we also expect our hedge ratio to come down somewhat, compared to where we had been targeting in the past few quarters.
Got it. Helpful color. Maybe just to tie everything together, ROE has been pretty strong, and it seems like you're positioned well to generate healthy returns in either a higher for longer environment or a more normalized origination market. You noted your operating ROE should remain in the mid-teens in the current environment and potentially expand to the high teens once the mortgage market grows. I guess, do you feel, do you still feel pretty good about that range? And based on what you're seeing in the third quarter, what should investors expect?
The operating ROEs, I would still say, are guidance or our view is very consistent with what we talked about in the second quarter or in second quarter earnings, as interest rates had begun to decline. So as interest rates decline and production volumes and income increases, that helps to drive up that operating ROE. And versus where we had been in the beginning of the year, assuming interest rates stay at these levels and production similar to what we've seen in the past couple of months in our release today, we would expect that to have upward pressure on our ROEs, probably to the higher end of the range that you know that I talked about on the call.
Really, higher teens are operating ROEs as we're going through the rest of the year.
Helpful. We're going to switch gears and maybe just touch on PMT, for a few questions. Can you just remind everyone about the significance of PMT, in the PennyMac complex, and maybe just tell us a little bit more about the investment portfolio?
Yeah, so look, I think we have a really unique structure with PMT and a really advantageous structure, as we're going to get to the following questions, I suspect. Look, PMT is an investment vehicle that we've had since 2009, and it operates really with three different strategies. The first one is in the correspondent business, so PMT buys, you know, various amounts of conventional loans that it securitizes and retains the MSRs. And in buying those loans, it relies on PFSI for fulfillment capabilities. And PFSI uses its underwriting and due diligence capabilities to diligence all the loans before they get securitized, then in the securitization process, what PMT ends up with is MSRs, and those are in the interest rate-sensitive strategies of PMT.
And those are and in addition to MSRs, PMT also has agency MBS that it holds for hedging the MSRs, but also as a requirement for being a REIT. And so it's that agency MBS position with MSRs that really composes the, you know, the lion's share of the interest rate-sensitive strategies. The third area that PMT operates is in its credit strategies, and that's where historically, you know, for the first X amount of years, or call it five years, that PMT really operated and was really focused on distressed mortgage assets. And then in 2015, it started investing in lender credit risk transfers with the agencies, primarily Fannie Mae.
In that process, it ended up with a CRT investment that it still holds a good amount of equity against it today. But, you know, the remaining CRT that PMT has has very low LTVs, about 50% LTV. It's been a terrific investment for PMT, and it's going to be winding down over the next, call it one to five, six years. In the meantime, you know, PMT also in its credit-sensitive strategies has been buying, you know, other CRT issued by Fannie Mae and Freddie Mac through its CAS and STACR originations program, and then from time to time, sells those when it doesn't meet PMT's required return.
I think that's, you know, there's the way I think about PMT is there's organic creation, okay? That's, that's, you know, its own CRT, its own MSRs. And then there's opportunistic investing that takes place when there's opportunities in the marketplace with credit spread widening or yields that, you know, exceed, you know, our required return to meet, you know, the, the, what we think about a 10% net dividend PMT that will buy those securities and from time to time, sell those securities. But I think, you know, PMT is well positioned in the fact that, you know, between the two companies, there's $100 billion of originations every year, and the ability to seize on opportunities in the marketplace, you know, is really, really valuable.
Got it. And, can you maybe just touch on the dividend? PMT's dividend was $0.40 a quarter, with earnings power a little lower in the mid thirties. So how should investors take the gap there?
Sure. So, you know, we've maintained the dividend at PMT at around $0.40, and part of our philosophy around the dividend at PMT is dividend stability. So to the extent that we see the opportunity for PMT's run rate earnings to increase back to or above that $0.40 level, you know, we're not necessarily going to adjust it on a quarter-to-quarter basis. When we look out further, and this gets back to some of the dynamics that we had talked about recently, but in the interest rate sensitive strategy, which is the strategy that has the largest amount of equity allocated to it currently, it's the earnings in that strategy have been somewhat contained over the past few quarters due to the inversion of the yield curve.
So, generally speaking, we finance with floating rate debt in that strategy, secured by the assets. And then the assets are generally longer-term assets, mortgage servicing rights, mortgage-backed securities that have yields which we mark to market on a quarterly basis, that are based off of a longer part of the curve. And so that the inversion of the curve has really driven sort of a spread compression in that strategy and contained the earnings from that strategy. As we expect the Fed to decrease rates as we're going forward through the next several quarters, and for the yield curve to normalize, we expect the earnings capacity of that strategy to increase, which should drive up the overall earnings potential of the entity back toward, or above that dividend level.
And that's why we feel comfortable maintaining and have felt comfortable maintaining the dividend at a $0.40 level, despite the fact that our near-term expectation is a bit lower than that.
I would just add, in the medium and long term, I'm really encouraged and enthusiastic about the ability to securitize other products like, you know, investor loans and second homes that would otherwise be deliverable to the agencies, and be able to take the subordinate bonds and be able to keep those as credit investments in PMT. I think that, you know, there is a plausible scenario where guarantee fees could continue to go up to drive additional production out of the agencies into the private label market. PMT is going to be a leading securitizer in that market to retain portfolio investments in sub bonds. That's just another, if you think about it, it's not that dissimilar from the CRT work that we did, you know, between twenty fifteen and twenty twenty.
There's also, you know, a potential opportunity to securitize closed-end seconds in jumbo loans. But our closed-end second business in PFSI, we're doing about, you know, call it around $100-$125 million a month. And right now, you know, we're looking at securitization that, you know, it could be a potential opportunity where PMT retains, again, the credit investments, as part of its credit sensitive strategies. And on the jumbo loan front, look, we're doing a good amount of jumbo loan originations in our broker direct channel, as well as increasing amounts in consumer direct and correspondent. And while those loans are being sold on a whole loan basis, we're beginning to see a path that we can securitize those as well.
I think that, you know, our first securitization of investor and second homes will happen sometime in or close to Q4, and we're going to look to do another one. I really am encouraged by the, you know, the organization's responsiveness to a securitization program and doing increasing amounts of securitizations is something that is a key strategic initiative for PMT in twenty twenty-five and beyond.
Great. I think we'll just queue up the last audience response question first before we go to questions. Over the next year, would you expect your position in PFSI to increase, to decrease, or to stay the same? So 43% increase, 36% stay the same, and then 21% decrease. Pretty bullish. So I'll turn it over to the audience for questions, if there are any. We have one up front here.
Thank you. So you made a comment earlier, the forbearance programs are very helpful now as compared to the past. Can you just simplify, like, why is that so helpful for your servicing costs? How much of, say, the recession impact mitigated by these new? Thanks.
So look, I think in the absence of forbearance programs, your outcomes get pretty binary. They get binary to the borrower, finds new employment or new additional income to bring the loan current, or you're marching down the road to foreclosure and property disposition. The work involved in taking a borrower through foreclosure, putting aside the borrower, you know, issues and tolls, is really expensive. It starts with there's a series of requirements that you have to go through in terms of notifying not only the borrower, but also the agency, FHA, VA, USDA, and you have to meet certain requirements and timelines, and if you don't, there's a heavy cost there. Then in terms of the property disposition, there are the cost to service goes up multiples.
And it's while I believe in our system, we've built in a tremendous amount of scale benefits for our default servicing, it still can't take away from the fact that, for example, on VA loans, if a property gets sold at a value you know that far exceeds the guarantee, the servicer takes the loss, otherwise known as the VA no-bid risk. And so that's one of the benefits of this new VASP program, and the fact that if you can get the borrower modified, you can then sell that loan to the VA. And for a borrower that's been through distress, obviously, you know, the probability of redefault is probably a little bit higher than on a regular paying mortgage. You move that out of your servicing portfolio.
In addition, that VA no-bid risk was priced into your valuation, so you get the benefit pickup there as well. So it's just a very labor-intensive business, primarily as a result of the fact you're having to deal with borrowers directly, and it's a very difficult business to drive to self-serve, like you have on regular way servicing.
I think the other piece, too, is that a lot of these methods for modifications or forbearance have, at this point, from the financial crisis and the pandemic now been somewhat battle tested. And so, you know, we, as servicers and the industry, have been able to see what works and what doesn't, and a lot of the things that do work have been adopted. And so if you, you know, versus going back 10 or 15 years, and, you know, coming out of the financial crisis, there are a lot more tools that have been battle tested around minimizing the disruption to the borrower, getting them back to current. And as David said, that's from a servicing cost point of view, sort of paramount in terms of keeping our overall servicing profitability high.
Look, when you talk to DC, when I'm in DC and you're talking to legislators, there's consensus that keeping borrowers in their homes is a top priority. One of the, you know, I think as we look back to the great financial crisis, there wasn't enough focus given to borrower programs and modifications like we have now.
If you look at the CARES Act, in terms of the outcome there, in terms of, you know, giving borrowers modifications or forbearance by just asking for it, and you look at the performance that took place, you know, the whole notion of strategic default or gaming the system, yeah, on the extreme margins there, there was cases of that, but not the systemic, you know, gaming of the system that some perhaps would have assumed took place. Suffice it to say, keeping borrowers in their homes is something that crosses party lines. And that's why I say that, you know, these modification programs are the most beneficial they've ever been.
Look, if we get into a unique situation, suffice it to say, I got to imagine that DC, regardless of whether it's a Republican or Democrat, is going to react to keep borrowers in their homes. We probably have time for one more question, if there is one. We have one in the middle here.
Hi, can you talk about what kind of recapture rates you're targeting for the borrowers in that six to seven rate range? And, you know, if there's any evidence that points to-
Yeah. So, look, I think that my kind of flip answer is as high as possible. But I think one of the things, you know, when I think back to the peak of refinance in 2021 and 2022, on the government side, we got about 50% recapture rates. And by the way, there's a lot of different recapture rates that are being bandied about the industry. I'm kind of old school in how I think about it. My denominator is total pay-offs, my numerator is loans that we originated. So that's my definition of recapture, and I would highly encourage you to ask people what theirs is when they throw the numbers out to you.
But for government, we've got about 50%, and I think that's a really, really high recapture rate. Conventional, we got as high as 30%, and that's the highest that I'd ever seen in my career. And I would. But I want higher, and that's what I tell our people every day. But that's, those are kind of the numbers that are stuck in my head under my definition.