PennyMac Financial Services, Inc. (PMT) Earnings Call Transcript & Summary

Hello, everyone, and welcome to our Investor Day presentation for both PennyMac Financial and PennyMac Mortgage Investment Trust. I'm Kevin Chamberlain, Executive Vice President of Investor Relations, and I'll be your host today. We're excited that you're here with us. Over the next few hours, you'll hear from a wide range of executives about the strategy and future of the companies. Before we begin, let me remind you that our discussions contain forward-looking statements that are subject to the risks identified on Slide 2 of the accompanying presentation that could cause our actual results to differ materially. I would also like to mention that you can submit questions beginning now and we will collect them for the Q&A sessions, which will occur throughout the day. David Spector, Chairman and Chief Executive Officer; and Andy Chang, Chief Operating Officer, will be your first presenters. They'll provide an overview of both companies and outline our strategies for growth. But before we bring David out to start the discussion, we have a video that will set the stage for the day, part history and part vision going forward. We think you'll enjoy it. [Presentation]

Again, thanks so much for joining us, and let's get started. And now, here's David.

Welcome, everyone, to our 2021 Investor Day, and thank you for your time. As Kevin said, over the next 3 hours, we're going to take you through the strategies, vision and goals of our various businesses and give you a better understanding of why PennyMac is well positioned for the changing landscape in the mortgage market that is quickly approaching. PennyMac has been a leader in the U.S. mortgage market for the last 14 years and has developed a mortgage banking franchise positioned for substantial growth. Over that time, we have carefully and organically built our balanced business model that has propelled us to become the second largest producer of residential mortgage loans and the sixth largest servicer in the country. The scale and size of both our Production and Servicing businesses provide us balance and stability and afford us the opportunity to earn superior returns regardless of the market environment we are in. In addition, there are substantial opportunities to continue growing our Production businesses. We continue to invest heavily in technology and marketing for our direct lending channels, driving our market shares higher. These channels benefit from the mature and scaled infrastructure that was built to support our correspondent business and continues to grow in efficiency and scale. Our Servicing portfolio, with over 2 million customers, also serves our consumer direct channel, providing our customers with the ability to refinance their existing loan or obtain a new purchase money loan. Our proprietary and in-house developed Servicing System allows us to create customized touch points with our customers, connecting with them in multiple ways. This capability allows for greater efficiencies and flexibility with our customers as was evident with our quick and efficient implementation of the CARES Act. Not only do we grant forbearances more quickly and frequently than many other servicers, but we also have some of the best resolution rates in the industry. As Steve Bailey, our Chief Servicing Officer, will outline later in his presentation, we were able to rapidly implement changes, allowing the vast majority of our servicing customers to enter into forbearance requests through our automated systems. We also continue to grow our mature correspondent channel where we are the #1 producer in the nation. As we look ahead, we believe the current changes to the GSE's PSPAs and lower gain-on-sale margins, which increases the liquidity required for smaller originators to securitize on their own, will drive increased volume to the correspondent channel as those clients adjust to these changes. Doug Jones, our President and Chief Mortgage Banking Officer and the mortgage banking leadership team, will go over these drivers in more detail a little later on in the presentation. Another competitive advantage for PennyMac is PFSI's synergistic partnership with PMT. PMT is a leading mortgage REIT with a nearly 12-year track record of investing in various mortgage-related assets while delivering excellent returns to shareholders. PMT is perhaps the only mortgage REIT that was set up successfully to navigate the market dislocations from COVID in 2020. PMT's current strategies of correspondent production and mortgage servicing rights, combined with legacy credit risk transfer investments, provides PMT with continued opportunity to generate attractive returns on equity. As we look ahead, we believe there's an opportunity for PMT to invest in the subordinated bonds of private label securitizations. Vandy Fartaj, PMT's Chief Investment Officer, will discuss the outlook for PMT in a later session. As you can see, we have built a mortgage banking franchise around a balanced business model with unmatched management expertise and a key synergistic partnership. All of these factors have led to outsized total returns that have beaten our key benchmarks since our inception. We have achieved strong, consistent and stable returns for investors in both companies through our consistent execution. This ability was on full display in 2020 as the pandemic caused many in the mortgage industry to slow operations, halt operations or even sell assets to address liquidity concerns. PFSI was in the market every single day, funding loans and providing our clients and customers the necessary liquidity that they needed to keep their operations going. PMT continued to invest in conventional correspondent production and MSRs every day and did not have to sell assets to address any liquidity issues. These results are attributable to the strong management experience, our best-in-class technology and our sophisticated risk and capital management ingrained in each company. Both entities have also delivered returns generated through varying market environments in different market sizes. And while these markets may fluctuate from year to year, the addressable market in which PennyMac participates in is very large. Mortgage debt is the largest segment of U.S. consumer debt and has grown steadily from 2014 to almost $12 trillion today. Mortgage debt also represents the consumer's largest life transaction, the purchase of a home. We feel honored to serve our customers and help them achieve the goal of homeownership as we know how truly important and life-changing that can be. Mortgage debt can also represent the refinancing of prior mortgage debt, which can also be meaningful to the consumer in helping them to save money or access equity from the value of their home. While mortgage refinance demand will fluctuate as rates rise and fall, what has remained steady over the last decade has been the strength and stable growth of the purchase market. Purchase originations have grown significantly and are expected to continue to grow as homeownership demand grows. Estimates for 2021 and 2022 purchase originations are forecasted to be $1.7 trillion each year, up 21% from 2020 levels, with PennyMac consistently over-indexing on the purchase market compared to the rest of the industry, we believe we are well positioned to continue to increase market share, which we have done consistently across all of our channels over the past several years. Our correspondent production and loan servicing businesses are our most mature businesses and provide stability and strength for our growing direct lending channels. While our correspondent and servicing businesses may be mature, we still expect to generate opportunities for growth in market share by taking advantage of the changing industry landscape I discussed earlier, and that growth will help drive the other channels. For example, $20 billion of monthly purchases of closed loans from correspondent equates to roughly 80,000 potential leads being boarded every month. That alone provides an enormous advantage to our consumer direct channel, but that isn't our only growth strategy. As we look forward, we expect outsized market share growth in our consumer and broker direct channels fueled by initiatives with meaningful investments in technology and marketing. As I said earlier, Doug and the team will take you through these strategies in greater detail and demonstrate how we are able to leverage the scale and infrastructure developed over the years for our correspondent business to drive growth efficiently across all of our channels. Turning to risk management. PFSI has demonstrated management expertise over the last 14 years with significant board and management oversight. This expertise is essential to long-term success in mortgage banking and not easily replicable. Risk management is at the core of our operations with our consistent focus on 0 defect, a concept drilled into the company from Day 1 by our founder and my friend, the late Stan Kurland. Stan knew that any success we had could only be sustained over the long term by an unwavering commitment to risk management in everything we do, and this was battle-tested and proven in 2020. As I stated earlier, we were in the market every single day pricing and funding loans, providing liquidity, providing forbearance and modification support to our customers and clients. We have the infrastructure in place to quickly understand our liquidity and capital positions in real time, and the policies and practices put in place by our management committees successfully mitigated the risks we faced. Without our dedication to our risk management policies and disciplines, we would not have been able to accomplish all that we did in 2020 nor what we will accomplish in the future. These accomplishments are going to be generated through our substantial investments in technology and marketing. Technology investments will be essential to continue to lead in today's rapidly changing mortgage environment, while our marketing strategies are aimed at driving new customer growth across all channels. Since our founding in 2008, we have always focused on technology innovation to drive our growth, whether it was enhancing the loan boarding of bulk distressed loans when we first started out, to building a state-of-the-art servicing system that allowed us to customize borrower interaction and seamlessly handle issues caused by the COVID-19 pandemic, we have always had technology at the forefront of our growth. Today is no different. Technology creates operating scale, creates efficiency gains and creates improved risk governance and regulatory compliance. This will be absolutely crucial as we prepare for increased regulatory scrutiny across the nonbank mortgage landscape. For those who are not prepared and do not have the proper technology capabilities to quickly navigate the changing regulatory landscape, there are going to be some very hard lessons learned. Technology innovation has always been at the heart of what we do. And as we look forward, it will be no different. However, we are now going to be pairing our technology innovation with new marketing and branding initiatives to bring brand awareness and familiarity to accelerate our growth initiatives. Our aim is to establish a consistent marketing message to build brand strength and synergies across lines of businesses. Investments in both technology and marketing are at the forefront of our growth strategies and essential as we look forward. To date, our substantial technology investments have driven growth, efficiency and scale. We developed our proprietary servicing platform, SSE, which allows us to pinpoint customer touch points with our borrowers and quickly adapt and change to new rules and regulations. We developed MAC, POWER and P3, our production channel platforms that are unique and customized for each specific channel. We have streamlined our fulfillment workflows and developed proprietary pricing and loan bidding engines. All of our dedication and focus on technology innovation over our 14 years and our substantial investments have resulted in PennyMac's integrated and truly scalable platform that is well positioned to take us into the future. And while this technology innovation has helped to drive outstanding growth to date, it has been achieved with limited marketing and branding. We have relied on relationship building and developing our reputation over years to drive our growth, but we are now truly positioned to develop the branding of the company across all of the lines of business. In consumer direct, we're going to focus on lead generation strategies for new customer acquisition, as well as focus on portfolio retention of our over 2 million Servicing customers. In Broker Direct, we will continue to bring in brokers and build those relationships through optimizing the customer experience and increasing familiarity with our operating model. In correspondent, we will be leveraging our existing strength as a trusted partner to continue delivering high-touch customer service. The central tenet to all of these strategies and branding is about building relationships across our customers and clients to help them achieve their goals, while providing a best-in-class experience. And as we help our customers achieve their goals, we will achieve ours. So what does that exactly look like? Well, for PennyMac, success in the medium term means growing our share as the largest correspondent aggregator, becoming a top 3 broker direct lender, becoming a top 5 consumer direct lender and becoming a top 3 servicer. We will pursue these goals while maintaining our top priority of profitable growth while targeting a return on equity of 20%. We have achieved a great deal in our 14 years, but we are just getting started and the future definitely looks bright. So as we look beyond the medium term, we believe we are well positioned for continued success over the long term. For the next couple of hours, we will take you through our growth strategies for achieving that success, and you will get to meet the very heart of that strategy, which is our deep and experienced management team. Doug and the mortgage banking team will take you through our balanced business model, our innovative and technology capabilities and why that sets us apart from our competition. Jim Follette will then take you through our fulfillment capabilities, and how the scale and efficiency of our omnichannel back-office fulfillment division allows us to push our direct lending strategies while maintaining our low-cost structure. Vandy and Will, will then take you through our synergistic relationship with PMT, providing a unique permanent capital vehicle that expands PFSI's product offering while organically creating investment opportunities for PMT. And then Pam will take you through our strong and sophisticated capital structure that has been built over the past 14 years. Dan is then going to conclude our exciting day and go over what I just outlined regarding our medium-term outlook and what we project PFSI's performance will look like when we achieve our goals and enter a more normalized market environment. You're going to want to stick around for this as we will go into details for what that looks like from an earnings perspective. You will get a sense of the earnings power of our balanced business model and come to understand why I am so excited about the future. Now I'll turn it over to Andy to go over the current market and how we are positioned for success. And again, thank you for joining us today.

Thank you. Our business at PennyMac is U.S. residential mortgages, which, as David noted, is a massive financial market. Since we founded PennyMac in 2008, the mortgage industry has transformed significantly and so has its leading players. Banks accounted for the majority of the mortgage market coming out of the great financial crisis. But over the last decade, nonbank specialists have taken market share. They are now the majority of both the origination and servicing markets. What's driven the change? Leading nonbank companies like PennyMac have the focus, specialized expertise and dedicated resources, including developing new technology to provide better service in the mortgage business and succeed. Many banks have retreated from the mortgage business for reasons like increased regulation, higher capital requirements and a shift in focus to their core bank customers and businesses. These are trends that we don't expect to reverse, which is why looking forward, we don't expect the banks to grow as competitors in a meaningful way. Despite the growing share of nonbanks, the mortgage industry remains very fragmented. While PennyMac is the second largest lender in the U.S. by total production volume over the last year, we still account for only 5% of the origination market. The top 10 lenders account for 37% of the market, which is a lot smaller than you see in other areas of financial services. The market for mortgage servicing is less fragmented than in origination. However, the top 10 servicers still account for less than half the market. PennyMac is the sixth largest servicer in the country with just under 4% share. We believe that the mortgage industry is ripe for consolidation. The benefits of scale are substantial. And what's required for success, like major investments in technology, make it increasingly difficult for subscale players to survive and succeed. At PennyMac, we have gained market share over the years through the organic steady expansion of our businesses, and we expect to be one of the winners with more industry consolidation in the future. We are confident of this because PennyMac has proven that our business model is set up for long-term success. We have one of the largest businesses in the country in both Loan Production and Loan Servicing, which is different than most public mortgage companies. To be profitable across market cycles, we believe that this balance between Production and Servicing is critical. And when operating at scale with large volumes, Production and Servicing are complementary businesses that result in a natural flywheel. We are one of the largest producers of new loans delivered into securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Our diversified model sources production from 3 channels: correspondent, consumer direct and Broker Direct. Our #1 correspondent business and our growing broker business are especially well suited for purchase money loans in the origination market. We retain the mortgage servicing rights on all our high-quality Loan Production, which in turn drives growth of our Servicing portfolio. Our Servicing business provides recurring fee income captured over the life of the loans that we service. In the event of higher interest rates, the expected life of the loan increases which results in a more valuable MSR asset. These dynamics create a natural hedge to our production income, and the 2 million and growing customers in our Servicing business drive leads for new opportunity in our origination business. How do we execute on this model? You will hear Doug Jones and other members of our management team explain in the next session. The unique partnership between PFSI and PMT is another advantage that many of our competitors wish they had or have tried to emulate. PMT is in the mortgage REIT with a long track record of success in the public markets. So it's a tax-efficient company with a low cost of capital. And PMT's purpose is to make long-term investments in mortgage assets. As the mortgage markets evolve and PMT looks to invest in private label securitizations, PFSI has access to an expanded product offering for its origination business. PMT benefits from the unique capabilities of PFSI as its manager with an industry-leading operating platform and more than 6,000 employees. As the manager of PMT, PFSI benefits from steady recurring revenue in the form of fees for investment management, subservicing and fulfillment for correspondent production. So the relationship between PFSI and PMT is a truly synergistic one and provides significant advantages for both companies. Our unique business model and structure are key ingredients of the long track record of success that PennyMac has established in the public equity markets. We look at return on equity as the primary measure of our financial performance. In 8 years as a public company, PFSI has delivered across different market environments with our return on equity averaging 26%. We have achieved strong results in large origination markets and smaller ones in periods of decreasing interest rates and increasing rates and in years when the 10-year treasury yield reached 3% and above. In the past year, the mortgage industry has reported record results. But in 2018, many originators did not make money, including some of the largest originators in the country. In that difficult year for the industry, PFSI made a 13% return on equity, driven by increased profitability from our servicing business and the disciplined management we are known for. Another contributor to PennyMac's success is our orientation towards the more sustainable purchase money part of the origination market. The percentage of our production volume that is purchase versus refinance has consistently outperformed the mortgage market. We achieved this higher purchase mix in our correspondent channel where our customers tend to have long-standing relationships that drive purchase money volume, and we expect the focus towards purchase money loans to continue as we expand our broker channel business. I'd like to take a moment to talk about the dynamics driving the purchase market. As David noted earlier, purchase originations are expected to be $1.7 trillion this year and are growing. The growth is being driven on the demand side by demographics. And then came the pandemic, which has only increased the demand for single-family homes. In the last decade, the U.S. added nearly 11 million new households, yet the supply of housing has failed to keep up. The pace of new home construction is finally approaching historical levels and the millennial generation is beginning to buy their first homes. These long-term demographic trends are hard to ignore. We expect this growing purchase market to drive the mortgage origination market as we plan our business for the medium term and beyond. To sum it up, we believe that PennyMac is uniquely well positioned to continue our success despite the uncertainties in how the mortgage market will evolve. We believe that industry consolidation will continue and that PennyMac will benefit. We see a growing purchase origination market, which we over-index to in our production business. If mortgage rates increase over time, that benefits the value of our large Servicing business. We don't know what will happen to the roles of Fannie Mae and Freddie Mac, but recent changes favor a larger correspondent market and an increased role for PMT. And we believe that with our continued focus and investments in technology, innovation and meeting our customers' needs, PennyMac will be well positioned however the future evolves. With that, I'll turn it back to Kevin.

Thank you for that, Andy. In our next segment, you're going to hear specifics around our mortgage banking franchise and our plans for growth from Doug Jones, PFSI's President and Chief Mortgage Banking Officer. Following Doug, each of our production channel leaders, Scott Bridges, Kim Nichols and Abbie Tidmore will speak as well as the head of our fulfillment operations, Jim Follette. Steve Bailey, Head of Servicing Operations is going to wrap up this segment with our plans for becoming a top 3 servicer. Take it away, Doug.

Thank you, Kevin. Picking up from where David left off, I'm excited to introduce you to my very technical and talented team who run our top line revenue units on a day-to-day basis. I think you will see why I'm highly confident in our ability to grow across the aspects of our business and hit the goals we have laid out for you today. As David noted, our focus has always been to organically build our businesses utilizing innovative and very detailed workflows. This is executed via our expansive and integrated 2021 technology platform. We believe this drives required customer experience in all of our businesses. It also builds efficiency and operational scale as we build the modern independent mortgage bank. That focus remains, and we are directing our resources to building and growing our direct lending businesses, all while continuing to leverage the foundational businesses we have in correspondent production and mortgage loan servicing. Our model of growth begins with our correspondent production and our loan servicing portfolio. These 2 are foundational mortgage banking businesses, which have fueled our steady market share growth over time. We have made significant investments to develop these 2 businesses throughout PennyMac's history, resulting in our industry-leading positions. Our correspondent model provides us with the ability to acquire loans in large numbers at very compelling returns. The deep relationships we have with correspondent lenders across the country, our capital markets infrastructure, our best-in-class mortgage fulfillment teams and industry-leading technology that incorporates our customer and investor requirements. These are the keys to maintaining our leadership position and driving continued growth. Our customers excel at originating purchase mortgage loans giving us an advantage in rising rate environments. Abbie Tidmore will highlight the strategy and evolving market opportunities that make us very bullish on this business looking ahead. Our Servicing business is operated on our organically built SSE platform, as David highlighted. Steve Bailey will elaborate on how we leveraged our proprietary servicing system to quickly implement automated self-service capabilities for borrowers to enter COVID forbearance programs to ease their financial burden as the CARES Act rolled out. It's also assisting us to help those same borrowers emerge from forbearance at a faster rate than the rest of the industry. We continue to evolve this platform with the customer relationship always at the forefront. Customer satisfaction means they are more likely to look to PennyMac for their next mortgage and retaining that customer for life is our objective. Our consumer direct lending group, led by Scott Bridges, has been an emerging strength of our platform, and we continue to believe it will get even stronger with the investments we are making. We have set ourselves a goal of becoming the #5 ranked consumer direct lender in the country, up from #18. We believe #5 is absolutely achievable, and Scott will go through our strategies to get there in a moment. We are executing this channel production very similar to how we built the correspondent production and servicing businesses. It's all about disciplined blocking and tackling, and we really like how our relatively young model is executing. Our broker direct lending division is our newest and fastest-growing production channel. Kim Nichols will expand on our strategies for this channel. I'll note that we are already ranked at #7. We believe getting to #3 is a very realistic goal over the medium-term horizon. The growth in this channel is driven by our talented people and technology investments that allow our broker customers to efficiently grow their business with us and leverage our strong platform. As in consumer direct lending, our technical capabilities to improve the customer experience is accelerating every month. Our production channels each provide us with unique and broad access to the overall mortgage market. We are supporting these channels with marketing investments that will leverage the strength of our brand to drive new customer growth. Additionally, our growth is supported by our robust end-to-end fulfillment operation that takes in large volumes of loans from all 3 production channels. The platform is a key contributor to our current and future success as we can manage our resources more effectively than anyone in the industry. Jim Follette will take you through the highlights of this industry-leading platform. I'd like to close my section of the presentation with a focus on our technology development and the strong investments we have made and continue to make. PennyMac has over 1,000 teammates that are 100% focused on innovative development to continue to drive operating scale, customer-centric capabilities and efficiencies to our production and servicing platforms. Today, the majority of this investment is directed towards the direct lending businesses, in many ways, replicating the success we've already enjoyed with the correspondent and servicing platforms. We have the best correspondent servicing platforms in the industry. Business results and customer satisfaction scores prove this out every month. Our platforms use proprietary technology integrated with best-in-class vendor applications. Technology is rapidly evolving, and the mortgage industry is ripe for automation and change. Many of these requirements are being disrupted in a positive way by fintech startups. However, we believe the optimal platform delivering the highest levels of customer satisfaction and operational efficiency will be organic with vendor applications to supplement in a targeted process. We are focused on building the best integrated platform available to drive our market share and future success, and we are confident in our ability based upon our already strong and innovative platforms. Our vision incorporates the best operating platform with state-of-the-art mortgage technology. Before I turn it over to Scott, I'd just like to end by saying that I've never been more confident in our team and our technology. And I'm willing to put PennyMac up against anyone in the industry. While I respect our competitors, there's no one out there that can match our management team, our operations, our business model or our integrated technology solutions. Now I'd like to turn it over to Scott Bridges to take you through our consumer direct lending channel. Scott, over to you.

Thank you, Doug. Every day, our analytics and data science teams are driven to maximize the recapture of our portfolio. These teams refresh our portfolio of 2 million customers to ensure we speak to customers that have the highest propensity to refinance or get preapproved to purchase a new home that day. Those selected loans are posted real time into our contact management system to ensure we connect with our customers with the highest and best possible loan options for their needs. We also actively monitor our portfolio for signal events so that we can proactively reach out to our customers the day of a triggering event and retain them as PennyMac customers. In our environment, when a lead comes into the call center, the loan officer immediately receives a screen pop that gives critical information such as the marketing campaign it came from, the signal event that may have occurred for that customer, the product type the current loan is in and other key data points that allow the LO to have critical knowledge on how to structure the new loan program right off the bat. We have a robust and competitive product menu with flexible amortization terms, which allows our customers to customize their new term whether they desire a standard 30-year term or perhaps a unique term of any duration, such as 22 years, 19 years, 17 years, the customer gets to choose. Our leadership teams are 100% focused on their channel, so we have independent leaders that oversee our port refinance, purchase and new customer acquisition channels. As a matter of daily routine, the leadership team manages performance of staff through a reporting structure that captures the critical KPIs of origination. The reporting discipline is a critical part of consumer direct success. The rigor around managing data each day allows for laser-like focus and the optimal steps to create success in each respective area. These include data science analytics for that specific business, creating specific predictive dialing campaigns and cadences as well as on-site channel-specific training to ensure sales acumen and performance is constantly measured and improving. The proof is in the pudding. And in 2021, with higher rates than 2020, we've seen our portfolio teams have higher daily lock rates per loan officer. This is largely unheard of in the industry and is a testament to our heavy investment in data science and machine learning to ensure our LOs are speaking to the right customers every day. Our new customer acquisition channel is a rapidly growing division with new call centers in Phoenix, Nashville and Southern California. Presently, we generate twice the web traffic of a major top competitor and are quickly emerging as a top industry participant with lead generation. We build sustainable and scalable partnerships with the industry's recognized lead generators and are on the path to being recognized as a top 3 lead buyer. Leads generated from outside our portfolio are expected to reach over 400,000 per month, leveraging key industry participants and media buys. Once received, all leads are prescreened to ensure maximum efficiency per loan officer. We have a multichannel lead generation platform that leverages affiliate marketing, paid search, programmatic media, display and native and social media to scale lead generation over time. Our operation pivots off a real-time command center and end-to-end analytics that drive efficient cost management and proactive lead optimization. Our environment involves real-time bidding on media buying and a CRM to increase conversion rates through customer journeys and optimize return on ad spend. Our singular and focused leadership and the new customer acquisition channel is critical to its growth. And with the marketing, data science and AI disciplines in place, we expect this division to be a substantial contributor to our consumer direct lending division. Every month between our existing and prospective customers, 2.2 million different people come to our website to pay their bills, review their loans, review interest rates, apply for a mortgage online, request payoffs and do other online activities. PennyMac is able to leverage that search information. And from a predictive behavior standpoint, use it for personalized marketing across all marketing mediums. For example, we have seen a 10x improvement in the effectiveness of our targeted e-mail campaigns over the last 4 quarters. And by harnessing this data, applying big data against it, we realized profound results. Our servicing team receives hundreds of thousands of calls per month that are identified by machine learning to be highly eligible for a refinance or purchase transaction and are live routed to dedicated refinance or dedicated purchase loan officers for the presentation of loan options. The synergies of having a servicing portfolio and consumer direct sales organization tied into one another provides material value for recapture and maximize loan offs or productivity as we're uniquely positioned to capture incremental sales opportunities at every customer touch point. Dedicated purchase teams receive leads daily that are identified through data analytics to have a high propensity to buy. We market to our customers in the consideration phase of buying, far in advance of the purchase decision, so we can be the first lender of choice for our customers. Our purchase teams are focused on preapproving existing and new customers for home purchases by becoming a trusted adviser throughout the purchase buying cycle. Purchase lead conversion is optimized through automated and scalable nurture campaigns, while targeted messaging to customers and realtors is used throughout the buying cycle. By using data science and predictive analytics, including multiple listing service, these alerts allow PennyMac to accurately predict future purchase activity for greater consumer engagement, conversion and portfolio retention. With dedicated sales and fulfillment for purchase, we deliver best-in-class execution to ensure an on-time close to all buyers. There is an exceptional growth plan for purchase, which is attainable and expected given the size of the expanding portfolio and incremental investment in data science and technology. We are implementing an exciting new digital application, which will provide a best-in-class borrower-facing online application and portal experience. The new platform will allow loan officers to take a full application with less time, send the online application to the customer to complete on their own or even copilot the consumer through the loan application, if necessary. A seamless integration of e-consent, Day 1 certainty, ability to pull their own credit and automated verification of assets where the customer can log in to their online banking and tie their accounts directly to the application highlight just a few of the transformational elements of the system upgrade. In sum, our loan officers will realize significant time savings per application, which allows for a reinvestment of found time into taking more calls, locking and funding more loans. At the same time, our customers win as the new digital application provides an easier and more intuitive application process that they can do with on their own time with or without a loan officer. Consumer direct sales is also moving to an updated and best-in-class CRM, which will provide customers an enhanced consumer experience from the very start of their interaction with PennyMac. This customer-centric approach will tie together all contacts and touches and house them in a single location to ensure an optimized customer and loan officer user experience. Dynamic conversational bullet points will be provided to the LOs on the phone to help the conversation down the right path. Additionally, this CRM solution will allow for a controlled process, which will drive scheduled follow-up routines leading to increased lead conversion and higher levels of portfolio retention. In total, with the implementation of these technologies underway, we plan for significant improvements in our operational efficiency and expect our loan times to match those with current industry leaders. Our path to becoming a top 5 retail originator is currently being realized every day by our centralized model that succeeds due to economies of scale, housing all sales staff in singular locations to allow for a laser-like focus on performance, having a dedicated QA staff to monitor call quality and performance, while using data analytics to provide highly convertible leads to our loan officers. Our loan officers are hired straight out of college or from the competitive open market and trained rigorously for 6 to 12 weeks. After training, they are fully sales ready on Day 1. This specialized training draws from our deep policies and procedures that have been built to ensure our loan officers are fully connected to our highly organized work environment. Our structure is built to succeed as we have the ability to quickly pivot and provide hands-on training for specialized programs, products or guideline changes while optimizing call routing, talk time, follow-up routines and customer experience. Distributed retail branch networks simply cannot compete. PennyMac's consumer direct lending channel has a history rich in growth and achievement with one of the strongest and deepest management teams in mortgage banking. By combining this with a material investment in data science, evolved database marketing, executing brand strategies for recapture growth and growth in technology advancements, CDL is strongly positioned for exponential growth. Due to these disciplines, we expect material gains in market share via an industry-leading portfolio retention structure and a rapidly growing new customer acquisition channel. Now I'll turn it over to Kim Nichols, Senior Managing Director and Head of our Broker Direct Lending Division.

Thank you, Scott. We opened our doors in the wholesale channel in 2018 and quickly established ourselves as a top 10 lender in the space. In 2020, PennyMac was the fastest-growing wholesale lender in the country according to Inside Mortgage Finance. Our full year market share in 2020 rose to 2.2%, and we experienced even more growth in Q1 of 2021, growing our share to 2.9%, and now PennyMac holds the #7 position in the wholesale channel. We continue to experience growth in our approved broker and nondelegated partners and now have nearly 2,000 approved partners in the wholesale channel. And efforts are underway to add even more partners as there are an estimated 14,000 licensed mortgage brokers in the U.S. With less than 15% of the country's brokers approved, we have tremendous upside potential in the growth of our partner base. The wholesale channel represents a significant growth opportunity in both the broker and nondelegated segments. Our mission is to help every broker and every loan officer within the channel grow their business. We do this by adding value with a great client experience, helpful technology, pricing structures and products. Our role is to help them grow. Since we are not in the distributed retail channel, we look to our wholesale channel partners to provide our reach into the purchase market. We know that we need to deliver tools, technology and a client experience that makes brokers competitive with scaled distributed retail platforms. To this end, PennyMac's POWER portal provides brokers with full transparency to their pipelines and loan status, 24/7. Our portal offers brokers self-serve functionality on several fronts, including the ability to lock loans into the portal until midnight, 7 days a week. Allowing our technology to drive self-serve functions wherever we can delivers flexibility, enabling our partners to transact whenever and wherever they want. This puts control of the transaction in the hands of the broker to deliver a great experience to their borrowers and referral partners while driving efficiency into the loan process. We leverage our proprietary pricing technology and granular pricing methodology to offer perfect rate and perfect term to our brokers. With Perfect Rate, brokers can offer their consumers a rate to the thousandth of a percent. And with Perfect Term, brokers have the ability to tailor the term of their loans to the exact month. The delivery of our powerful pricing capabilities into the broker channel is a result of the efforts of our product and pricing group. Speaking of which, the same team engineered OPTIMIZE, our best-x MI pricing tool. OPTIMIZE takes the guesswork out of mortgage insurance pricing and searches through multiple provider options to obtain the best quote available for our brokers' clients. Brokers gain access to some of the industry's most competitive MI rates through PennyMac with this tool. This creates an advantage for our broker partners, especially in today's competitive purchase market. Brokers really appreciate that we don't sell our servicing. Over the past couple of years, we are the only large wholesale lender who has not sold our servicing through a bulk servicing transfer. We offer great customer service to support our brokers' clients beyond the closing table. Our partners can feel confident that their borrowers will have a seamless post-close experience and are in good hands. Further, on PennyMac to PennyMac refinances, we allow netting of escrows. This results in lower closing costs for some borrowers and gives our brokers an advantage when the existing loan is serviced by PennyMac. We wrap all of our technology and tools with a great team of engaged people. We have a national sales team dedicated to our partners, and we care about our brokers business and referral partners as much as they do. Our partners really enjoy working with our knowledgeable, accessible and engaged account executives. The broker's single point of operational contact are broker operations managers, or BOMs, as we call them, deliver communication, support and pipeline surveillance that our broker partners truly appreciate. Together, the account executive and BOM teams provide a high level of engagement that our partners see as a value add. Above all else, we view this as a people and relationship business. Our team really gets that. It's part of our culture, and it's something that truly differentiates us from the competition. We have a fairly untapped opportunity in the nondelegated correspondent segment. While these are technically secondary market transactions, PennyMac reviews and underwrites the loans prior to closing and issues a clear to close. Our customers then close the loans in their own name and fund these onto their warehouse lines with the confidence that the loans can be sold to PennyMac. The nondelegated customer then redelivers the approved loan for purchase on our industry-leading correspondent platform. In this channel, we combine our technical expertise in the broker channel with our best-in-class correspondent acquisition process. We have just begun to expand our non-delegated service offering, and we'll have the opportunity to increase our relevance in this segment as we broaden the scope of these services. PennyMac is uniquely positioned to serve as a business partner across the mortgage professional continuum. From an independent mortgage broker to a large-scale mortgage banker, PennyMac can be a long-term partner for brokers and emerging bankers to support their business goals, whatever they may be. Our relationships can be, in the long term, an effective feeder system for a delegated correspondent channel. We have extreme focus on the client experience. We listen to the voice of the customer through feedback loops and are continuously iterating on process and technology enhancements based on the voice of the customer. Voice of the customer is the foundation off of which we are building a best-in-class client experience. While most of our focus is on actionable feedback. Here's some recent feedback from our broker partners. [Presentation]

As you can see, the themes of relationship and engagement truly resonate with our customers. So how will we achieve top 3 channel status? First, we will continue to grow our partner base. As we look out, we have an incredible opportunity in this growing channel. We've already reached #7 on an approved broker base that represents less than 15% of the universe of brokers. In addition, we will move forward with an expanded nondelegated service offering, which will in turn further support the growth of our nondelegated partner base and promote share growth in the emerging banker and transitioning broker segment. We continue to focus and deliver on the client experience, never forgetting that people, relationships and trust are the engines that drive lasting partnerships. And finally, and critical to our success in this channel, investment in technology. We are working on the launch of our new digital lending platform, and we've only just begun to deliver on a pipeline of exciting technology enhancements to add value to the broker channel. Now I'll turn it over to Abbie.

Thank you, Kim, and good afternoon, everyone. I'm going to talk a little bit about our correspondent channel. I'll touch on why we've had success in the channel and why I believe we're well positioned for share growth in the current market. First, let's talk about where we are today. We're the #1 correspondent lender in the market with over 700 active clients that consist of community banks and credit unions, well-established independent mortgage bankers and builder-owned mortgage companies. So how do we become the #1 correspondent lender? Consistency and reliability. Those are the key foundations of our success, and they resonate throughout all correspondent touch points at PennyMac. Our capital markets expertise allows us to provide consistent and competitive execution to our clients. Our fulfillment process truly is second to none and provides consistency and accuracy, while also offering speed and reliability. The defect feedback loop that we provide to our clients, because of its accuracy, is critical in helping them protect their equity and avoid losses. Our consistent and reliable commitment to the correspondent channel in all markets has also helped to drive our success. As an example, when the COVID-19 pandemic hit last year, we continued to provide liquidity to the market, while many of our competitors exited the market altogether, at least temporarily. So we've proven to be a reliable source of liquidity for our client base. Our innovative technology has helped to drive consistency by allowing seamless integration throughout the loan delivery process. And finally, there is the consistency with which we approach our client base. Without the correspondent client, there would be no correspondent channel. So we approached every relationship as a mutually beneficial partnership. Because of that, we have a diverse and loyal client base with very long-standing relationships. Our sales team has had relationships with many of our clients for 20-plus years, long before even coming to PennyMac. So there's a long-term mutual trust and respect with our client base. All of these things have helped us become the #1 correspondent lender in the market. Now let's talk about the opportunity we see in the current market. This slide is a view into the historical opportunity of our client base versus the correspondent channel size as reported by Inside Mortgage Finance. We're comparing the pre-COVID market to the post-COVID market. You can see in the pre-COVID time period that the yellow bars, which represent our clients' opportunity, are smaller than the blue bars representing the entire correspondent channel, which makes sense. We don't have relationships with every correspondent seller in the market, so you would expect that, that blue bar would be taller. Now if we look at the post-COVID time period, you'll see that this has flipped and the yellow bar is now larger than the blue bar. This means that our clients are producing more volume than what's being reported into the entire Inside Mortgage Finance correspondent channel. That difference illustrates the growth in loans sold by our clients, directly to the agencies versus to correspondent aggregators. Now there are a few key reasons for that growth. First, there was uncertainty around forbearance at the time that the pandemic hit. Speed from origination to final delivery to the agencies was critical in that time frame because there was uncertainty as to whether you could even sell a loan to the agencies that were in forbearance. So really, any of our clients that we're able to sell directly to the GSEs began to do so in order to shorten that time frame that was at risk. Pipelines were at record levels, which put tremendous pressure on warehouse capacity, which then drove many of our clients to sell direct to the agencies due to their lack of review and guaranteed turn times. The size of the market also drove very large margins for our clients last year. Because of that, they were able to retain servicing without really having to invest cash in that servicing. Additionally, by creating OMSRs on their balance sheet, they were able to defer taxes on the asset over time versus recognizing taxes in the current period as they would have done with whole loan sales. So not only were they able to book OMSRs without investing cash, they were able to partially fund the OMSR on their balance sheet through deferred taxes. So many of our clients view this as an attractive time to retain servicing that they then could hold and sell in the bulk market when the economics were in their favor. And then last, but certainly not least, the GSEs began to target smaller originators by offering more competitive pricing through the cash window and thereby incenting them to sell directly to the agencies versus through aggregators. Now why do we see this as an opportunity? Well, today, there are significant changes coming to the GSEs that will drive many of these originators that have been selling direct to the agencies back into the whole loan aggregator market. First and foremost, starting July 1, each GSE will limit deliveries to the cash window to $1.5 billion for any given originator. We believe that because of the strong relationships we've built with our client base, PennyMac is well positioned to be a consistent and efficient alternative to the GSE cash window. The GSEs are also limiting their acquisition of second home and investment properties to 7% of single-family acquisitions. So to put that in perspective, our client base today is producing low double digits when you combine these 2 occupancy types. They're going to need an outlet for these products. And because of our capital markets expertise, as well as PMT's private label securitization capabilities, we're also well positioned to capitalize on this GSE change. So going forward, how do we maintain our leadership position in the correspondent channel? First, we continue to increase the share of production from our clients. We know the market is shrinking and becoming more of a purchase-focused market. Over the years, we've always put focus on developing relationships with companies that over-index in purchase markets. We also have relationships with many of the largest builder-owned mortgage companies in the nation. So we're well positioned to grow our share in a purchase money market. The smaller market will also drive down margins for our clients. So those clients that were retaining servicing because margins were wide enough that they didn't have to invest cash in servicing, will now be incented to release servicing to avoid investing cash. As the largest whole loan aggregator in the market we will be the beneficiary of that change. We've seen disruption in the correspondent investor market this year. In March, Caliber announced its acquisition by NewRez. AmeriHome was acquired by Western Alliance Bank in April and Flagstar recently announced its acquisition by New York Community Bancorp. As is typical of any acquisition, there's uncertainty around what happens to their appetite for the correspondent market? There's uncertainty around what happens with current management. Will their operational philosophy change, et cetera? We see that uncertainty as an opportunity for PennyMac given our consistency in the market that we've been discussing. We talked about the changes coming from the GSEs on our last slide. Our clients will have to find a better balance between direct-to-agency sales and home loan aggregator sales. There is no doubt the whole loan aggregator market will grow and given our speed and accuracy throughout the fulfillment process as well as our reliable pricing execution, we're well positioned to capitalize on this shift. We'll also expand the already robust suite of products and services offered to our client base. As an example, we recently announced our ability to buy loans that are closed with e-mortgages including loans that utilize remote online notarization. We're very excited about this because we're one of the first large aggregators in the market with this capability. To date, if clients close loans with e-mortgages and particularly those utilizing remote online authorization, the agencies were the only viable options for liquidity. So having this capability will enhance our ability to capture loans that otherwise would have gone directly to the GSEs. And lastly, we just have to continue to deliver the unmatched, consistent and reliable customer experience that's made us the #1 correspondent in the market. With that, I'll turn it over to Jim to discuss our fulfillment operation. Thank you.

Thanks, Abbie. Hi there. I'm Jim Follette, and I lead the mortgage fulfillment division, or MFD, as we call it. MFD manages all operations and technology for our 3 production channels, including consumer direct, broker direct as well as correspondent production. I'm excited to spend a few minutes discussing why PennyMac's fulfillment operations are a key differentiator for us on behalf of our customers, our shareholders and our teammates. We are committed to a holistic approach to process, technology and organization design that is truly customer-centric. For decades, the mortgage industry has built process and technology to enable internal stakeholders. However, limited consideration was given to the customers, including consumers, brokers and correspondents. We took a unique approach understanding that if we focus on solving problems for our customers, the resulting process and technology would lead to the most efficient and most effective origination and acquisition platform in the industry. There are very specific requirements from our many stakeholders, including, but not limited to, the end investor, the regulators, the agencies, our capital markets and servicing groups in addition to many others. There are data requirements as well as both complex and simple rules that govern both the calculation and documentation of each loan. Further, there are very specific compliance requirements related to timing of disclosures, which result from the highly dynamic activity that occurs throughout the origination process. Knowing that there was a better way to solve, we developed a highly innovative, end-to-end, data-driven, task-based workflow, initially focused on our correspondent production business, resulting in the most efficient and effective platform in the industry. Over the past few years, we applied this approach to the direct lending channels, enabling the incredible scale throughout 2020. Although many in the industry have been discussing the need to do the same for years, we recognize the process, technology and most importantly, the cultural obstacles that have stymied advancement in the industry. We deliberately inspected, questioned and broke down every process and expectation. We distilled the loan origination process into 17 process groups that perform hundreds of tasks. By dividing the process into these 17 groups, we can hire and train differently. We are no longer limited to hiring only experienced mortgage professionals who are trained by others. We find that by training highly motivated and intellectually curious professionals, we can deliver on our commitment to flawless execution. We leverage the best and the brightest experienced mortgage professionals for the most challenging areas of our origination process and continue to attract and retain these key individuals, but have extended the available hiring to those without any mortgage experience. We have a robust training program, which enables an associate to successfully perform within weeks of hiring. Further, through the 17 groups, we have a career path for our teammates as they develop their experience. As a result, more than 80% of our team members are either offshore or just starting their careers, which result in materially lower expenses and a very consistent process. An additional benefit from our commitment to a data-driven, task-based workflow is the ability to leverage automation for further improvement in scalability, efficiency and efficacy. We continue to seek automation for each task as we develop technology solutions as well as determine the most efficient and scalable solutions for the organization. As I mentioned before, we take a holistic approach as we consider process, technology, organization design together. To further enable the process, we extend how we leverage data throughout and have introduced over 4,000 unique workflow and data validation rules. These rules help orchestrate the workflow, advancing the loan through multiple functions simultaneously. Further, the rules provide immediate insight into problem areas from both customer escalation concerns as well as overall quality of the origination and acquisition of our loans. The continually advancing workflow rules enable us to drive the loans to the right person at the right time in order to improve our acquisition and origination time lines. Further, the data validation rules ensure that all applicable credit and compliance rules are applied real time to ensure we produce a defect-free loan. We have found that most technology available supports the happy path loan very effectively. However, we earn our reputation as a trusted partner to our customers as well as regulators, investors and teammates by navigating the complex and unique situations that present themselves on any subset of loans. The technology has been developed with a commitment to a single platform across all channels, which results in process parity and resource flexibility. This allows us to deploy changes more rapidly across all channels and leverage similar data structure, business rules and workflow in order to adapt to the changing demands of the industry. Beyond process and technology design, we have diligently created and evolved our organizational strategy in anticipation of changing markets as well as a result of the advancing process. Too often, the dramatic benefits that are possible from progressive process design and modern technology are not realized because companies fail to recognize the importance of workforce management and organization design. We are accountable to growing the value of our associates while serving our shareholders. As we are successful in automating key elements of the workflow, leveraging lower cost resources for less complex functions, both domestically and globally, and improving productivity, we are able to not only support the career progression of our associates, but also materially drive down expenses. We have the deepest, most experienced and most innovative operations leadership team in the industry, who is absolutely committed to growing the careers and opportunities to those we serve. We succeed where others fail because of our culture, and I am humbled every day to be surrounded by such an incredible team within the mortgage fulfillment division. In conclusion, our holistic approach to process, technology and organizational design has resulted in an incredibly reliable process which allows us to deliver on our promises made to our customers while simultaneously supporting all 3 channels of PennyMac's loan production. Further, we are extremely scalable and react with incredible speed to the demands of the market, while continually finding ways to improve efficiency. Lastly, we have developed an industry-leading culture where associates demand innovation in both our process and technology, thus allowing us to deliver on our commitment to our customers and shareholders. With that, I will turn it over to Steve Bailey.

Thank you, Jim. You've heard in previous presentations about our large servicing portfolio. In the next few slides, I'll cover some key statistics and important strategies that reveal how our management of the portfolio fits into PennyMac's overall plans and growth strategies. PennyMac compares very favorably to competition in our cost per loan service. These statistics come from an annual study performed by MBA covering a broad spectrum of servicers ranging from midsized and large IMBs to midsized and large banks. Our costs are lower than all groups despite the fact that we have a much higher percentage of government loans in our portfolio than the competition. Government loans have higher cost than conventional loans. That's because government loans have higher delinquency rates that require more costly loss mitigation activities and higher inquiry rates from less experienced homeowners. Scaling and improvements in automation and workflow in our proprietary servicing system have led to year-over-year decreases in our cost measured in basis points. And while we are reducing costs, we've still been able to maintain high-quality standards. When we look at complaints filed with the CFPB, measured as a percentage of 100,000 loans, we have the second lowest complaint ratio amongst high-volume servicers. These complaints are inclusive of periods where servicers had to contend with the many changes that came from the CARES Act. And this low ratio is also despite the fact that most of our servicing portfolio came through our correspondent channel where customers first originate with a third party and then smoothly transition to PennyMac. Loan transfers are a difficult process and provide many opportunities for breakdowns that lead to complaints. Much of our success around customer satisfaction and our reduced cost per loan is due to our proprietary servicing system. SSE is a suite of proprietary PennyMac applications and processes integrated with key partner applications. PennyMac's data warehouse affords increased efficiency in servicing, performance tracking and reporting. The new software is cloud-based and strategically structured for ease of modification in an ever-changing environment. SSE has unique interfaces with vendors, internal workflow-based systems and customer-facing platforms such as a website, native mobile applications and homegrown IVR workflows. SSE has served us very well during the pandemic. A high percentage of loans that required forbearance have gone 60 or more days delinquent. In the first week after the CARES Act was published, we gathered to determine how we could use SSE to create clarity for homeowners. We wanted to enable self-serviced opportunities for homeowners to answer their own questions and enter or exit forbearance using our website and automated voice response system. The result was that many customers were able to put themselves into forbearance inside the rules established in the workflow on our website and then perform check-ins to either extend forbearance or view their payment options for coming out of it. In the chart, you can see that for both government and conventional loans, we put customers into forbearance at faster rates than others. And then subsequently, we've had faster and higher rates of pulling customers out of forbearance through the many options created by the investors. The most popular exit from forbearance has been through modifications and partial claims. We've completed over 100,000 COVID modifications in partial claims since the inceptions of the CARES Act, and our recidivism rates on the modifications have been better than modeled. You can see the automation rates we were able to achieve on the various steps of the forbearance to modification workflow. Let's now take a look at our early buyout activity, which has grown with the growth of the government servicing portfolio. EBO is an important aspect of effectively managing government loans. In order to optimize the process, you must have capital markets expertise, efficient financing ability, clean servicing data, efficient servicing workflow and top-level risk management. These factors ensure appropriate buyout activity, fast turn times and quality customer interaction, leading to a successful process. Our portfolio has grown significantly over the last several years. We have gone from being just outside the top 10 to the eighth largest to the sixth largest servicer. We plan on becoming a top 3 servicer over the medium term. And we'll do this because of our strong growing origination capability and our SSE system that allows us to differentiate from competition and change management. Our strong management team is bolstered by top-level risk management processes. In summary, our large servicing portfolio is a key strategic component of our balanced business model. When managed properly, the portfolio affords low-cost, high-quality leads for our consumer direct lending business, portfolio provides a growing stream of recurring earnings and cash flow. This reliable income serves as a macro hedge to our production income in rising rate environments. The successful execution of loss mitigation activities keeps customers in their homes and enhances lifetime relationships. Now I'll pass it back to Kevin for the Q&A.

Thanks, Steve. Well, we've gone over quite a bit of information so far. And this seems like a good time to stop and get thoughts from you. For our first Q&A session of the day, let's welcome back David and Doug. You guys ready for some questions?

We are, Kevin.

Let's go.

Take it away.

First question, David, I'll throw to you. Investors are asking why are we having an Investor Day now? They don't recall that we've ever had one.

Well, believe it or not, we did have one back in 2011. And as I think back to that Investor Day, on that day, we talked about the sophistication and core functionality that we were building and we were going to need as we built forth to become a legacy-free mortgage bank. As we finished 2020, it became apparent to us that all of the hard work we had done over the years had really paid off as we managed through 2020 and COVID, both companies did remarkably well given all that we had built. And we felt that coming out of COVID, it really was time to really take the time to discuss what we built in the company and what we have in the company and the vision for what we have going forward. In many ways, I think my hope is that people leave here today understanding and appreciating the investments that we've made in technology and process and risk management. And most importantly, the management depth that we have to be able to do all that we've done over the last year. And I think it positions us really nicely to compete and to grow to achieve the goals that I laid out earlier today.

Got it. That's great. So this next question revolves around M&A. And I know Andy had talked in his presentation about the fragmented market. And so the question is, how does M&A fit into your strategy?

Well, as many of you know, we historically have not engaged in M&A. And I think that coming out of this cycle, I expect a lot of consolidation to take place in the industry. We, of course, see everything that comes our way. But as I've mentioned earlier, we have built this company based on our organic strategy. And as mortgage bankers, operating is what we do best. So I suspect that we will continue to organically grow our correspondent channel, our broker and consumer direct lending channels and our servicing platform. And I think, in many ways, the flywheel that you see that -- between the production and servicing is only going to accelerate as we move forward. And we'll see. I think the one nod I would make is I expect there to be servicing packages that come out for sale. And while we prefer to grow our servicing portfolio through our lending channels from time to time, we have purchased bulk servicing and we will look into the opportunity. And most importantly, the returns are there, we will engage in a similar type transaction.

Got it. So kind of expanding on that in terms of the bulk MSRs. So Doug, in terms of what are your expectations for the bulk MSR market as we go forward?

So we believe the bulk market will be very active in the back half of 2021 and maybe into 2022. We had this very unique market in 2020, where many, I'll say, midsized IMBs, who historically have never invested into servicing retained servicing because they could retain it for no cash investment and the theory that the interest rates will go up and it will present itself as a pretty good investment in trade. And so as David said, we will look. We really like our returns in our correspondent channel. Those historically have been excellent. The other thing that you get to do in a whole loan that you don't in a bulk is you get to do diligence on the asset. That proves out to be very important when you're calculating returns and expectations. That said, if the right opportunity at the right return presents itself, we absolutely would buy bulk servicing.

Got it. Okay. Let's switch a little topics to the kind of regulatory side. And so Doug, again, for you, an investor wants to know, with the new administration, do we see increased scrutiny from regulators in the future, especially for servicers post-COVID?

So let me maybe just address, get into the foundation that Stan Kurland and all of us kind of came together in a sense that IMBs need a regulator, and we have great respect for regulators. Day 1, we established a 0 defect methodology, everything that we've built around workflow process has always had that 0 defect. We've got a very developed and mature enterprise risk management system where we run constant QA/QC on all of our processes as well as periodic independent audits. So I think we're very well positioned. We're, candidly, kind of pro regulatory guidance in the sense that the industry needs it. And whether it's the CFPB or whether it's one of 50 different states' regulations, we absolutely operate that way and feel very comfortable in that environment.

Obviously, we would prefer to have less regulatory testing taking place. And we have, every week, it seems like there's another entity coming in, but we're set up really nicely to be able to handle any additional regulatory burden that takes place in the industry, and we're expecting more regulation coming out of the events of 2020.

Got it. So for this next question, I'll throw it out to both of you. So what are the limits on your growth? How big can you grow the platform?

So maybe I'll take the operating side and let David talk about the obvious in terms of capital and liquidity. But our operating platforms, we really like, and there's 2 phases to that, I'll say. One, we are in the geos that we need to be in. We have offices and big regional offices across the country to service time zones. And then so we like that footprint and see no requirement for physical growth in the future. Our operating technology, which I think had a lot of exposure today. Again, everything is either developed or in development and will be done shortly, all will be a cloud-based process. And we really like that ability to get scale and get scale in the right way. Sometimes you just get scale and you don't get data right, you've got to get data right. So I'm very comfortable, very confident that, that is in place to do what we've said we're going to do.

And look, I think on the capital front, we've been very fortunate from the day we started this enterprise that we've been able to raise capital. First, we started out with private equity vehicles. And then with the opening of the public markets, we quickly raised money for PMT and then we took PFSI public in 2013, as I pointed out. And capital has never really been a constraint to our growth. We've been very fortunate, and we had many of you to thank for this that we've gone out and we've explained what we're looking to raise capital for and we've been able to do so. And as you'll see in Dan's presentation, Dan or Pam's presentation later on today, that we have an incredibly sophisticated capital structure in both PMT and PFSI. And I'm very, very encouraged and happy with what I see with both companies, whether it's asset-based financing, which is typically the cheapest cost of financing or in PMT, we've been able to raise convertible debt and PFSI, we've been able to really build out an unsecured lending program. And then, finally, the ability to raise equity in PMT and grow PMT, while on the PFSI front, we've been growing our capital base and using our capital in a myriad of ways. I feel really good about our capital position as we look to achieve our goals over the medium term.

Yes. That's great. So Doug, you touched a little bit on the technology efficiencies that we built. And so this next question is more set around the consumer direct technology. So it sounds like you have great technology. Are those vendor solutions? Or have you built those in-house like SSE?

In the 2 direct businesses, we will have what I'll call kind of the best-of-class in combination. What we found, we've been very active in the fintech market in terms of talking to fintech start-ups. And there's, in a really good way, there's disruption coming into space, and there's some very talented and very compelling, I think, applications that have been developed. And so -- and sometimes we meet and it's not the right application or just doesn't do what we want it to do in terms of our workflow. So when you look at proprietary technology, yes, and then we will enhance that with primarily applications, almost all, I'll say, fintech based. And that's really where you get your, I'm going to say, kind of industry-leading very modern technology around the digital era of workflow and process and customer experience.

Got it. And so maybe a little follow-up on to that. How do you think the technology stacks up against kind of some of the channel leaders that have really touted their technology?

I like what we've got. I think we're going to be very competitive. And technology really has -- you have to have kind of what I'll call 3 functions, okay? You've got the customer-facing function, you've got the workflow function and then you've got your regulator and investor function. And so contrary to what I think we've seen sometimes in the market where you take your iPhone and you press a button and then you get a mortgage, it's not quite that simple, okay? The customer facing is important. And clearly, consumers like to operate off their phone or they like to interact when they want to interact. And so I don't want to downplay the customer facing, and we clearly believe in that. But the workflow is really, really important. How do you create the approval and the experience for the customer win your "processing" and closing and approving that loan. I think Jim had mentioned earlier, in our corresponding platform, we've got over 4,000 rules in the consumer and the platform and the broker platform. That will probably be up to about 6,000 at least because you've got compliance issues there that you better deal with that you don't in the correspondent channel. So when you put all those in, you have to give a great customer experience. You have to do it at a cost and efficiency that is industry leading, and you have to comply with regulators and investors. The industry is 100% dependent upon Fannie, Freddie and Ginnie. And they have rules and you follow them and with technology and you make it efficient. So when you put all that together, yes, we're really good.

Great. So this next question is coming in from Trevor Cranston of JMP Securities. It says, can you share any color on how your portfolio recapture rates have evolved over time as sophistication of your predictive analytics has improved? Do you have any medium-term goal for portfolio retention? So maybe Doug, I'll throw that question to you.

Great question. The trend lines, both in the refinance on agency, the refinance on [ govi ], the purchase on both are very, very good. And we have got targets that we're going for. We're well on the way. I'm very pleased with those. We're probably maybe a little bit ahead of where I thought we'd be at this time as we continue to develop our technology and get those platforms 100% complete. When you give the customer a great experience and our servicing team does and how we board loans and how we close loans, you start to get a bit of a customer that wants to be at PennyMac. And so yes, we like those trend lines and I think that will be a big part of the future.

Got it. So this next question is really on the branding and marketing that we had talked about. Can you expand on the branding strategies you're currently developing? Who are you targeting? And could you put parameters around spending amounts? What benchmark should we look for to measure your success?

Well, there will be no stadium naming rights. So we'll start there. Doug, I'll turn it over to you.

So I guess we won't be seeing PennyMac stadium anywhere, but we'll try to get over that one. So I think the primary driver for us in branding is that we operate 3 different channels. We operate a very large serve port, and we want to grow all of those. And we want to help our business partners grow their business as well as ours. It's a venture with our partners not against our partners. So the more that we can, fundamentally, the way we communicate to our customer. So it's not how retail loan officers, not how an operating person or Jim Follette's world. It's not how servicing, it's how PennyMac communicates. So the words we use, e-mails we use, chat - how we use, texting - how we use, sometimes there's even requirements around what I call snail mail, how that's worked, it has to be in a very direct way in the sense of this is PennyMac. We want the customer to understand that we are always behind them. We're here to help them, whether they refinance with us or they don't, we're their friend. And so how you communicate and how you touch your customer and the frequency you touch your customer were really important. And that's the main driver that we want to brand an amazing customer experience.

Fantastic. All right. The next one is from Kevin Barker, Piper Sandler. What key -- excuse me, what key accomplishments should we observe over the next few years to know you are making progress with achieving top 5 market share in consumer rec channel? So Doug, maybe I'll throw that to you.

Well, I think there's various measurements out there, whether we're not into, I'm going to say, market share. I think that's one that's always kind of dangerous. So I think how we measure in terms of success in size will be dependent upon the various industry channels that measure ranking [indiscernible]. David...

Yes. I think, look, I think, obviously, we're always going to start with profitability. But in terms of our -- in terms of where we stand on a table, I think that, obviously, we're going to look at the size of the production market. We're going to be -- we get real-time information in terms of where people are expecting the market to be and we can look at our locks and put enough a fallout ratio against it, and we can forecast out where we think fundings are going. We can also get a sense on viewing our production by loan type and geography and things of that nature. We can look at the amount of MBS [indiscernible] that are issuances. There's a myriad of ways you can see if you're achieving your growth targets. But I think it always comes back to what I think is profitability. And I think as we get even more granular in our pricing and we begin to really focus even further and deeper into kind of the hand-to-hand combat that we see in the call centers out of that, we'll be able to understand very quickly that we're on our way to achieving our growth targets.

I think to David's point, growth without proper returns is unacceptable.

Yes. Yes. So a little bit into that point, and I'll throw this out as a jump ball, and this is definitely a very talked about topic. But does the increased competitive environment in the wholesale channel change your strategy in the channel? And does margin compression there affect margins in consumer direct or corresponding?

It's a silly question, Kevin.

Markets are markets. And we've been doing this a long time. And over time, there's been some nuttiness in correspondent or craziness in retail or wholesale. It is what it is. Historically, these have never lasted very long. And I think probably this one too, over time, will feather itself out. So it hasn't changed anything we're doing other than we have a goal, we have a position. We believe very strongly in what we're doing, and we will execute. But we're not worried about a few months here now.

Yes. That's the -- I think that's really a distinction of this management team and the culture we have here. Yes, we have these medium-term goals. We're not going to get caught up in the weekly or monthly gyrations that take place over very short periods of times where we see kind of what I call silliness that's taking place in the market.

Maybe just expand on that, the last part in terms of margin compression in one channel affecting the margins that we got.

Yes. If the broker margin remains tight, it puts probably the most pressure. The only place it really puts pressure would be in distributor retail because the distributor retail allowing the broker generally compete head to head every day. So that would be the one place that it could put some margin pressure.

Got it. Okay. This next question comes from Henry Coffey at Wedbush. How do you manage the channel conflict between brokers and your consumer direct channel that want to harvest recapture from servicing?

So we look at it this way. We're in correspondent, we're in broker and we're in retail. All 3 are customers. We only do well when all 3 channels do well. And so we have a lot of initiatives that we work very closely with our correspondent customers to help them grow their business. We do the same thing in the broker channel, okay? We want our brokers to grow their business, to be successful, to make money, et cetera. We want our retail group to continue to grow, whether it's in port recapture or it's in the new customer acquisition. And what's interesting today the way the market works, you could take broker correspondent and some will say, "Oh, we don't recapture." What really happens is as soon as that borrower becomes in the money, they're getting marketed by 10 different companies today. So we will do things to help our business partners. I think the conflict is more marketing conflict than market reality conflict.

And we compete -- like in retail, we compete against other retail originators. In broker, we compete against other broker originators. And correspondent, we're competing against other aggregators. We don't compete with ourselves. And so we're just -- that's I think an important message on that one.

Okay. All right. And for you guys, we appreciate all the good questions from those of you out there. As a reminder, you can continue to submit questions for our Q&A sessions throughout the presentations. We received some questions that we saved for the end. We've got questions on PFSI's 20% ROE. Dan Perotti, our Chief Financial Officer, will go over that in greater detail a little later, so we're going to hold off for now. So next, we're going to go and hear from the Chief Investment Officer, Vandy Fartaj, and Will Chang, our Deputy Chief Investment Officer. They'll discuss the exciting investment opportunities that lie ahead at PMT. Over to you, Vandy.

Thanks, Kevin. PMT is the unique and successful mortgage REIT that capitalizes on its access to PennyMac's powerful origination infrastructure. What's unique about PMT is its ability to source investments in the agency and non-agency mortgage and MBS markets, while also using PFSI to generate investment opportunities and manage the interest rate risk associated with its portfolio. PMT also has a strong balance sheet and excellent liquidity. We avoid the use of repo financing where possible for our long-term investments and therefore, the negative potential impacts to liquidity of associated margin calls. Unlike a number of our peers, we avoided having to liquidate assets at the bottom of the market in 2020 to meet margin calls because we use term financing to fund our positions. Our team has extensive experience in managing the interest rate and credit risk that are unique to the residential mortgage sector. We manage our portfolio's interest rate risk through active hedging using a wide variety of instruments. We manage credit risk by originating and servicing the loans underlying our investments. And we can choose our opportunities using an intimate knowledge of the collateral while also acting to influence and improve their performance. PMT focuses on identifying investment opportunities in 3 segments of the mortgage market: correspondent production; MSRs; and mortgage credit. First, we are a leading producer of conventional conforming mortgage loans through our correspondent production segment. These loans are sold to PMT by the small to mid-size originators and build your own mortgage companies Abbie talked about and are ultimately distributed into the capital markets. We have a long history of consistent market share growth. The second segment is our investment in instruments such as mortgage servicing rights, or MSRs, that provide excellent returns, but carry significant exposure to shifting interest rates. We earn superior risk-adjusted returns through our ability to manage and hedge our rate exposures with a strong long-term record of successfully managing interest rate risk, including volatile and fluctuating environments. As of the end of the first quarter of 2021, PMT held MSR positions with a market value of over $2.4 billion. The third segment is mortgage credit, again, sourced from our correspondent production business. For instance, from 2015 to 2020, we invested in an innovative credit risk transfer bonds, or CRTs, accepting some of the credit risk on loans that we originated and sold to Fannie Mae. Since we underwrote the loans and continue to service them, we have a solid understanding of the underlying loans credit profiles. With our CRT structure, the alignment of interest is very high. We are the producer, the credit investor and the servicer of the underlying loans. Now let's turn our attention to our credit-sensitive investments. The outlook is quite positive. The fast prepayment speeds experienced by the reference pools means that potential credit losses are minimized as principles being repaid to PMT. In addition, fair value gains are recognized as bonds amortized since the positions are held on PMT's books at a discount to par value. The underlying loans have a strong credit profile that benefit from the robust housing market and steady home price appreciation. As of the end of the first quarter, PMT held more than $2.6 billion of CRT investments. We don't anticipate adding to our CRT investments in the near future because the FHFA made the decision in 2020 to halt the type of front-end lender risk share agreements that PMT was investing in. But we've devised other innovative ways of organically generating credit-sensitive investment opportunities that we will describe later in this presentation. Needless to say, credit-sensitive strategies are an important component of PMT's investment strategies. A unique aspect of our business model is our ability to generate new investments organically through our correspondent production. Our market-leading correspondent operation has originated over $182 billion in unpaid principal balance of production in the last 12 months with over 725 clients that sell loans to us. In the first 4 months of 2021, PMT purchased an average of about $11.5 billion in conventional loans a month, giving us a market share of approximately 17% in this segment. This contributed to the growth of our MSR position. None of our competitors possess a comparable platform that generates investments in the same organic fashion and such a scale. This gives us a major competitive advantage in the REIT sector. We can acquire MSRs at a competitive price while controlling the composition of our purchases. We also use our correspondent production arm to produce credit-sensitive investments. We'll go through this in more detail later. But the new preferred stock purchase agreement, or PSPA, changes that were implemented between the FHFA, Fannie Mae and Freddie Mac a few months ago, creates an opportunity for us to acquire a significant amount of credit-sensitive investments. As Abbie mentioned, the PSPA limited how much Freddie and Fannie can buy of loans on investment properties in second homes, which means that the excess will need to be distributed through non-agency transactions, and we stand ready to buy the credit-sensitive pieces of those deals. Looking at our interest rate-sensitive strategies, you'll see a strong return profile that is not dependent on favorable interest rate changes. This is evidenced by our 15% return on equity for our rate strategies in 2020 despite historically low mortgage rates and very fast prepayment speeds. As we will discuss in detail, our hedging team uses a variety of strategies and instruments to hedge the interest rate sensitivity of MSRs. Our MSR position also has strong credit quality and benefits PFSI's industry-leading servicing efficiency and technology. It also has a relatively low weighted average rate of 3.43%, since much of the position was originated over the last year at low prevailing mortgage rates. PMT's market-leading correspondent operation and large MSR holdings requires a systematic and disciplined approach to interest rate hedging. In particular, MSRs are unique in the way they respond to changes in market interest rates. Most fixed income investments lose value as rates rise and increase in price as rates drop. This is described in the bond field as having a positive duration, which is a common measure of an asset sensitivity to rate changes. Prepayment rates are also influenced by market rate changes. Prepayment space increase as rates decline and vice versa because they're comprised primarily of interest payments whose expected longevity decreases as rates fall and prepayment rates rise. MSRs are one of the few asset classes that rise in value as interest rates increase and see their values drop as rates move lower. Bond investors refer to these unusual assets as having negative duration. It's important to remember that mortgage durations are not constant. Positions that are both long and short will see their exposure change as rates fluctuate due partly to changing expectations for prepayment rates. This means that our hedging approach must account for the interest rate exposures of both the correspondent production pipeline, which has a positive duration as well as the MSR portfolio, which has a negative duration. The interaction of these 2 positions means that the hedging tactics that we need to use can change a great deal as rates change and the market outlook shifts. Hedging PMT's complex risk exposures takes the efforts of a talented and dedicated team that uses high-level analytics to trade a variety of bond and derivative instruments. PMT is one of the market's biggest users of MBS options, and our risk management team also utilizes a combination of mortgage, treasury and swap products as necessary to manage the firm's mark-to-market exposure and control its cash position. Given the size of PMT's positions and the extent of its exposures, the risks are difficult to fully mitigate especially over an extended period. Measuring the different sensitivities utilizes state-of-the-art analytics and proprietary technology that require frequent updating and calibrating. We want to assure ourselves that we understand the positions exposure to economic and market-related shocks. PMT invests major resources in risk management and hedging operations and technology. Managing a position of this magnitude is a very complex endeavor that protects the firm from exposure to fluctuating interest rates and prepayment speeds. In addition to the work the hedging group does for PMT, the group similarly manages PFSI's hedge position, albeit somewhat differently than PMTs. As Pam will discuss, the profile of PFSI's hedge position will typically have larger gains in a market selloff and greater losses when the market rallies. This is because we expect greater production revenues from our direct channels when rates decline and issuance picks up. Hedges are also maintained to protect our expected early buyout revenues going out a year. Since PFSI owns significant quantities of Ginnie Mae servicing, EBO revenues are an important component of returns for the asset that needs to be safeguarded. At this point, Will Chang, our Deputy Chief Investment Officer, will discuss how PMT's well positioned to generate attractive risk-adjusted returns. Will?

Thanks, Vandy. PMT obtains a competitive advantage through the use of technology created by its manager and services provider, PFSI. Our P3 system creates a seamless integration with the firm's proprietary loan-bidding system. This allows PMT to provide our corresponding customers with streamlined processes for submitting loans and receiving bids that improve the user experience. Our proprietary pricing engine generates rate sheets and also prices bulk loan packages based on each loan's unique attributes. It's also highly efficient allowing us to compute and disseminate large numbers of mid-day price updates very quickly. Our proprietary pooling algorithm compares a variety of pooling scenarios to determine the best execution for our loan production on a daily basis. We also have an integrated ticketing system that handles all trades across instruments, end markets and also supports counterparty confirmations. And as PFSI continues to invest in production and servicing-related technology, we expect PMT to remain a beneficiary over the long term. Let's take a closer look at the various opportunities that PMT is positioned to capitalize on in an evolving mortgage market. Conventional mortgage production currently remains robust. April was the largest issuance month for Fannie and Freddie since the early 2000s with over $289 billion in securities issued. We don't expect a sharp slowdown anytime soon as mortgage rates remain very low by historical standards. While rates have increased over the last few months, mortgage rates are still well below their previous low of around 3.3% that we saw in 2013. The housing market also remains robust, which benefits our correspondent operations that are very strong in purchase money lending. On average, purchased loans made up approximately half of our lending volumes over the last few years, even as the overall market has skewed towards refinancing activity. We routinely rank in the top 2 for conventional purchase volumes. This means that our production volumes are steadier than most of our competitors in the correspondent market and not as highly dependent on continued low mortgage rates to drive refinance activity. There have been some significant changes to the mortgage and GSE landscape in 2021, largely due to the new PSPA changes that we mentioned earlier. The changes that have been implemented include limits on how much any individual lender can sell to the so-called cash windows of Fannie Mae and Freddie Mac, where they buy loans directly from originators. This means that midsize lenders that have been selling most or all of their issuance to the cash windows must find alternative outlets for their production. This is very favorable for large correspondent lenders like PMT. We are well positioned to buy the production of the midsized lenders that do not have the approvals, technology and experience to create their own mortgage-backed security pools. We think that this will allow us to continue to grow our production and market share when overall issuance volumes start to normalize. Another change to the mortgage landscape are new limits instituted by the FHFA on how much production of nonowner-occupied loans can be purchased or securitized by Fannie Mae and Freddie Mac. The nonowner-occupied sector includes loans made on both second homes and investment properties. We think that PMT's capital markets presence and expertise, especially in the market for non-agency securities that don't utilize Fannie and Freddie will allow us to carve out an important and profitable role in this sector. Before proceeding, I would like to briefly describe how nonagency or private label deals work and create credit-sensitive assets. To create what are also called structured transactions, a package of loans is placed in the equivalent of the trust. A series or classes of tranches were then created that have varying degrees of seniority. The senior bonds are protected from credit losses by 1 or more subordinate bonds, which are the first bonds in the structure to receive losses due to defaults on the underlying loans. Structured transactions of this sort allow investors to tailor their investments to meet their return targets within their risk tolerances. The most senior and therefore, the safest bonds have the lowest yields and returns. The subordinate bonds are credit-sensitive assets that trade to higher yields, rewarding investors that accept and properly manage the extra risk and understand the delinquency and default behavior of different types of residential mortgage products. Returning to the PSPA agreements. We expect the new limits governing nonowner-occupied deliveries to Fannie and Freddie to help PMT in 2 ways. It will allow us to improve our pricing and expand our market share in the sector, giving us a competitive advantage over firms that don't possess the infrastructure necessary to create bonds backed by these loans. We expect that this product will eventually become a very important and profitable part of our business. In addition, buying these loans also gives us a way of organically creating credit-sensitive investments for PMT. An important aspect of PMT's management philosophy is our focus on balance sheet flexibility and liquidity. PMT's warehouse financing structures, similar to PFSI, are well diversified across multiple leading banks, have varying maturities and are sized to ensure PMT has the capacity and flexibility to support the demands of the robust conventional origination market. More recently, we have focused on extending the duration of these structures and more than half are now represented by 2-year terms. We have minimized our use of repo financing for our investment positions and instead funded most of them using term notes that mature 3 to 5 years after issuance. The decision to avoid repo financing was a large factor in our ability to outperform our competitors during the height of the COVID-related market dislocations in 2020. When the financial markets seized up in the spring of last year, the mark-to-market values of many mortgage assets temporarily plunged since the repo lending is based on the market value of assets. The sharp drop in the value of even safe assets repoed by REITs led to margin calls since repo lenders sought to reduce their exposure to match the lower market value of the assets. Managers that could not raise sufficient funds to meet margin calls on short notice were forced to liquidate large amounts of their portfolios, sharply reducing their leverage and earnings power once the market rebounded. PMT avoided this cycle of margin calls and forced liquidations due to our policy of terming out as much of our financing as possible without mark-to-market provisions. As a result, we did not have to liquidate any positions in March and April of 2020 to meet margin calls. This allowed us to outperform our peers as the value of our holdings rebounded over the course of the year, while other REITs either shrank or were forced to acquire assets at higher prices. We've continued our commitment to term financing this year. We fully termed out the financing of our most recent CRT bonds and issued 5-year term notes to fund much of our Fannie Mae MSR position. None of our CRT financing has mark-to-market provisions. For the most part, we use repo as a temporary funding vehicle while we arrange longer-term financing through the term note market. PMT further enhanced its capital structure this year by issuing senior exchangeable notes. We issued $345 million of 5-year notes due in 2026 with a conversion price of $21.69 per share, an attractive premium to PMT's book value at issuance. This gives PMT a total of $555 million in exchangeable notes outstanding at the end of the first quarter. PMT represents an attractive investment opportunity in the mortgage sector. We have a proven track record of generating strong risk-adjusted returns and a unique capability to organically generate attractive investments. We also have a risk management and financial discipline that has benefited the company through a variety of economic conditions and market cycles. In conjunction with the operational expertise and technology platform provided by PFSI, PMT has a unique competitive advantage in the REIT sector that cannot be replicated. Now I'll turn it back over to Kevin.

Thanks, Will. Okay. It feels like another good time to take a break from the presentations. I know a lot of you have questions for the -- and the answers to those questions are going to come from David and Vandy. All right. So let's get started. This first question has to deal with CRT. So Vandy, I'll throw this over to you. What are you doing to reinvest CRT as it runs off?

Sure, Kevin. We're going to continue to focus heavily on organic asset creation and investment like we have over the last several years. So you're going to see significant amounts of capital getting redeployed in the mortgage servicing rights. And additionally, there is an emerging market opportunity arising from FHFA's desire to reduce the footprint of the GSEs. What we're seeing today is 2 things. First, there's limitations being put on sellers where they can't deliver more than $1.5 billion annually to each of the GSEs. And as a result of that, we anticipate that there could be hundreds of billions of loans that would typically make its way into the GSE's cash window become available for purchase in the correspondent channel. Second, there was a limitation put on nonowner and second homes at 7%, and the market opportunity today is really closer to 10% to 12%. So that excess beyond the 7% limit is going to find its way into private label securitization. We're actually today aggregating loans into our first nonowner securitization. And with the requirements of retaining risk on nonowner securitizations, you're going to see PMT making an investment in the subordinate bonds or credit risk tied to these loans. This is very similar to what we've been doing for the last several years with our CRT investments. We've actually likely been the largest investor in mortgage credit tied to agency-eligible loans. And going forward, if we see the footprint of the GSEs continue to shrink, there's going to be a larger swath of loans that could find its way into private label securitization. And we are uniquely positioned with a strong capital markets expertise and private label experience where we can capitalize on this opportunity, especially when you consider today that we operate the largest agency correspondent in the market.

And this was -- Kevin, this was the original investment thesis for the creation of PMT. If you recall, we established PMT to -- with an eye really towards private label securitization coming back, and PMT being a unique vehicle that can run a corresponding aggregator and have the capital to invest in subordinate tranches. And so in many ways, it's really -- it's come a lot later than we thought it would, but it's -- I think it's here.

Okay. Great. So staying on kind of the same CRT theme, how do you expect the current CRT portfolio to perform going forward?

Sure. I think the performance of our CRT investments is going to be really, really well. And the most important thing to consider is the alignment of interest today. We're not only the investor in the CRT investments, but we're the servicer, we're the portfolio manager and the work that we're doing is all at the loan level when it comes to loss mitigation. That's going to produce a superior outcome for our investors. Then when you think about the strong home price appreciation that we've experienced over the last several years, in particular, the last couple of years, our borrowers in these CRT investments have significant home equity. As a result, we're going to experience lower loss severities over time. And the level of foreclosures is likely going to be lower as borrowers who face financial challenges are more likely to sell their home versus going through a foreclosure process. And so our -- and obviously, it varies based on prepayment rate, but our expectation is that the investments that we have in CRT probably has an average life of somewhere between 4 to 5 years.

That's great. All right. Well, CRT is obviously a big topic. And so the next question stays on that topic. Next question comes from Chaitanya Terala at D.E. Shaw. So David, I'll throw this one to you. With PMT -- will PMT start doing front-end lender CRT transactions again?

So I would say in the short term, I wouldn't expect us to be doing lender CRT. It's really unfortunate because, as Vandy points out, I think one of the things that we've experienced and witnessed ourselves is, as he said, the strong alignment of interest that takes place in lender CRT is just really apparent to us, whether it's the work we do, when we buy the loan, we review the loan. It's a securitizer. We understand what's going into these MBSs. And then as the servicer and we saw this during COVID, we just react as an owner as opposed to just a servicer. And I think you're going to see that in -- when you look at the results of lender CRT versus regular way CRT. And I think right now, we're in a regulatory environment where CRT has not achieved favorable capital treatment. It's a real shame. We're going through a period of home price appreciation really over the last 10 years where CRT has performed very favorably for investors. But at the same time, in insurance, and we are going to have periods where there's going to be home price depreciation. And I think that our hope is that, eventually, we're going to see kind of people looking at CRT again. I would like to see more participants on the lender CRT side. I think that was one of the issues that we faced and that we didn't have enough participation from others. But I think that for the short term, we're going to be in a period of time where we're not going to see lender CRT.

Got it. That's great. So Vandy, this gets back a little bit to what you were talking about in terms of the FHA shrinking the footprint of the GSEs. The question that comes in is, how do you expect PMT to perform if that trend reverses?

I think PMT will perform exceptionally well in either market environment. I think we've proven over the last several years that when you have an agency mortgage-centric environment, we will succeed. We've grown our correspondent channel to be the largest agency mortgage correspondent in the market. We need substantial investments in mortgage servicing rights. And we have been the largest investor in the underlying mortgage credit of these loans. I think we've invested in underlying mortgage credit tied to over $100 billion of loans. So in an environment that's more agency mortgage-centric versus private label, I think you're going to see us continue to succeed.

And I think also, Kevin, as we heard earlier today, running a correspondent aggregator, you have to have some core functionality that's predictable every day. And that core functionality is setting pricing, being in the market, being able to buy loans as quickly as possible for small originators to be able to clear their warehouse lines. And I think what we've done on the fulfillment side, combined with the technology that we have in place, really, really goes to support everything that Vandy says. And I think it's really a testament to the team. If you think about it, we put in a new correspondence system last year in the middle of COVID and the highest origination market in the last 15 years. And I think that does not go unnoticed by our correspondent business partners.

That's great. That's actually a great lead-in because the correspondents' generating the MSR asset, and so the next question is really around that. So Vandy, how do you feel about the MSR asset as an investment in this environment?

That's a good question. So today and for a very long time, the mortgage market really yields, have compressed quite a bit. And MSRs on a relative basis are the most interesting, highest returning asset in the market today. And when you think about mitigating risk, the work that we do from a hedging perspective has produced really great consistent results for a number of years. And it's one of the few mortgage assets where you can actually mitigate the largest market risk, which is the interest rate risk tied to that investment. And as we've seen through the COVID crisis, there were a lot of mortgage assets that were hurt and prices were significantly depressed. So when you consider that, along with all the work that we put into creating an MSR securitization structure over the last several years, so that we can have term funding against the asset and address the asset liability mismatch that has existed for years with that investment, I think, today, we're in a very good place because we've mitigated that risk as well.

And I think that risk management theme is a theme that you see throughout how we manage PMT. Just to go back to CRT for a moment, there we had an asset where we couldn't hedge. And there we had an asset where we knew we wanted to establish term financing. And so Vandy and the team developed this really innovative financing structure that didn't have mark to market. We were able to term out our debt. And so again, going back to your comment about what happened during COVID, we were able to -- while we were unhappy with the -- what was going on in the market and the mark-to-market effects we were having, we were saying at the same time, we did not have margin calls, we did not have to sell assets, and we're able to enjoy the climb back up to where we basically recaptured all those mark-to-market hits that we took when COVID started.

Yes. That's great. So the next question switches a little bit to the dividend. So David, I'll throw this one to you. So how much flexibility does PMT have in regards to the dividend? What's the right dividend yield for PMT? And how do you look at dividend versus book value over the long term?

So we've always felt that our dividend strategy had a series of questions we need to answer. The first one was we wanted to always to be tied to GAAP earnings. And so while there are REIT requirements to pay out your taxable earnings, we really wanted to try to mirror our GAAP earnings, understanding that there's the mark-to-market gyration that take place from time to time. But really, tying to GAAP earnings was kind of the first order of business for us. The second one is we felt it was very important and it's still very important for us to be consistent in our dividend. We really want to try to avoid the special dividend or the quarterly gyrations of the dividend because we think it's important to investors that it stays consistent. Obviously, the third point is we want to make sure we have the cash. And I think we feel really good about how we do our liquidity forecasting and how we handle our capital management. And so it's with those 3 things in mind that we always approach the dividend. Historically, we paid a very consistent dividend. We were running $0.47 before COVID. We briefly went down to $0.25 for a quarter, back up to $0.40, we're back to $0.47. And so it's we -- as I say, it's something that we spend a lot of time on. And I think that as it pertains to the yield, look, I think I would be remiss if I didn't say I don't -- at times, I don't feel as though we get the credit for what we've built in PMT and the organic nature of it. And of course, we'd love to see the yield lower, but that's up to those in the market. But for us, it's just a matter of operating with a consistent, transparent, definable philosophy.

Fantastic. Well, thank you both. Once again, thanks to all of you out there for the great questions. Please continue to submit your questions for a final Q&A session. Up next, we're going to hear from Pam Marsh as well as Dan Perotti, Chief Financial Officer. You'll hear about our capital and liquidity management and then see what our financials look like in a more normalized market. Take it away, Pam.

Thank you, Kevin, and thank you to our investors for your time today and your interest in PennyMac. We are nearing the end of our day, and I would like to direct your focus to our strong and sophisticated capital structure and other key financial metrics. We hope you take away from this section the strength of our balance sheet and the risk management disciplines that are key to our success. We have built a strong foundation over many years that will support our future growth. PFSI employs prudent financial management across all aspects of its businesses as we seek to maintain a solid and stable capital foundation. Our leverage has been managed to very low levels, significantly lower than most public mortgage companies. You will note that our nonfunding debt has run at less than 1x our equity capital. Our total debt to equity has historically been around 3x or less. While that ratio has increased over the last year driven by our loss mitigation efforts, resulting in a large balance of modified early buyout loans on our balance sheet today, our longer-term view is that total leverage will run more consistent with our historical lower levels. As Vandy noted in the previous session, our capital markets teams have employed successful and disciplined hedging of PFSI's MSR investments. Our hedging program seeks to moderate the impact of interest rate changes on the fair value of our MSR asset through a comprehensive hedge strategy that also considers production-related income. It serves to protect our book value and maintain a more consistent earnings stream even in the event of significant rate shifts. This discipline and risk management was developed over many years, and its effectiveness was proven as it played out in the volatile interest rate environment we experienced over the past 18 months. Another key component of our financial governance is an extensive focus and discipline around liquidity management. This discipline ensures that we are always positioned with appropriate liquidity to meet our financial obligations, prudently run our businesses and be prepared for more volatile environments. The hedging of our MSRs is an important component of our liquidity and capital management. It is imperative in our perspective to hedge the MSRs, given the financing structures that we have in place to provide liquidity. In a falling rate environment such as 2020, where the collateral value of the MSRs declined significantly, our hedging activities provided the offsetting liquidity and income to effectively manage this risk exposure. Our discipline includes weekly updates of our liquidity forecast that is aligned with our financial models. We run stress scenarios utilizing the sensitivities in our capital markets hedge profile to test the liquidity that may be required as a result of interest rate movements and any timing differences that can occur. Based on the scenario analysis and our view of the environment, we maintain substantial liquidity reserves to ensure that we are always positioned to address sudden liquidity requirements as a result of more volatile and stressed environments. These disciplines were also tested and served us well through the worst of the market dislocations last March and are expected to contribute to the strong growth in book value we expect going forward. Turning to our financing structures. As you saw earlier in the PMT session, and here, each of PFSI and PMT have in place separate and distinct financing structures developed over many years. These structures encompass sophistication, diversification and duration. We utilize our balance sheet with secured revolving and term financing structures to optimize our cost of funds, complemented with term unsecured debt that benefits our corporate ratings. Our warehouse financing structures to support loan production have been established with deep partnerships among the strongest global financial institutions. The structures are designed to manage risk diversification across multiple bank partnerships, varying maturities and are sized to ensure that we have the capacity and flexibility to meet our production growth and product initiatives. More recently, we have focused on extending the duration of these structures with the majority now represented by 2-year terms. Each of PMT and PFSI maintain distinct structures with no cross default or cross collateralization. But because we have similar structures at each of our bank partners, they provide for the seamless financing of our loan production. In aggregate, among the relationships we maintain, we have established more than $22 billion in warehouse financing. For our longer-term investments in MSRs, we have established innovative revolving securitization structures to enable the issuance of secured term notes that more closely match the expected life of the asset. These structures also provide for a variable component that enables bank financing of the MSR asset as it grows until it reaches the size that supports the issuance of a new term loan. Importantly, last year, as we saw the market for senior unsecured notes strengthened, we made substantial enhancements to our capital structure with the issuance of $650 million of 5-year notes attractively priced at a 5.38% coupon. Earlier this year, with continued improvement in the debt markets, we issued an additional $650 million of 8-year notes at 4.25%. The strong financial performance of PFSI contributed to the successful issuance of these notes and resulted in upgrades by both S&P and Moody's. And now I would like to turn the presentation over to Dan Perotti, our Chief Financial Officer, to discuss our capital investment opportunities and outlook.

Thanks so much. As Pam mentioned, PFSI has robust processes in place to ensure that we maintain sufficient capital and liquidity to insulate its business from market stresses like what we experienced over the last year as a result of the COVID-19 pandemic. Maintaining the soundness of our capital structure is our top priority and the importance that we place on ensuring that soundness cannot be overstated. Even so, the success of our business over the past few years has generated substantial excess capital. We seek to invest this capital in a number of ways, many of which have been the focus and discussions of presentations earlier today. First and foremost, we utilize our capital to enhance and grow our businesses. We provide them with the critical resources they require to compete and achieve the targets we have laid out for PFSI. This includes investing in technology that enables the continued growth trajectory of our nascent direct lending businesses and improve the efficiencies in our established correspondent and servicing businesses. Our capital is also used to invest in employees, infrastructure, marketing and other resources that are required to succeed. We also deploy capital to take advantage of opportunities in different market environments. That results in enhanced profitability through the use of our balance sheet. These investments have historically been concentrated in both purchases of MSR portfolios. These portfolios provide ongoing fee revenue, additional scale and reduced per unit costs in our servicing operation and additional customer relationships that lead to originations through our consumer direct lending channel. We have also used our balance sheet to repurchase and hold early buyout loans, or EBOs, from Ginnie Mae pools. Our use of capital in this way over the past year has enabled us to capture significant gains from the resecuritization of loans that have reperformed. And that offsets increased servicing costs from the pandemic and bolsters the profitability of our servicing business. Beyond these uses of capital, we also continually evaluate the use of any excess capital for potential return to shareholders. PennyMac's management team has a long history of prudently returning capital to shareholders. We employed a program to repurchase 20% of PMT's outstanding float between 2015 and 2018 when it was trading below book value. Those repurchases were significantly accretive to PMT's shareholders. Similarly, PFSI has been active in returning capital to shareholders, enhancing the return of their investments and showing that it's an efficient and responsible steward of the capital held by the company. PFSI returns capital to its shareholders in 2 ways. The first is through a regular quarterly dividend, which we introduced in 2019. Our philosophy around our dividend is to provide a stable and meaningful component in the structure of long-term sustainable returns to our shareholders while still providing significant flexibility to invest in our businesses and other opportunities. We've increased the level of the dividend twice since its introduction, reflecting our confidence in PFSI's ongoing financial performance. In addition to PFSI's regular quarterly dividend, we have also been an active buyer of PFSI shares, especially over the last year. This method of returning capital to our shareholders is more flexible and opportunistic. It can be deployed when we have excess capital and see the investments in our stock is providing an attractive return relative to other potential uses of the capital. As we repurchase stock, we continue to maintain our financial discipline, ensuring that our leverage, equity, liquidity and other financial metrics remain within prudent thresholds. Given our current strong capital position, we have capacity to deploy additional capital in this avenue, and we'll continue to evaluate repurchases considering the returns implied by our outlook for PFSI's financial performance. Our strong financial performance, combined with the risk management practices previously outlined, have allowed us to repurchase approximately 20% of PFSI's common stock since the start of 2020 while continuing to retain earnings and grow our equity base. In fact, since our IPO, we have consistently grown book value per share, which also provides important support to the market value of PFSI shares. Before we get to our discussion of PFSI's medium-term outlook, I'd like to review some of the drivers of PFSI's recent earnings. In recent years, our rapidly growing direct lending channels have contributed significantly to our profitability. The growth of these channels has shifted PFSI's earnings profile meaningfully from a few years ago when they had minimal contribution to recent periods where they comprise the majority of our production earnings. Additionally, the growth in PFSI servicing portfolio and our capabilities surrounding EBO loans have served to increase the contribution of servicing to PFSI's earnings and complement our production businesses. Although industry volumes are expected to decline in 2021, PFSI's mix of servicing and production allow us to generate meaningful returns even when volumes slow. Declining prepayments are supportive to our servicing revenues and the value of our MSR asset. We also expect returns from EBO loans to continue to bolster servicing profitability through the next several quarters as the recovery from the pandemic continues. Our participation across multiple channels in our production business further allows for diverse avenues of growth and success. Our direct lending channels continue to provide an opportunity for growth given our relatively low market share, and with respect to consumer direct, the millions of customer relationships we have in our growing servicing portfolio. Given these factors, we expect PFSI to achieve a return on equity for the remainder of 2021 close to its pre-COVID historical levels of approximately 20%. Looking forward past 2021, our financial outlook is driven by the goals that we expect to achieve with our businesses over the medium term, outlined by David earlier and supported by the strategies our leadership team has spoken to throughout the day. To review once more, these goals are: to maintain and continue to grow in our position as the #1 correspondent aggregator in the country; to grow our Broker Direct lending business to be the third largest in the country; to grow our consumer direct lending business to be the fifth largest in the country and through all of this production as well as targeted MSR acquisitions; to grow our Servicing platform to be the third largest in the country. These goals are not objectives for the far off and distant future, but positions that we believe can be achieved over a medium-term horizon and achieve while adhering to our core principles of risk management and profitable growth. Although the mortgage market is often turbulent and fast moving, we believe that over the time period, interest rates will generally rise, origination volumes will decline and industry capacity will readjust. Accordingly, our medium-term earnings outlook is reflective of conditions in a normalized market as well as the implementation of our plan to achieve these objectives. We also believe that we will continue to have opportunities to return capital to shareholders through the interim period while we achieve these objectives, further improving our returns on equity. Finally, we will continue to adhere to our principles of prudent financial management and modest leverage in the pursuit of these objectives, minimizing the risks surrounding this outlook and ensuring the continued soundness of our operation. Our projected achievement of these goals, along with our expectation of continued stock repurchases, results in an illustrative medium-term outlook projecting superior returns produced by PFSI. We expect to generate approximately $15 per share in the medium term in a normalized market condition with an associated return on equity of greater than 20%. Our view of a normalized market is an important component of this medium-term outlook. As markets normalize over the forecast period, we would expect industry origination volumes to decline to approximately $2.3 trillion per year. These volumes would be the result of interest rates gradually increasing and our expectation of a 10-year treasury yield around 3%. Given the declines in the overall market volumes and the significant market share that we already enjoy in our correspondent channel, we expect our correspondent volumes to decline as well but not as sharply as the overall market. This is due to the strategies that Abbie described to continue to increase our share in the channel as well as the various factors we have discussed that will support the growth of correspondent as a share of the overall mortgage market, such as reduced deliveries directly to the GSEs. In Consumer Direct, we will continue to grow our originations as market volumes decline through increased recapture of our growing servicing portfolio, expanded capabilities and new customer acquisition and increased purchase market penetration. All of these developments will be supported by our technology and marketing analytics, as Doug and Scott discussed earlier. The combination of these strategies will allow us to produce over 2% of total market originations annually in this channel, consistent with the fifth ranked retail originator in 2020. In our Broker Direct channel, we expect to continue to grow substantially over the next few years, more than tripling our total 2020 volumes and significantly increasing our share of the market to become the #3 broker lender. As Kim described, we will continue to utilize our strength and experience in client service and relationship management, combined with our evolving technology and tools, to expand our base of brokers and nondelegated sellers to achieve our objectives in this channel. Finally, our Servicing portfolio will continue to grow as a function of the significant volume of loans produced by each of these channels, supplemented by opportunistic purchases of MSRs against the backdrop of normalizing market prepayment speeds. We have demonstrated our ability to meaningfully grow our Servicing portfolio despite the significantly elevated prepayment speeds experienced in the last year and expect to continue to be able to grow to $800 billion in UPB over the next few years as our market share and production increases and the prepayment speeds decline. As market volumes decline over time, we expect industry capacity to gradually adjust to appropriate levels and for margins in each channel to also normalize to levels consistent with the longer-term equilibrium. In all channels, our estimates of those margin levels are lower than those experienced in 2020 and the first quarter of 2021. We expect normalized margins in each channel to have differing relationships to the margin levels we are seeing in the market today. We expect normalized Consumer Direct margins to be meaningfully lower than those experienced today as prepayment speeds slow and competition increases further. However, we believe normalized correspondent margins will be roughly in line with today's levels, which are near pre-COVID averages. With respect to Broker Direct, we believe margins will increase from their current low levels that have resulted from the extreme competitive dynamic in the channel today. The combination of these factors result in our illustrative outlook for PFSI's medium-term financial performance. Gain on loans held for sale decreases from the 2020 levels as significantly higher direct lending volumes and higher Broker Direct margins are more than offset by the impact of lower correspondent volumes and declining margins in the Consumer Direct channel. Additionally, over the medium term, we expect early buyout volumes and gains to return to roughly pre-COVID levels, adjusted for portfolio size, further reducing gains on loans held for sale. Increased direct lending originations lead to higher loan origination fees, while declining correspondent volumes contribute to lower fulfillment fees. Net loan servicing fees increased in our normalized outlook compared to 2020 due primarily to the larger servicing portfolio, which is projected to be approximately 87% larger in our medium-term outlook than at the end of 2020. Additionally, although our outlook for net loan servicing fees includes our estimated cost of hedging the MSR portfolio over time, 2020 results included a net negative impact from interest rate declines and prepayments experienced by the hedged MSR portfolio, which we do not project to recur in our outlook. The normalized prepayment speeds embedded in our outlook are also expected to moderate fair value impacts associated with the rapid prepayment speeds, such as those we experienced in 2020. Finally, we expect our overall expenses to be meaningfully higher in our medium-term outlook given the growth of our businesses while reflecting the significant efficiencies that we continue to build as a result of scale and the successful implementation of technology and process enhancements described by management throughout the day today. In particular, the continual decline in servicing costs described by Steve Bailey in our Servicing business and the process enhancements described by Jim Follette in our fulfillment operations will continue to reduce expenses on a per unit basis. As you can see from this outlook, even with rising rates and a declining origination market, we believe we are well positioned to continue gaining production market share, growing our Servicing portfolio and delivering significant value to our shareholders. And with that, I will throw it back to Kevin.

Thanks, Dan. With that, we've reached the end of our presentations. At this time, we'd like to take one more opportunity to answer your questions. Please welcome back, David, Andy and Dan.

All right. So Dan, this first question is for you, and it's about our outlook. It comes from Michael Kaye at Wells Fargo. Can you define the medium term?

So we don't have specific parameters around the medium-term, but if you look what we've laid out in our outlook, generally corresponds to when we'd reach a $2.3 trillion market, which is really a couple of years out from where we are currently. In addition to that, it will take a little bit of time to build the platform as we've laid out in our medium-term outlook, so building our servicing portfolio to $800 billion, building up our direct lending channels to the levels that we've shown in the medium-term outlook. And so between both of those factors, getting both to a normalized market as well as building up our platforms, we think that probably falls in the range of 2 to 4 years.

Got it. So this next question kind of stays on the theme of the outlook. So what are the potential upsides and downsides to the outlook? Are there new opportunities or investments that are not included in your forecast that could serve to boost these numbers?

I think generally speaking, when we're looking at our medium-term outlook, we consider it really to have more upside than downside. The -- specifically, I think what drives the upside to the medium-term outlook is really around the efficiencies that we think that we may be able to gain as we implement the various strategies and technologies and process improvements that were described throughout the day today. If you look at our medium-term outlook, we have, and I described that we have, included some gains and efficiencies. And really, if we're looking toward our production channels, the net margins that we've included in there are really what we've seen in a normalized environment historically. However, given the technology that we are planning and currently implementing and the process improvements there as well as, if you look at what we've been able to achieve in our correspondent lending business with the platform that we've built there, we're the #1 aggregator and our unit costs in that channel are really at industry best and lower than all of our competitors. We think we'll be able to achieve something similar with our other lending channels as well as in servicing and really drive to industry best-in-class unit costs, which would really allow a better-than-market margins in a normalized environment, net margins in a normalized environment, which would be upside to our outlook that we portrayed. In addition to that, our outlook doesn't really consider any additional opportunities for partnerships or additional products that could further enhance profitability, which would be further upside in terms of the outlook.

Got it. Got it. Okay. This next question changed a little bit to capital uses. So Andy, I'll pose this to you. The investor is asking, can you talk about your preference for capital return? How should we think about share repurchases versus quarterly dividends versus special dividends over time?

Yes. Well, we like quarterly dividends and we like buying back our stock. We've generated a lot of capital from earnings over the last couple of years and returned a lot of capital. PFSI initiated a dividend back in 2019. And we have sort of targeted a dividend yield of about 1%, 1.5%. We think that regular quarterly dividend is an important component of shareholder returns. It gives shareholders regular income. We've increased that dividend a couple of times since we initiated it. We've also been really active in repurchases of common stock, especially in the last 1.5 years. We -- since the start of last year, we bought back 15 million shares or 20% of the common stock since the start of last year. And the market has given us that opportunity, I think, with where the stock has been priced. I think it's fair to expect that -- us to continue to be very active in repurchasing the stock, especially if the stock price provides us the opportunity to generate returns that make sense for us. We think that share repurchase, buying back stock, makes a lot more sense than, for example, special dividends, both for us and also for shareholders. So the short answer is it's a combination of the quarterly dividends as well as buying back stock.

And I think, Andy, this buyback issue avails itself in both companies, both in PMT and PFSI, we've been very active in buying back stock when we see the appropriate returns and the appropriate capital that we have in place. And I think we have an active, active liquidity management program where we look at our cash over a 12- to 18-month period and we look at the returns of the buying back of stock, and we buy back that stock. And in the case of PMT, when we see the opportunity to raise capital at the appropriate returns, we go ahead and do the same.

Great. All right. This next question comes from Kevin Barker at Piper Sandler. Do you view the 20% ROE as a target in all parts of a cycle or a target ROE through a cycle? Considering many originators have significant excess cash and capital due to 2020, do you feel the industry-wide ROEs may run below targeted levels longer than we have seen in previous cycles? So maybe Dan, I'll throw that over to you.

Sure. I guess for -- I can't really speak for the entire industry. So I'll speak in terms of us and what we see for our outlook. The 20% overall that we laid out, or 20%-plus, is really a target. And so if we look at different interest rate environments, in different market environments, it's something that we believe is very achievable in many or most environments. And certainly, our historical ROEs have borne that out, if you look back over the past several years where we've been able to achieve 20%-plus ROEs through many different market environments. There are certain market environments where we believe our ROEs could fall below the 20%. And again, if you look back historically in years that were more difficult for the industry, specifically 2018, we saw our ROE drop to 13%. And really, that's consistent with the guidance, I think, that we've given previously where we'd expect to achieve mid-teen returns through different market environments, and that includes some of those more challenging years. As we're moving forward and as we've moved forward from 2018, obviously, our businesses have scaled and we've built our direct lending businesses, and those continue to grow. And so our expectation moving forward is that if we were to encounter a similar environment to 2018 that our ROEs would be north of what we achieved in that year. But there still does exist the potential to dip a bit below the 20%, although that is our target.

Got it. All right. This next question is around our debt rating. So maybe I'll throw this to Andy. Do you have a goal of becoming investment-grade rated by S&P and Moody's?

Well, I think we think both PFSI and PMT are investment-grade companies and investment-grade credits. We have -- part of the reason why you saw PFSI enter the unsecured debt market last year was really with an eye to that. We saw an opportunity with the success that the company had and with where the markets were to raise a 5-year term debt last year, an 8-year term debt again this year. And these were factors that, for example, I think Moody's and others have cited as improvements to the capital structure over time that would lead to increases in ratings over time. And we've received upgrades from both Moody's and S&P as a result. So I think you've heard from us that we've -- we're always focused on capital management and optimizing our capital structure, and we continue to do that. And I think that's one of the many things that distinguishes us, both PFSI and PMT, in the industry versus other mortgage originators and versus other mortgage REITs.

Fantastic. So this next question is concerning more of our -- or one of our financing partners. So David, I'll ask this one to you. The question comes in, are you concerned that Credit Suisse is a large part of your financing facilities?

Not at all. Not at all. Look, I think that over the now almost 14 years that we've been in existence, number one, Credit Suisse has been a very, very valuable partner of ours from the very beginning. We've seen banks go through their own issues. But this speaks to our governance process. And we have a strategy that requires diversification of financing partners. And so I think that, number one, we have a myriad of banks with substantial capacity, both committed and uncommitted. We have them across all of our assets that we finance. In addition, our facilities are moving more and more to 2-year facilities. So it's giving us a little bit longer-term in terms of those facilities. And I think that as we look at our financing capacity, we can withstand any business partner getting out of financing agency eligible loans, and we would be just fine. Having said that, all of our banks are really sophisticated, well-known banks. And even in the most extreme case where one of them wanted to get out of this business, I think it would be over a very long period of time. And I think it's -- in terms of financing agency loans, this is not an issue that we have faced in the last 20-plus years in this market through a financial crisis and a COVID crisis in terms of agency lines contracting. And I don't worry about this at all.

Okay. Next question goes back a little bit to the outlook. So Dan, I'll throw this back to you. Question is, what's your normalized level of servicing profitability? And what's the run rate we should expect related to EBO in a more normalized environment?

So if you look at our servicing profitability historically, pre-COVID, we typically ran between 4.5 and 5.5 basis points of the total balance of the Servicing portfolio. So if you look going forward -- obviously, in the current periods, we've had sort of outsized impact from EBO, from early buyout. But going forward, as that subsides, we'd expect our servicing profitability to be somewhat higher than that 4.5 to 5.5 basis points. So that's what's included in our medium-term outlook. And that's really driven by the increased efficiencies that we have, both as a result of the scale and the servicing portfolio growing as well as the process improvements and technology enhancements that we've detailed throughout the day, which will drive down -- further drive down our unit costs. With respect to the EBO and our expectation from that going forward in the medium-term outlook, really, as the impacts of the pandemic subside, we're expecting EBO, obviously, to decline from the levels that we've seen over the past year. We really expect it to get back to roughly pre-COVID levels but scaled for the overall size of the Servicing portfolio, so roughly a similar contribution to the overall profitability of the servicing business as we saw pre-COVID.

Got it. Thank you. So David, this last question is for you. And it really is around kind of the age-old the question that we've gotten a lot, but it's what about combining PFSI and PMT.

Yes. Look, I think our structure is such a competitive advantage for us, for both entities, and it has been from the get-go. And I think when you look at the history of these 2 companies, just the synergistic relationship that these 2 companies have and how they have benefited from one another is so unique. And many have tried to replicate it, and it's very, very difficult to replicate. And I think that as we -- as Andy spoke about, if you see the GSE footprint getting reduced or as we look to introduce more products, it gives us just a real competitive advantage over independent mortgage banks from both entities. PMT doesn't have to bear the cost associated with creating investments. And PFSI has an alternative source of capital, of which to be able to be a part of and to manage. And I think it's something that is such a part of our culture that there's just -- there's no reason for us to combine these 2 entities.

Thank you. All right. Thank you very much. That concludes our Q&A. And now I'll pass it over to David to close.

Thanks, Kevin. I'd like to thank everyone for your time today. We hope you leave here today with a deeper understanding of what makes PennyMac a leader in the industry and truly unique. I hope you enjoyed your time spent with our management team as well as hearing our vision for continued success. Like I said before, I'm really excited about the future prospects for both PFSI and PMT. For those of you that have any additional questions, please reach out to our Investor Relations team. Thanks again, and we hope to see you in person very soon. Stay safe.