David Spector: Well, look, I think the things we can’t control and clearly, from what we’re seeing in October, I would expect Q4 to be profitable in production. We’ve got an industry-leading correspondent franchise at really coming under severe pressure to swing it to the unprofitable side. And a similar story can be said on broker as well. I mean we’re making inroads in roads and broker. And while the current run rate of production is closer to $1.2 billion, $1.3 trillion market, it’s still more than enough to keep us operating profitably. I’ll tell you, I think the really in the consumer direct channel, the product that I’m really enthusiastic about is closed-end seconds. We had a very good quarter in closed end sectors where we originated $200 million in the third quarter alone.
We’ve originated $450 million to date. And the margins are very nice. It’s a profitable probable product for us. We sell them all into the secondary market. So there isn’t — we’re not retaining them. We do retain the servicing on them as we currently service the first on these loans as well. And one of the real added benefits is that it keeps capacity in place for our consumer direct channel. And lately, we will see a great decline in and having that capacity in place will be very important for us to be able to see on the opportunity to refinance borrowers in higher rate mortgages. And so I’m enthusiastic about what we’re seeing in Q4. And I think that we’re setting ourselves up to continue to continue to grow ROEs in an environment that’s higher for longer or in an environment where rates are decline.
Michael Kaye: Good to hear. — just on expenses. I know you took a lot out you were early, but I don’t think anyone was thinking anyone was planning for more great to be where they are now. I mean are you positioned okay on expenses in production? Or do you think there could be potentially more trending, just given the environment is probably worse than most of us were expecting.
David Spector: I think on the production and servicing side, we are very good at being able to bring up staffing or take down staffing based on the gearing ratios that we see for the market we’re in. I think that there’s a — from my perspective and the rest of the organization, we’re running a core functionality. And we’re not — we’re clearly outsized for a $1.2 trillion market nor are we going to put ourselves in that position. Having said that, we’re doing some things like looking at our technology infrastructure, and I suspect we’re going to be looking to reduce expenses there. We’re doing things like if there’s attrition, we make our management team jump through hoops before we hired or replace that. But by and large, to your point, we did — we took our medicine earlier.
We knew what we needed to do. We did it, I think, three or four times in ’22 alone. But having said that, it’s given us the opportunity to focus on growing ROE, which we did this quarter, getting it back up into the double digits.
Operator: Your next question comes from the line of Eric Hagen of BTIG. Your line is open.
Eric Hagen: Hey, good afternoon, how you are doing guys? First question here. I mean can you talk about how you’re maybe adjusting our pricing for different borrower credit characteristics, — any changes to the credit box even more generally as rates have moved up as high. Like whether you’re intentionally targeting higher quality loans because rates are high and affordability is at this constraint?
David Spector: Yes, look, I think that the way we think about pricing mortgages is, number one, we only buy loans that are scalable to the GSEs or that meet FHA or USDA guidelines. Having said that, I would say in late in the third quarter of last year alone, we made some conscious decisions in terms of pricing risk attributes to take into account higher rates. And so along those lines, a lot of the lower FICO FHA loans and VA and USDA loans, we believe, we’re going to acquire, I would say, a higher return in the investment for servicing, given that in a higher rate environment, typically, you see delinquencies increase. You see correspondent seller stretching and while we gain will diligence loans and we underwrite loans. And inevitably, you do start to see delinquencies go up.
I think this move while we get a little a little bit on the early side, I’d rather be early than late, as you can well imagine. And I think it’s bearing out. If you look at the Fcs and the LTVs of our production versus the rest of the market, I think it’s meaningful. It’s something that the management team looks at on a regular basis. But I don’t — we’re not arbitrarily making making changes to the credit box.
Dan Perotti: And you can see — Eric, if you look on Page 33 of the deck are the characteristics of the loans that we’re acquiring, especially through correspondent over time, the FICO has increased significantly, and a lot of that is in response to some of the factors that David was talking about and some of the changes that we made going back to the third quarter of last year.
Eric Hagen: Yes. No, that’s helpful. With the hedging results in the period, would you say that the function of the level of rates? Or is it interest rate volatility? Is there sort of like an ideal environment, you feel like for hedging the MSR and maybe even kind of teasing apart and talking through the hedging results in the quarter would be helpful. And any hedging through October as well. Thanks.
Dan Perotti: Sure. So we talked a little bit last quarter about the elevated hedging costs that we are seeing from volatility being very high and some of the impact of the inverted yield curve as a lot of that abated here in the third quarter, we saw a pretty meaningful inversion of the curve as well as all come down. We saw our hedge costs decline meaningfully our overall profile and our strategy at this point is really given how high interest rates are, typically, when rates were lower or more balanced, I would say, in terms of the maintenance of our servicing portfolio. We targeted a hedge ratio that was less than 100%, so that we would allow for gains in a selloff because origination volume would decline and for potential losses, limited losses in a reality because we would see an uptick in origination in origination income.
— with rates at this level, where so much of the servicing portfolio is meaningfully out of the money. We’ve really flattened that hedge profile and are targeting a profile that’s fairly close to 100%. So when we take out the cost of servicing, I mean, the cost of hedging rather, and then look at what our hedge ratio was compared to the change in value. We actually come up to pretty close to 100%, given the change in value that we saw during the quarter. So overall, there was relatively — from our perspective, little leakage given the size of the servicing portfolio and the MSR asset and the change in interest rates that we saw during the quarter. To your point, given how — given where we are in rate and the fact that so much of our servicing portfolio is out of the money, we would expect that this targeting of the hedge ratio closer to 100% is where we’d be probably at least for the next few periods, barring a meaningful interest rate rally.
The — I think that sort of covers where hopefully what we saw during the quarter here as well as what you might expect to see going forward.
