Q1 2024 PennyMac Financial Services Inc Earnings Call

Participants

David Spector; Chairman of the Board, Chief Executive Officer; PennyMac Financial Services Inc

Daniel Perotti; Chief Financial Officer, Senior Managing Director; PennyMac Financial Services Inc

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

Doug Harter; Analyst; UBS

Crispin Love; Analyst; Piper Sandler Companies

Kyle Joseph; Analyst; Jefferies

Terry Ma; Analyst; Barclays

Eric Hagen; Analyst; BTIG

Presentation

Operator

Good afternoon, and welcome to PennyMac Financial Services Inc's first-quarter 2024 earnings call. Additional earnings materials, including presentation slides that will be referred to in this call are available on PennyMac Financial's website at PFSI. dot PennyMac.com.
Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on slide 2 of the earnings presentation, it could cost the Company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials.
Now I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Financial's Chief Financial Officer. Please go ahead.

David Spector

Thank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter earnings call. PFSI. reported net income of $39 million and an annualized return on equity of 4% in the first quarter. These results include $125 million of fair value declines on mortgage servicing rights, net of hedges, and $2 million of a nonrecurring legal accrual.
Excluding the impact of these items, our results were very strong. PFSI's annualized operating ROE was 15% as we continue to demonstrate the resilience and strength of our balanced business model. Our Production segment remained profitable, contributing $36 million to pretax income, driven by higher volumes in the direct lending channels.
And our large and growing servicing portfolio continues to anchor our financial performance with pretax income of $125 million, excluding market-driven value impacts and nonrecurring items. Total loan acquisitions and originations in the first quarter were $22 billion in unpaid principal balance, driving continued growth in our servicing portfolio to nearly $620 billion with 2.5 million customers.
Turning to the origination market, current third party estimates for total originations in 2024 average $1.8 trillion, reflecting growth from an estimated $1.5 trillion in 2023. However, we believe these estimates to be optimistic and dependent upon multiple interest rate cuts from the Federal Reserve in the second half of the year.
With current expectations for market interest rates to remain higher for longer and mortgage rates back up into the 7% range. We expect these third-party estimates will decline further from their current levels. So the origination market remains constrained.
Currently, we believe it is beginning to reset. In the last two years, we estimate approximately $3 trillion of mortgages were originated with a note rate of 5% or higher. And a higher for longer environment, this group of borrowers is expected to continue growing, supported by a purchase market with strong pent-up demand from key home-buying demographics.
It is our expectation that when interest rates do decline, many of these borrowers will undoubtedly look to lower their mortgage primary driving refinance volumes higher and total originations up to more normalized levels.
As I will discuss, we are very well positioned to capitalize on increased volumes of refinance loans when rates do decline. However, in the current market environment, we remain focused on adding new originations to our growing servicing portfolio, and we are also actively exploring a continuum of potential opportunities related to our proprietary servicing system.
These opportunities will allow us to leverage what we have built to unlock additional value for many of our for our many stakeholders. Sse is approving servicing system and has helped to drive excellent customer service for our large and growing base of borrowers.
Since its launch in 2019, our servicing cost per loan are down more than 30%, and the results of multiple industry surveys have confirmed our position as one of the lowest cost servicers in the industry due in large part to our utilization of SSE.
Not only does our servicing system provide our associates with a friendly and intuitive user interface, but its increased flexibility versus other systems was highlighted during the pandemic, we were able to seamlessly implement system changes to quickly accommodate regulatory changes, which allowed many of our borrowers to enter and exit forbearance programs via self-service and automated channels.
One opportunity we are looking at includes expanding our subservicing business beyond PMT, potentially beginning with some of the larger correspondent sellers we already work with to maintain smaller servicing portfolios.
Additionally, we have been approached by numerous innovative technologies in the industry, looking to partner with us leveraging SSE alongside other mortgage technology to create a comprehensive marketplace of next-generation mortgage banking technology.
While a meaningful upfront investment and a longer timeline would be required, we could also look to potentially commercialize SSE into a multi-tenant industry-leading servicing software platform, licensing our technology to other servicers in the industry.
We believe SSE's competitive advantages versus other servicing systems in the marketplace are meaningful, and we are encouraged by the opportunities that we have explored thus far. However, we will be thoughtful, further monetizing SSE, and we remain committed to doing the right thing for our customers and other stakeholders.
As I mentioned earlier, our first quarter annualized operating ROE was 15%, a significant increase from the first quarter of last year and highlighting our ability to generate strong results in what we expect is one of the smallest quarterly origination markets in this interest rate cycle.
As we look to build on these results in 2024 servicing income is expected to continue driving the majority of our operating earnings, particularly in a scenario where interest rates remain elevated. The majority of our servicing portfolio continues to be comprised of borrowers that have locked in very low interest rates, which we expect to provide a base level of earnings that persists for an extended period of time supporting our continued profitability.
Additionally, delinquencies remain low due to the overall strength in the consumer as well as the substantial accumulation of home equity in recent years due to continued home price appreciation.
Our multifaceted approach to mortgage production and position as one of the largest producers in the country provides us with unique access to originate and acquire newly originated mortgages in the current market. In recent periods, we have added a meaningful volume of mortgages with no rates of 5% or higher to our portfolio.
And we expect this population of borrowers to provide strong leads for our consumer direct division when rates do decline as rates remain higher for longer, this population of borrowers is expected to grow, driving an even larger opportunity in the future.
As of March 31, roughly 25% or more than $150 billion in UPB of mortgage loans in our servicing portfolio were at these higher rates, driving our expectations for additional upside potential in our Production segment when the origination market improves.
I will now turn it over to Dan, who will review the drivers of PFSI's first quarter financial performance.

Daniel Perotti

Thank you, David. PFSI reported net income of $39 million in the first quarter or $0.74 in earnings per share for an annualized ROE of 4%. As David mentioned, these results included $125 million of net fair value declines on MSRs and hedges, and $2 million of accrued interest related to the final Black Knight arbitration result.
The impact of these items on diluted earnings per share was negative $1.74. PFSI's Board of Directors also declared a first quarter cash dividend of $0.2 per share. Book value per share was $70.13, down slightly from the prior quarter end, primarily due to the annual issuance of additional common stock related to our equity compensation awards program, which more than offset growth in retained earnings.
Turning to our production segment, pretax income was $36 million, down slightly from $39 million in the prior quarter. Total acquisition and origination volumes were $22 billion in unpaid principal balance, down 19% from the prior quarter. $20 billion was for PFSI's own account and $2 billion was fee based fulfillment activity for PMT.
Pennymac maintained its dominant position in correspondent lending in the first quarter with total acquisitions of $18 billion, down from $24 billion in the fourth quarter of 2023. The decline from the prior quarter was driven by our focus on profitability over volume.
Our correspondent margin in the first quarter was 35 basis points up slightly from 34 basis points in the prior quarter. Acquisitions in April are expected to total approximately $7.5 billion and locks are expected to total $8.1 billion.
In Broker Direct, we continue to see strong trends and continued growth in market share as we position PennyMac has as a strong alternative to channel leaders from. Despite a smaller overall market locks in the channel were up 20% from last quarter and fundings were essentially unchanged.
We reported broker channel margins of 103 basis points, up from 79 basis points last quarter, which included the impact of higher levels of fallout during that quarter. The number of brokers approved to do business with us at quarter end was over 4,000, up 36% from the same time last year. And we expect this number to continue growing as top brokers increasing and increasingly look for a strong second option.
In Consumer Direct lock volume was up 35% from the prior quarter and originations were up 62%. Higher volumes in the channel were driven primarily by an increase in streamline refinances of government loans as mortgage rates declined from their recent highs, providing us with an opportunity to lower mortgage payments for borrowers who previously locked in higher rates. Production expenses, net of loan origination expense were 7% higher than the prior quarter, primarily due to increased volumes in the direct lending channels.
Turning to servicing, the Servicing segment recorded pretax income of $5 million, excluding valuation related changes and nonrecurring items, pretax income was $125 million or 8.1 basis points of average servicing portfolio UPB.
Loan servicing fees were up from the prior quarter, primarily due to growth in PFSI's own portfolio as PFSI has been acquiring a larger portion of the conventional correspondent production from PMT in recent periods, operating expenses increased slightly.
Earnings on custodial balances and deposits and other income decreased slightly due to a smaller due to smaller average balances during the quarter. As a result of seasonal tax payments at the end of 2023. However, custodial funds managed for PFSI's own portfolio totaled $5.4 billion at March 31, up from $3.7 billion at year end.
Realization of MSR cash flows increased $34 million from the prior quarter due to lower average yields during the quarter. Pdl income was down slightly and we expect this contribution to remain low for the next few quarters. The fair value of PFSI's MSR increased by $170 million, driven by higher mortgage rates at the end of the quarter, which drove expectations for lower for lower prepayment activity and higher earnings on custodial balances in the future.
Hedging losses were $295 million our hedges were positioned with increased net exposure to interest rate volatility during the quarter to limit elevated hedge costs. The Investment Management segment contributed $3 million to pretax income during the quarter and assets under management were unchanged from the end of the prior quarter.
Provision for income tax expense was $4.6 million, resulting in an effective tax rate of 10.4% due to the vesting of certain stock-based compensation awards, which positively impacted PFSI's tax liability.
Finally, on capital, in February, we issued a new five year $425 million term note secured by Ginnie Mae MSRs and servicing advances and subsequently retired $425 million of secured term notes due to mature in August of 2025.
We'll now open it up for questions. Operator?

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Bose George, KBW.

Bose George

Hi, everyone. Good afternoon. I wanted to ask first just about the hedging this quarter. Just I guess, could you just kind of walk through a little bit about what drove some of the hedge ineffectiveness this quarter?

Daniel Perotti

Yeah hi Bose. Thanks. This is Dan. So as I mentioned in the remarks that during the quarter, we were positioned with a year an increased exposure to really interest rate volatility overall, meaning that if interest rates were a bit more volatile, then that would lead to greater loss exposure in the MSR either way. The reason that we yes, whichever direction the rates move up.
The reason that we were positioned that way, it was, as I had mentioned, due to the elevated cost of hedging during the quarter, given the inverted shape in the US, yes, significantly inverted shape of the yield curve during most of the first quarter and at the onset of the quarter and as well as the elevated levels of implied volatility and options.
And we are seeing a pretty significant potential cost for maintaining our typical hedge position and so on, we needed to identify if we need it. If we wanted to, I'll take that sort of except those hedge costs and which would be enough to ensure that money that would be insured to be lost on the hedge or open up certain exposures.
And so we elected to open up certain exposures. As you know, interest rates were and significantly volatile in the first in the first quarter. And that led to the on the hedging, the hedging loss that you see.
As we're moving into the second quarter, we've repositioned our hedge. We have really two factors that have changed on. One is that the hedge at the shape of the yield curve has changed on overall levels of volatility and have also changed implied volatility in the options market.
I mean, so that has improved the cost outlook of hedging, and we've also repositioned our hedge to what I would call sort of a more a more traditional profile on where we would expect games in a selloff and losses in a rally and so we don't expect as we go for the same type of recurrence of the same type of result.

Bose George

Okay, that's helpful. Thank you. And then I wondered as the VA announced that the VASP. program and were they purchased loans that was otherwise going to foreclosure? Or do you think this could remove a lot of the tail risk from VA servicing and then in turn improve valuations, especially for the VA exposure that you guys have in the MSRs?

David Spector

Yes. So I think that under the taste the program, I think it's a really good program for existing customers that are delinquent because it would remove the tail risk of taking those loans down a foreclosure stop advances and some of its value to us. It's a little bit concerning because there is some moral hazard around the program on, but I'm concerned that lead to some level of strategic defaults.
And I continue to be a will recognize this and put some controls in place and come around it. And I think there's also phenomena in the marketplace because interest rates have increased meaningfully so quickly there's kind of a tale of two cities that pertains to VA loans for many of the borrowers already have really low rates.
And I don't see them really engaging strategic defaults are really being in this position, the ones with the higher rates that I'm really concerned about on. But, you know, suffice it to say, I think the devil is going to be in the details of the VA discloses more Dan can go over kind of where the portfolio sits today to build a lot of great work on that.

Daniel Perotti

Sure. As we look at our servicing portfolio today and what loans might be eligible for VAs under the guidelines that we have seen, we think it's about 4,700 loans or $1.2 billion of UPB of outstanding VA loans that would be in that deep delinquency position where they don't have an alternative elsewhere in the VA waterfall that would help serve their loss mitigation needs come in. So overall versus our total portfolio, a small portion today.
In terms of the go forward implications for VA servicing and the valuation of VA servicing, as I mentioned, it could be somewhat beneficial in terms of our current portfolio looking at the delinquencies certainly helps remove some of the on the delinquency risk and downside around VA loans and then in more extreme cases.
But as David mentioned, where we have potential concern today is around the moral hazard and how that could eventually play out and if we and others would sort of get comfortable with that. So I think it's a little bit early to say whether it would have a net benefit or negative impact in terms of the surfacing value.

Bose George

Okay, great. Thanks for that.

Operator

Doug Harter, UBS.

Doug Harter

One of the things. Can you talk about the market for originating second, second liens, how that was in the quarter and how you would view Freddie Mac's new announcement?

David Spector

Hey, Doug, how are you today? I think that, but we are very supportive of the GSEs and getting in to second lien originations, say by the sheer fact they offer cash out refinances they kind of already here are in that market. And I think that, you know where we see issues in the marketplaces. We see cash out refinances being done on low rate mortgages, which I think is not a great place for anyone to be in.
And that's why we came out with the second lien program. Um, we I think that you know, and with Friday's announcement, I would just expect that Fannie will follow suit on their portfolio. I think it's going to I think it's an important tool for borrowers who need or want to tap their equity on. It creates some standardization in the industry.
And I think it's something that will be what could be could be very meaningful from our perspective in a world where we're originating now north of $100 million a month of closed end seconds. It's and it's a product that's a key component of our of our of our product offerings to our to our customers. But I'm and I'm really excited about it.
And I know that there's you know, there's some there's some issues around concerns around, you know, private capital getting crowded out. But I think it's I think the fact that that people are you have you have some borrowers who are taking cash out refinances and paying off low rate mortgages is a very important issue that is going to get addressed by the offering of the second lien.

Doug Harter

Great. Thank you.

Operator

Crispin Love, Piper Sandler.

Crispin Love

Thanks. I appreciate you taking my questions. Just based on some of your comments, it seems that servicing will be a key driver of operating results. Just given the current rate environment rate cuts being pushed out, given this, do you have a target in mind on servicing portfolio growth as you move through 2024? And also just what's your appetite for acquiring and that's MSRs?

David Spector

Well, if we have them built a really great model in terms of growing the servicing portfolio from as a byproduct of our organic, our organic growth strategy and as we continue to lead in the correspondent space and continue to grow our presence in the broker direct space. I expect that our servicing will continue to grow at probably even a little faster clip.
And I don't we don't have we don't have servicing size goals in the company we could go out and buy big block of servicing and get really big really fast. What I'm really focused on is the organic growth of the portfolio.
And I think that we've done a great job in the 17 years that we built this company to build this balanced business model with a flywheel that when rates do decline, we can offer refinances to our borrowers. And we have seen strong consumer direct channel to meet that challenge.
And so I would expect the support to continue to grow. And, you know, I think that you know, as we see that growth takes place, you know, we're going to we're going to continue to be on the right side of that grow such that I'm not I don't see a melting ice cube scenario and anytime in the future.

Daniel Perotti

Yes, just to give a little bit more definition to that, if you look at what our pace of for origination flash acquisition through our direct lending and correspondent channels, we've typically been adding $20 billion to $25 billion of servicing overall to the platform per quarter. We have some runoff against that.
I think we are around $10 billion this quarter so that you can sort of do the math there. Overall adding $10 billion to 15 billion a quarter is around the pace that we'd expect to see most likely through the rest of the year.
And we do we do look at servicing portfolios in terms of the acquisitions. We do review the portfolios that come out onto the market. But as David mentioned, we are focused on adding to PFSI's portfolio generally at a higher note rates.
And there are a few more of those types of portfolios that have come out recently. But there are also still a preponderance of lower note rates, mortgage servicing portfolios on which may be attractive as a PMT. more as a PMT. investment, but less so for PFSI.
And although we look at those portfolios, generally speaking on the return. We've not seen any that sort of meet our return hurdle as well as portfolio characteristics that we would want to add to our portfolio. We have significant control over the characteristics of the loans that we add to our portfolio through our through our production channels and specifically in correspondent able to shape the type of loans or the characteristics of the loans that we're bringing on to be able to limit the downside and have less control of that if you're buying sort of blocks of servicing book servicing.

Crispin Love

Great. Thank you. I appreciate that. And just one last one for me. At gain on sale margins, that increase in the quarter looks to be mostly driven by Broker Direct and you just discussed some of the dynamics there and what drove the margins higher? And then just competition and Broker Direct broadly with you being a top click, the top three player in the channel.

David Spector

Look I think that on the broker direct store in in Q1 is really something everyone in the organization is incredibly proud of and we're continuing to gain share and Broker Direct and I think it's really a byproduct in that top brokers see PennyMac as a strong alternative to the top two participants.
And we've got great tech supporting our brokers and brokers need a strong second option, I would say as it pertains to gain on sale margins, look, we've there was a period of time, you know, a year or two back when there was irrational pricing taking place in this part of the market. And I think we've seen a kind of a return to more rational pricing.
And, you know, it's steel margins are continue to remain good. And I think that, you know, it's something that I foresee continuing in Q2 and beyond. But it's just there's just a lot of a lot of good things coming out of broker direct from, you know, just from broker feedback. And we're seeing increased amount of jumbo activity at a broker direct and Issuer Services it's a very meaningful shift quarter over quarter.

Daniel Perotti

One of their other note that I have the one other note that I have on the on the broker margin too, is that if you look back to the fourth quarter, we broker margins were impacted by some fallout in excess of our model that we experienced in the fourth quarter as we had that sharp interest rate rally and that did not recur in the first quarter. And so we view the first quarter as a bit more normalized for the current environment and in line with our expectations on barring some significant change as we're going forward in terms of the broker margin specifically.

Crispin Love

Yes. Thanks for that. Thank you for taking my questions.

Operator

Kyle Joseph, Jefferies.

Kyle Joseph

Hey, good afternoon and thanks for taking my questions. A lot of them have been asked. I just wanted to home in on slide 6 regarding the technology and post unlock, yes, you laid out four strategies. Is it going to be a four pronged approach? You anticipate focusing on one of these more than the other others and give us a sense for the timeframe for the layout of this?

David Spector

Yes. Look, I think it's not it's not a linear approach we're taking on. We're exploring all options as it pertains to SSE, and I'm really encouraged with the opportunities as they presented themselves. I mean, clearly, we have the most advanced system in the marketplace.
And as you can see from on the earlier slides that, you know, just the just what we've done or later sites from what we've done to drive down servicing costs is really is really remarkable in that. And that's a testament to the system that we have.
We continue to identify efficiencies. And I, you know, I look, I look at the opportunities in there and there are plenty follow on. I think first and foremost, we need to focus on continuing to drive down the costs and we need to continue to optimize our investment servicing platform.
Furthermore, I think then, you know, you know, with that we have a competitive advantage and that will allow us to it will increase our production capabilities on in the organization and that and now we've vitally important.
But I think as it pertains to see, the next logical step is sub-servicer and we need to expand beyond P&T. And there's some real opportunities there and soliciting correspondent sellers who maintain smaller servicing portfolios from. I think that there are there are banks and other large servicers who perhaps want to get out of servicing.
But clearly on our success on SSE compared to other offerings in the marketplace is being noticed. And I think that that's a that's a very I think that's a great selling point for us. We're also having good conversations with technologists and other innovative parties in the industry.
Interesting and building on our technology and working with us to get the technology out into the marketplace. And I think that the next final step, which is which is probably the option that's furthest away, is just commercialization of the technology that would require some investment to allow for multi-tenancy on the platform.
But I think that, you know, as I said, we've yes, as you know, there's a lot of talk about pay out in the marketplace. And when I look at what we've done on the system and I know many, many in the industry, I'm hearing want to get to 60%, 70% self-serve using a I were at 95% self-serve on our system.
And I think a lot of the AI discussions that are taking place in the marketplace are really yesterday's automation discussion ARM. And we built this system really to be to be robust and into really allow borrowers to Gino to really be served and I think that where we've had a lot of great AI development here in the organization.
On the production side, we have we've deployed AI to documents from clients and brokers, which helps in the classification of documents and extraction of data from on the servicing side, we can we can route all documents to the area that certainly has affected or needs to address documents coming in. We have a lot of great voice AI tools that we're using and what's exciting.
One is the one that, you know we can. We can record all customer conversations to drive better business outcomes, but also be able to see all customer complaints, which allows us to reduce the complaints to continue to reduce costs.
And so I think that this system is going to continue to outshine home and is one that is going to be really meaningful first and foremost for us. But we also think it's important for the industry, and I'm excited about seeing others and reap the benefits as well.

Kyle Joseph

Yes. Very helpful. Thanks for answering my questions.

Operator

Terry Ma, Barclays.

Terry Ma

Hey, thanks. Good afternoon. So I think last quarter you guys spoke about a seasonal decline in ROY. in the first quarter, but you should expect to continue to kind of build on that throughout this year. And obviously, you guys printed 15% operating ROE this quarter. So maybe can you just speak to your confidence level that you can continue to build on top of that 15% going forward despite the new, I guess, higher for longer rate outlook?

Daniel Perotti

Yes. I think from looking at the higher for longer rate outlook, we would expect our ROVs to generally be our operating ROEs, I should say to generally be in that sort of mid teen, potentially moving up to high 10s, our ROE level as we move through the year, depending on the size of the overall size of the mortgage market.
As David noted in his remarks, and despite the fact that we are higher for longer, there are more and more market mortgages that exist at these higher rates. And so any bit of interest rate volatility leads to greater and greater, yes, refinance opportunities or opportunities for the market to become that incrementally larger and sort of feed the flywheel in terms of our refinance business and boost our other channels.
And so on. So we do expect a general increase from these levels of our OE, but probably remaining in the mid to in the mid to high teens for this year.

Terry Ma

Got it. That's helpful. And then I just wanted to follow up on the hedge and if I interpreted your comments correctly, and you guys were initially positioned for more rate file in the first quarter that did not materialize. And so therefore, there were some hedging inaccuracies that you guys have since adjusted. Is it possible to kind of give a mark-to-market on how those hedges have performed quarter to date.

Daniel Perotti

And so we don't typically give that sort of inter-quarter updates and everything changes a little bit on a day-to-day basis but we are tracking adjusted for costs much closer to our 90% to 100% hedge ratio this quarter than what we saw last quarter.

Terry Ma

Okay. Great. That's helpful. Thank you.

Operator

Eric Hagen, BTIG.

Eric Hagen

Your line is open and the things that we've done looking at Genie correspondent I mean, how sustainable do you think those margins are at these rate levels? And how do you weigh the option to either cut your margin or expand the credit box to win more business when rates are at these levels versus maybe rates being lower, how would you maybe change your risk or return hurdles if rates are in fact lower?

David Spector

Yes. Look, I think as it pertains to us and we're not the organization that's going to be going down the credit box to get more production from. We're always focused on margins, return and profitability. I will tell you that in the first quarter we saw you know, we saw some from some kind of weird activity and we had a market participant and raised a bunch of capital that was just being overly aggressive on.
I will tell you that, you know, there's still share to be gained. We had a good quarter. We had over, we're going to finish the quarter over 20% market share. We're still the dominant player on the Government correspondent side, Tom, I will tell you that I expect margins you know, to continue to kind of run where they are today or I don't you know, we're kind of we're kind of holding steady state here on hand.
We're getting you know as it pertains to correspondents for getting increased gain on sale activity from good whole loan executions away from the GSEs. And so I think that that's that, that's important as well, but I don't know why I think we've gotten off to a nice start in April out, but that's continued through the quarter.

Eric Hagen

Yes. Okay, that's helpful. I'm looking at slide 23. And looking at the tangible net worth assets, I mean, is there a target range for leverage at these rate levels? I mean, you guys are doing a 15% pre-tax ROE. I mean, how does that compare to your cost of capital? Or how do you see that maybe changing different levels of leverage?

Daniel Perotti

So but overall, in terms of our total debt to equity, as we've got noted on the on the page, we typically targeted around [3.5]. We've been below [3.5] given the lower at a lower rate environment recently, we continue to add to our servicing portfolio and as we as we move through time, and that has driven up a bit our non-funding debt to equity ratio, which we target roughly in the range that we're in now between [1 to 2.5].
So in overall, I think we're in in terms of the non-funded debt to equity ratio in this in sort of range. We would expect in terms of the total debt to equity ratio could be higher. But that's really driven by our overall production volumes primarily, which that you know will be a function of the market more than anything.
And so we don't expect to dramatically change our leverage profile or to change our leverage profile in a meaningful way. As we're moving forward, we think we're managing to a prudent level there. And as I discussed before, we think that in the current environment that really results in a mid-teen -- mid to high teen operating ROE.

Eric Hagen

Got you. Okay. Thanks a lot. Appreciate it.

Operator

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

David Spector

I'd like to thank everyone for joining us on the call today. And if you have any questions, please feel free to reach out to our Investor Relations team. And I look forward to speaking to you all on myself over the next coming months. Thanks so much.