And then on the production side, to the extent that we see an uptick in production, there will be some uptick in the production expenses that goes along with that, and that will really be determined by the size of the market. And in particular, on the interest rate decline on the refinance side and if that expands that would necessitate some additional growth in those expenses.
Operator: Our next question is from the line of Trevor Cranston with JMP Securities.
Trevor Cranston: One more question on the hedging of the servicing side of things. The earnings on the custodial balances have obviously become pretty significant over the last several quarters. Can you talk about any hedges you guys have put in place to sort of protect that earnings stream as that fund potentially starts to move lower? And also just talk in general about how we should sort of think about the impact of lower Fed funds on the economics of the servicing business.
Dan Perotti: Sure. So our — soon, the earnings on the custodial balances on our servicing portfolio are projected to really follow the forward curve. So to the extent that rates today are projecting a decline in short-term interest rates, which they are, our projection for those cash flows that’s embedded in our MSR value reflects lower earnings on those custodial balances as we move forward in time. And that — those changes since the forward curve would change if you shock interest rates up or down, those changes in the earnings on the custodial balances are also incorporated into our hedge. That’s part of what we see changing in the value of servicing if we were to see an interest rate shock down. And that’s part of what we’re hedging what we’re hedging for hedging against.
If you look at — and we’ve sort of, I think, put out there in our earnings materials that our custodial balances are generally tied to short-term interest rates or Fed funds to the extent that we see Fed funds go down, we’d expect the rate that we’re earning on those custodial balances to follow to some extent to follow relatively closely the same way that it followed as interest rates increased. We’ll also see some of our financing costs decrease as the portion of our portfolio, the portion of our financing that’s really secured by MSRs is generally floating rate. And so you have a bit of an offset there as well in terms of that revenue versus the expense. But on the hedging side, so those will be somewhat offsetting. But on the hedging side, that’s part of what we are hedging against for a decline in interest rates is the decline in that — in those earnings on custodial balances.
Operator: Our next question is from the line of Shana Chao with Bank of America.
Unidentified Analyst: Previously, on the call, you mentioned the margin calls under secured debt. Like how should we think about how much rates need to decline before you see any impact of margin calls on your secured facilities.
Dan Perotti: We’re pretty over-collateralized at the moment. So currently, at the end of Q4, we had a little under $1 billion of cash on the balance sheet — we have the ability to draw against our secured facilities for around $2 billion of additional value. And as I mentioned, we paid down some of our secured facilities during the quarter with our unsecured debt issuance. So we really have a pretty be a pretty significant reduction in value to get to a point where we would have a margin call on our unsecured debt. Additionally, the hedges that we have in place, if we have a decline in interest rates, generate cash and that cash can then be used to pay off any margin calls that we might have. And so we’re really both from an overcollateralization point of view as well as from sort of the performance of the hedges were pretty significantly covered off against the risk of the margin.
Unidentified Analyst: Okay. Great. That’s helpful. And then I think we’ve heard from some third parties that even first season books, there’s been delinquencies for certain pools of Ginnie Mae, over 10%. It looks like the 60-day delinquency increased 40 bps sequentially for the USDA, but still relatively low at 5.2%. Can you just comment on what you’re seeing and then generate delinquencies and expectations going forward?
Dan Perotti: Overall, we’ve seen our Ginnie Mae delinquency fairly stable. There’s always some amount of seasonality as you’re going through the fourth quarter. especially in the Ginnie Mae book will you have an uptick towards December. And usually, there’s a pretty meaningful downtick in February and March as folks receive their income tax refunds. And so we saw a bit of that overall on the portfolio, though, delinquencies have been pretty contained as they were through the whole year. We publish our overall delinquency profile for the MSR in the deck were up slightly from the prior year in terms of delinquencies, overall delinquencies. So it’s not something, that we see as a significant issue, I agree that in certain pockets, there has been some pressure, and we have seen some in certain areas, some delinquencies, uptick similarly, we’ve seen probably better-than-expected performance in others.
The other piece that I mentioned, which is the way that delinquencies impact us. You may have seen that our servicing advances increased quarter-over-quarter really, that was not driven very significantly by delinquencies. That was really driven by seasonal property tax payments. A lot of that increase was really from current borrowers where just property values have appreciated pretty significantly over the past few years, property tax amounts change that impacts the amount that’s being escrowed and then maybe a shortage for a payment or two while the escrow analysis is redone and the borrower’s, escrow account sort of catches up. If you actually look at our servicing advances year-over-year, they went down slightly year-over-year in terms of looking at Q4 to Q4.
So the summary of all that is just that delinquencies, we have not seen a significant shift. And in terms of how it impacts us on a cash basis has been very contained and very similar to last year.
Operator: We have a final question today from the line of Kevin Barker with Piper Sandler.
Kevin Barker: I just wanted to follow up on the realization of cash flows line that came down pretty meaningfully. And we also saw prepay speeds drop quite a bit this quarter. Now obviously, seasonality played a big part in that. But do you feel that the realization of cash flows remains fairly low as we would go through the first half of 2024 given the portfolio is producing very low prepay speeds at this time?
Dan Perotti: To your point, the realization of cash flows declined a bit going from Q3 to Q4 as interest rates were high for most of the fourth quarter. We have seen a decent interest rate decline as we go into Q1, as I mentioned there, we haven’t been an uptick — some uptick in refinances that will flow through to some uptick in prepayment speeds. And so I think we do expect some uptick in the realization of cash flows as we’re going into the first quarter, given those dynamics. But overall, we expect that there’s — for the servicing portfolio and servicing profitability will still be significant and meaningful as we’re going through the next year.
Kevin Barker: Great. And then could you just provide maybe a little bit more depth on the demand for refinances versus closed-end seconds. Now I realize the demand is very low relative to the overall market and what it has been in the past, but just given your customer base and the servicing portfolio, are you seeing your customers start to lean in more towards refinances in last month two? Or are you seeing the close in second still starting to garner more retention?
