Q1 2020 Earnings Call
Expanded to include higher coupons and not just the lower dollar price production coupons.
It was very helpful for many market participants who do you.
Left hand chart shows daily fed purchases of MBS, which has now exceeded $500 billion.
It's in Q3 in 2012, demonstrating again, the speed and size, which events are unfolding today.
With.
That I will hand, it over to Matt.
Thank you Bill and good morning, everyone, if volatility increased and spreads widen non agency RMBS, we de levered reduced risk to raise thanks.
Thanks Kash.
We liquidated around 18 billion specified pools, NPPA, representing about 50% of our agency.
Initially saw lower coupons, where there was some sponsorship.
Eventually reduce exposure to higher coupons when the fed adjusted its Paul.
Timing of most of these portfolio sales.
Turning as they did before unlimited Q he was announced recession.
Purchases.
With respect to our legacy non agency portfolio, we had become increasingly concerned about levered portfolio liquidations occurring across the market.
Acceleration in size and frequency of margin calls arising from widening spreads.
Increasing haircuts.
As a result, we decided to liquidate substantially all of our non agency portfolio and to eliminate the aforementioned risks.
The effect of the portfolio sales, we just described.
Please turn to slide 13.
Another large driver of performance during the quarter collapsing specified pool pay ups.
On the upper right hand side of the slides shows.
Three and a half coupon high loan balance specified pool pay off levels.
Discharges indicative of the price action that impacted with risk appetite and balance sheet capacity low specified pools.
Perhaps or indicated by the.
Blue bars and measured on the left access.
Okay.
Reticle value and as measured on the right access.
In ceded premiums fell from around 4.2 around one.
With that took place in the market at negative pay ups.
Indicating that the specified pools traded below settlement date.
Specified pools have significantly recovered in April.
The lower charts show our specified pool breakdown on December 30, Onest and on March 31st.
Can feed that we liquidated essentially all of our lower pay ups stories during march to minimize losses, while delevering.
Specifically, we sold the net of 13.4 billion pools during.
Quarter across 3% to Florida half percent coupons predominantly in high LTV pull us.
Today, we are on the right hand side of this slide shows coupon performance for the first quarter.
Despite the massive volatility agents.
The RMBS ultimately performed well after the fed step to analysts on is shown in the bottom chart.
Our implied short positioning on the MSR asset moved to the 2% coupon end markets.
From two and a half in three years at the end of December as a result of the interest rate Kelly.
Our long holdings include two and a half through fives.
Please turn to slide 15.
This slide shows our interest rate and mortgage spread to exposure.
Although we recognize that these representation of our exposures are too simple to have been accurate descriptions portfolio performance during the crisis.
As volatility of risk measures regain their use from us.
These exposures remain low consistent with our historical positioning.
In the top right chart, you can see our exposure to instantaneous changes in mortgage spreads.
As of March 31st.
25 basis point spread widening would decrease book value by 1.4%.
Chart on the bottom of the page interest rates.
I see that as of March 31, and instantaneous parallel shift in interest rates upward of 50 basis points would negatively impact book value by only 1.3%.
Please turn to slide 16.
We'd like to dedicate time states wanted to biggest challenges we are currently facing.
Increasing mortgage loan forbearances servicing advances.
Well the could 19 pandemic began as liquidity crisis, because these things often go it has transformed into a credit traces.
Shutting down large as of the United States as far reaching economic impacts.
Unemployment has skyrocketed and is expected to continue decline.
With so much of economy, shuttered and people out of work and staying home.
Delivery of all types of borrowers creditors and lessees to pay their obligations has been called into question.
At the end Mars Congress enacted the cures act, which besides including relief checks and other supporting measures as an important impact directly on our industry.
One mortgage loan payments, which are ready to extend obviously, an additional 180 days for borrowers with fairly back mortgages.
Experienced financial hardship related to the pandemic.
Yes also prohibits foreclosures for 60 days.
Through one of our subsidiaries we own the MSR for over 8000 loans guaranteed by Fannie Mae Freddie Mac and as a result, we are responsible for making advances for certain payments. The events. They are not made by or borrower.
In normal times issue is not burdensome.
Coated our 60 day delinquency rate was about 30 basis points, and we were able to manage liquidity needs related to this and the ordinary course of our business.
However, with the forbearance programs now in place as a result at the cares Act the situation.
His difference.
During the forbearance period, we are responsible for remitting monthly scheduled principal and interest for loans backed by Fannie and monthly scheduled interest for loans backed by Friday.
Additionally, we are responsible for making an intermittent taxes insurance payments to local authorities and insurance companies.
Hi, good collecting data on March 20 Threerd.
This data is shown by the blue bars at the bottom of the Sharks and references the left axis.
As of April 20, Eightth, our experiences at 5.7, 10% of our loans by counts have entered for us.
The grey line shows the daily percentage changes in the number of loans and Refurbishments and as measured by their great access.
Yes.
It's worth pointing out that both the mortgage bankers Association and Black Knight loan servicing technology company published data regularly.
Regarding forbearance rates for GST loans, and our data has so far been very consistent with both of those sources.
Please sir.
It's a page to slide 17.
This slide we consider how our servicing obligations intersect with our liquidity position.
We have taken a scenario analysis approach and treated you scenarios.
Okay is a moderate stress case and a severe stress case.
Pending on the speed of the relaxation of social dismissing measures and the reopening of the economy. We believe that a 15% rate is a reasonable estimate for base case.
Of course is impossible to predict the ultimate take up rate with any certainty as you will see we believe our liquidity position is strong enough to withstand stresses to this outcome.
Scenarios differ primarily by varying the maximum forbearance.
Okay great.
The base case assumes 15%.
Moderate stress case assumes 20%.
The severe sterne movie across these three scenarios the very prepayments from 25 CPR in the base case to 20 CPR in the moderate stress case to 15 CPR in the severe stress case.
Repayment rate is an important driver is forecasting is advancing obligations.
Mr. Custodial accounts for principal and interest can be used to offset is like issues. So of course. These funds Misty paid back the next month.
Net variable is the existence of a servicing advance facility.
During the process of negotiating documents on such facilities for large wall Street banks.
We expect that any facility would accommodate both Fannie and Freddie advances.
Although subject to customary closing conditions and GRC approvals. We have included the existence of such a facility in our scenarios.
The last variable is the valuation of our existing MSR portfolio.
We have two outstanding facilities, where we borrow against our answers.
And the borrowing base depends on the market value of the MSR.
Therefore scenario, we stress Mr price in order to simulate potential emerging costs.
These price stresses start from our 331 valuation and declining from a 3.0 multiple down to a 2.0 multiple in the severe stress scenario.
All three scenarios exquisitely include payments of the estimated nonrenewable fee due in September.
Charge at the bottom left of this slide shows our projection for advancing obligations.
In all three scenarios you can see that the servicing obligation peaks right around at December 2020.
Before this curves rise quickly due to get accumulation of PMT Eni advances and then declines as we are able to recoup kenai advances from interim claims processing.
So even in the base case, the maximum advancing a million at $400 respectively.
To determine whether or not those are big numbers were small we need to overlay those actions.
With our liquidity.
The chart on the bottom right at the slide lays out a path of our liquidity over the next 18 months.
Starting with a steady state cash balance of around $1.2 billion.
The reason, we are holding such a large cash balance today is precisely in consideration of this true advancing obligation.
As you can see we expect our excess cash balances decline as we pass through the advance wave and then to return to a more normal level.
In all three cases, we maintain an excess liquidity buffer of between 400 million and $600 million.
Rick portfolio of our size and with the risk tolerances, we expect to be running we believe for good morning, and are subject to comfortable file.
It's important to us that you have full transparency about what we're seeing around servicing advances and how we're thinking about this in the context of our MSR portfolio.
We hope this explanation helps.
In summary, based on information between discussing today, we see quake and it's about our liquidity position.
Please turn to slide 18.
The reality is that this handymax has reordered everything and we have a lot of work to do before we are in a position to return kit business as usual.
Dancing obligation is significant and while we feel confident and our ability to manage it it will take time for events to unfold before we anticipate returning to a steady state business model.
To be sure there are multiple obstacles that will certainly dragged down earnings in the near term.
Include higher than normal cash balances increased servicing costs from our subservicer delinquent loans cost to set up and maintain the servicing advance facilities and uncertain can't MSR pricing.
Having said that you believe that the opportunity in our target assets is very attractive.
We discussed earlier with fed support agency Ta is recovered all of the March widening and then some so that returns in that part of the market are similar to what they were pre crisis.
Specified pool pay ups have recovered and much of what they lost in March but are still somewhat lower than they were when the prices began.
As a result, we're seeing returns on rate hedged agency RMBS into low to mid teens.
In the MSR asset that we're seeing the most interesting opportunities.
Well its shoot that there's much to work through regarding forbearances advances and higher costs service.
We still estimate that the forward looking returns on our existing book of MSR when paired with MBS is in the mid teens based on our Q1 valuation.
Earlier, we discuss some potential scenarios about the future path of MSR crisis.
Should MSR multiples decline.
The two and a half times on our existing book from three times.
We would estimate that the paired return would be in a very high teens.
MSR bulk market remains shut down so it's not profitable at the moment to acquire new assets there.
The MSR flow market slowly come back to life and indeed, we are buying a trickle up MSR assets in that channel.
The multiples in the flow market are usually lower than in the bulk market and while visibility remains somewhat unclear.
Today, we think at full product can be acquired below two multiples.
On a forward basis, we think that translates to yield north of 25% when paired with agency RMBS.
We don't yet know the amount of assets that can be acquired at those levels, but it is clearly very interesting at those prices.
The barriers to entry in the servicing business our many.
Every facet is time consuming and complex will mean market participants who already have the infrastructure process and relationships in place, we'll be able to access the condors kinds of returns just mentioned.
We had two harbors are uniquely positioned to take advantage of that attractive opportunity on an ongoing basis.
With each day that passes the outlook gets a little clearer.
As Tom said at the outset, we aim to be as transparent as possible and we will continue to update you with new developments over time.
With that I will turn it back to the operator.
Ladies and gentlemen, we will now have question answer session.
If you would love tough question, Dave Please press Star one.
Telephone keypad now.
If you find that your question has been on Sir you May remember yourself from Q.
Hosting started to again by Star one to ask a question on we'll just hold for a moment to allow everyone to stick.
We will take our first question today, which comes from.
Doug Harter. Please go ahead.
Thanks.
First thanks for the additional disclosure around the liquidity needs.
Just math and on your commentary about the attractiveness of of New returns can you just talk about or kind of where you are in the flow programs is that something that you guys are acquiring loans or Amazon is through the flu today, we were what it would take from a liquidity.
Position to feel comfortable.
Brief acquiring loans through flow.
Yes. This is bill I'll take that.
So so as as Matt said, we are.
Acquiring what we call a trickle.
During the depths of the liquidity crisis, we like many of other competitors.
Suspended our acquisitions there as I said that market is slowly coming back to life. We are we are back in the market on a limited basis really in a way that does not increase our.
Forbearance and advance risk.
There's different ways you that by targeting.
Certain types of collateral and so forth.
And then we can talk about later if you'd like.
That's what we're doing it in a way that said that that minimizes that liquidity burden and.
We are using the opportunity to see how much assets can be acquired at those levels and.
And how much and obviously at those levels, it's very interesting and.
If we're able to do that we will we will figure out away how to how to make that were.
Great.
You could just talk about.
The capital structure Aster after the book value decline in the quarter. The mix of preferred is obviously much much higher now and kind of.
How you think about that mix and kind of what would be the the plan to kind of get that back in line with.
Goals, you had previously or targets you have previously mentioned.
Well.
Thank you good morning.
Obviously, it's something that.
Acutely aware I'll, then review and.
So.
Yes, you're right that's.
Great. Thanks for taking on kind of construction, so let's say we.
On the review so people.
Yes, I'd be curious as to whether or not we would.
Yes.
Common equity.
And obviously that would be very dependent upon opportunities.
So.
Something though.
Yeah, we're obviously, where we have them.
Review.
Yes.
Yes, we will attempt to.
Deal with that.
The best we can.
Okay. Thank you Doug.
Thank you.
Our next question today comes from Merck Jefferies. Please go ahead, Sir your line is open.
Yes. Thanks, a question about the looks really progressing.
On slide 17.
Good.
No liquidity number does that assume that just based on the carrier.
No I have on him now orders that also ASU.
Draws on these facilities and turn the process of mckercher.
This is bill I'll take that it's a combination of all of that and so it's it's a pretty comprehensive.
Set of assumptions and models.
That incorporate to the best of our knowledge.
All of the potential.
Rags and sources that we will have at our disposal.
And we think where we cannot be tried to to be fair, but conservative.
And try to stress the models as you see like three scenarios. So it includes includes all of those.
Okay got it. Thank you Sir just given the high quality nature of a servicing advance in the low risk credits or use generally sensing somewhat unlimited capacity incidents that so you know God forbid you had a scenario is even more stressful then your for this us.
As you would just be able to expand the financing available to you.
Yes, I mean, we're certainly.
I think you can see this in liquidity projections, we are certainly sizing our.
Our needs.
Based on.
Stresses.
To the base case.
Q2, this to the severe stress and meet and even a little bit more than that.
Can't see that in your liquidity projection because the only went to the stress, but what it would still be true would hold up for it for so much.
Bigger than that.
Now it is true if we see.
Forbearance rates, increasing a lot higher than 25%, which Greg I mean, I don't see I think we're already starting to see.
I mean, as staggeringly big and the as the unemployment statistics are proceeding in the market. We are starting to see them leveling off a bit so we feel pretty good about projections.
Rise above one of your 25%, but obviously if that does where we're.
The negotiations that we have.
With the banks.
Could allow potentially to be renegotiating upsize, but we're sizing it to be something larger than 25% at the moment.
Okay, great any can you give us a sense of how they're in the blended returns might be impacted under the differences as they've been kind of course the reality.
Capital of the funding.
Advances in other businesses.
Well.
That might be a little bit more I don't if I have those numbers at my fingertips I do know.
What we said was.
Including.
Including the the higher Forbearances and increased cost of service.
And reduced cash flow.
From.
Loans in forbearance on the servicing assets.
That.
In our base case, the paired Levered return is still in the mid teens.
Hi.
I'd have to check about the other scenario I don't have them here, we can get back.
Okay got it okay. Thank you.
Our next question today comes from Bose George. Please go ahead. Your line is now open.
Hi, good morning.
So on staying safe.
Thank you first can you give us an update on book value since quarter end.
Good morning, guys. This is Tom I'll pick up.
So.
Well I'll pick up versus on at about.
All amounts from further comments so firstly.
I always have to open up the caveat that five weeks to model quarter America.
But.
Yes.
Yes, Matt alluded to in their script.
Hey, Paul May as we experienced a notable unfavorable repricing in spec pools, which generated the signal.
Ill.
However, there is a couple of things to note.
With respect to the effects that from Bernstein, it's on the servicing advances will have on future MSR marks.
And then additionally, we plan to record.
The internalization fee.
Time revenue in Q2.
So.
Yes, there's.
A couple.
The big variable obviously against the.
Corporate counsel Craig will Smith.
Please.
Yes.
Yeah, I'll take that one thanks, Tom and good morning Bose.
So.
So to put a little more color around.
Those moving parts the.
Specified performance has been strong in April and followed on in May.
In multiple point recovery afterwards.
After the big fell off in March basically things back to closer in line with where we saw them in February.
So back component.
For Q2 is is driving attribution of around.
Up 14%.
Okay.
Tom also mentioned.
Servicing so we like always are getting our servicing valuations bank they.
The value by three independent brokers.
[music].
However.
As time passes and we had this and we had this in some of our liquidity position projections.
As.
You can imagine ads as well.
Forbearance flows through and prepayments speeds, possibly pick up.
We might see some.
I'm pressure on multiple fronts.
And so with that.
If that sort of pricing work to come through.
We could see that sort of in the base case with the two and a half mold leading to a book value change of about.
That could be 150 or $175 million, so that can be that could be around an eight or 9% impact.
In the third thing that that Tom noted.
The internalization payment although it is.
It is due to be paid in September.
We are going to recorded in Q2, so that's about another 8% offset though.
I'd like to give you a more straightforward answer, but there's a lot of moving parts here and it'll depend on how those things play out.
Okay actually thanks, now, but that is very helpful. So I can get leaving aside the at the charge for the management fee. The this spec pool up 14, the MSR, maybe down eight or nine so like it's 5% up for the quarter to date is probably reasonable ballpark.
Yes. This is even outside of your view sort of for second so the MSR Mark.
That we're guessing about that that we don't we don't know we don't we have and of federal marks which don't reflect that kind of kind of movement at the moment given what we think is happening with forbearance rates increasing.
And how we think the world will think about that that is a possibility of.
Of how we think the world might unfold.
Right, but that depends on the path of of how the MSR asset performs and what the future marks end up being we highlighted in the flag. It just to put it out there that that is a possibility and could happen.
But we don't know we'll have to wait and see.
Okay, that's really helpful and stuff so that makes sense for in terms of conservatism on that.
Yes, thanks, very much and then just going back to that to stress scenarios. Like you note that you assume the reimbursement on that that the PXI.
Is after the 15 months.
Yes, there's been some discussion and some sat at the GRC might come out with something to reimburse servicers sooner than that you have any thoughts on how that might play out.
I don't Unfortunately, I am hearing the same thing you are theres lots of.
Proposals and possibilities influx.
These projections are are made with with the best information and assumptions that we have at the time, we update them.
Every day, as we learn new things and and incorporate new information.
So.
As of the moment Thats with these things include and thanks should we be able to reimbursed differently or hopefully better than will include those and we can update.
You guys on those when they have.
Okay, great. Thanks very much.
Thanks, Bob.
Our next question please.
Thank you. Our next question comes from Trevor Cranston. Please go ahead.
Hey, thanks.
One more question on the the liquidity projection the depend the forbearance scenarios.
I guess first I just wanted to clarify that that does include.
We are the buyout of the mandatory contract.
And then two I was curious if there's any.
Assumption in the projection.
Right around the dividend level to Andrew.
He is paid for the for the first quarter. Thanks.
Sure and hydro thanks for the question.
So the answers to those first question is yes today explicitly includes.
That payment also point out by the way what's not included in here is any.
Liquidity your cash raising from any portfolio adjustments that we.
I would make if necessary right. This is all keeping the portfolio.
Cost of what it is it does not include any any dividend payments, but it doesn't it doesnt in away, but the idea here is that that the portfolio is going to earn what it's going to earn.
Right and that's going to be paid out.
Right. So we're not.
Building into the liquidity projections, a a growth in that in the liquidity from not paying the dividend right. It's assumed to all be paid out so that included or not included I'm not sure but.
We're not taking that money and and then hoarding it to make liquidity look better it's assumed to be paid out to two due to the dividend.
Okay Gotcha.
Some of that color traveler.
Yes, thank you for that.
Yes, and then on the.
Scenarios, you were discussing for MSR valuations.
I was curious if there's any way for you to.
Provide some context around kind of what where do you think the.
Ralph approximate sort of multiple on the MSR book would be in this area with.
Thank you your stress case to answer in terms of forbearance.
Combined with like a significant.
Compression, there and hardware primary secondary mortgage rates for it.
Look it's very it's thanks for the question. It's that's a very hard question, it's very hard to know.
You're asking about what I think the future prices of something might be as the world unfolds right.
That said no and.
And we've talked about this a little bit.
On on.
Earlier in the quarter.
MSR Mark it is hard to value.
In.
Especially today, because it's not very many trades taking place.
Right and so the brokers are in a situation, where they say well how do I would numbers on something when I don't.
The any observable trades.
Illiquid and stressed market.
Without willing buyers among sellers right.
And so.
In the absence of that.
The brokers have taken the approach.
That.
Let's keep for the moments risk premiums constant to what they were.
Don't know, where that's true or not the speed with which the markets have been evolving and moving has been astonishing as Matt just told you specified pool pay ups.
And he's on the chart in the presentation. They went from four points down to 1.4 below.
All right in some cases.
Back up to four point, they're all back to where they work right now there will be increased costs from.
Servicing delinquent assets from the Forbearances, there will be reduced cash flows.
As the non paying borrowers don't pay their service fees. So there is what I would call a technical.
Cash flow effect.
All right.
From from the servicing the cash flows, but depending on the curing scenario that you think might.
Just in the world, whether it's a deferral option or something how long that persists for <unk>.
Is unknown, maybe it's even short maybe after one year.
People start paying Remortgaged again, if some of these deferral options come to fruition and there's not that much of an interruption. So it's hard to know.
All right I think we do think generally that.
That the low.
To multiple is very hard to achieve on any long term basis for these assets.
With willing buyers are willing sellers, just the nature of the casuals and the timing and what they're worth in the end the and the interest rate and convexity characteristics and so forth.
As I said in a previous comment I think it could go to two and a half depending on some of these things.
Depending on.
Lots of factors.
I don't see it going much below.
That.
So too.
I guess, if you had some very high stress scenario, 25%.
That no one is expecting including us.
Yeah I.
I guess, it's very hard to know.
As as as things normalize as trade start to occur.
Markets start to heal, we'll we'll get more visibility and we'll be able to speak with more more clarity on what we think listeners are.
Trevor third annually.
In our liquidity projections, we did we did and have like Bill said, there's all kinds of uncertainty, but we didn't do include scenarios that that you take us down to it to two multi even though we think that.
Well, maybe that sit here, we'll have to see what happened, but we do include those numbers and our.
Our projections.
Okay got you that's helpful.
Then on the advance facilities you guys are working on I know than our closed yet are you able to say anything about.
You know kind of what the what the cost of those facilities are likely to be whether utilized and assuming they do close.
Not really I'd say, we're still working on them and they're not close them and we're seeing good humor.
I mean.
I mean, they're very Margaret traveling I would say.
Yes, Okay, that's fair prepared to discuss I'm sorry.
Okay. Thank you guys.
Thanks Trevor.
Our next question today comes from Rick Shane. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning, and I hope everybody is doing well.
Wanted to touch on servicing advance facilities briefly.
Currently and I think Mark pointed this out servicing advances our triple A. type assets and get very favorable financing.
Im curious in this environment.
Pricing remains as attractive as it has historically and does access to servicing advance borrowing.
Represent another barrier to entry in terms of that business.
Sure. Thanks My question.
So.
So.
A servicing advancing as an asset class rise does typically in June enjoy financing could sponsors and so far that would be.
An asset, though that I think I think what you're thinking of is if we were to create the advancing securities and then sell them to the marketplace. What it would look like W. AAA security for the Investor that would buy those notes all right. That's the that's on the on the end user side to what were making here right.
So we really are the actually you're in your I I missed smoking you're in your Overcomplicated. My question I apologize I just meant on from a collateral perspective, but servicing advances considered to be AAA collateral that we get that it gets that it is because of where it stands in.
The waterfall, you typically get very favorable borrowing costs and very high advance rate.
Yes, that's true because the the counterparty risk is generally considered to be do you see risk instead of instead of the service or risk. Yes. The advance rates are typically I can tell you right market advance rate.
On on advanced facilities, depending on T. 19 eyes corporate advances typically range in the 80, 595% range.
All right those are just market terms for those kinds of things.
Yes in are you and are reflective of what you said.
Yeah and are you seeing any change in pricing given the current market conditions related to those facilities.
Yeah, I I'd say, it's probably.
It's probably a little bit wider than what it was and what it would have been in February.
But it's still it's will vary look, though I guess that are still very low compared to.
Compared to other things in the world at the moment.
Got it Okay. Yeah, you made the classic mistake of assuming my question with smarter than it really was.
Uh huh.
Wanted to on a very simple level make sure I understood that second thing.
You know look you've exited the non agency business.
We understand given market conditions, why you did that I am curious if you think that that is a permanent exit or that will be a business that you will and an opportunity that you'll revisit when markets normalize.
Well, obviously I'll take good morning, Greg It's times.
Obviously, it's something that we have seen on deep expertise and.
Well just have to see how things unfold.
Okay, great. Thanks, Tom.
You bet.
Our next question stay comes from Steven.
Hi, good morning.
You know effectively no credit risk now so I want to focus one one question on prepayments into on servicing it can first on all the repayments and refinance activity really more at a higher level.
How do you see the recent.
Environment impacting processing times and repayment speeds.
A lot of informing applications, you know borrowers that would have maybe been a clean already rather than a Wi Fi will now have an employment gap unemployment, possibly other things that I would I would have to take on slow that approval pipeline, but.
How do you guys see that impacting refinance activity I know the mortgage bankers pretty.
Optimistic that the mortgage the treasury spread Titans.
Pretty quickly back to to refocus levels, but would love to get your thoughts and then how to think about that from a lag on levied by index you know as they're going to extend will that set of six weeks as more of eight or 10 or 12 or more so comments around that would be great.
Sure I'll start with that one Steven that's a that's good.
That's a great and interesting question. These days, there's there's definitely a lot of uncertainty and speculation.
Going on out there I think one interesting thing that we've observed a very recently.
Just yesterday actually speeds or release for for the April period and.
Broadly I think they surprise most of the market on the on high side. So the.
That April closings would have reflected the very high M.B. I read and baby five rate and the rate environment sort of back in the end of February and an early March before was really came under any stress and I think most.
The market participants would have thought that there would have been.
A very big impact.
On the ability of people to to sort of go through with.
Closings, just with social distancing right and the country being being a shutdown as it was.
I think the seeds that came through in April showed that sat there probably was a pretty high pull through rates.
They were actually.
Yeah actually increased by about 25%, which I think is what people might have thought they would have increased.
No in typical times in normal times, given the given the prevailing interest rates and conditions. So.
I think that was you know, it's only one month and if it was a bit surprising.
And we'll have to see this is this is unlike anything anyone's ever ever really observed. So so we're monitoring that and you know, we're obviously going to watch the Jade as it comes in.
Let's see where that goes.
Yeah, I was that a few words to that.
I think though that there are there our forces on both sides obviously rates are.
At low levels right, so that in ordinary time should be creating very high refinancing volumes.
I'm 47 states now permit some sort of remote motorization.
All right.
Hi, our counter or think they'd be read.
Two thirds of recording offices allow allow electronic filing is today.
Verification of employment requirements have been relaxed across the country. So for us so but the world.
Is making adjustments to.
To allow for for the refinancing machines, you continue and I think this this month speed has.
Has been or selection of that that said you know.
Which was a surprise many people that said I think I think various wall Street analysts are are projecting speeds to slow down you know you know as much as much as a 15% or maybe even more next month.
We're seeing some signs on the refi index and so forth, but I think I think it slowing down.
From a high level and from a <unk> and so I think that speeds will probably remain.
More elevated than people might think.
Given given.
A more now you've thought about what the what the pandemic is doing and its little dismissing measures.
Great appreciate the comments and I guess before before asking you to predict the future again Oh.
Ask about the servicing us portfolio and just and just how the advance obligations restructured but can you provide any kind of mix would grow obligation how much of it it's scheduled versus actual for both interest in print quanta, what's different across Fannie and Freddie and certainly Danny I believe is scheduled schedule, but I don't think you guys having exposure there.
Can you give us any any break down there and you know maybe you can quantify the difference I mean, how much of an average age of payments is.
What's the pool and so if its actual principal advances instead of scheduled.
Much of that they've got a savings on the total advance obligation to you guys, just 5% or 15% or what is that number on a delinquent payment.
Okay. So.
The short answer to your last question is I don't know I don't have those numbers handy.
On the breakdown of the portfolio.
20% of our portfolio is Fannie Mae actual actual.
I want to say around a 30% is.
His Freddie Mac.
And therefore scheduled actual right right and the balance and the balance is Fannie Mae schedule schedules.
You wouldn't be it after the actual.
Well.
I was it was a even even the actual actual though which has no principal and interest.
Advancing.
Mcgeechan does have to unite advancing yes, yes, and it's obviously an most.
Oh, yes, and and and the most ways the way the modeling works and having them out of the way that the world works is that the bigger part of the obligation.
Anyway.
Okay, but still I mean, I've I've heard correctly, 20% is scheduled excuse me is actual actual which means you're not advancing any scheduled on received interest for principal in that 20%.
That's correct.
Great. Appreciate you clarifying that I'm not looking for that information.
Back to predicting the future.
You know w., a recovery or W of that outlook is certainly concerns people are talking about in a one aspect of 120 day rule is you know if you get one good payment when they go into forbearance again, the clock we set so.
I don't want to ask you to run a scenario for every possible situation, but in that event, where you're maybe forced to cover.
Seven of the next 10 mortgage payments you know how does that look from a liquidity standpoint, I would imagine the government would have to step down in that type of situation with some facility because it's certainly not at a two harbors specific problem. It would be everyone, but do you have any thoughts around that with the clock lead setting if you get one payment in.
Not very deep ones.
I would say that that if that the that the advanced facilities are built to build to cover that.
Right, So I think.
These things.
You know there that that they would be scalable in order to accommodate that but the sizes.
Our large enough as you know, especially with with with the penile advancing the principal and interest custodial accounts can be used to offset that and so well look while a low rates and fast prepayments.
You know for for premium mortgage portfolio are generally not not great.
In this instance, it was it would go a long way towards towards covering those sorts of obligations as I said the <unk>. The p. Eni part of the advancing is generally we look at it as being the easier.
To accommodate because of that.
And so I think all of those thoughts would be true if that if that were to take place.
Great well I appreciate likely earlier I would add I would add to like we said earlier, if you know if a scenario like that worse to happen. We of course, you know we of course will then.
Have time right there we do habits.
One of an unlimited amount of time, but as time passes that allows us to sort of be reactive and work on either additional facilities for upsizing of facilities.
Which I think we would be able to do if we if we needed to in that scenario.
That's a great point, because it's not it's not a margin call. One day issue, it's something you'll see playing out of that much. So you'll see the the Doug young as it is as you follow your delinquency numbers. So I appreciate the comments today. Thank you very much.
Thank you thanks Steven.
Our next question comes from Kenneth Lee. Please go ahead.
Hi, Thanks for taking my question just wondering on a broader level how would you characterize your current appetite for making the investments and over the near term just give him to potentially attractive opportunities you see.
Weigh it against the uncertainty that's a that's one on environment. Thanks.
I'm sorry could you repeat that question I don't think I I don't think I caught it.
Yeah, certainly I've just on a broader level just wondering how would you characterize your your current appetite for making investments in the near term given the potentially attractive investment opportunities you're seeing.
Weighed against the uncertainty you're seeing Rob environments, and Relatedly, you know, how how leverage and the portfolio could or could evolve a little near term.
Yeah I'll start.
This is Matt I mean and in in one word where we are quite cautious here I think we have to.
Get a little bit of.
Time passage and a little bit more visibility visibility into what our you know what are advancing obligations are gonna be and.
And see how forbearance unfolds and sort of look at its impact on on all mortgage assets.
And we're looking forward to doing that I think we're not we're not quite there we do need some passage of time, but like I said earlier, there's there's.
You know there's indications that there is interesting opportunity out there once we feel like we're in a comfortable position to.
To take advantage of things, but over still pretty cautious today.
I mean, I would add one one thing that I think is sort of.
Self evident and away like like once taking both for that would be win win.
When the forbearance uptick rates start turning over I.
I guess like seen another contacts once once you see that then you can sort of jacked really what's with the future is gonna look like and so forth and so I think that's that's one of the main thing that we're looking for.
Okay very helpful. Thanks, again, and hope everyone stay safe.
Likewise, thank you very much like the idea.
Our final question comes from my few how nice. Please go ahead.
Hey, guys and thanks for taking my question just just a few quick ones first how you are you Myers and sort of counterparty risk with the non bank Servicers are the guys you might as well.
Just curious on it.
What's it like out there.
Well I'm, sorry from from people, who who who are buying from or.
What kind of choice I mean, where frankly, mainly sub servicers when some of the capital rules coming out well could come out of liquidity Ltacs, how does that just sort of not being monitored I guess easy question that you feel like there could be it the need to transfer servicing at some point.
Right. So so the answer is no I mean, we have you have.
We have three sub servicers as you know right now and we've been public about who they are its flagstar bank Jos a bank right, there's dogan, you'll which is.
A pure sub service or they don't own any servicing they don't have particularly any any capital stress here.
And then we've got Mr. Cooper, we <unk>, we have ongoing diligence reviews with them and <unk>.
And we checking with them about these these sorts of things.
Regularly and periodically. So so we are we don't have have concerns at the moment about that.
Okay. So there's no reason to go back up servicing or anything of that nature rencen to anyone of them going into liquidity issues.
I'm sorry, Keith like you said, one more time I'm I'm, sorry, I'm, just saying backup servicing things like that there's no is there anything place to move servicing if you have to.
We do not have have like a hot backup in place no. We don't have that no. One of the advantages I think of of our model is its diversified.
Nature of the thing right that we have it.
It it's spread out among among different.
Different sub servicer. So again as you know our portfolio is roughly split 40 30 30.
All right.
You know to the extent that we would we would be able to potentially see.
Through our regular reviews, any any stress or or.
Maybe maybe on a forward looking bases try to.
Anticipates such things, we can of course entrance the process to move servicing from from one to the other.
That that you'll be do that.
No I not readily book, but but we do it.
We're very experienced in that that could be accommodated in some number of some amount of time, obviously requires coordination and approval from the geographies.
So we could do that but we do not have a hot backup in place.
Got it okay.
Thanks, Ryan for that and then on just from a modeling question that that sort of net interest spread that you guys get that 113, I mean, there's been a lot of moving parts, obviously with the sale, but not instant book.
Repo costs coming down.
And how do we think about.
You know trendy and how that did a trend how should we think about modeling that going forward.
Well I can I can take that question is Mary.
So I think we we expect on the asset side the yields to be in a low to mid threes in the near term I would note that you know as any de lever the portfolio.
Oh, we correspondingly needed to reduce our net book at a time when three month LIBOR was extremely elevated and stress and long term rates for low.
So we do expect that this will impact.
You know in Q2.
You know, but as slop Enray post reset we expect you know the net yield to return tomorrow recently observed levels.
Got it when they will be an impact from a <unk> there will be lower yields because the needs of that higher yielding not easy book is out.
Yeah that'll have a slight impact.
Got it great. Thank you.
That's a lot.
Ladies and gentlemen that completes todays question and answer session.
Just trying to call back over to Matt Good care for any additional closing remarks.
Thank you Claire and thank you all for joining our conference call today, we look forward to speaking with you again you have a wonderful.
Ladies and gentlemen.
Today's conference call. Thank you for your participation.
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