Q4 2020 Two Harbors Investment Corp Earnings Call
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And we're currently holding from the two harbors investment Corp, fourth quarter 2020 financial results Conference call. At this time, we're currently assembling today's audience and plan to be underway shortly.
I appreciate your patience and please remain on the line.
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Okay.
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Good day and welcome to the two harbors investment Corp, fourth quarter 2020 financial results Conference call Today's conference is being recorded.
And at this time I would like to turn the conference over to Poly Unison. Please go ahead.
Good morning, everyone I'm excited to join the two harbors two and look forward and working with all of you.
You're welcome to our call to discuss two harbors fourth quarter, 2020, and onshore as well.
On the call. This morning are Bill Greenberg, President and CEO.
Why are you whiskey, our chief financial Officer and.
Chapman, our chief investment Officer.
The press release and financial tables associated with today's call were filed yesterday with the S E T.
If you do not shop, a copy you may find them on our website or on the SEC's website and S E T.
And popped up.
And our earnings release and slide you have provided a reconciliation of GAAP to non-GAAP financial measures.
We urge you to review this information in conjunction with today's call.
I would also like you mentioned that this call is being webcast and may be accessed and the Investor Relations section of our website.
I would like to remind you that remarks made by management during this conference call and the <unk>.
And right May include forward looking statements.
These statements are based on the current beliefs and expectations of management.
And actual results may be materially different.
Because I bought a variety of risks and other factors.
We caution investors not to rely unduly on forward looking statements.
Except as may be required by law.
This does not update forward looking statements and expressly disclaims any obligation to do so.
I will now turn the call over to Bill.
Thank you paulino.
Thank you, everyone and welcome to our fourth quarter earnings call.
Before I begin I'd like to publicly welcome Paula Torch here on this first earnings call with two harbors.
I'll leave it brings with her more than a decade as financial services and Investor Relations experience and we.
We're very excited to have her here with us.
This morning, I will go over our quarterly results at a high level and share some thoughts on our forward outlook.
Mary will give more details on our financial results and Matt will discuss our portfolio composition activity and risk profile.
Yeah.
Turning to slide three we are very pleased with our fourth quarter performance and book value of $7 and 63.
Which represents a five 8% quarterly return on book value.
The results were driven primarily by continued outperformance of lower coupon TBA is some improvements and specified pool pay ups and some marginal tightening and MSR spreads.
We have spent a significant amount of resources over the years building out our MSR acquisition and oversight and platform and we reaped some benefits this quarter and we added over $40 billion of unpaid principal balance with MSR through both our flow sales channel and bulk purchases.
Finally, as a reflection of all of these trends and with the confidence and our forward outlook. We also raised the common stock dividend this quarter by 21% 2017 cents per share.
We have also been very focused on our liability structure.
Subsequent to quarter and we issue.
$287 million on a new convertible note maturing in 2026, and whose proceeds were primarily used to refinance the existing convertible notes that is maturing in January 2022.
We felt it was important to execute this exchange sooner rather than later and it provides uncertainty for the rest of our capital structure for the intermediate future without having this maturity and looping and for the next year.
Additionally, we wanted to have as many potential opportunities as possible to execute and this window was available and so we were pleased to access it.
With the certainty provided by the exchange and maturity extension of the convertible note. We also felt it was the right time to call our series E preferred stock.
As a consequence of the events of the first quarter, our ratio of preferred stock to total equity and increased from 20% to about 32%.
While we have stated that we felt this amount was manageable.
Recognize that this was not only high compared to our peers, but more importantly is not what we would write down on a blank piece of paper for our capital structure.
During 2020, we built up a very sizeable liquidity position to protect us against further market stress.
And as time has passed and as the markets have stabilized and we have come to recognize this and mark of available liquidity as overly conservative.
Furthermore, the primary measure by which we manage our portfolio as potential loss to stockholder equity and not nominal leverage and we have stated many times that we are comfortable with our portfolio and risk profile.
Further deploying all of this excess liquidity into our targeted assets would increase our risks and comfortable levels.
Those two ideas together led us to the conclusion that we had a certain amount of capital that was essentially follow and that its best use was to call. The series D preferred stock.
After the call is completed on March 15th our new ratio of preferred stock to total equity will be about 26%, which we think is appropriate for our agency force MSR portfolio.
The convertible note exchange and the call of the preferred stock will result in a mix of common preferred and unsecured debt that is the right size for our portfolio composition and risk appetite for the foreseeable future.
It is also accretive to earnings as Mary will discuss in a few moments.
We continue to see good momentum and our MSR purchase program, which should help to offset the impact of higher prepayment speeds and CA.
Purchases and our MSR flow program grew by over 136% year over year.
The strength of our platform and the relationships, we've built to source and manage the assets.
On the RBS side, there are still several tail wins, the most important of which are very low funding rates and continued fed involvement and which they have indicated will persist for some time.
However, spreads on RBS, alright, very tight levels as Matt will discuss later and we.
Think some caution is warranted.
While on shore, the timing of any potential spread widening we believe that in an environment with uncertainty and the direction of RBS spreads is one where our portfolio with its lower exposure to those spreads because of the MSR offset is especially attractive.
Turning now to some comments about the full year performance results for 2020, as a whole participating to be sure and book value declined to $7 six <unk> from.
And from $14.54, a result of the market volatility and dislocation induced by the pandemic.
The decisive and proactive actions, we took and the first quarter two seller non agency portfolio day.
The balance sheet and generated a strong liquidity position.
We took control of our own destiny, and we met every single market call. It during the period.
Apart from portfolio returns 2020 has been a transformational year for two harbors and we transitioned to self management.
Our stakeholders continue to benefits on the collective investment risk management governance and operations expertise from those who have been supporting the company for many years.
At the same time, we have the opportunity to deliver additional value through significant annual cost savings and enhanced returns on any future capital gross.
Importantly, the internalized management structure enhances transparency and further aligns our goals with that and our stakeholders.
In many ways, we think of our newly internalized company as two harvests two pointed out on and we're really excited for 2021 and two years ahead.
I'll now turn the call over to Mary to discuss the details of our financial results.
Thank you Bill and good morning, everyone.
Please turn to slide four to review our financial results for the fourth quarter.
We generated comprehensive income of $113 $5 million 41 per common share.
Representing an annualized return on average common equity of 22, 1%.
As Bill mentioned, our book value Rose to $7 63.
From $7 37 per share on September 30.
And the total economic return of five 8%.
Book value growth was driven by favorable MSR pricing due to margin and I'll tightening and MSR spreads.
D day dollar roll Specialness, and lower expenses due to transitions and self management.
Moving on to slide five.
Core earnings increased to <unk> 30 per share and <unk>.
Eight cents and Q3.
Interest income decreased this quarter.
And from $89 $7 million to $72 $5 million due to lower average balances and coupons as well as higher agency amortization due to prepayments.
This decrease was partially offset by lower interest expense of $22 6 million, reflecting lower borrowing rates and average balances.
Gain on other derivatives increased from $32 $9 million to $43 $5 million due to higher TBA dollar roll income on higher average balances and continued roll specialness.
Roth Specialness contributed six cents to core earnings versus four cents and Q3.
Expenses declined by $6 2 million, primarily due to transition to self management and lower service and cost.
Turning to slide six our portfolio yield and the quarter was $2, two 6% and our net spread decreased two basis points to one seven and 6%.
Portfolio yield decreased by 16 basis points from two.
And $2 four 2% to $2 two 6%.
Primarily due to higher agency MBS prepayments.
Aircraft debt balance decreased 14 basis points from six 4% two point.
Five zero percent.
And then primarily by favorable repo Roth.
This quarter, we are providing additional disclosure to reflect the impact of net TBA dollar roll income and our portfolio yields.
Inclusive of this impact the annualized net spread for the aggregate portfolio was 196% with a benefit of 36 basis points and cost of funds.
I'd like to reiterate that since our MBS position continues to reflect and accounting yields from the higher rate environment in which they repurchased.
Core earnings and portfolio yield anticipated.
And our anticipated to exceed our expected economic returns in the coming quarters.
We expect our asset yields to decline over time to market rates.
And the net portfolio spread should converge to market levels and a more consistent with our return expectations.
Slide seven highlights our strong liquidity and capital position.
With ample liquidity with $1 4 billion and unrestricted cash.
Well as 259 on unused committed capacity on our MSR asset financing facilities.
Late in the third quarter. We also added a 200 million servicing advance facility to provide committed capacity and the advent of increased forbearance is our default.
As a reminder, forbearance rates have been to date benign and lower than expected.
Turning to leverage our economic debt to equity at quarter and declined to six eight times from seven seven times at September 30th and with decreased decreased risk late in the quarter.
And our quarterly average economic debt to equity was seven five times and Q4 compared to seven six times and the third quarter.
On slide eight we've outlined the pro forma impact of the liability and capital actions, we have taken post quarter end.
As Bill mentioned, the issuance of new convertible debt in February.
And certainty around the maturity and refinancing of our existing convertible debt, which matures in January of next year.
With that certainty and hand, and our plans to optimize the financing of our MSR asset over the coming year.
And we elected to redeem 275 million and preferred stock.
Actively reducing our cost of capital as well as our preferred ratio to 26%.
Taken together these actions are expected to deliver and annual net benefit to earnings of approximately <unk> <unk> per share beginning in 2022.
And the reduction and preferred dividends offset by costs associated with the convertible debt and incremental MSR financing.
And the final note. We have included information on REIT taxable income and the tax characterization of our dividend distributions on appendix slide 27.
For additional information regarding the distributions and the tax treatment.
Please reference the dividend information found in the Investor Relations section of our website.
I will now turn the call over to Matt for a market on view and portfolio update.
Thank you Mary and thank you all for joining today.
Turning to slide nine, let's review, our quarterly portfolio activity and competition.
As previously noted the fourth quarter economic performance was primarily driven by a general spread tightening and MBS as the federal reserve continued its balance sheet expansion, having purchased almost one five trillion MBS during Q4, so far.
Not surprisingly the strongest move with gene and the current coupon mortgages that have been the fed's focus with a more modest but positive performance and higher coupons.
With interest rates and modestly better steepening with generally stable. We also saw some modest improvement and MSR spreads.
As Mary noted, we did decrease risk somewhat during the quarter reflected by lower economic debt to equity of six eight times.
And this was in part from sales and Paydowns on our specified pool portfolio, where valuations and some stories and coupons have become less attractive.
In addition, after having increased our position size and TBA twos, two 7 billion significant spread tightening and resulting valuations and the quarter led us to reduce debt exposure.
On net we took our overall notional TBA exposure down by $1 billion to end the quarter at $5 2 billion.
Another factor behind the decision to reduce our exposure was that the fed began to focus its purchase activity and forward months, which aligns more closely with the origination sales and has the effect of decreasing roll specialness.
The result has been debt roll Specialness and the 2% coupons has decreased significantly between mid December and the end of January.
Okay.
We continue to have good success in sourcing and substantial volumes of new servicing two our flow channel at attractive levels and have largely been able to maintain the size of our portfolio and this fast prepay environment.
Additionally, we opportunistically added almost 200 million market value of interest only securities are idle during the quarter.
The market is seeing very strong demand from banks for structured mortgage backed securities near par dollar price, which can only be created today by stripping IL off of premium securities.
And as like the spreads on the strip down and secure Verde and better tighter than that on the underlying securities.
We consider those spreads quite aggressive with some structures actually having negative option adjusted spreads which means that the result, and Io debt, we retain is very attractive.
Additionally, these positions provide portfolio of benefits that are similar to MSR, when paired with RBS and reducing mortgage spread exposure even further.
Okay.
Please turn to slide 10, as we discuss our specified pool positioning and prepayments.
And the lower left hand chart, you can see that specified pool performance was mixed with the 3% three five and 4% coupons specified outperforming PBA debt.
That are underperforming and both lower and higher coupons.
While we don't own any specified pools, and a 2% coupon and as I mentioned earlier, we do on PVA, which outperformed by more than a point during the quarter supported by strong fed demand and attractive roll dynamics.
Today with regards to specified pools, we remained positioned largely in loan balance and geography stories.
And the lower right hand chart, we show a comparison of generic speeds to our specified portfolio speeds by coupon.
The slower prepayment speeds of specified as compared to generic highlights the reason that specified pools command a significant price premium over TBA.
Okay.
Moving to slide 11, you can see that our MSR portfolio was valued at $1 6 billion as of December 31.
Based on 186 billion of UCB and with the gross coupon of three 7%.
That translates into a price of about 86 cents or.
And we're right around $3 two multiple on our existing portfolio.
Yes.
The balance was from the end of 2019 are also shown here and I would highlight two things first our <unk> is up modestly and a fast prepay environment, which is a testament to our ability to source MSR investment.
Second the weighted average coupon fell from four 1% to three 7%.
And again with what you would expect debt refi environment.
As we reinvest into new production collateral and will benefit our portfolio of prepayment speeds should rates stabilize.
We settled two 3 billion of new MSR and through our flow program during the quarter, which represents record volume for us as we experienced our biggest three months ever.
Activity and the bulk market continues to increase as well and we continue to find valuation and situational with some packages trading at pre crisis yields most of them are clearing at wider spreads.
We had some success on the bulk market and settled on $24 billion UTV and four separate transactions.
Flow pricing during the quarter was fairly constant and out of three multiple.
And the lower right hand chart, we compare our servicing prepayment speeds and blue versus generic collateral and Graham.
Currently on majority of the underlying loans on our servicing portfolio have some form of seasoning or prepayment protection, which is why our speeds are somewhat smaller than the implied TBA speeds.
Nevertheless, we do have expectations for speeds to remain high going forward.
Primary mortgage rates have continued to grind lower with 30 year rates generally below 3% and national surveys, even with the spread between primary and secondary rates at wide levels.
The longer that interest rates stay at these levels the greater our expectation that primary mortgage rates will decrease further.
As a result on less interest rates sell off and provide prepayment relief. These faster prepayment speeds will certainly continue to impact returns.
Okay.
Over the next two slides, we display our effective coupon positioning and risk profile.
And the chart on the top of Slide 12, we show the combined exposures and the agency P&I bonds and MSR at year end compared to our positioning at the end of Q3 as indicated by the David bullets.
Okay.
The main change and our effective positioning was decreased and the two and a half and 4% coupons are result of the specified pool activity I mentioned earlier.
Okay.
The lower left hand chart shows our common book value exposure to 25 basis point spread widening or tightening and.
Indicates that book value would decrease by only two 7% and and instantaneous 25 basis point spread widening.
And what we're combining the effect of structured IL with MSR escalation today, which we had not done on prior periods due to smaller position sizes.
And aggregate. This two 7% exposure is lower than in recent quarters due to the reduction and specified pools and TBA positioning.
Moving to slide 13 here, we see our interest rate and curve exposure, both on a BOE and in line with our historical positioning.
I'd call. It again that the agency MSR portfolio provides significant interest rate offsets, which you can see by comparing the gray bars, the blue bars and both charts.
Okay.
Let's turn to slide 14.
And just look at some data that highlights the attractiveness of the agency MSR portfolio construction.
As we've discussed before is impacted mortgage spreads significantly, which today, our appetite and of the ranch.
To illustrate let's go over the first chart.
What we have here is 10 years of daily option adjusted spread data on the Jpmorgan mortgage index with the X axis being the OAS.
Okay.
It's important to also point out that this data includes previous periods of quantitative easing and when the Federal reserve were also active buyers of mortgages.
The scatter plot shows the change and OAS spread over one year time horizon for any given starting spread.
Dots that are above the X axis indicate that spreads were wider one year later from where they began and dots below the ex access indicate that spreads for Tiger one year later.
You can see a clear pattern, which is quite intuitive that when spreads are tight and they tend to widen and when spreads are wide they tend to retrace tighter.
Mortgage spreads and typically mean reverting.
As of January 4th day, OIS for 16 basis points and as highlighted by the vertical Blue line.
This data shows that it's quite common for spreads to widen and 20 or 30 basis points and the year that follows and fact in the past 10 years. There are exactly zero instances when spreads were unchanged let alone tighter one year later.
Okay.
The lower chart quantify as our preference for the agency MSR portfolio construction.
Again, the X axis is the starting OAS same as the other chart the Y axis. In this case shows the expected returns on the same one year time horizon using the average of the one year spread change data has just described.
In particular, we assume that the spread change occurs immediately and the portfolio earns the higher yield for the next one year.
We have plotted and agency only portfolio, which represents agency MBS hedging the swaps, which is the light blue line.
On the agency plus MSR portfolio is represented by the Black line.
You can see that at the OAS level of 16 basis points here.
Historically, we've observed spreads move around 20 basis points wider over the next year and.
And in that case, the one year return would be expected to be negative around down 1% and the agency only example.
But because of the mortgage spread widening and protection embedded into the agency plus MSR construction you expected return for the paired strategy is much better and gets you into the mid high single digits.
The flat slope of the agency plus MSR line relative to the agency <unk> portfolio is what we mean when we talk about our stable expected return and book value profile.
And it's particularly powerful and tight mortgage spread environments like today.
We're not think spreads are necessarily going to widen and they are certainly strong supporting technical factors, but valuations are rich and history suggests limited further upside.
Yeah.
Finally, I'd like to take a look at our outlook for two harbors and our return expectations on slide 15.
After the significant spread tightening we've seen and the last two quarters, we see gross returns for specified RBS paired with swaps as being less attractive than they were two of them to be and the range of mid to high single digits, depending on coupon and story.
Current coupon TBA returns are enhanced by roll Specialness, which is likely to continue for the near future, albeit at less attractive levels.
New investments and flow MSR paired with RBS today can also drive returns and the high single digits to low teens, and if you assume role special and less on the RBS component can be higher.
We continue to focus on our strong partnerships with MSR sellers and internal platform, which gives us the ability to source significant volumes, especially in todays prepay environment and <unk>.
Now I'll turn it back to bill.
Thanks for that discussion Matt.
To conclude we feel very good about our agency force MSR portfolio and the forward outlook.
As Mary highlighted our capital and liquidity position remains very strong and we took steps subsequent to quarter and to further optimize our capital structure. The day benefits accruing over time to our common shareholders and <unk>.
As Matt said, new investments and specified pools are less compelling today with spreads near the tight and the long term ranges and we have reduced risk and leverage somewhat given the environment.
However, as we discussed we still see returns for our strategy to be supportive of current dividend levels and this tight spread environment is one where our agency force MSR strategy is especially attractive.
Thank you very much for joining us today, and we will now be happy to take any questions you might have.
And if you would like to ask a question. Please press star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off.
Our equipment.
Again that is star one to ask a question.
And our first question will come from Doug Harter.
Please go ahead.
Thanks, and good morning.
Can you talk about the relative size.
And of your MSR and agency portfolio today.
If I look at slide.
And it looks like the interest rate sensitivity from for both us and the relatively kind of matched up.
Can you just talk about kind of your expectations and willingness to kind of continue to grow the relative size of each.
Sure Good morning, Doug and thanks for joining us and Thats good question.
So as you pointed out on slide 13 on the left hand chart you do see the interest rate sensitivity of the on the agency RBS and the and the MSR as being roughly.
Equal and offsetting but if you go to slide 12, Youll see that theres, a little bit of difference between the mortgage spread exposure between the MSR and the RMB. So it's not right.
And if something is exactly interest rate hedges on exactly the same as mortgage spread hedged exactly.
And that the relative size and.
The amount of the MSR depends on and level of interest rates as well as relative pricing.
We don't particularly have a target of what the right.
The terminal.
Size of the MSR is that's a dynamical thing and we manage it actively.
Got it and then.
If you could just.
How do you think about the current <unk>.
And of the <unk>.
Low program relative to the expected runoff.
Is that kind of size for for growth or is it sort of has to kind of replace replace runoff at this point.
I'd say I'd say that again, it's market dependent and we're very pleased with the with the amount of flow servicing that we're acquiring which as Matt said is largely offsetting the runoff we.
And we do as we've noted in the past have recapture.
Programs with our existing sub servicers as well and that's part of what we're doing also and.
The amount of relative size that we acquire and any period.
It is a function of the price right that debt we are showing.
Showing two our solar partners right. If we were to increase our price substantially we would get substantially more MSR volume and so it's a balance between.
On the attractiveness of the price that we're looking to see.
Fans and the volumes that we're getting.
Principal.
Thanks for joining us thank you.
And our next question will come from Rick Shane.
Please go ahead.
Hey, everybody and good morning.
One quick housekeeping question and then a couple of other questions.
I didn't hear and have you guys provided a book value quarter to date.
Good morning, Rick Thanks for joining we did not provide it Brad.
But through the.
Through the end of last week and it's early in the quarter, but through the end of last week, we were up a little north of 2%.
And so far on quarter, so thats coming on.
Again from spirit, and spread tightening and up and coupons and so that's where we are so far.
Perfect. Thank you and thank you for all the technical stuff.
A really interesting call and the materials are helpful.
I'd love to understand slide 11, and a little bit better in terms of MSR pricing, it's consistent with what we've heard anecdotally which is debt.
With the big supply of MSR.
Available due to production that pricing remains benign and how do we think about what we're seeing on slide 11 in context of <unk>.
On the marginal tightening of MSR spreads that you guys are preferred two as well I just need to understand the dynamic between that slide and those and that comment.
Sure Good morning, Rick I'd like to have you here I'll take that one.
Tom.
Well, you know I mean I see in debt.
And the lower left the price multiple of new flow that we're acquiring is a little north of a three multiple.
We did say that the MSR spreads tightened marginally maybe only 50 basis points that doesn't have a big impact.
On the price.
And so you know maybe the price went up from.
From three to $3, one malls or something like that so it's pretty small effect, but.
Noticeable in the and the returns.
Got it Okay, and then last question for me and and.
And is U.
And increase modestly the allocation to Io.
Can you help us and again just putting this in context of what we saw last year think about liquidity and funding.
For those assets and and.
Does this create a risk that we should be considering.
Sure I'll take that one.
I guess, we're looking at it.
And yes, we're looking at it on and on an opportunistic basis here.
Atypical.
Four.
Well to be able to source significant.
These are high.
Coming sort of as a function of the huge demand for sit down bonds that's happening today.
<unk>.
The third.
The spreads on the asset or a little bit greater than what we're seeing on servicing Bryan Bryan maybe a couple of hundred basis points Brad.
There is an advantage.
And keep the dialogue and the funding aspect of things, whereas the haircuts.
Lower and the funding rates are significantly lower.
Terms of two.
The liquidity of them and.
And there.
Certainly.
And more liquid and then servicing right so they're like I.
I said, they're CUSIP.
And they trade on a cheaper two if you want to sell servicing and so long drawn out process.
So you can improve it and liquidity.
And and I think overall the thing to keep in mind here.
The addition of the keep the dialogue really Jeff.
And the extension of the portfolio construction and they really provide the same exposure and servicing does.
And we're looking at gross.
Terrific. Thank you guys for all the detail and hope you're all well.
Thanks, Rick Thanks for joining us.
Our next question will come from Eric Hagen.
Please go ahead.
Hey, good morning, guys good to hear from you.
Couple of questions here can you talk about where sub servicing and costs are right now and how they may have changed over the last you know call. It three months and then on.
On the funding and hedging side are you seeing opportunities to take advantage of a flatter term structure by adding longer term repo and then on the hedging where along the yield curve do you think it makes no sense to add hedges right now.
Sure Good morning, Eric and good to hear from you tube and thanks for joining us.
And I'll take the first question and then I'll let.
Let Matt talk about a couple of other people other question.
Sub servicing costs have been a bit.
And stable when we enter into sub servicing agreements.
We have a a free determines.
Cost of service schedule.
It sets out what the costs are for performing loans and nonperforming loans.
And so forth.
And so that really hasnt changed at all.
In recent months, our cost of service for performing loans is still in the and call.
Called the $67 per loan for.
Per months area.
And.
There was some some some activity around the cost in terms of the cares Act and the forbearance and.
That came on line, but as we've discussed before and Thats been a very.
Very benign and lower than expected.
And I'll, let Matt talk about the you know the term structure of our repo rates, though.
Okay. Thanks, Bill good morning, Eric.
Yes, the repo markets and terrific like you noted.
And it's very flat term structure is very flat.
Tom.
Oh.
With rates and.
And the 22 25 basis points.
And the higher interest for longer term.
I think we we typically do.
We typically have.
A pretty termed out.
But I think we'll and I can give it a down round.
Around 60 day and weighted average at the end of Q4, I think you would expect to see that turns out.
Ranges for us, which is more like and the 70 to 80 days weighted average.
We I think we've seen.
And last year with UPC and term markets fully redevelop and we're seeing when youre and you borrow at attractive rates.
For multiple counterparties so.
No I think will continue.
Continue to ladder, our maturities as we typically do.
Great and that was really helpful color and then on the far bulk transactions over the quarter can.
Can you give us some sense or some kind of market color. If you will around the competition in the market.
For those transactions and and really what in your opinion with catalyzes potential additional bulk sales to take place.
Going forward.
Yeah. Thanks, Eric.
<unk>.
I think as we've said in the past you'll be fine.
And both transactions to be situational there're some packages.
That we think are pretty tight and some debt debt are attractive the competitions for bulk packages is pretty.
Pretty good right now I mean, it's competitive there's there's I would say that market has killed and wages probably as many market participants training and the bulk market is there was there was pre crisis.
On competition, probably is is if anything continued continuing to increase a little bit on this.
And one reason why we prefer the flow market. These are relationships that we have built over time and have in place.
With you now.
Approximately two dozen.
Of sellers that southwest on a daily basis.
And that's in environments like this.
And can be more and more stable and and and and a constant stream of flow products.
Throughout this whole episode, what we've seen is is with primary and secondary spreads being so wide.
And the need to sell.
And in bulk and bulk for Servicers has been diminished in general.
So I think you won't see more packages come to market until you see at a significant rate classes my belief.
Really interest there. Thank you very much I appreciate it.
Okay. Thank you.
Our next question will come from Bose George.
Go ahead, yes, good morning.
And I just wanted to go back to the on all this.
And I'm, sorry, excuse me.
Why are we just see.
I guess it was operational risks.
And so net net.
Is that the preferred place two.
And all of this is on the small samples.
And also.
Good morning, Bose, Thanks for for asking that question.
Yes.
I think it's certainly true you don't need the operations in order to two manage the Io position.
But the financial risks are certainly civil or two to the MSR position in terms of managing the interest rate risk debt prepayments because actually risks that we have as Matt said, we view this as really a and opportunistic sort of environment, where where the where the demand from from banks and other participants for more stripped down.
[noise] coupons.
Leaves behind unattractive looking Io this doesn't always happen.
And there is normally not as much io in the market the amount of the stripped down and CMO is being created is historically very high and.
And so they're attracted today they give us the portfolio characteristics that we like they they have good financing characteristics, they're pretty liquid and so for those reasons, we like them, but I wouldn't call. It a strategic change and what we're doing at home.
Okay, Great. That's helpful. Thanks, and then just on the <unk>.
And you guys noted at Sam and Jeff.
And can you just talk about where it stands now relative to your line and then just what would you expect.
After the quarter. If you think you could see improvement, especially on this.
And the near term.
Sure Good morning, George It's Matt I'll take that.
On line.
I mean, it has come up significantly I think the main thing that caused that and.
On the standard really changed their purchasing activity.
Push their purchases out into the other into the back months, which which more matches origination and sales.
So for example.
And we talked about this.
Q3 earnings right at the time, we were seeing for example.
The two advantage for for TBA two as for example, as being 100 basis points room and.
And you go right at the time, and I think that where the roll rates and that coupon today are indicating something only like 20 or 25 basis points through.
So that's off dramatically and.
I mean.
And will that level will certainly be a function of deferred activity and theyre and theyre buying Brexit and modify their activity and a little bit I guess, where I would expect.
No a continuation and kind of the levels that we're seeing today and near term and let's say the change something but.
And it's probably reasonable to expect something similar to us and good day.
Okay, Great. Thanks, and then also just one last one.
<unk>.
On the litigation is there any timeline for when Goldman there's resolution on that.
Yes.
Yeah.
I'm, sorry, I was on mute there.
Excuse me gross.
And as you know the situation is active as average.
And you can appreciate I can't really say much more than that.
<unk> continues to believe this is without merit and we are in early stages of this process and again and I'm sure. You can appreciate I can't really say much more than that.
And I understand thanks, a lot.
Thank you.
Our next question will come from Trevor Cranston.
Go ahead.
Alright, thanks, and good morning.
You briefly talked about.
Primary secondary spreads and your opening remarks.
I was curious couple of things.
First.
With respect to where MSR valuations are today.
On.
Do you think that's significant.
Compression of primary secondary spreads as already reflected in the valuations and.
More generally and sort of how we should think about the overall impact to the portfolio.
That spread does continue to grow.
Over the course of the year.
Terrific. Thanks, very much for that question and thanks for joining us.
Yeah.
Certainly.
Decompression and primary secondary spreads is baked into current MSR pricing.
And that's one reason why we've said in the past that debt.
And particularly servicing prices might see lower today than they did pre crisis. Most of that reason is because is because the primary and secondary is so wide and valuations or are building and that compression and.
So from and if you look at it yields or spreads and things of that nature that that incorporate that mean reverting of that spread.
You would find that the pricing is similar to what it was pre crisis.
Okay got it.
And then.
One more question and looking at the slides 13 and 14 on there.
Spread exposure.
And the level of spreads.
Today versus historical levels.
And I think generally the continued start in January.
If you guys continue to find opportunities to add more either through MSR or <unk>.
And lighter worst further today would you would you consider taking sort of a net net.
Net exposure to kind of a overall a short position.
Or is that something you guys try and keep it a free.
The underground.
Zero.
Thanks.
Yes, that's a good question.
Again, we don't have a target for that number we think let me talk about our other interest rate exposures. We think the net exposure to mortgage spreads is already low.
We are finding.
And the ability to two to sell these stripped down.
<unk> and low to negative option adjusted spreads, which allow us to routine.
And on iOS.
Our debt as you pointed out that we're creating especially on a flow basis is very attractive which serves to reduce debt more. So again, we don't have a target for that number but it's driven entirely by by the opportunities, but I think the idea and as you know the whole thesis of our of our strategy used to meet and maintain a portfolio where that exposure is low and that's what we're trying to do.
Yeah.
Okay I appreciate the comments thank you.
Thank you.
And that will conclude today's question and answer session I would now like to turn the call back to Mr. Bill Greenberg for any additional or closing remarks.
Thank you very much and everyone for joining us today.
And thank you for your interest and two hours.
And this will conclude today's conference. Thank you for your participation and you may now disconnect.
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