Q2 2021 Two Harbors Investment Corp Earnings Call
[music].
Greetings and welcome to the 2 harbors investment Corp reported second quarter 2021 financial results at this time all participants are in a listen only mode.
And answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host volume so calling the ships you may begin.
Good morning, everyone and welcome to our call to discuss 2 harbors second quarter 2021 financial results.
With me on the call. This morning are Bill Greenberg, our President Chief Executive Officer, and Chief Investment Officer on the Mary risky, our Chief Financial Officer.
The press release and the financial tables associated with today's call were filed yesterday with the SEC and are available on both the 2 harbors and SEC website.
In our earnings release and slides, we 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 to mention that this call is being webcast and may be accessed in the Investor Relations section of our website.
As a reminder remarks made by management during this conference call and the supporting slides may include forward looking statements.
These statements are based on the current beliefs and expectations of management and the actual results may be materially different because of 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 2 harbors 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.
Good morning, everyone and welcome to our second quarter earnings call.
Before we begin I'd like to acknowledge Mac Kevin's departure from the company on June 30.
Matt and I worked very closely together over the last 9 years, and we had a very productive partnership.
On behalf of the 2 harbors team I'd like to thank Matt for his years of service to the company and we wish him. Good luck in his future endeavors.
As we announced a few weeks ago I have taken on the role of Chief investment Officer, Once again, and I look forward to working with the investment team as well as the rest of the company to navigate through the complex market environment in front of us.
Please turn to slide 3.
At quarter end book value was $6.42 per share representing a negative 9.6% total economic quarterly return.
The second quarter performance is almost entirely the result of significantly wider spreads on high coupon the RMB, yes.
The stubborn the absence of prepayments burnout, along with the introduction of government programs to help borrowers refinance both contributed to changing market expectations around prepayment speeds in these coupons.
The MSR market was very active and we saw 125 billion of <unk> in bulk deals come to market in the second quarter alone.
Bringing the year to date volumes to approximately $180 billion, which is roughly the volume that we might typically see for full year.
We have been successful in deploying more capital in the MSR space.
This quarter as we purchased $6.5 billion in <unk> through bulk transactions and have commitments to add another $17 billion UTV subsequent to quarter end.
Additionally, we settled on $16.4 billion UCB and our flow sales program during the quarter.
Core earnings were <unk> 19 per share.
However spread movements generally dominate the portfolio performance relative to core earnings and this quarter was no exception.
In the absence of spread movements and with more than 1 quarter in mind, we believe the portfolio of can support the dividend of <unk> 17.
Which the board declared for the second quarter.
Post quarter end.
Issued approximately $256 million of common equity and the risk with non dilutive transaction by selling shares right at our book value.
Besides being accretive to EPS by virtue of the expense dilution alone. We felt that it was advantageous to both current and new shareholders to be prepared to invest in our target assets when the opportunity to do so presents itself.
We expect that MSR supply will be robust in the second half and we think that fed tapering and reduce the bank buying will lead to wider not tighter RMB S spreads when that finally occurs either later this year or early next.
We have been disciplined in keeping our leverage flow as mortgage spreads have hovered around the all time tight levels.
This positioning is not cost us anything in terms of performance thus far.
And in fact has saved us from additional losses.
Every coupon has underperformed their hedges for the last 2 quarters.
As a result of our new equity and our liquidity positioning, which Mary will discuss further we have plenty of dry powder to invest at attractive levels.
Please turn to slide 4.
Briefly discuss the overall market environment.
The second quarter of 2021 was characterized by falling long term interest rates a flatter yield curve.
And despite continued buying of current coupon the RBS from the federal reserve and large money center banks wider mortgage spreads.
Inflationary pressures have generally increased as the reopening of the economy has highlighted gaps in the supply chain and scarcity of workers, especially in the restaurants travel and the service sectors in general.
As an indication in mid July the CPI index printed at 5.4%, which is the highest it's been in 13 years and as shown in figure 1 by the Blue line.
Compared to 2 years ago, which removes the base effects from the pandemic overall CPI prices are still up a healthy 2.5%.
Interestingly many market participants have pointed out that prices in the US current truck sector shown by the Gray line in the figure increased by more than 40% in the period and was responsible for a large part of the aggregate increase in CPI.
The fed and many economists have insisted that inflation spikes such as these are temporary although many other market participants arent so sure.
At the June fed meeting the fed surprised the market by moving forward. It's meeting the expectations for its first 2 rate hikes to late 2023.
Although the initial market reaction was for higher rates later interpretations focus on whether the fed and moving at the median rate hike the expectations had changed its reaction function.
And Mike Chuck choke off growth prematurely just of the economy is getting going.
Some market participants have pointed to the delta variant of the Covid virus as being of risk to forward growth or whether future growth can keep up with the optimistic expectations that are already priced into the equity markets.
At the July meeting last week, the fed confirm that the labor market has shown significant improvements the chairman Powell indicated that multiple strong jobs reports are required before commencing the tapering process.
Chairman Powell also clarified the while there is little support to start tapering RMB S. Before treasuries it could possibly reduced RMB as purchases at a faster of monthly pace.
Weather for the reasons I, just described or simply because of positioning and other technical factors 10 year interest rates ended the quarter of 35 basis points lower retracing of large portion of the increase which occurred during Q1, while shorter term interest rates were largely unchanged.
Despite the fact that the fed is now clearly talking about tapering spreads on current coupon. The RBS were largely unchanged on the quarter and still sit at very tight levels with current coupon OAS at -3 basis points as seen in figure 3.
Compared to other periods of quantitative easing in the past where the fed was buying mortgages. These spreads are still at least 10 basis points rich to those periods and compared to periods, where the fed was not actively buying mortgages spreads are about 30 basis points lower.
The fed has stated that they are committed to of tapering process, which is orderly methodical and transparent and we have no reason to doubt the fed's intentions.
However, the picture is further complicated by the large amount of RMB, yes that has been purchased by the banking sector, which has been fueled by increased deposits and low loan growth.
With the news that all of the large banks considered pass the Dodd Frank Act stress tests is likely that dividend increases and share buybacks may lessen bank appetite for low yielding the RMB yes.
Day in HUD borrowers the ability to enter into forbearance arrangements.
Deferrals still remains the best option for borrowers to become current again on their loans.
As in the MSR owner, we are committed to working diligently with our Subservicing partners to do everything we can to help keep borrowers in their homes.
I will now turn it over to Mary to walk you through of discussion of our financial results.
Thank you Bill and good morning, everyone. Please turn to slide 6 to review our financial results for the second quarter.
Comprehensive income was negative $194.6 million, representing an annualized return on average common equity of negative 47 per cent.
And our book value was $6.42 per share compared to $7.29 at March 31st.
Resulting in the total economic return of negative 9.6%.
As Bill mentioned earlier the quarter over quarter decline was the result of significantly wider spreads on high coupon RMB asked where we have significant exposure.
Moving on to slide 7 core earnings were 19 per share compared to 17 cents in Q1.
Interest income decreased from $56.1 million $243.4 million as our Rmb's position continued to decline through a combination of sales and paydowns.
Interest expense rose by 1.7 million, reflecting the increase in financing related to the growth in our MSR portfolio as well as of fall quarter of interest expense on a convertible debt issued in February.
And other derivatives rose by 7.7 million as the benefited from a larger position and TVA as well as increase of all specialness.
Turning to MSR net servicing income increased by 3.6 million $247.4 million. This was the result of higher balances slower speeds and fewer delinquencies.
There was also a notable decrease in expense the majority of of which is related to servicing expenses and.
And driven by a number of opposing 1 time items with the first quarter incurring certain non recurring costs and the second quarter, including certain non-recurring credits.
An average of the 2 quarters expense.
Is it better indication of the run rate for the first half of the year.
And the table on the lower right, we show our portfolio yields.
Ah realized net spread in the quarter of rose by 28 basis points to 193%.
Driven by of 47 basis point increase in our portfolio yield.
Which more than offset of 19 basis point increase in funding costs.
This net increase was driven primarily by improved MSR asset yields offset by increased MSR financing, which carries a higher borrowing rates.
Net spread as of June 30th which reflects our estimates for the near term is expected to increase modestly due to a higher proportion of MSR in the portfolio.
And slightly higher Rmb's healed.
Turning to slide 8 or liquidity and capital positions continue to be strong post quarter, and we issued 40 million shares of common stock for net proceeds of approximately $256 million.
Which when combined with the excess cash on hand positions us to invest in the MSR and and RMB askmen spreads spreads widened out to more attractive levels.
Are unrestricted cash balance told the $1.3 billion at quarter end.
Funding for agency RMB us do the repo market remains attractive.
As expected financing for MSR through bilateral of facilities has increased as we buy more MSR assets as well as diversify and optimize our financing facilities given minimum use the requirements.
Finally leverage remained relatively unchanged from the prior court quarter with both the average and quarter and economic debt to equity at 6.5 times.
I will now turn the call back to bill for our markets overview and portfolio update.
Thank you Mary.
Let's turn to slide 9 to discuss our quarterly portfolio of activity and composition.
We have remained disciplined and are positioning ahead of anticipated rmb's papering and reduction in the bank volume.
The portfolio of balance decreased from 18.6 billion to $17.1 billion through a combination of sales and run off.
In particular, we sold from 2.5% of 3 per cent coupon pools and bought 2.5 per cent coupon tba's as we felt the pools were unattractive from of spread perspective, while the role of Specialness of the TBA still allowed for a positive return potential.
Our MSR value was down slightly even though we added more UBB, even prepaid which simply reflect the lower prices into of lower interest rate environment.
Please turn to slide 10, as we discuss our specified pool positioning prepayments and performance.
As you can see in the figure 1 we remained positioned in loan balance and geography stories.
Within the geography stories, which are focused on New York collateral our investments are predominantly in the 4% and 45 per cent of coupons, while our loan balance exposures are more evenly distributed in the 3% of 245 per cent coupons.
Figure 2 shows the quarterly total of returned performance by coupon on TBA contracts shown by the gray bars and on our specified pool holdings shown by the Blue bars.
The most notable properties of this chart our first the higher the coupon the worst of the quarterly performance and seconds only the 2.5 per cent coupon assets were spared from material Underperformers, which was clearly the result of said and thank supporters of the coupons.
Finally figure 3 shows of comparison like coupon of observed prepayments speeds from pools delivered into TBA contracts again shortened by gray bars to observe prepayments speeds on the hour specified portfolio again shown by blue bars.
Overall.
Payment speeds of that are specified pools remained significantly slower than pools delivered into TBA showing the value of the prepayment characteristics of that collateral.
We also show of comparison of this quarter's prepayment rates the last quarter's which you can see by looking at the diamonds above each bar.
Here you can clearly see the impact of the first quarter's rising rates had on prepayment speeds for at the money current coupon mortgages at speeds on 2.5 per cent coupon TBA slowed from 2000 CPR 2 about 8 C. P. R.
However, it is also evident from this chart the prepayment speeds on the higher coupons, both in TBA as well and specify pools have not materially declined despite the sharply higher interest rates in the first quarter.
Whatever the reason for this persistence of fast prepayments in the high coupon sector, whether due to the introduction of the new government programs that I mentioned earlier or do something else. The market seems to have adjusted it's forward looking expectations for prepayment rates and extrapolated continued fast speeds far into the future, which was surely at least 1.
1 of the causes of the behind the performance seen the figure 2.
While there is no doubt that high coupon speeds have been fast we do not believe the long standing behaviors of mortgage borrowers have suddenly changed and we do expect burnout to manifest itself in the high coupons at some points.
Indeed, and the most recent prepayment of course, we have started to see early signs of Burnouts as high coupon speed slow more of the day counts.
Already some market participants are beginning to wonder whether the adjusted the expectations have gone too far and have reduced their forecasts on high coupon somewhat.
Despite the underperformers of the high coupon sector, we're still comfortable with our exposure, especially given the widening experienced this quarter.
Hi, coupon specified pools have a long history of being attractive providing stable prepayment profiles, along with the generally wider spreads which had made them good assets from which to extract high risk adjusted returns and you do not see any reason to change that view.
Moving to slide of 11, you can see in figure 1 that are MSR portfolio was valued at 2.0 billion as of June 30th based on almost 191 billion <unk> and with the gross coupon of 3.5 per cent.
That translates into the price of about 106 cents or right around of 4.0 multiple given the modest amount of excess of of the base servicing fee.
The percentage of of MSR in the forbearance continued to decline throughout the quarter ending at 2.2% by Lone count.
We settled on $16 for billions of <unk> of MSR through our flow program during the quarter and $6.5 billion in bulk purchases, which together was more more than enough to offset runoff in the period and grow the <unk> by 3.6 billion.
And figure 2 we show of settled <unk> for the flow and book channels for the last 4 quarters.
As expected the flow channel settlements of decline since the fourth quarter and parallel with the lower refinancing activity.
Both settlements are more opportunistic in nature, and therefore of less predictable.
Nevertheless, you have committed to purchasing $25 billion UVB through the bulk channel of year to date.
For reasons, we have discussed previously we expect the bulk of volumes in the second half of the year to also be robust.
Despite the recent retracement in the interest rates during the second quarter MSR values have appreciated meaningfully since 2020, and we expect that small 2 medium sized servicers would be incentivised to reduce mark to market volatility in their balance sheets and monetize of their holdings.
So while it is difficult to predict or activity in succession of the bulk of market.
We are confident that market dynamics will be favorable and allow us to continue to grow our portfolio.
And figure 3 we compare our servicing prepayment speeds and blue bars versus TBA collateral and gray bars the.
This is of similar chart to the chart on the previous page and shows that are MSR payment speeds are slower than TVA because of its collateral characteristics.
Moving to the charts on the top of Slide 12, we showed the combined exposures of the agency P&I bonds MSR Nio as of June 30th as compared to our positioning at the end of the first quarter as indicated by the black diamonds.
Given the performance of this quarter I think some additional words about this page are in order to help describe our portfolio.
Figure 1 a in the top left shows the bond equivalent value of our security and TBA positions and you can see that we have holdings in bonds ranging from 2.2.5% through 5 per cent coupons, which in very round numbers are equally distributed.
We have discussed many times about the characteristics of MSR, but let's quickly review.
MSR being in the interest only instruments, whose value rises when rates rise and fall when rates fall as negative interest rates duration, which offsets the exposure of RMB of securities.
Furthermore, when primary mortgage rates rise future of prepayments are expected to slow, which makes interest only instruments more valuable and sort of MSR prices rise in that case 2.
In contrast in that scenario the prices of current coupon RMB of Securities will fall.
Prices and yields move universally 2 each other.
This behavior MSR values of rising when rates rise and when current coupon spreads widened looks smells of acts like a short position in current coupons RMB of securities and it is useful to think of of MSR in this way.
Figure 1 b shows the duration and spread risk equivalent of our MSR expressed in current coupon short positions.
Comparing of the gray bars to the black diamonds.
The effective short position of the MSR asset shifted down and coupon and is now represented by a combination of 2 per cent and 2 of the half per cent exposures.
Figure 1 C shows the 2 charts on the left added together and represents our combined position.
As regular listeners know, we often speak about how our portfolio 2 mortgage spreads is low and that is shown in figure 2 we read indicate that our portfolio could be expected to lose 1.1% in the 25 basis points spread widening.
But the important thing to remember is that the that reflect the 25 basis point widening across the coupon stack, including the current coupons spreads where the MSR offsets the effective short position is manifest.
The MSR does not provide any spread hedge benefit if only non current coupons experienced material spread wide thing as happened during this quarter.
On that we are pretty flat the current coupon complex as defined by the sum of 2 per cent in 2.5 per cent exposures.
Of the bias for 2 in the hands over twos and long the rest of the stack.
Moving to slide 13 here, we see our interest rates and curve exposures.
Both are low and in line with our historical positioning.
I would call out again that the agency plus MSR strategy provide significant interest rate the offsets, which you can see by comparing of the dark gray bars to the blue bars, and both figure 1 and figure 2.
Given the right rally during the second quarter and the continued 25 basis point rally into July you may be looking at the left hand side of these charged for the first time in quite a while.
Although the end of quarter positions indicate that we would lose 1.8 per cent in book value for an instantaneous 25 basis point parallel shift downward in the rates and 2.2 per cent for a bowl flattening of 2005 basis points.
Is important to note that these numbers reflect the snapshot in time, and we can and do actively hedge our portfolio as market conditions change.
In particular, although we think that of less than 2 per cent move for an instantaneous 25 basis points changing range is not very big very early in the quarter, we reduced this exposure even further.
Finally, I'd like to discuss our outlook for 2 harbors and a return the expectations for new investment since July 14th.
This quarter, we split out the expected returns for investments in current coupons and high coupon the assets as we see significantly different returned profiles for the 2.
We also added some shading to show last quarter's returns.
Even with the market's faster prepayment expectations, we now see the long term return potential of higher coupons hedge with swaps to be in line with our investment goals in the high single the low double digits, which is a significant increase from the mid single digit returns that'd be saw in the securities last quarter.
And as I mentioned earlier, we feel that there is potential further upside to these returns and the case the burnt out becomes manifest current coupon spreads widened as the fed and banks retreats overtime or any other reason debt repayment speeds and expectations moderate.
Current coupon specified pools head with swaps, however, still do not offer enough return and pose significant widening risks as a standalone investment.
With TBA still rolling special near term returns can remain reasonably attractive in the absence of spread widening with expected returns in the high single to low double digits.
To be clear the higher end of that range assumes roles specialists lasts forever and the lower end of that range assumes of quick reversion to normal implied funding levels and relies on today's historically tight spread levels for its return.
When the Msr's paired with specified pools. The combined expected return range is from mid single digits to mid teens.
Pending on whether current coupon specified pools or high coupon specify pools are used in the pair of construction and depending out of range of expected returns of in the summer.
Finally, when current coupon TVA is paired with MSR. The range of expected returns is narrower than 4 MSR of hedged with pools and again it depends on how long roll specialists last as well as the range of expected returns of MSR.
And as long T B as expressed in current coupons than the exposure to spread risk will be very low.
We are excited about our investment opportunities in the pair the agency plus MSR construction and we are focused on deploying capital there.
As I mentioned previously we expect there to be attractive opportunities to deploy more capital and both the MSR and Rbis in the second half of the year.
MSR supply of should be ample as market participants looked of monetize the MSR holdings and we have a platform in place to acquire service and overseas significant new purchases.
Rmb's spreads her tight spill, but they won't be this type forever with.
With the fed talking about tapering and the banks already beginning to at least moderate their purchases, we expect spreads to widen maybe gradually maybe sharply but we are ready unable to participate in any such attractive investing opportunities when that occurs.
Thank you very much for joining us today, they will now be happy to take any questions you might have.
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1 moment, please while we pull for question.
Our first question is from the harder with the credit Suisse.
Please proceed with your question.
Thanks.
Spelled just you know I was wondering if you could just talk about your thoughts around longer term portfolio of construction and kind of weather you know a quarter or 2 quarters. Like you just saw where you had significant divergence and coupon performance.
What kind of makes you rethink about you know kind of how you would want a structure the coupon distribution.
M S ours, and and the pools and whether you'd want more of a balance of Sir.
[noise] sure good morning, Doug Thanks, very much of the question.
So as we show on slide 12.
The amount of MSR that we currently hold hedges of certain amount of of mortgages of current coupon mortgages right and so as we <unk> as you see from the chart and as we said in the prepared remarks were generally net flat. The current coupons. If you look at choose in 2 and a half and we have some relative.
<unk> thoughts around liking 2 and it has more than 2 is there which is why you see that positioning.
And then we have more capital and so we have to deploy that somewhere.
Right and we have chosen 2.2 deploy that in the higher coupon specified pools for reasons, we discussed as of as as I said in my prepared remarks, you know the high coupon specified is have a of a long history of of generally having a wider spreads and be having stable of prepayment profiles, which makes it easier to extract.
Ah Ah spreads from those investments now if I actually of your question of you're you're wondering well, maybe we should have that.
Amount of capital deployed instead to lower coupons and of course, you know we thought about that during during the quarter.
Or before and and we chose not to do that mostly because we felt that there was significant.
[noise] widening risk from the fed tapering in the low coupons now it's true right all spreads were tight in the quarter and and I I guess, if you say, we what we were you surprised by we were surprised that high coupons widens without low coupons widening right if everything had wine in parallel.
The the performance would've been different and so going forward we.
We think that it is much more likely.
For the low coupons to widen without necessarily the high coupons sharing and that going forward that certainly more likely than it is then the high coupons continue to widen the local ones do nothing so we like our positioning here and we think the high coupons offer offer a fair amount of value.
Great. Thank you for that color, but.
And our next question is from those George would be around you have to be our please we'll see what's your question.
[noise] [noise] Hey, this is suppose like she gets from Cape UW.
Actually first and 2.
<unk> of the capital that you guys raised can you talk about just the deployment is that.
Sort of the timeline for that or is that gonna.
You're gonna be based on spread widening and what you see out there.
Yeah. Good morning Bose Thanks for the question.
The you know.
It's gonna be a combination of of you know we have been deploying some amount of that capital into our target of assets already in terms of Ah MSR and low coupon T. B S. We've not deployed it all as we've discussed previously.
Previously and in the prepared remarks, you know, we we expect better opportunities to invest in the army S. In the in the near term.
And then the pair of construction that's still attractive. So we are the playing our capital there where we can't.
Okay, great. Thanks, and then actually in terms of of the MSR is the percentage of the portfolio.
Yeah can you just remind us is there you know.
Just kind of of level, where it could go 2 it is you keep deploying capital there.
Yeah, you know we don't have a you know a set limit in mind, we we we manage the portfolio 2.2 a set of of risks both drawdown risk of it you know the and spread movement of risk of as well as as well as liquidity risks and so forth. So you know we don't we don't have a a from numb.
[noise] in mind, but we feel that we can grow that portfolio uhm substantially in the near term if opportunity presents itself.
Okay, great. Thanks, actually just 1 more quick 1 can you give us an update on book value of course your day.
Yeah sure book value is is up slightly this quarter. So far through the end of July we were up around a half a percent.
Okay, great. Thanks.
And our next question is from ricocheted with J P. Morgan. Please we'll see what's your question.
Hey, guys. Thanks for taking my questions. This morning, most of been asked and answered, but I do want to talk about what we're seeing in the primary markets and how you think the competitive dynamics. There are impacting prepayments you you've talked about.
Some expectation of burn out on the higher coupon pools, but given the.
The intense competition for volume and the fights over spread by the originators.
Why won't that persist as long as rates remain low in the refi activity opportunity remains attractive.
[noise] Yep of good morning, Rick Thanks for the question.
Well.
So I settled of long question, and and and and there's lots of moving pieces. There is as you know.
Certainly I I think in the in the lower coupons in the at the money coupons.
You know of speeds are expected to be fast.
And obviously, depending on interest rates and if rates were to push the lower still.
We would expect to see speeds there pick up you know 1 thing that's interesting. Though is is you know what people call. The re striking of the mortgage universe right, which is that you of mortgage rates here you know to the bars I say, 2.2 or 3 quarters, 2 and 7 eighths something like that I I read 1 thing.
And this week that said that the percentage of mortgage borrowers who have of 25 basis point incentive fee is right now of around 61 per cent of of agency borrowers. The last time rates were here in January.
With that same mortgage rate 74 per cent of borrowers, where where it had 25 basis points or more of incentive and the money and so that's just reflective of the fact that lots of people of refinanced already right and there's fewer people that have incentive at this rate level of the sort so in order to get the same refinancing response right.
Actually have to push a little bit lower.
In terms of in terms of higher coupons and so forth look the the the concept of burnout has been true for generations.
Generations of mortgage borrowers and investors and simply reflects the fact that after investors. After borrowers have had many opportunities to refinance at the lower rates the people who remain who haven't.
Are less likely to do so when they see it's for the third time or the fourth time of the fifth time right and.
Despite the competition and despite you know of government programs just people are less reactive there and and we expect that's the remain true.
At some point.
And as I said, we're starting to see that in the.
In the July release of prepayments, we're seeing it in our own servicing the portfolio, where we were able to track daily prepayments. There's obviously a prepayment report released Tonight and Black Knight data has you know is is projecting that that those prepayment speeds on high coupons will decline.
Ah more the day count to get and so I think that's just the behavior of of of of the way mortgage borrowers are.
Got it okay very helpful. Thank you though.
You're welcome.
Our next question is from Kenneth the lead with RBC capital markets. Please we'll see what's your question.
Hi, Thanks for taking my question I'm wondering if you could just share with US your current expectations for how long the dollar roles specialness could be expected to the last thanks.
Thanksgiving's good morning, Thanks for being with US you know I think that dollar roll specialist is is is intimately tied to the fed and the bank buying so I think that that once you see those things moderate or or Starcher Richie.
Start to retreat, I think you'll see real specialists start to come off as well.
Gotcha very helpful. And then just 1.1 follow up if I may just broadly speaking in terms of your of your of hedging profile of or positioning is there anything special day, that's being done ahead of the potential fed tapering you know it comes.
Scenarios being hedged specifically thanks.
[noise], Yeah, well you know.
We think that that that tape.
Tapering or reduce spying does not have 2.
The coincident with the changing the interest rates and so there's not much right hedging or portfolio of hedging to do but are very are very positioning of being shorts choose.
And generally flat the current coupon of complex.
Is bites construction, a hedge Ah a portfolio of hedge 2 that tapering process and so you know when I think about what the risks of the portfolio are 1 of the things that's not a risk for our portfolio is is fed paper.
Gotcha very helpful. Thanks again.
Thank you.
And our next question is from Jeffrey Cranston with G. M. P. Securities. Please proceed with your question.
Alright, thanks, good morning.
Follow up on the question about you know your <unk> your positioning within the coupon stuck in you're being sort of neutral twos and 2 enough continuing to be the long the high coupons.
And I was curious when you think about the risks of the portfolio in that position day.
What what kind of scenarios could you foresee that would actually cause hi, coupons to continue underperforming after what we've already seen in the second quarter would that be sort of related to policy restaurant, making revise easier or the other things that you could foresee cause I can kind of coupons to continue the underperform.
Thanks.
[noise] yeah. Thanks for that question yeah. It it it would be something like that you know I mean, many people have talks the this quarter about whether the underperformance of the high coupons has been you know a a a constant spread event, then and only changing prepayment expectations or not a change of the expectations and the only a spread.
Well I think of events.
You know, we sort of come down in the middle of that and we think that even with increased prepayments expectations in those high coupons that these expected returns on those assets are are are are attractive and consistent with our goals as we show on page 14th right and so we think that that you would have to see free.
Payment the expectations.
Increase even from here.
Which I think has been done quite a lot and so and so I view that as as unlikely and and all of these government programs and and increased policy risk has generally been incorporate into the prices of ready. So so it's hard for me to see how how that would happen more and again.
I think there's a bigger risk Ah Ah the prices and spreads in the lower coupons and so as I said of it you know she said that we were surprised by something it was that the high coupons widened in the lower coupons that didn't that that'd happened differentially and now I think the risk is is inverted to the other way and I think high coupons look more attractive than than local ones for the opposite reason.
Okay that makes sense and I was curious when we listened to some of the earnings calls from the originators. It sounds like a lot of them are.
Saying much more intently on.
Trying to increase cash out revised so so I was curious.
You know do you think increased focus there could beef.
The significant enough to prevent they're of burn out in the slowdown or is that the business like would be a much more marginal 1 and not that significant.
Yeah, I mean, it could be it's it's it's hard to know you know I think I think mortgage originators always like cash out revised because of the balances are bigger than the they make you know.
A point or whatever or 2 points on every long day. They they they liked the bigger balances and so you know we we do live in a period, where where there's been significant H P, a and and and it's not surprising that he originated wants to do that so I think that's that's part of the overall refinancing machine that is in people's repayment of expectations already.
I mean, it could be significant but I, but I think it's I think it's.
In People's expectations.
Okay got it and the last thing apologies if you already addressed this I got on the the code a little bit late but the increase in the portfolio yield during the second quarter could just talk through what drove the drunk there. Thanks.
Yeah, let Mary take that 1 please.
Sure the morning, Terry so the the increase of any of them came primarily from an increase in an emissary of.
Okay got it the <unk>.
Bulk of it.
Okay. Thank.
Thank you.
And our next question is.
Is from Eric Hagen would be T. I D. Please proceed with your question.
Hey, Thanks, Good morning, 1 follow up on the 17 and a half billion in bulk since quarter and was that a single package or was it multiple packages and can you talk about how you expect of finance it like how much of the excess capacity from here from there to the lines are being used to acquire those.
The package of packages.
Yeah, the library take that 1.2.
Yeah. It's it's it's multiple packages and then side of the second part of your question was relating to financing.
Yeah, how much of the excess capacity from your financing lines is being used to acquire of those packages.
Well I would just say that we you know we will continue to increase the usage of the emissary financing going forward as the portfolio growls, we have plenty of of capacity on our facilities and we'll use that to optimize.
The financing on the asset.
Okay, I guess, what I'm getting out of like what is the pro forma leverage I mean, that's the big Big package of bulk what does the pro forma leverage for taking that onto your balance sheet.
Considering the equity of is in July as well.
Well, we typically the advanced rates on MSR around 70 per.
Per cent and we will you know we will.
The little optimized usage of the facilities given you know the the use requirements and that compared with our excess cash on hand.
To determine the right amount of of got down on the facilities.
Okay alright, thank you.
And we have reached the end of the question of an answer session and I'll now turn the call of over 2 and Greenberg for of closing remarks.
Well. Thank you very much for everyone for joining us today and thank you as always for Ya interested in 2 hours have a good day.
This concludes today's conference and you may disconnect. Your line of at this time.
Thank you for your participation.
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