Q3 2022 Annaly Capital Management Inc Earnings Call
Good morning, and welcome to the <unk> Capital Management third quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Sean Kensal Director of Investor Relations. Please go ahead.
Good morning, and welcome to the third quarter 2022 earnings call for <unk> capital management.
Any forward looking statements made during today's call are subject to certain risks and uncertainties, including with respect to COVID-19 impacts which are outlined in the risk factors section in our most recent annual and quarterly SEC filings.
Actual events and results may differ materially from these forward looking statements.
We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings.
Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date hereof we.
We do not undertake and specifically disclaim any obligation to update or revise this information.
During this call we may present, both GAAP and non-GAAP financial measures.
Conciliation of GAAP to non-GAAP measures is included in our earnings release.
As a reminder, we routinely post important information for investors on the company's website www dot ml dot com.
Content referenced in today's call can be found in our third quarter 2022, investor presentation, and third quarter of 2022 financial supplement both found under the presentations section of our website.
And we intend to use our webpage as a means of disclosing material nonpublic information for complying with the company's disclosure obligations under regulation FD and to post an updated investor presentation and similar materials on a regular basis. Please.
Please also note this event is being recorded.
Participants on this morning's call include David Finkelstein, President and Chief Executive Officer, Serena Wolfe, Chief Financial Officer, Yogurt, Writeoff, Chief Investment Officer, Ken Adler head of mortgage servicing rights and makes any head of residential credit.
And with that I'll turn the call over to David.
Thank you Sean good morning, and thank you all for joining us on our third quarter earnings call. Today, we'll provide an update on the macroeconomic landscape our financial results this quarter and our positioning heading into year end.
And Serena will then discuss our portfolio activity and financial performance.
Now beginning with the macro backdrop and what continues to be a historically challenging year to third quarter brought about a further selloff in the bond market and mortgage spreads widened to crisis era levels.
Persistently high inflation readings rapid and sustained federal reserve rate hikes tightening financial conditions elevated volatility.
Oh political turmoil and rising financial stability risks have weighed heavily on markets now to put this in historical perspective. The total return for the Bloomberg U S aggregate bond market Index was negative 14, 6% in the first three quarters of 2022 far worse than the negative two.
9% 1994, the previous worst year in the history of the index and in light of the continuation of this difficult environment.
We experienced a negative economic return of 11, 7% for the quarter.
So the federal reserve has signaled that it is determined to continue tightening monetary policy until inflation approaches its target a commitment that has been echoed by virtually all fed speakers since chair Pals Jackson hole speech at the end of August . This has caused a meaningful repricing of the right path with markets currently expecting the hiking.
Cycled the ended of fed funds rate nearly 5% compared to expectations of just three 5% at the end of June led to a sharp selloff in interest rates and exceptionally high levels of volatility.
A consequence of volatility has been extremely weak investor demand for fixed income products, particularly for agency MBS in fact, the third quarter represents only the third time in the past 10 years in which banks and mutual funds to critical private sector holders of mortgage securities and loans have reduced their.
Agency MBS holdings simultaneously.
In light of the sharp selloff in rates and widening in MBS spreads the Freddie Mac primary mortgage rate rose to $6, 94% as of last Thursday more than doubling in 2022 and contributing to the abrupt slowdown in housing market activity.
Home price appreciation very likely peaked for the cycle and has begun to reverse course in many parts of the country.
Given the mortgage affordability shock from high home prices and rapidly rising rates. We now expect the housing market to correct potentially erasing the entire appreciation seen each year by early to mid 2023.
Now although prices could fall meaningfully from their recent highs homeowners has built up substantial equity cushions lending standards have been conservative given low rates on existing mortgages homeowners are unlikely to default unless labor markets weakened considerably from year.
Despite volatility in interest rate and mortgage markets funding conditions continue to be healthy as agency MBS repo residential credit and MSR facilities remains readily available.
Our financing rates have risen certainly but are commensurate with other benchmark short term interest rates, while high volatility could drive an increase in repo haircuts, we've seen limited evidence of this thus far.
The favorable financing conditions are driven by the high balances of Investor cash in short term interest rate products best seen by the elevated bank reserve balances and reverse repo participation at the federal reserve and notwithstanding fed portfolio run off reaching its steady state run rate of up to 95 billion per month finance.
And conditions should maintain support was cash remains ample.
Now shifting to our portfolio our focus is on prudently managing our liquidity leverage and risk profile in the current environment. We continue to position ourselves defensively, given sustained volatility and have strong liquidity with more than $6 billion in unencumbered assets, including $4 3 billion in cash and <unk>.
<unk> MBS, which represents over 50% of our common equity as of quarter end.
During the quarter, we maintained our economic leverage at six five turns until mid September when the sharp market sell off over the last two weeks of the quarter brought our leverage up roughly half of turned in the quarter was seven one turns.
While we are comfortable with our current portfolio positioning we expect our leverage to trend modestly lower over the longer term reflective of our target capital allocation.
With respect to portfolio mix, we modestly grew each of the three strategies with our total assets increasing to $86 2 billion as we selectively deployed capital from common equity issuance on the quarter, while the majority of new capital was committed to agency our capital allocation to the sector decreased <unk>.
Four percentage points to 67% as the agency portfolio absorbed the vast majority of the increase in leverage to end the quarter.
Turning to residential credit in light of deteriorating housing market fundamentals portfolio growth was focused on opportunistic additions of securities that are less susceptible to home price declines, but we believe our whole loan portfolio is well positioned to withstand further weakness in the housing sector. We have tightened our already stringent credit standards and we expect.
This pace of Securitizations to moderate in the near term. Nevertheless, we remain the largest nonbank issuer of prime jumbo and expanded credit MBS this quarter.
Now with respect to our mortgage servicing rights business, we have now fully scaled our platform, having more than tripled our portfolio size year over year <unk>.
The MSR portfolio benefits from stable cash flows and the low prepayment environment and helps to hedge the risks of the further slowdown in housing activity. Although we were the second largest purchaser of MSR in 2022 as of the end of the quarter, we expect to be measured with respect to future growth considering the sectors relative attractiveness in our.
Our risk parameters.
Overall, we anticipate market challenges will persist over the near term and will maintain our defensive posture until volatility subsides, while spreads across our investment strategies are historically attractive again, we're focused on preserving liquidity and optionality against additional market turbulence and when the outlook.
Proves we are well positioned to take advantage of opportunities across our three businesses.
Now lastly, before handing it off to Ilker I wanted to take a moment to provide some perspective on where we sit today, we understand that 2022 has been an immensely challenging period financial markets.
We recently marked 25 years as a public company.
The taper tantrum and most recently the financial market dislocation at the onset of Covid and it has proven our ability to successfully navigate through these episodes of market.
Turbulence and we are confident that our business model will emerge from this current period stronger than ever.
Now with that yoga will provide a more detailed overview of our portfolio activity for the quarter and outlook for each business.
Thank you David.
As you discussed <unk> brief respite in the first half of the quarter interest rate volatility resumed its much higher risk sentiment turned negative and agency MBS sharply underperformed interest rate hedges with spreads widening between the five to 30 basis points.
Meanwhile, non agency spreads also saw considerable volatility throughout the quarter, but ended Q3 roughly unchanged.
<unk> remained relatively stable.
Starting with the agency portfolio activity at holdings grew by roughly 3 billion in market value as we patiently deploy the equity raised during the quarter purchasing meaningful upheaval updates then led by constant leverage on new capital.
We continue to rotate the portfolio up in coupon and significantly reducing our holdings of threes and below while adding to our positions in pulling out some pause which benefit from lower sensitivity to the spread movements and better carrier.
Our coaches were predominantly in pools, and we reduced our TBA holdings by $3 5 billion.
During the quarter specified pools outperformed TBA TBA as investors gravitated towards the better <unk> specified collateral given the elevated volatility.
Additionally, with TBA rolls softening pools provide incremental kit across nearly all coupons.
Last name with the mortgage universe firmly out of the money primarily by perspective.
Seasonal cash flows are in strong demand the embedded HBA should provide extension protection benefiting our portfolio, which is unable to reach over three years seasoned.
In terms of Prepays, our portfolio page nine eight CPR in Q3 has slowed down from $14 nine CPR in the prior quarter, primarily driven by higher rates.
We expect the slow prepaid that mine went to persist over the near term as seasonal turnover decline and cash out refinances diminish due to elevated rates and declining HBA.
In our hedge portfolio, we maintained a defensive posture consistent with prior quarters.
Added over <unk> 5 billion notional primarily longer dated swaps to match the extension of our assets as rates continue to rise.
Additionally, we added over 7 billion in sales unit features pages at the front end of the curve to maintain protection as our short term nature of the swaps drove them.
Turning to our residential credit business, the economic market value of the laser portfolio ended Q3 at $5 1 billion a modest increase over Q2.
As David briefly touched on portfolio growth was largely driven by the increase in our NPL LPL structured securities positions and area of the market that has very high credit enhancement and is collateralized by loans from season borrowers with significant equity who are less exposed to negative <unk>.
Yes.
In residential whole loans, we set of 900 million of expanded credit loss in Q3, and sponsored three securitizations generating 120 million market value of retained Dolby X months.
We expect future whole loan purchases to moderate given increasing borrowing rates and seasonal factors, which will likely reduce housing market transactions.
With respect to our MSR business.
We continue to grow our MSR holdings with the purchase of one bulk packages, representing roughly 150 million end market failure.
In light of the fragility of the housing market. It's important to note that our portfolio consists of data high credit quality 760, FICO, 68% LTV sub 3% coupon collateral, which has benefited from steady rise in interest rates this year.
MSR portfolio paid $4 three CPR in the third quarter, providing very attractive and stable cash flows whilst tailoring is unhedged to slow turnover speeds in the deep discount MBS universe.
Year to date through the third quarter, we have grown our MSR portfolio by over $1 2 billion in market value to nearly $1 9 billion.
As the market stands today.
That's across our investable asset classes look very attractive from a historical perspective.
Hollywood to reiterate David's point, our focus in this period of elevated uncertainty will be to preserve liquidity.
In MSR market, we anticipate debt originators will continue to monetize the MSR given pressure on margins and cash requirements.
We will be patient to further grow our portfolio even expectations for ongoing supply while cognizant that MSR has been more resilient to the cheapening experienced in other sectors.
In Red National could it even look patient about adding further exposure given the decelerating housing market.
In agency MBS, the widening experienced year to date has been particularly acute.
Nominal spread some production coupon mortgages that are in excess of 150 basis points and option adjusted spreads are over 50 basis points.
As mentioned these are levels not seen since prior crisis absorbs such as Colgate and the 2008 financial crisis.
However, the difference is to those periods versus today.
Repo financing remains widely available.
Second comparable to offset such as corporate credits are meaningfully tighter.
And third.
The backdrop for agency MBS is more attractive.
Mortgage universe, they blow us.
Offset <unk> is much better and.
With higher rates slowing housing activity supply should contract materially.
Lastly, the possible to have a broader economic slowdown has increased and agency MBS has historically outperformed comparable fixed income products during recessionary periods.
Our outlook is optimistic for each of our three businesses over the medium term, but we will remain patient to grow the portfolio until we see evidence of volatility subsided.
With that I will hand, it over to Serena to discuss the financials.
Thank you Luca today I will provide brief financial highlights for the quarter ended September 32022, and discuss select quarter to date metrics.
And with prior quarters, while our earnings release discusses GAAP and non-GAAP earnings metric.
My comments will focus on our non-GAAP AAD and related key performance metrics, which exclude PAA.
Additionally, our per share metrics are adjusted for al one for four reverse stock split effected in September 2022.
Our book value per share was $19, 90%, the key trade, which decreased by $3 65 per share for the quarter, primarily due to higher rate spread widening and the continued declining valuations on our agency portfolio, along with lower credit valuation, albeit more modest declines in comparison to the agency book.
Our swap in futures position supported book value, providing a partial offset to the agency declines mentioned above.
<unk> $6 93 per share to the book value during the quarter and our MSR position added <unk>.
As noted in our Q2 earnings call, while our teachers book does not offset higher repo rates.
The derivatives are fully reflected in economic return and in Q3. They said they function with features aligned having contributed 60% of the hedge benefit to Apple value.
After combining our book value performance at our third quarter dividend of <unk> 88.
Quarterly economic return was negative 11, 7%.
We generated earnings available for distribution of $1.06 per share.
<unk> continued to outpace our dividend that we experienced the beginning of the moderation in AAV that we have discussed on our recent adding coal with AAV per share reduced by <unk> <unk> compared to last quarter.
The LOE for the quarter is primarily related to the continued rising repo rate clothing repo expense more than tripled during the quarter as well as lower expected TBA dollar roll income, which declined by approximately 17%.
AAV did benefit from our increased swaps net interest benefit on higher received rates 33 cents per share reduced premium amortization ex PAA and lower CPI hedging.
And continued growth in MSR related income increasing by six cents per share compared to Q2.
Given the challenges David in Elko referenced in the current environment and the impact on the idea of the competition of our hedging portfolio United about.
All things equal we currently expect Q4 earnings to be roughly in line with the third quarter dividend.
Average yield ex PAA were 37 basis points higher than the prior quarter at three 4% due to lower CPI and a meaningful decline in amortization.
Additionally, the portfolio generated 198 basis points of NIM ex PAA down 22 basis points from Q2, driven by the reduced TBA dollar roll income and higher repo rates.
Net interest spread does not include dollar roll income therefore, the decrease with more muted down six basis points at one 7% compared to Q2.
Now turning to our financing David provided color on our views of the robustness of the funding markets.
However, we continue to see uncertainty about the pace of future rate hikes with most of the liquidity within the repo market continuing to try to fed data offshore tab.
Because of this uncertainty bilateral repo markets continue to price 10 market more cautiously, resulting in wider term premiums.
Access to 10 markets remain intact.
However, we do not expect a meaningful shift in our positioning until we feel that that has reached the end of the tightening cycle.
As a result, as we messaged in prior quarters, we continue to maintain a shorter dated book over the near term versus prior years that quarter over quarter weighted average repo maturity was up 10 days compared to Q2 at 57 days.
Turning to our residential credit financing strategy.
Our discipline and accessing the securitization market throughout the year has kept our net exposure to our unsecured has whole loan book appropriately sized with only $805 million on the balance sheet to end the quarter.
92% of our gas consolidated whole loan portfolio has 10 funded through our residential securitization with a weighted average financing rate of three 5% approximately 450 basis points below the current non QM Costa patents.
As a securitization market slowed in October and the cost of funds to access the securitization market has steadily risen we remain well positioned with significant warehouse capacity approximately $1 4 billion across multiple partners with staggered renewal date.
Given our favorable positioning we will continue to monitor the securitization market and are prepared to be opportunistic.
Shifting to MSR financing, we drew on our MSR warehouse at <unk> during the quarter for $250 million and after quarter end executed the accordion for title facility of $500 million.
To reiterate our message from last quarter, we put this facility in place primarily for liquidity purposes, and expect to maintain lower leverage on this business.
Overall, the upward trend in interest rates impacted our total cost of funds for the quarter rising by 44 basis points to 154 basis points in Q3.
Meanwhile, our average repo rate for the quarter was 225 basis points compared to 81 basis points in the prior quarter.
Our activity in the securitization market also impacted funding costs, increasing the weighting on securitizations on the competition across the fund along with higher effective rates previously referenced about a three 5% compared to $2, 73%, resulting in an increase of five basis points to cost of funds.
Finally swaps positively impacted cost of funds during the quarter as previously mentioned by 85 basis points more than twice the benefit in comparison to Q2.
Lastly, as David mentioned earlier, and we maintained an abundant liquidity profile was $6 1 billion of unencumbered assets down modestly from the prior quarter at $6 3 billion.
The reduction in unencumbered assets was due to the pledging of a portion of our MSR to the previously mentioned warehouse facility and higher leverage levels on agency MBS.
With that we will turn it over to questions operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Bose George of Keyw. Please go ahead.
Hey, everyone. Good morning, Greg.
Can I start just asking about mark to market book value So far this quarter.
Sure Bose good morning, So obviously the turbulence continued into October and notwithstanding the fact that we did pick up a few percentage points. This week.
But nonetheless as of last night book was up 6% to 7% at roughly <unk> 16.
Okay, great. Thank you and then your current dividend implies a net ROE of around 17, and a half fish.
And is that an attainable economic return on your portfolio and then just in your comments you noted that next quarter will be more in line with that.
The dividend, but when you think about the dividend should we really be focusing more on the economic return versus the EAP just given your treasury futures.
Sure Bose.
Doug to your point, we discussed this with you last quarter actually economic return or economic earnings is how we think about it and just to review.
Serena's comments as she mentioned, we do expect to earn the dividend this quarter.
Earnings earnings available for distribution is moderating.
And also to <unk> point swap income is becoming an increasing portion.
That.
As short rates are increasing and futures do impact or benefit the economic income or economic return, but don't flow through.
So there is some non economic factors that may bring it.
Down, but nonetheless to the point of moderation there are real economic factors that are influencing earnings for example.
As we as we sit here today.
Leverage will likely be lower.
Financing costs are going up and some swaps rolling off so we do have to take those into consideration and with respect to the actual earnings yield as you mentioned, we're right around 18% on quarter end book.
Above the peer set as it has been really since the onset of Covid and it's above where we've been historically.
We'll obviously take a look at that.
As the market evolves.
And make a determination as to what the appropriate yield should be and as we've said consistently we expect to maintain a competitive yield with the peer sets, but also sustainable and in line with our historical <unk>.
Average payout ratio so to give you a summary, we feel good about Q4, we will see how rates evolve over the next number of months and always look at the dividend in conjunction with our board and come up with the appropriate payout ratio.
Okay, great. Thanks, a lot.
You bet Bose.
The next question comes from Doug Harter of Credit Suisse. Please go ahead.
Thanks, Ken.
Can you talk about how youre thinking about leverage balancing kind of near term volatility versus kind of the wi level of spread.
And kind of what you might be looking for in order to either take up our take down leverage from here.
Sure. So we did take down leverage somewhat modestly as we as we started the quarter, but where we sit today is around 6% and three quarter turns and we feel good about it.
Agency MBS as well as other sectors, we invest in has historically achieved but.
But also volatility is historically high and the technical factors associated with agency specifically in terms of fed Runoffs and where flows are coming from have also been somewhat negative. So what we're looking for in terms of.
How we're managing the portfolio as a decline in volatility and money to flow into fixed income and particularly agency MBS. So we're comfortable with the current leverage ratio is leveraged level. Currently it is elevated to where we've been.
But at the end of the day assets are cheap and we do expect there to be a decline in volatility in spreads and historically wide levels.
We're certainly comfortable with where we're at now.
Okay.
I guess in that construct with.
Knowing that there is volatility I mean, why not kind of going into that leverage kind of creep higher.
And sort of take a longer term view and absorb near term volatility.
So let's talk about the last six weeks and what we've gone through with the market and just to frame out how we're thinking about things in.
Candidly, Doug there has been virtually no good news over the past six weeks for fixed income investors beginning with the Jackson hole speech in late August where that was probably one of the most hawkish speeches we've seen from from the fed in quite some time and then subsequent to that we move into September we get it.
Strong payrolls number.
Then CPI ticks up from five 9% to six three again not good news we go into the September fed meeting, where the dot plots exceeded what the market was pricing with a 43 ace right at the end of the.
At the end of 2022 projected as well as reinforcing that hawkish tone and then we get into late September and we have the U K gilt.
Debacle, which led to a 140 basis point sell off in gilts over the course of about five days, which is for a very developed market like the UK is stunning and then the ministry of Finance intervention and then we move into October with September payrolls, showing very strong results three 5% unemployment.
<unk> rate as well as 5% year over year wage gains and then following that September CPI at six 6%, which is obviously our core CPI, which is obviously quite high.
All of this explains I think why we had a trough to peak sell off across U S yields of about 120 basis points and 35 basis points wider MBS spreads. So we have to be respectful of all of that now we're sitting here at the quarter end with $4 3 billion in cash and agency MBS on.
Encumbered.
We feel like we want to maintain our liquidity until we get out of this and we get some better news, we do expect things to turn obviously, obviously the economy, we've seen signs of slowing but remains resilient with a strong labor market and underlying inflation, which we havent seen turn yet.
So we need to really see a turn before we would we would.
Incrementally add to our portfolio does that help.
Very helpful. Thank you Darren.
You bet.
Next question comes from Rick Shane of J P. Morgan. Please go ahead.
Good morning, everyone and thanks for taking my question.
So.
Very intrigued by the hedge.
Next on page 11.
Find it particularly interesting in the context of <unk>.
What we've seen for mortgage rates and we've had this incredible of them, which is that between December 21, and today, we basically reset the channel markers in terms of mortgage rates from a low to high.
And those extremes work.
Lowest and highest in more than 20 years.
You've seen your hedge ratio shift.
Your hedge composition shift fairly significantly as we approach potentially a peak in terms of mortgage rates how would we expect this to shift.
I'm, particularly concerned about the swap ratio and adding a lot of duration there in an environment, where you might actually start to see speeds pick up at some point in the future.
Sure.
So.
I'm, assuming you're asking like are we hedging too much Avi luck, putting luxury women ages is that it seems to be my understanding.
I think I.
Yes, but I think the real question is from our point of view not being a sophisticated assets as you are.
How do you mitigate that risk of being over hedged.
If rates do start to shift and is that what we're seeing in terms of this mix shift on the on the hedge portfolio.
Sure.
Uh huh.
If you look at recently the performance of mortgages you will see it.
Correlation with the rates and the correlation is that innovative solo mortgages onto the platform. So we expect this short term negative correlation to process. This is <unk> what it used to be in the long run usual risk off days, our market drove the days, but we are in an environment, which David released.
Describe fluctuated nicely in the previous question that we are in a very different environment that risk off environment market setup environments. This explains a little bit tougher.
<unk> designation, but I see your point on <unk> been looking into data and the point when we realize that correlation is turning off we will do the appropriate actions, but to reiterate we do not take interest rate.
We're positioned right now we are trying to fully hedge and we are cognizant that correlation is on the other side of the.
System.
Does that help.
It does and it's actually it's actually.
Such language around.
Some of the things that we're seeing that struggled we struggled to explain as well in terms of a risk on risk off as well. So thank you.
Yes. It is being looked at this episode has been an environment, where risk office coming with a rate sell off so that's why it is particularly difficult towards the financial players in the system that are special that you hear them up on the financial news that 6% to 40 port holder and all that kind of stuff all theyre really trying to describe is that this car.
Relation break the other way around and Thats why it is very difficult.
Got it okay. Thank you.
Thanks, Rick.
Okay.
Once again, if you would like to ask a question. Please press Star then one.
And the next question comes from Trevor Cranston of JMP Securities. Please go ahead.
Hey, Thanks, good morning.
Question on the composition of the agency portfolio.
You guys have obviously been moving up in coupon.
As the current coupons increased substantially over the course of the year.
Can you talk about sort of how much liquidity.
Float there is like above 5% coupons today and kind of on the on incrementally with the current coupon where it is.
Right now kind of what coupons you'd be looking to move into within the agency portfolio.
Yes.
It's a good point.
Liquidity above five retail at 500000 six's unrelated.
In fact.
The movements are so fast that we have been skipping coupon spec, David and I've been doing this like over 25 years, we have never seen a coupon skipping like this.
Production coupon skip from <unk> to five <unk> and vitamin a short period of time and not even five star.
$96 price.
There is not that much liquids and <unk>.
This is a wrong word to say there is not that much flow in <unk>. So thats why when we say up in coupon, we usually mean five we shifted most of our.
Lower coupon exposure into five it's like $96 price and especially with the concern that Rick was raising it on the previous question, we really like that price point 96 to $98 price point and.
Where we stand right now that will probably be most of our focus going forward.
And Trevor one more point about margin liquidity I think everybody has heard about some of the dislocations that have been exhibited in markets and yes liquidity is constrained, whether it's treasuries or agency MBS or out the help the spectrum, but this is largely a function of volatility and when volatility does subside.
Syed liquidity will certainly improve but nonetheless, you have to be a very gentle with your approach to managing fixed income portfolios in the current environment.
Yes, okay that makes sense.
And then one question on the MSR.
Obviously valuations continued to move higher this quarter.
Can you talk sort of theoretically.
For low coupon.
<unk> kind of where you view the cap in terms of valuation and if there's a.
Point somewhere soon word.
<unk> of it could actually become positive.
Yeah, I'll start and Kevin can certainly add we are certainly in the context of that cap. If you just look at the increase in valuation on the quarter. It's only it's only a 10th of a multiple and we had roughly a 100 basis point increase in rates across across the curve and the MSR CPR went down rough.
The 30% so so you're starting to see that crest here, Ken we'll treat it.
And your point I mean look the cash flows are fully extended.
Theres only so it's slowed the pulse can pay but the certainty of them paying slower continues as rates rise.
Option adjusted basis, it gets more favorable the other point is when you own MSR you'd manage lots of cash balances so as rates rise.
Earn the servicer the owner of the MSR earns more return on those cash balances so that negative duration.
In the front end of the curve continues so theres always going to be that negative duration, yes that flow effectively.
Provides more Abraham as short rates do rise, obviously and another point to note in terms of the construction of our MSR, we feel very good about what we own we've achieved a lot of growth over the past year.
And the overall MSR is 400 basis points out of the money in the credit is quite good so.
With respect to how housing evolves, we think that asset is going to perform very well for us.
To add to both David and Ken.
These discount MSR is look it may not be hedging interest rate risk in our model, but it is still hedging the turnover risk in the mortgage market at turnover risk is the biggest this gift of volatile to subsets in the mortgage market, we like where we stand on the discount MSA.
Okay. Okay. That's great. Thank you.
Thank you Trevor.
Okay.
This concludes our question and answer session I would like to turn the conference back over to CEO , David Finkelstein for any closing remarks.
Thank you Andrea and thanks, everybody for joining us this morning, and good luck over the next number of months and we'll talk to you soon.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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