Q2 2024 Two Harbors Investment Corp Earnings Call
Good morning. My name is Melissa and I will be your conference facilitator. At this time, I would like to welcome everyone to Two Harbor's second quarter 2024 financial results conference call. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question and an answer period. I would now like to turn the call over to Maggie Karr.
Operator: At this time, I would like to welcome everyone to Two Harbors' second quarter 2024 financial results conference call. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question and an answer period. I would now like to turn the call over to Maggie Karr.
Margaret Field Karr: Good morning, everyone, and welcome to our call to discuss Two Harbors' second quarter 2024 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer, Nick Letica, our Chief Investment Officer, and Mary Riskey, our Chief Financial Officer.
Margaret Field Karr: Good morning, everyone, and welcome to our call to discuss Two Harbors' second quarter 2024 financial results.
Speaker Change: With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer, Nick Letica, our Chief Investment Officer, and Mary Riskey, our Chief Financial Officer.
Margaret Field Karr: The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website as well as the Investor Relations page of our website at TwoHarborsInvestment.com. In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.
Speaker Change: The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website as well as the Investor Relations page of our website at twoharborsinvestment.com.
Speaker Change: In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call.
Margaret Field Karr: These are described on page 2 of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, Two Harbors does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill.
William Ross Greenberg: Thank you, Maggie. Good morning, everyone, and welcome to our second quarter earnings call. Before getting into our financial results, I would like to take a moment to recognize the retirement of our CFO, Mary Riskey. As previously announced, Mary will retire in August after a long and distinguished career, the last 13 years of which were at Two Harbors. Mary was already at Two Harbors when I joined in 2012, and I remember having numerous conversations with her in those early years and being struck by her knowledge and command of very technical issues.
Speaker Change: Thank you, Maggie. Good morning, everyone, and welcome to our second quarter earnings call.
Speaker Change: Before getting into our financial results, I would like to take a moment to recognize the retirement of our CFO , Mary Riskey.
Speaker Change: Mary was already at Two Harbors when I joined in 2012, and I remember having numerous conversations with her in those early years and being struck by her knowledge and command of very technical issues.
William Ross Greenberg: For twelve years, I've come to admire Mary for her honesty, character, commitment, and loyalty. There is no doubt Mary has left an indelible mark on our company, and we are grateful to her for her leadership. Mary, you'll be missed, and all of us at Two Harbors wish you the very best in your next chapter.
Speaker Change: There is no doubt, Mary has left an indelible mark on our company and we are grateful to her for her leadership.
William Ross Greenberg: We are also very excited to announce that William DeLisle will be joining us as Interim CFO, effective August 1st. William and I worked together for 10 years, from 1998 through 2008, and I couldn't be happier to work with him again. Most recently, William worked at Caliber Mortgage, where he was CFO and then president through the completion of the sale of Caliber. Prior to that, he was head of capital markets at Citi Mortgage.
Speaker Change: William and I worked together for 10 years, from 1998 through 2008, and I couldn't be happier to join together again. Most recently, William worked at Caliber Mortgage, where he was CFO and then President through the completion of the sale of Caliber.
William Ross Greenberg: He has vast experience in the mortgage industry, with deep knowledge of servicing, origination, markets, and risk management. In this time of growth and change for our company, we are especially fortunate to be able to draw on William's wisdom and expertise. We will continue to search for a permanent CFO who will be able to help us grow, not from where we are currently but from where we expect to be in the near future. William Dalal's presence allows us to be careful and thoughtful in that search.
Speaker Change: Prior to that, William was head of capital markets at Citi Mortgage.
Speaker Change: In this time of growth and change for our company, we are especially fortunate to be able to draw on William's wisdom and expertise.
Speaker Change: William DeLisle's presence allows us to be careful and thoughtful in that search.
William Ross Greenberg: Now, turning to our quarterly results, I'll start by providing an overview of our performance, followed by a discussion of the markets. And we'll finish with an update on round point operations. Mary will cover our financial results in detail, and Nick will discuss our investment portfolio and return on investment. Let's begin with slide three.
Speaker Change: Now, turning to our quarterly results, I'll start by providing an overview of our performance, followed by a discussion on the markets, and finish with an update on round-point operations.
Speaker Change: Mary will cover our financial results in detail, and Nick will discuss our investment portfolio and return outlook.
William Ross Greenberg: Our book value at June 30th decreased to $15.19 per share, representing a 0% total economic return for the quarter. For the first half of the year, we generated a total economic return of 5.8%. Our second-quarter results were primarily affected by a small widening in RMBS spreads and higher realized volatility in the second quarter compared to the first quarter. MSR performed well with stable cash flows supported by slow prepayments. Please turn to slide four for a brief discussion of the market.
Mary: Let's begin with slide three. Our book value at June 30th decreased to $15.19 per share, representing a 0.0% total economic return for the quarter.
Mary: For the first half of the year, we generated a total economic return of 5.8%.
Nick: Our second quarter results were primarily affected by a small widening in RMBS spreads and higher realized volatility in the second quarter compared to the first quarter.
Nick: MSR performed well with stable cash flows supported by slow prepayment speeds.
William Ross Greenberg: In the second quarter, there was no lack of conflicting economic data driving a pickup in volatility. Figure one on this slide shows CPI readings from the beginning of 2021 through the present. Both employment and CPI reports came in stronger than expected in April, followed by weaker than expected readings in May, and then stronger and better than expected reports in June. Unexpected developments in the U.S. presidential race, plus surprising results in French and British elections, also contributed to market volatility.
Nick: In the second quarter, there was no lack of conflicting economic data driving a pickup in volatility.
Nick: Both employment and CPI reports came in stronger than expected in April , followed by weaker than expected readings in May, and then stronger and better than expected reports in June .
William Ross Greenberg: After rising 50 basis points and then falling by 50 basis points, the 10-year Treasury yield ultimately rose again and finished the quarter about 20 basis points higher at 4.40%. The two-year Treasury yield followed a similar path, rising 40 basis points and falling by 30 basis points, finishing up 13 basis points to 4.75%. In June, the Fed left rates unchanged as it continued to wait for more good data showing that inflation was steadily declining towards their 2% target.
Nick: The two-year Treasury yield followed a similar path, rising 40 basis points and falling by 30 basis points, finishing up 13 basis points to 4.75%.
Nick: In June , the Fed left rates unchanged as they continued to wait for more good data showing that inflation was steadily declining towards their 2% target.
William Ross Greenberg: Market expectations for interest rate cuts in 2024 declined from about three cuts, or 75 basis points, to about two cuts by quarter ends, as seen in Figure 2. The Fed's own projections, the dot plots, moved the median expectation for Fed funds down from three cuts to one, though a plurality of members had two cuts in their forecast. Inevitably, many forecasts shifted the first cut further out in time, reinforcing the higher-
Nick: Market expectations for interest rate cuts in 2024 declined from about 3 cuts, or 75 basis points, to about 2 cuts by quarter ends, as seen in Figure 2.
Speaker Change: The Fed's own projections, the dot plots, move the median expectation for Fed funds down from three cuts to one, though a plurality of members had two cuts in their forecasts.
Speaker Change: Inevitably, many forecasts shifted the first cut further out in time, reinforcing the higher-for-longer view.
William Ross Greenberg: Post-quarter end, on the back of a weaker-than-expected inflation reading, Chairman Powell signaled that an interest rate cut is probable for September, and the market is now fully pricing in a September rate cut. We also expect that volatility will decrease as the Fed embarks on an easing cycle, which will benefit both RMBS and MSR valuations and further supports the idea that this is an excellent environment for our current allocation to MSR and agency RMBF. Please search slide five for a brief discussion on round points operation.
Chairman Powell: Post-quarter end, on the back of a weaker than expected inflation reading, Chairman Powell signaled that an interest rate cut is probable for September , and the market is now fully pricing in a September rate cut.
Speaker Change: We also expect that volatility will decrease as the Fed embarks on an easing cycle, which will benefit both RMBS and MSR valuations, and further supports the idea that this is an excellent environment for our current allocation to MSR and agency RMBS.
William Ross Greenberg: Our goal in owning and operating a mortgage company was to achieve economies of scale, improve MSR economics, and to be able to leverage a more expansive set of opportunities in the mortgage finance space, thus creating new sources of profitability for the company. In line with our previously articulated plan, we completed the transfer of all of our servicing to RoundPoint's platform in June. Round Point now services over 900,000 loans, or about $225 billion in UPB.
Speaker Change: Please turn to slide 5 for a brief discussion on round point operations.
Chairman Powell: Our goal in owning and operating a mortgage company was to achieve economies of scale, improve MSR economics, and to be able to leverage a more expansive set of opportunities in the mortgage finance space, thus creating new sources of profitability for the company.
Chairman Powell: In line with our previously articulated plan, we completed the transfer of all of our servicing to RoundPoint's platform in June .
Chairman Powell: Ground Point now services over 900,000 loans, or about $225 billion of UPB.
William Ross Greenberg: We continue to be focused on implementing operational efficiencies to deliver a low cost of service per loan and are pleased with our progress so far. In the second quarter, we also launched our direct-to-consumer originations platform, and we are actively taking loan applications from potential customers. In just the first few weeks of operations, through July 25th, we have taken locks on more than $25 million worth of loans.
Chairman Powell: We continue to be focused on implementing operational efficiencies to deliver low cost of service per loan and are pleased with our progress so far.
Chairman Powell: In the second quarter, we also launched our Direct-to-Consumer Originations Platform, and we are actively taking loan applications from potential customers. In just the first few weeks of operations, through July 25th, we have taken locks on more than $25 million worth of loans.
William Ross Greenberg: While this is still a very small number, we are pleased that we have met the target that we set for ourselves, and we expect this number to grow over time, even if interest rates remain unchanged. As a reminder, this direct-to-consumer platform is designed to have small but steady and positive returns in a higher-rate environment like this but should be able to generate larger returns in a refinance environment and act as a hedge to faster-than-expected prepayments. We also intend to begin offering ancillary and home equity products to our customers, including second lien loans, later this year. We added approximately 17,000 loans from one subservicing client in the quarter.
Chairman Powell: While this is still a very small number, we are pleased that we met the target that we set for ourselves, and we expect this number to grow over time, even if interest rates remain unchanged.
Chairman Powell: As a reminder, this direct-to-consumer platform is designed to have small but steady and positive returns in a higher-rate environment like this, but should be able to generate larger returns in a refinance environment and to act as a hedge to faster-than-expected prepayment speeds.
Chairman Powell: We also intend to begin offering ancillary and home equity products to our customers, including second lien loans, later this year.
Chairman Powell: We added approximately 17,000 loans from one subservicing client in the quarter. We believe that we are the ideal partner to service MSR for new and existing MSR holders, and we are actively working on the ability to support various structures.
William Ross Greenberg: We believe that we are the ideal partner to service MSR for new and existing MSR holders, and we are actively working on the ability to support various structures. Our results this quarter again demonstrate the benefits of our portfolio construction of MSR paired with agency RMBS. In addition, through owning an operating entity, we are able to more closely affect our returns through our own actions by lowering operating costs, hedging our existing portfolio through recapture originations, and expanding our opportunity set.
Chairman Powell: Our results this quarter again demonstrate the benefits of our portfolio construction of MSR paired with agency RMBS.
Chairman Powell: In addition, through owning an operating entity, we are able to more closely affect our returns through our own actions by lowering operating costs, hedging our existing portfolio through recapture originations, and expanding our opportunity set.
William Ross Greenberg: Our investment strategy is designed to produce returns across different market environments. With the majority of our capital allocated to hedged MSR, our portfolio is less exposed to fluctuations in mortgage spreads than portfolios without MSR, while still preserving upside to falling volatility and spread-tightening environments. With that, I'd like to hand the call over to Mary to discuss our financial results.
Chairman Powell: Our investment strategy is designed to produce returns across different market environments.
Chairman Powell: With that, I'd like to hand the call over to Mary to discuss our financial results.
Mary Kathryn Riskey: Thank you, Bill, for your kind words about my upcoming retirement. It has truly been an honor to serve as Two Harbors' CFO, and I have been fortunate to work with amazing people. Now please turn to slide six. Our book value is $15.19 per share at June 30th compared to $15.64 at March 31st, and the 45 cent common dividend results in a flat quarterly economic return. As a reminder, total economic return is the primary metric we consider as an indicator of our performance. Please turn to slide seven.
Mary Kathryn Riskey: Thank you, Bill, for your kind words about my upcoming retirement. It has truly been an honor to serve as Two Harbors CFO , and I have been fortunate to work with amazing people.
Speaker Change: Now please turn to slide six.
Speaker Change: Our book value is $15.19 per share at June 30th compared to $15.64 at March 31st.
Speaker Change: Including the $0.45 common dividend results in a flat quarterly economic return. As a reminder, total economic return is the primary metric we consider as an indicator of our performance.
Mary Kathryn Riskey: The company generated comprehensive income of $0.5 million, or 0 cents per weighted average common share, in the second quarter. Net interest expense of $38 million was favorable to the first quarter on lower average borrowing balances and rates, partially offset by lower RMBS interest income from net sales. Net servicing income of $172 million included $139 million of service fee income and $37 million of float and ancillary income, offset by $4 million of third-party subservicing fees and other MSR-related servicing costs.
Speaker Change: Please turn to slide seven.
Speaker Change: The company generated comprehensive income of $0.5 million or 0 cents per weighted average common share in the second quarter.
Speaker Change: Net interest expense of $38 million was favorable to the first quarter on lower average borrowing balances and rates, partially offset by lower RMBS interest income from net sales.
Speaker Change: Net servicing income of $172 million included $139 million of service fee income and $37 million of float and ancillary income, offset by $4 million of third-party subservicing fees and other MSR-related servicing costs.
Mary Kathryn Riskey: Net servicing income was favorable to the first quarter by $12 million due to higher servicing fee collections and float income, as well as lower third-party servicing costs as we transitioned our remaining servicing to the Round Point platform. Investment securities loss and change in OCI were favorable to Q1 by about $48 million due to a smaller sell-off in rates and slight spread widening. Servicing asset losses were $23 million in the quarter, unfavorable to the first quarter due to amortization that more than offset the effect of higher rates driving an increase in the servicing asset. Net swap and other derivative gains were lower in the second quarter by $125 million due to a smaller sell-off in rates. Please turn to slide eight.
Chairman Powell: Net servicing income was favorable to the first quarter by $12 million due to higher servicing fee collections and float income, as well as lower third-party subservicing costs as we transitioned our remaining servicing to the Round Point platform.
Chairman Powell: Investment securities loss and change in OCI was favorable to Q1 by about $48 million due to a smaller sell-off in rates and slight spread widening.
Chairman Powell: Servicing asset losses were $23 million in the quarter, unfavorable to the first quarter due to amortization that more than offset the effect of higher rates driving an increase in the servicing asset.
Chairman Powell: Net swap and other derivative gains were lower in the second quarter by $125 million due to a smaller sell-off in rates.
Mary Kathryn Riskey: RMBS funding markets remain stable and liquid throughout the quarter with ample balance sheets available. Spreads and repurchase agreements tighten slightly, with financing for RMBS between silver plus 16 to 20 basis points. At quarter end, our weighted average days to maturity for our agency RMBS repo was 85 days. We finance our MSR activities across five lenders, with $1.9 billion of outstanding borrowings under bilateral facilities. Our five-year MSR term notes matured in June, and we replaced them with increased capacity on the repo secured by the variable funding notes. We ended the quarter with a total of $630 million unused MSR asset financing capacity and $91 million unused capacity for servicing advances.
Chairman Powell: Please turn to slide 8.
Chairman Powell: RMBS funding markets remain stable and liquid throughout the quarter with ample balance sheet available. Spreads on repurchase agreements tighten slightly with financing for RMBS between silver plus 16 to 20 basis points.
Chairman Powell: At quarter end, our weighted average days to maturity for our agency RMBS repo was 85 days.
Chairman Powell: We finance our MSR activities across five lenders with $1.9 billion of outstanding borrowings under bilateral facilities. Our five-year MSR term notes matured in June and we replaced them with increased capacity on the repo secured by the variable funding note.
Chairman Powell: We ended the quarter with a total of $630 million unused MSR asset financing capacity and $91 million unused capacity for servicing advances.
Mary Kathryn Riskey: I will now turn the call over to Nick.
Nicholas Letica: Please turn to slide 9. Our portfolio at June 30th was $16 billion, including $11.1 billion in settled positions and $4.9 billion in TBAs. Our leverage increased to 6.8 times as we migrated up in coupon and agency RMBS, shifted from specified pools to TBAs, and increased our notional mortgage exposure. Despite a pickup this quarter, volatility has been trending down as the variability of Fed outcomes has diminished, which we believe warrants a slightly more aggressive stance.
Chairman Powell: I will now turn the call over to Nick.
Nicholas Letica: Thank You Mary. Please turn to slide 9. Our portfolio at June 30th was $16 billion including $11.1 billion in settled positions and $4.9 billion in TBAs.
Nicholas Letica: Our leverage increased to 6.8 times as we migrated up in coupon and agency RMBS, shifted from specified pools to TBAs, and increased our notional mortgage exposure.
Nicholas Letica: Despite a pickup this quarter, volatility has been trending down as the variability of Fed outcomes has diminished, which we believe warrants a slightly more aggressive stance.
Nicholas Letica: While our leverage increased, you will notice in the bottom right graph that our spread exposure increased only slightly. Generally, higher coupon RMBs have lower spread durations than lower coupons. So as we went up in coupon, we also increased leverage to maintain the spread exposure of the portfolio. Lastly, we continue to manage our exposure to interest rates very closely, and similar to the first quarter, our rate exposure was low in the second quarter. Please turn to slide 10.
Nicholas Letica: While our leverage increased, you will notice in the bottom right graph that our spread exposure increased only slightly.
Nicholas Letica: Generally, higher coupon RMBS have lower spread durations than lower coupons, so as we went up in coupon, we also increased leverage to maintain the spread exposure of the portfolio.
Nicholas Letica: Lastly, we continue to manage our exposure to interest rates very closely, and similar to the first quarter, our rate exposure was low in the second quarter.
Nicholas Letica: In the second quarter, interest rates rose modestly, and volatility picked up, primarily owing to erratic economic data. Bigger One, which we have shown over the past several quarters, shows spreads versus volatility from 2019 to present. Our preferred implied volatility gauge, two-year options on 10-year rates, increased from 97 to 103 basis points on an annualized basis, slightly above its year-to-date median. With rates and volatility higher, the nominal spread of current coupon RMBS predictably finished eight basis points wider at 127 basis points to the Treasury curve. While the option-adjusted spread finished three basis points tighter at 24 basis points, reflecting the increase in implied volatility.
Nicholas Letica: Please turn to slide 10.
Nicholas Letica: In the second quarter, interest rates rose modestly and volatility picked up, primarily owing to erratic economic data. Figure 1, which we have shown over the past several quarters, shows spreads versus volatility from 2019 to present.
Nicholas Letica: Our preferred implied volatility gauge, two-year options on 10-year rates, increased from 97 to 103 basis points on an annualized basis, slightly above its year-to-date mean.
Nicholas Letica: With rates and volatility higher, the nominal spread of current coupon RMBS predictably finished 8 basis points wider at 127 basis points to the Treasury curve, while the option-adjusted spread finished 3 basis points tighter at 24 basis points, reflecting the increase in implied volatility.
Nicholas Letica: On a month-to-month basis, RMBS spreads generally follow the pattern of higher rates driving weaker performance and lower rates driving stronger performance. As you can see in Figure 2, the nominal spread curve steepened across the coupon stack over the quarter, increasing the attractiveness of higher-coupon work. Please turn to slide 11 to review our agency RMBS portfolio. Figure one shows the composition of our specified pool holdings by coupon and story, and on figure two, you can see the performance of TVAs compared to the specified pools we own throughout this quarter. Hedge mortgage performance was negatively impacted across the coupon stack by the considerable choppiness of rates.
Nicholas Letica: On the month-to-month basis, RMBS spreads generally follow the pattern of higher rates driving weaker performance and lower rates driving stronger performance.
Nicholas Letica: As you can see in Figure 2, the nominal spread curve steepened across the coupon stack over the quarter, increasing the attractiveness of higher coupon mortgages.
Nicholas Letica: Please turn to slide 11 to review our agency RMBS portfolio.
Nicholas Letica: Figure 1 shows the composition of our specified pool holdings by coupon and story, and on Figure 2, you can see the performance of TVAs compared to the specified pools we owned throughout this quarter.
Nicholas Letica: Hedge mortgage performance was negatively impacted across the coupon stack by the considerable choppiness of rates. We actively moved our positions around between specified pools and TBAs across the coupon stack.
Nicholas Letica: We actively moved our positions around between specified pools and TBAs across the coupons. We added approximately $1.6 billion in notional of 5.5% to 6% TBAs to better position our RMBS portfolio for potential spread tightening into a lower volatility environment. We also rotated approximately $665 million notional of lower coupon securities into 6% to 6.5% on TVAs to capture wider spreads and higher coupons, and we subsequently replaced 450 million 6.5% TBAs with specified pools to improve performance should rates rally and prepayments pick up. Figure 3 on the bottom right shows our specified pool prepayment speeds increased to 7.2 CPR from 5.1 CPR in the first quarter, as expected due to seasonality.
Nicholas Letica: We subsequently replaced 450 million 6.5% TBAs with specified pools to improve performance should rates rally and prepayments pick up.
Nicholas Letica: Figure 3 on the bottom right shows our specified pool prepayment speeds increased to 7.2 CPR from 5.1 CPR in the first quarter as expected due to seasonality.
Nicholas Letica: As a majority of our RMBS holdings are currently priced at a discount to PAR, faster speeds are beneficial to our portfolio. Please turn to slide 12 as we discuss the environment for investments in MSR. MSR performed well in the second quarter, with valuations being bolstered by a few large non-bank originators competing on lower amounts of supply. Given the strong bids in the market, certain large buyers turned into sellers, including ourselves. Figure one shows servicing transfers since the beginning of 2014. As expected, transfer volumes for the first two quarters of 2023 show a decline from the record levels of the past two years.
Nicholas Letica: Please turn to slide 12 as we discuss the environment for investments in MSR. MSR performed well in the second quarter with valuations being bolstered by a few large non-bank originators competing on lower amounts of supply.
Nicholas Letica: As you can see in Figure 2, primary mortgage rates hovered again near 7% in the second quarter. Overall, prepayment rates for 30-year Fannie Mae RMBS increased to 6% CPR in the July report from 5.3% at the beginning of the quarter as turnover hit its spring peak. The in-the-money share of 30-year mortgages remains below 5%, although the share continues to slowly grow due to new origination. Prepayments follow the central themes of the last two years, turnover seasonality, early curtailments, and muted refinancing.
Nicholas Letica: Prepayments follow the central themes of the last two years, turnover seasonality, early curtailments, and muted refinancing.
Nicholas Letica: Please turn to slide 13 to review our MSR portfolio. The portfolio was $211 billion UPB at June 30. We settled 328 million UPB of MSR through flow sale acquisitions and committed to purchase approximately 1.6 billion UPB through a bulk acquisition, which settled early in the third quarter. Post-quarter end, we converted to purchase 1 billion UPV through another bulk purchase. We have also opportunistically committed to sell 6.4 billion UPB of higher coupon MSR.
Nicholas Letica: Post-quarter end, we converted to purchase 1 billion UPB through another bulk purchase.
Nicholas Letica: Although our goal is to grow our MSR portfolio over time, we will continue to actively manage our assets, including MSR, and allocate capital based on where we see opportunity. This was a targeted part of our MSR population, which we selected based on where we felt there was an extraordinary bid in the market.
Nicholas Letica: Although our goal is to grow our MSR portfolio over time, we will continue to actively manage our assets, including MSR, and allocate capital based on where we see opportunity.
Nicholas Letica: This was a targeted part of our MSR population, which we selected based on where we felt there was an extraordinary bid in the market.
Nicholas Letica: The price multiple of our MSR increased slightly to 5.8 times from 5.7. Repayment rates for our MSR holdings increased to 5.3 CPR, also following turnover seasonality, slightly slower than the same period in 2023. However, our MSR, with a gross WAC of 3.5%, continues to enjoy slow prepayments and strong float income because of higher rates. But when rates inevitably drop or prepayments increase, we are prepared for that,
Nicholas Letica: The price multiple of our MSR increased slightly to 5.8 times from 5.7 times.
Nicholas Letica: Repayment rates for our MSR holdings increased to 5.3 CPR, also following turnover seasonality, slightly slower than the same period in 2023.
Nicholas Letica: As Bill mentioned, we now have a retention recapture business up and running, which will protect our investment at MSR, particularly if rates were to materially fall. Though we have intentionally designed an MSR portfolio that has lower refinance characteristics, with over 800,000 loans, there will always be some borrowers seeking to refinance their mortgage. Finally, please turn to slide 14, our Return Potential and Outlook. The top half of this table is meant to show what returns we believe are available on the assets in our portfolio.
Nicholas Letica: When rates inevitably drop or prepayments increase, we are prepared for that too.
Nicholas Letica: Though we have intentionally designed an MSR portfolio that has lower refinance characteristics, with over 800,000 loans, there will always be some borrowers seeking to refinance their mortgage.
Nicholas Letica: We estimate that about 61% of our capital is allocated to servicing with a static return potential of 13 to 16%. The remaining capital is allocated to securities with a static return estimate of $15 to $17 million. With our portfolio allocation shown in the top half of the table, and after expenses, the static return estimate for our portfolio is between 10.8 to 13.4% before applying any capital structure leverage to the portfolio. After giving effect to our outstanding convertible notes and preferred stock, we believe that the potential static return on common equity falls in the range of $12.5 to $16.5, or a prospective quarterly static return per share of $47 to $63.
Nicholas Letica: Finally, please turn to slide 14, our return potential and outlook slide.
Nicholas Letica: The top half of this table is meant to show what returns we believe are available on the assets in our portfolio.
Nicholas Letica: We estimate that about 61% of our capital is allocated to servicing, with a static return potential of 13-16%.
Nicholas Letica: The remaining capital is allocated to securities with a static return estimate of 15 to 17 percent.
Nicholas Letica: With our portfolio allocation shown in the top half of the table, and after expenses, the static return estimate for our portfolio is between 10.8 to 13.4% before applying any capital structure leverage to the portfolio.
Nicholas Letica: After giving effect to our outstanding convertible notes and preferred stock, we believe that the potential static return on common equity falls in the range of 12.5 to 16.5%.
Nicholas Letica: Looking ahead, we remain optimistic about the return potential of our investment. Nominal spreads for agency RMDS are still wide on a historical basis and possess tightening potential in a lower interest rate volatility environment. In fact, the relationship of spreads to rates has become less dramatic, as evidenced by a decline in the volatility of mortgage spreads. Mortgage demand is on much more solid footing than it has been over the last several years, exhibited by the tightening of mortgage OAS in a sell-off with rising volatility.
Nicholas Letica: Looking ahead, we remain optimistic about the return potential of our investments.
Nicholas Letica: Nominal spreads for agency RMBS are still wide on a historical basis and possess tightening potential in a lower interest rate volatility environment.
Nicholas Letica: In fact, the relationship of spreads to rates has become less dramatic, as evidenced by a decline in the volatility of mortgage spreads.
Nicholas Letica: This is a large reason why we have turned more constructive in the near term and are comfortable operating with slightly higher levels. With about 60% of our capital invested in hedged low-coupon MSR that has low duration and low spread volatility, the portfolio has and should continue to perform well in bouts of heightened interest rate volatility while still preserving upside in a spread-tightening environment. Our MSR portfolio remains deeply out of the money. Less than 1% of the mortgage loans that back our MSRs are likely to refinance at current mortgage rate levels, keeping prepayment risk low and leading to stable, attractive returns.
Nicholas Letica: Though the MSR market is presently in a dynamic of lower supply and higher demand, there will continue to be opportunities to add MSR at attractive levels given our unique combination of investment management experience coupled with our own servicing and recapture operations. Thank you very much for joining us today, and now we will be happy to take any questions you might have. Thank you.
Operator: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal, and our first question will come from Doug Harder with UBS. Thanks and good morning.
Nicholas Letica: www.larryweaver.com
Speaker Change: And our first question will come from Doug Harder with UBS.
Nicholas Letica: Hey, Doug, good morning. This is Nick.
Nicholas Letica: Thank you for that question. You know, if you look, we've described our leverage range as being somewhere between five to eight times from a high to a low. If you look at where we are now at 675, we're just slightly above the middle of that range. We did increase our leverage, as we noted in our call and our prepared remarks, by about three quarters of a turn. But, you know, I would still say we're not, you know, we're also, as described in the call, slightly more aggressive. But, you know, if you look at our overall risk metrics, and, you know, leverage is just one metric of the way we look at risk. There are many other metrics as well.
Nicholas Letica: And as we pointed out, our spread sensitivity of the portfolio is a big, big one. And if, you know, from quarter to quarter, our spread sensitivity hasn't changed very much, I would say that the interpretation or the feeling about, you know, which part of the coupon stack we feel has a better opportunity right now has been to move up in the coupon for a variety of reasons. And by doing so, you know, that does lower the, you know, per unit of mortgage; it does lower the amount of, you know, technically of spread duration, but it does other things. For example, we do think we capture more volatility sensitivity by being in higher coupons. And we just generally like that part of the stack better than the lower coupons.
Speaker Change: But one metric at the way we look at risk there are many other metrics and as we pointed out Our spread sensitivity the portfolio is a big big one And if you know from quarter to quarter our spread sensitivity hasn't changed very much. I would say that the
Speaker Change: Interpretation or the feeling about you know which part of the coupon stack we feel has better
Speaker Change: opportunity right now has been to move up in coupon for a variety of reasons and by doing so you know that does lower the you know per unit of mortgage it does lower the amount
Nicholas Letica: But I would still say we're, you know, slightly more aggressive, but certainly not, you know, full bore on mortgage spread tightening. We do, you know, I think, like many market participants, we have more confidence that the Fed will cut rates this year. We do expect that that will happen. But, you know, as we have a Fed that is still stated to be data-dependent, and as we've seen over the last few years, you never know.
Nicholas Letica: [inaudible]
Nicholas Letica: [inaudible]
Speaker Change: Mortgage spread tightening, you know, we do you know, we I think like many market participants We have more confidence that the Fed will cut rates this year and we do expect that that will happen But you know as we have a Fed that is still
Nicholas Letica: Our construction of our portfolio, which again is quite intentional, with 60% of our capital in MSR, provides a lot of return stability but still preserves upside should the Fed in fact cut, and we do see a steepening of the yield curve and a decline in volatility.
Speaker Change: stated to be data-dependent, and as we've seen over the last few years, you never know. Our construction of our portfolio, which again is quite intentional, with 60% of our capital in MSR, provides a lot of return stability, but still preserves upside should the Fed in fact cut, and we do see a steepening of the yield curve and a decline in volatility.
Speaker Change: Great, I appreciate that answer, Nick. Thank you.
Operator: Our next question comes from Trevor Cranston with Citizens JMP.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Trevor Cranston with Citizens JMP.
Trevor John Cranston: Hey, thanks. Good morning.
Nicholas Letica: We've talked some about the potential for spreads to tighten if and when volatility declines. I guess as you look forward over the remainder of the year, with the Fed potentially starting to lower rates and also the election upcoming, can you talk a little bit about sort of the timeframe you guys see for when we could actually see a meaningful decline in volatility?
Trevor John Cranston: You talked some about the potential for spreads to tighten if and when volatility declines.
Speaker Change: I guess as you look forward over the remainder of the year,
Trevor John Cranston: You know, with the Fed potentially starting to lower rates and also the election upcoming, can you talk a little bit about sort of the time frame you guys see for when we could actually see a meaningful decline in volatility? Thanks.
Nicholas Letica: Thank you, Trevor. Thank you for that question. I'll elaborate a little bit on the prior response. It's very hard to time things exactly right. And I think it's a little bit foolhardy to try to put a stake in the ground about exactly when things like that will happen, as we all know from being in the markets for a long time. But the reality is that the probability of a Fed cutting cycle in a lower volatility environment is better now than it has been in the last two years, as, most notably, inflation seems to be finally trending down towards a level at which the So it's a very difficult thing to say.
Speaker Change: Thank you, Trevor. Thanks for that question. I'll elaborate a little bit, I guess, on the prior response. You know, it's very hard to time things exactly right, and I think it's a little bit, you know, foolhardy to try to put a stake in the ground about exactly when things like that will happen as, you know, I think, as we all know from being in the markets for a long time.
Trevor John Cranston: But the reality is that the probability of a Fed cutting cycle in a lower volatility environment is better now than it's been in the last two years, as most notably inflation seems to be.
Trevor John Cranston: Finally trending down towards a level in which the Fed can start cutting rates again. So it's a very difficult thing to say. In the market, I think if you look at the forward curve, particularly in terms of the Fed for this year,
Nicholas Letica: In the market, I think if you look at the forward curve, particularly in terms of the Fed for this year, the market is now pricing in about two and three quarter cuts, which is up about one cut since the beginning of the quarter, and we've had this better data. That seems to be pretty fully baked into what we think could happen right now. It certainly could happen, but it feels like it's pretty rational.
Trevor John Cranston: The market is now pricing at about two and three-quarter cuts, which is up about one cut since the beginning of the quarter, and we've had this better data.
Trevor John Cranston: That seems to be pretty fully baked into what we think could happen right now. It certainly could happen, but it feels like it's pretty rational.
Nicholas Letica: So I wouldn't expect to see an immediate drop in volatility. If we felt like there was an immediate drop in volatility, we would probably position ourselves with even more leverage than we have. And, as you mentioned, we have an election coming up. We've had a lot of gyrations around that. There's a lot of geopolitical instability around the world right now, so it's not something that we think is going to happen immediately, but it's more likely to be a gradual thing that happens for the balance of the year and into 2025.
Speaker Change: You know, I wouldn't expect to see an immediate drop in volatility. If we felt like there was an immediate drop in volatility, we would probably position ourselves with even more leverage than we have.
Trevor John Cranston: And as you mentioned, we have an election coming up. We've had a lot of gyrations around that. There's a lot of geopolitical instability around the world right now. So, you know, it's not something that we think is going to happen immediately, but it's more likely to be a gradual thing that happens, you know, for the balance of the year and into 2025.
Nicholas Letica: Got it. Okay, that's helpful. In terms of the construction of the hedge portfolio, can you maybe comment a little bit on how you guys are thinking about using treasuries as opposed to swaps, given where swap spreads are trading recently?
Speaker Change: Got it. Okay, that's helpful.
Speaker Change: In terms of the construction of the hedge portfolio, can you maybe comment a little bit on how you guys are thinking about using treasuries as opposed to swaps, given where swap spreads are trading recently? Thanks.
Nicholas Letica: Sure, we have, at the end of the quarter, we did have a little bit more, if you look at our swap in terms of DVO1 composition, we have a little bit more swaps than Treasury Futures on its hedges. That's been quite intentional, again, because, you know, we do, if you look at the...
Speaker Change: Sure, we have at the end of the quarter, we did have a little bit more, if you look at our swap in terms of PV01 composition, we have a little bit more swaps than Treasury futures on its hedges. That's been quite intentional, again, because, you know, we do, if you look at the
Nicholas Letica: Carry on using swaps versus treasury futures; it is better. And certainly, there is, you do introduce some amount of swap spread volatility to the mix. But we think where swap spreads are right now, they're a meaningfully better carry than having treasury hedges. And so we have shifted a little bit more to that side. We think it's a good time to be having, you know, being long that risk on the hedge side versus treasury futures.
Speaker Change: The carry on using swaps versus treasury futures, it is better. And certainly there is, you do introduce some amount of swap spread volatility to the mix.
Speaker Change: We think where swap spreads are right now, they're meaningfully better carry.
Speaker Change: than having Treasury hedges. And so we have shifted a little bit more to that side. We think it's a good time to be...
Speaker Change: Having having you know being long that that risk on the hedge side versus versus Treasury futures but as usual, you know, we use a mix of them and you know, it's it varies depending upon where swap spreads are and and
Nicholas Letica: But as usual, you know, we use a mix of them. And, you know, it varies depending upon where swap spreads are and so on. And a little bit about our gross outlook in the market in terms of, you know, what treasury supply is, you know, most recently, we had a refunding announcement this week that was pretty good for the market, and swap spreads do seem to be, you know, a little bit better bid than they had been throughout the second quarter, at least.
Trevor John Cranston: and a little bit about our gross outlook in the market in terms of, you know, what treasury supply is. You know, most recently just, you know, we had a refunding announcement.
Trevor John Cranston: This week it was pretty good for the market and, you know, swap spreads do seem to be, you know, a little bit better bid than they had been, you know, in the, in the, throughout the second quarter at least.
Trevor John Cranston: Yeah. Okay. I appreciate the comments. Thank you.
Operator: Thank you. The next question comes from Bose George with KBW.
Speaker Change: Okay, I appreciate the comments. Thank you.
Speaker Change: Thank you. Our next question comes from Bose George with KBW.
Bose Thomas George: Hey everyone, good morning, and congrats Mary on your upcoming retirement. Actually, first, I don't know if you guys gave this already, but if not, can we get an update on book value quarter to date?
Bose Thomas George: Hey everyone, good morning, and congrats, Mary, on your upcoming retirement. Actually, first, I don't know if you guys gave this already, but if not, can we get an update on book value quarter to date?
Nicholas Letica: Sure, good morning, Bose. Thanks for that question. Through last Friday, we're up approximately 1% on our revenue.
Speaker Change: I'm sure good morning Bose, thanks for that question. Through last Friday we're up approximately 1% on book value.
Bose Thomas George: Okay, great. Thanks. And then I wanted to, on slide 14 where you have the expected return and your return on the RMBS is 15 to 17, I guess up from 12 to 13. Can you just sort of break out the drivers, I guess the leverage is a little higher, you went up in coupon, just how much, or if there's anything else that contributed to that as well?
Speaker Change: Okay, great.
Speaker Change: Thanks. And then I wanted to, the slide 14 where you have the expected return and your return on the RMBS is 15 to 17, I guess up from 12 to 13. Can you just sort of break out the drivers, I guess the leverage is a little higher, you went up in coupons, just how much, or is there anything else that contributed to that as well?
Nicholas Letica: Hey Bose, it's Nick. Thanks again for the question. You hit it right on the head. Leverage is up a little bit, and we did migrate up in coupon, which is driving more return potential out of the security section of the portfolio.
Speaker Change: Hey Bose, it's Nick. Thanks again for the question. You hit it right on the head. Leverage is up a little bit and we did migrate up in coupon, which is driving more return potential out of the security section of the portfolio.
Bose Thomas George: Okay, perfect. Thank you.
Speaker Change: Okay, perfect. Thank you.
Operator: Thank you. Our next question comes from Jason Weaver with Jones Trading.
Bose: You bet, boss.
Speaker Change: Thank you. Our next question comes from Jason Weaver with Jones Trading.
Jason Price Weaver: Hey, good morning. I see that you've expanded the ATM program. Is there any change to the target asset allocation for the new capital raised there, or was this in response to a change you've noticed in the marketplace, anything like that?
Jason Price Weaver: Hey, good morning. I see that you enlarged the ATM program. Is there any change to the target asset allocation for the new capital raised there, or was this in response to a change you've noticed in the marketplace, anything like that?
Nicholas Letica: Yeah, thanks for the question. You know, I would characterize this as really more of a housekeeping item.
Speaker Change: Yeah, thanks for the question. You know, I would characterize this as really more of a housekeeping item.
Nicholas Letica: You know, we had depleted our ATM authority really in the fourth quarter of last year. But, you know, in the first quarter and in the second quarter, we didn't utilize our ATMs at all. And so this was really just resetting the thing back to a level where we could take advantage of any market opportunities should they arise in the near term, but we have no plans imminently to do that. This was really just to reset it to a more normal level from where it had gotten.
Speaker Change: You know, we had depleted our ATM authority really in the fourth quarter.
Speaker Change: of last year.
Speaker Change: But, you know, in the first quarter and in the second quarter, we didn't utilize our ATM at all. And so this was really just resetting the thing back to...
Speaker Change: a level where we could take advantage of any market opportunities should they arise in the near term, but we have no plans imminently to do that. This was really just to reset to a more normal level from where it had gotten.
Jason Price Weaver: Okay, thank you. Yvette, I noticed you touched on this during the prepared remarks, but can you talk a bit more about Round Point's ability to recapture, given what we may be moving into as a lower rate environment?
Speaker Change: Okay, thank you. And then I noticed you touched on this during the prepared remarks, but can you talk a bit more about Round Point's ability to recapture given what we may be moving into as a lower rate environment?
Nicholas Letica: Sure. Well, as we've said publicly, we made a decision to start up our own platform last year. We began that effort in December. And, you know, at the time, we set for ourselves a target of being able to make our first loans by June, which we did. We continue to make locks, and we fund some loans. As Nick said in our prepared remarks, though, only 1% of our portfolio is in the money.
Speaker Change: Sure, well, you know, as we've said publicly, you know, we made a decision to start up our own...
Speaker Change: platform.
Speaker Change: Last year we began that effort in December and you know at the time we set for ourselves a target of of being able to make our first loans by June which we did. We continue to to make locks and we funded some loans as Nick said in our prepared remarks though only 1% of our portfolio is is in the money and something like
Nicholas Letica: And something like only 5% or thereabouts of our portfolio has mortgage rates above 6% or something like that. And so we're still a long way away from being able to be in a refinance environment. You know, my own view is that even if the Fed cuts rates, that doesn't necessarily mean that long-term rates are going to go down very much at all. You know, the natural state of things is just typically a positively sloped yield curve, right?
Nicholas Letica: Only I want to say like 5% or thereabouts of our portfolio has mortgage rates above 6% or something like that. And so it's it's still a long way away from being able to be in a refinance environment.
Speaker Change: You know, my own view is that even if the Fed cuts rates...
Speaker Change: That doesn't necessarily mean that long-term rates are going to go down very much at all.
Nicholas Letica: And we've been in this flat to negatively shaped yield curve for a long time. So I think there's lots of room for the Fed to cut mortgage rates to stay where they are. But nevertheless, if mortgage rates go down, we are building up capacity and the ability to recapture more of our loans, should they come in the refinance window, and we're gearing that up as we speak. Alright, thank you very much for the color.
Speaker Change: you know, the natural state of things is typically a...
Speaker Change: Positively sloped yield curve.
Speaker Change: And we've been in this flat to negatively shaped yielder for a long time, so I think
Speaker Change: There's lots of room for the Fed to cut and mortgage rates to stay where they are, but nevertheless, if mortgage rates go down, we are building up capacity and the ability to be able to...
Speaker Change: recapture more of our loans should they come in the refinance window and and we're gearing that up as we speak.
Jason Price Weaver: All right, thank you very much for the color.
Speaker Change: All right, thank you very much for the color.
Operator: And our next question comes from Eric Hagen with BTIG.
Speaker Change: And our next question comes from Eric Hagen with BTIG.
Eric J. Hagen: Hey, good morning. I hope you guys are well.
Eric J. Hagen: How do you think the yield or the total return outlook looks for TVAs versus pools right now? Do you feel like you're getting a pickup in yield and what is that?
Eric J. Hagen: How do you think that the yield or the total return outlook looks for TVAs versus pools right now? Like, do you feel like you're getting a pickup in yield? And what is that? You'll, you know, pick up kind of look like, or How would you kind of describe the value proposition for being overweight TBAs right now?
Speaker Change: You'll, you know, pick up kind of look like or how would you kind of describe the value proposition for being overweight TBAs right now?
Nicholas Letica: Hey Eric, it's Nick. Thanks for that question. We don't there's an don't see a tremendous variation, honestly, between TBAs and pools in the increase in our pools is uh... to some degree driven by the movement of how MSR moves through time and how it needs to be hedged with current coupons. Pools do generally have wider spreads than specified pools because you pay up for the specified pools for some better convexity characteristics, which is usually in the form of a tighter yield or tighter spread in exchange for better qualities in terms of hedging and return and other return scenarios.
Nicholas Letica: Hey Eric, it's Nick. Thanks for that question. We don't, there isn't, don't see a tremendous variation honestly between TBAs and pools and the increase in our pools is, you know, to some degree driven by
Nicholas Letica: The, you know, the movement of our, you know, of how, you know, MSR moves through time and how it needs to be hedged with current coupon, you know, we did, you know, pools do
Speaker Change: Generally, have wider spreads than specified pools because you pay up for the specified pools for some better convexity characteristics, which is usually in the form of a tighter yield or tighter spread in exchange for...
Speaker Change: better qualities in terms of hedging and return and other, you know, return scenarios.
Nicholas Letica: But if you look at the pickup in our pool port and our TBAs versus pools, it was primarily in those production coupons, which we migrated up into. And certainly, I would say in five and a half, we don't really see any great pool opportunities right now. I'd say the only place where we, as we noted in our prepared remarks, that where we did some migration from TBAs to specified pools was in six and a half where we did buy some, generally, lower pay-up pools to provide for better convexity and those kind of, for that kind of coupon. It's a combination, as we always look at things, of liquidity, where it is on the stack, and our ability to efficiently and quickly move around should we need to as the market moves.
Speaker Change: But, you know, if you look at the pickup in our
Nicholas Letica: [inaudible]
Speaker Change: I'd say the only place where we, as we noted in our prepared remarks, that where we did some
Nicholas Letica: did some migration from TBAs to specified pools was in six and a halves where we did buy some, you know, generally lower lower payout pools to provide for better convexity and those kind of for that kind of coupon, but
Nicholas Letica: It's a combination, as we always look at things, of liquidity, where it is on the stack, and our ability to efficiently and quickly move around should we need to as the market moves.
Eric J. Hagen: Thank you. How do you guys expect conditions in the bulk MSR market to potentially respond if prepayments pick up more materially? Like, do you expect the typical list of sellers to show up if rates are lower? And do you feel about the concentration risk and market share? Concentration among originators is a risk for buyers of services.
Speaker Change: Okay, that's helpful.
Speaker Change: Thank you. How do you guys expect conditions in the bulk MSR market to potentially respond if prepayments pick up more materially? Like, do you expect the typical list of sellers to show up if rates are lower? And do you feel like the concentration risk and the market share?
Nicholas Letica: Concentration among originators is a risk for buyers of servicing.
William Ross Greenberg: Thanks, Eric. That's a good question. The supply dynamics in the MSR market have been unique and interesting in this market period, where rates have risen so far and fast, and we've had the large banks taking both sides of buying and selling. I think a lot of the, and so your question about forward supply and what that looks like compared to what it's looked like in the recent past is certainly going to look different. I think, to a large degree.
Nicholas Letica: Thanks, Eric. That's a good question.
Speaker Change: you know the the the supply
Speaker Change: dynamics in the MSR market have been unique and interesting as right in this market period where rates have risen so far so fast and and we've had you know the large banks taking both sides of buying and selling.
Nicholas Letica: I think a lot of the... And so your question about forward supply and what that looks like, compared to what it's looked like in the recent past, it's certainly going to look different. I think that, to a large degree,
William Ross Greenberg: Most of the low-wax servicing has probably changed hands already. There doesn't seem to be, you know, while we continue to see packages of that stuff out there in the world. Certainly, I think we're in the later innings of seeing that stuff traded. Your question is, if rates fall and there's a lot more origination of at-the-money servicing, there are many market participants, originators, who are not equipped to hold MSR as it's being produced. It depends on the kind of rally.
Speaker Change: Most of the low-wax servicing has probably changed hands already, it doesn't seem to be, you know, while we continue to see packages of that stuff out there in the world, certainly
Speaker Change: I think we're in the later innings on seeing that stuff trade. So, your question is, if rates fall and there's a lot more origination of at-the-money servicing,
Speaker Change: You know there are many market participants originators who are not equipped to
Speaker Change: to hold MSR as it's being produced.
William Ross Greenberg: In a gentle, grinding rally, mortgage spreads and primary, and secondary will probably stay constant rather than gapping out. So originators who don't have a lot of capital will be forced to sell that as they go. Also, in a rally as we are in a trending market, MSR malts will be declining. And so many people who don't have the ability to hedge are gonna wanna get rid of that stuff as soon as they can, right, or else they risk a lower mark-to-market on the stuff, right?
Speaker Change: It depends on the kind of rally, you know, in a...
Speaker Change: in a gentle grinding rally.
Speaker Change: Mortgage spreads and primary, secondary will probably stay constant rather than gapping out and so originators who don't have a lot of capital will be forced to sell that as they go.
Speaker Change: also in a rally as, you know, as...
Speaker Change: In a trending market, MSR mulch will be declining, and so many people who don't have the ability to hedge are going to want to get rid of that stuff as soon as they can.
Speaker Change: right? Alistair Riskey, a lower market on the stuff.
William Ross Greenberg: And so, you know, I think you will see a pickup in supply of at-the-money stuff, to some degree. It won't be one-for-one with the origination pipelines in the market as a whole, right? But you will see some of that stuff come out.
Speaker Change: Right. And so, you know, I think you will see a pickup in
Speaker Change: in supply of at-the-money stuff, to some degree, it won't be one-for-one with the origination pipelines in the market as a whole, right, but you will see some of that stuff come out. There's often a lag between, you know, when rates...
William Ross Greenberg: There's often a lag between, you know, when rates start to fall and mortgages are made; that, in itself, is a 60-day to 90-day time period as well. And then there's usually a little bit of lag further for the MSR stuff to come to market as well. So, I do think you would see that, but the MSR market is often laggy and slow-moving and that sort of thing. But I think you would expect to see some increase in that at-the-money stuff.
Speaker Change: start to fall and
Nick: and mortgages are made, that in itself is a 60 day.
Speaker Change: to 90-day time period as well and then there's usually a little bit of lag further for the MSR stuff to come to market as well so so I do think you would see that but the MSR market is is often laggy and slow-moving and and that sort of thing but I think I think you would expect to see some increase in that in that the money stuff
Eric J. Hagen: That's really helpful. Thanks, Bill. I appreciate you guys. Thank you. Good to see you.
Operator: Thank you. It's good to see you.
Speaker Change: That's really helpful. Thanks, Bill. Appreciate you guys. Thank you. Good to see you. You too. Thank you.
William Ross Greenberg: This concludes today's question and answer session. At this time, I would turn the conference back to Mr. Greenberg for any additional or closing remarks.
Speaker Change: This concludes today's question and answer session. At this time, I would turn the conference back to Mr. Greenberg for any additional or closing remarks.
William Ross Greenberg: I want to thank everyone for joining us today, and thank you, as always, for your interest in Two Harbors.
Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
William Ross Greenberg: I want to thank everyone for joining us today and thank you as always for your interest in Two Harbors.
Speaker Change: This concludes today's call. Thank you for your participation. You may now disconnect.