Q4 2024 Two Harbors Investment Corp Earnings Call
Williams: Atlantica, our Chief investment Officer, and Williams, along our interim Chief Financial Officer.
Williams: 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 Q I N V doctrine.
Williams: Our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures.
Williams: Are you to review this information in conjunction with today's call.
Williams: 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.
Williams: These are described on page two of the presentation and in our Form 10-K, and subsequent reports filed with the SEC.
Williams: Except as may be required by law to does not update forward looking statements and disclaims any obligation to do so.
Bill: I will now turn the call over to Bill.
Bill: Thank you Maggie and good morning, everyone and welcome to our fourth quarter earnings call.
Bill: Before turning to our results I'd like to take a moment to remember our board member Reid Sanders, who passed away this month.
Bill: <unk> served as a member of our board of directors since the company's inception in October of 2009.
Bill: He was a trusted advisor and partner to and our management team and to me personally and we will miss him greatly.
Bill: Please turn to slide three.
Bill: Our book value at December 31st was $14 and 14, seven cents per common share and including the fourth quarter common stock dividend of <unk> 45 per share represented a 0.0% quarterly economic return on book value.
Bill: For the full year of 2024, regenerated, a 7.0% total economic return on book value.
Bill: Please turn to slide four.
Bill: Figure one shows the evolution of the market's expectations for the Feds interest rate policy over the past year.
Bill: While the fed delivered 225 basis point cuts over the quarter robust jobs that inflation data along with hawkish comments from chairman Powell at the Fed's December meeting tempered rate expectations for 2025.
Bill: Steve at the beginning of the fourth quarter the market was pricing in more than 100 basis points worth of additional fed cuts shown by the Blue line, but by the end of the quarter. The market had reconsidered all the pricing and roughly 35 basis points as seen by the Purple line.
Bill: Over the quarter, the 10 year Treasury yield went up by 79 basis points to finish at 457%, while the two year increased by 60 basis points to $4 two 4% steepening of the yield curve by 19 basis points as seen in figure two.
Bill: While short term rates may yet decline in 2025, the fed remains very data dependent.
Bill: Or are there.
Bill: A decline in short term rates does not necessarily correlate to a decline in longer term treasury rates or mortgage rates.
Bill: Rather it's our expectation that mortgage rates are likely to remain above 6% in the intermediate term.
Bill: At that level, the so called lock it effect should keep housing activity muted and incidentally. We will also help prepayments slow which is a benefit to the value of the MSR portfolios like ours.
Bill: Interest rate volatility is likely to remain high for the foreseeable future with the biggest risk being that inflation reemerge as the fed pauses or reverses the rate cutting cycle.
Bill: We continue to keep our interest rate exposure low and I believe that our MSR centric strategy will generate favorable returns independent of any short term fluctuations instead drip and funding rates.
Bill: Please turn to slide five.
Bill: At year end, we service 212 billion <unk> MSR across 861000 loans 58000, or $11 2 billion U P b of which our service for third party clients.
Bill: Looking back 2024 concludes our first full year of owning and operating mortgage company and I'm pleased to say that the integration of round point Institute is largely gone. According to the plan that we laid out in August of 2022.
Bill: In particular, we are already reaping the improved economics that we estimated due to lower costs and increase revenue streams from servicing the loans from our own MSR portfolio.
Bill: We have benefited from the increased economies of scale and additional cash flows from the servicing asset which had previously benefited our sub servicers and not us.
Bill: In 2024, we also launched the direct to consumer origination platform with the intent of maintaining our current servicing portfolio through recapture of the underlying mortgage loans, where the borrower refinances or moves into a new loan product.
Bill: We think of this effort, primarily as being a hedge to our MSR portfolio that serves to protect our asset from faster than expected prepayment speeds should interest rates dropped precipitously.
Bill: Altogether the value of choose MSR portfolio benefits from the success of servicing which directly affects the success of originations, which circles back to a positive value contribution to the MSR portfolio.
Bill: With a weighted average note rate of 346% of our MSR portfolio and mortgage rates currently around 7% roughly only 0.2% of our customers would benefit from a rate and term refinance.
Bill: With that as background, we funded $42 million <unk> first mortgages in the quarter and Theres approximately another $21 million <unk> currently in the pipeline.
Bill: We recognize that these are small numbers, but we are very pleased with the proof of concepts and progress thus far.
Bill: In less than one year, we stood up a brand new platform entirely from scratch with no legacy risks and for de Minimis cost.
Bill: The challenge and opportunity in 2025 is to bring this platform fully to scale.
Bill: Despite the small number of refinanced loans that are servicing portfolio. We are utilizing the platform to bring incremental revenue and returns to our shareholders.
Bill: With mortgage rates north of 7% many of our customers are looking for ways to extract equity, while not giving up their ultra low mortgage rates and so in the latter half of the year, we began to offer second lien loans to our borrowers.
Bill: In the quarter, we acted as a broker on $33 million <unk> and a combination of both open ended and closed end loans.
Bill: Intend to expand this effort, which will likely include originating the loans in their own name.
Bill: With mortgage rates expected to remain above 6% in 2025, our focus at round point is on generating additional cost efficiencies in servicing, especially through the use of technology and AI applications.
Bill: From a customer experience perspective, we are dedicated to creating a strong platform and brand for our customers to charge you for all of their mortgage and home equity needs.
Bill: Our results in 2024 demonstrated the benefits of our portfolio with its core focus on hedge the MSR.
Bill: With roughly two thirds of our capital allocated to MSR, that's almost 400 basis points out of the money.
Bill: That asset should generate relatively stable cash flows going forward, regardless of the path of short term interest rates.
Bill: Our MBS spreads remain wide on a nominal basis reflective of continued elevated levels of implied interest rate volatility.
Bill: While 2024 saw our MBS spreads meaningfully tightened the outlook for our MBS in 2025 is still attractive, but the risks are more balanced.
Bill: The efforts, we have made and continue to make regarding process improvements and product offerings that Rob points allow us to shape, our return profile in a way that owning only a portfolio of securities cannot.
Rob: I'm very proud of what we have accomplished in the past year and I'm tremendously excited about where we're going.
William: With that I'd like to hand, the call over to William discuss our financial results.
Rob: Okay.
William: Thank you Bill.
Rob: Please turn to slide six.
Rob: Our book value was $14 47 per share at December 31 <unk>.
Rob: Compared to $14 93 sets of September 30th.
Rob: Including the 45 common stock dividend.
Rob: This resulted in a flat quarterly economic return as Bill has already mentioned.
Rob: For the year, we generated an economic return of 7.0%.
Speaker Change: Please turn to slide seven.
Speaker Change: The company incurred a comprehensive loss of $4 $6 million or <unk> <unk> per weighted average common share in the fourth quarter.
Speaker Change: Net interest expense of $35 million was lower than the fourth quarter or $7 $4 million due to lower our NPS borrowing balances as a result of sales so far the Eos <unk>.
Speaker Change: Additionally, we shifted a portion of our MSR financing from credit facilities to the F N repurchase agreements.
Speaker Change: On average carry lower floating rates spreads this was slightly offset by a higher overall average MSR borrowing balances.
Speaker Change: Net servicing income was $168 million minus $5 million.
Speaker Change: MSR related servicing costs.
Speaker Change: This is down slightly from the third quarter due to lower float income, resulting from lower average outstanding balances and lower rates.
Speaker Change: Dallas is given the decline in short term rates.
Speaker Change: The lower float was offset partially by higher servicing fee collections and higher sub servicing related income.
Speaker Change: As expected due to higher yields investment securities gains and changes in OCI swung from a gain of $270 million in the third quarter to a loss of 267 million in the fourth quarter.
Speaker Change: Additionally, net swap and other derivative gains in our Rps hedge portfolio.
Speaker Change: $145 million over the fourth quarter compared to losses of $205 million in the third quarter.
Speaker Change: Resulting from market movements as swaps and futures offset by market movement TBA is slightly lower swap interest spread.
Speaker Change: The servicing assets showed a gain of $82 $5 billion in the fourth quarter. After a loss of 100 series $3 $4 million in the third quarter.
Speaker Change: I hear rates and lower projected prepayments resulted in a positive $179 4 million dollar change in the valuation of MSR as opposed to a negative $93 8 million dollar change in the second quarter.
Speaker Change: Results declined in the fourth quarter to $57 million from 62 million in the third quarter.
Speaker Change: The decline in results was a result of lower U P. B.
Speaker Change: The sale of MSR in the third quarter as well as a decline in realized prepayment rates.
Speaker Change: It is important to look at changes in values for the assets and the hedges together rather than in isolation.
Speaker Change: The net change in the some of the investment securities gain in changes in OCI.
Speaker Change: Swap and other derivative gains as the servicing asset gains shows a loss of $47 $5 million in the fourth quarter compared to a loss of $67 $3 million in the third.
Speaker Change: Please turn to slide eight.
Speaker Change: Our MBS funding markets remains stable and available throughout the quarter with.
Speaker Change: With spreads for repurchase agreements at software plus 75 basis points.
Speaker Change: Concerns about anticipated year end funding pressures.
Speaker Change: Certainly around fed actions have dissipated and rates have reverted back to more normal ranges around plus 15% to 20 basis points.
Speaker Change: Retrospect, you read was uneventful or the funding markets and early indications in 2025.
Speaker Change: That spreads are normalizing into a tighter historical contexts.
Speaker Change: Quarter end.
Speaker Change: Our weighted average days to maturity or agency MBS repo was 49 days compared to 78 days at the end of <unk>.
Speaker Change: Q3.
Our days to maturity are typically lower at December 31, as we intentionally rule repo to a third quarter past year end to avoid any disruption of funding that can sometimes occur.
Speaker Change: Refinance our MSR activities across five lenders was $1 8 billion of outstanding borrowings under bilateral facilities.
We ended the quarter with a total of $864 million in unused MSR asset financing capacity of $60 million in unused capacity for servicing advances.
Nick: I will now turn the call over to Nick.
Nick: Thank you William.
Nick: Before I launch into the slides and provide more detail, let's talk a little bit about the fourth quarter performance at a high level.
Nick: This was an interesting quarter, particularly for mortgage performance as mortgage spreads didn't exactly follow the usual playbook.
Nick: In total we started the quarter with less mortgage spread risk in any recent quarter with most of our exposure in five and a half that up as.
Nick: As rates rose and spreads widened, we let our spread exposure increase which contributed positively to our performance.
Nick: Our MSR was aided by slower than expected prepayment speeds. The other quick rise in rates in October which triggered a fair amount of rehashing impacted our MSR performance.
Nick: As we discussed in last quarter's earnings call the risk of our MSR varies as rates move both in terms of duration and coupon exposure.
Nick: As rates increase the duration exposure declines and shifts into higher coupons in practice that means having to sell some of our MBS at lower prices due to higher rates and in a month like October at wider spreads.
Nick: Higher rates are typically spell trouble for mortgage performance and it did again in October as interest rates increased and volatility spiked ahead of the presidential election, which negatively affected many mortgage REIT book values.
Nick: However in November following the decisive election results investors aggressively returned to the market leading to a recovery in spreads that would not have been predicted based on the move in rates.
Nick: Over that two month time period, the 10 year Treasury yield increased by 39 basis points and the slope of the two year tenure treasury curve flattened by 12 basis points, yet the index turned in a net positive excess return plus five basis points.
Nick: So hawkish comments from the fed in December drove rates higher yet again and pushed the quarterly index excess return to minus 11 basis points, the muted reaction or mortgage spreads compared to prior periods was notable.
Nick: Of course, the index is heavily weighted to lower coupons and performance across the stack varied widely.
Nick: Higher coupons, especially in pool form outperformed turning in a positive hedged return performance.
Nick: Jumping into the deck, please turn to slide nine.
Nick: Our portfolio at December 31 was $14 8 billion, including $10 4 billion in subtle positions and $4 4 billion in T B as.
Nick: Our economic debt to equity decreased slightly to six five times, though as you can see in figure three our mortgage spread exposure increased into a more normal range of spreads became more attractive in the quarter as.
Nick: As we have said in the past the leverage exposure is but one of many risks we manage and it can't be taken by itself to assess our overall risk.
Nick: We continue to manage our exposure to rates across the curve closely you.
Nick: You can see more detail on our risk exposures on appendix slide 17.
Nick: Please turn to slide 10.
Nick: As you can see in figure one our preferred implied volatility gauge to your options on 10 year rates increased from 94 to 101 basis points on an annualized basis right in the middle of its range for 2024.
Implied volatility and nominal spreads remained higher than longer term averages while option adjusted spreads are close to longer term averages.
Nick: The level of mortgage spread volatility has materially declined from earlier parts of this interest rate cycle, improving the risk adjusted return profile.
Nick: The nominal spread on TBA current coupon finished 11 basis points wider at 117 basis points of the treasury curve, while the option adjusted spread finished six basis points water at plus 23.
Nick: Note that some of the spread widening reflects the shift from about a 5% current coupon at the start of the quarter something in between five and a half sixes by quarter end.
Nick: As you can see in figure to the nominal spread curve steepened with peak spreads around a 6% coupon a quarter at the.
Nick: The OAS curve flattened with higher coupons picking up spread as prepayment risk diminished.
Nick: Please turn to slide 11 to review our agency MBS portfolio.
Nick: Figure one shows the performance of TBA as compared to the specified pools, we own throughout this quarter.
Nick: As I mentioned earlier, given that the interest rate curve beer steepened and implied volatility ticked up lower coupons underperformed higher coupons.
Nick: Higher coupons specified pools are the best performer as you can see in figure one outperforming tva's by at least a quarter point and rate hedges by about a half point.
Nick: In terms of activity, we shifted TV exposure up in coupon and replace some specified pools with Tas.
Nick: We also bought some higher coupon pools to improve carry as dollar rolls weekend.
Nick: Incorporating the effect that our MSR has on our net notional mortgage exposure our position increased by about $1 5 billion over the quarter.
Nick: So primary mortgage rates increased by about 75 basis points in the quarter overall prepayment rates for 30 year agency MBS rose by <unk> four percentage points to six 9% CPR as higher coupons speeds reflected the lagged effect of the mini refi wave triggered by the fall in rates in Q3.
Nick: Borrowers with a refinance incentive responded to the lower rates in September with a propensity is similar to a borrower behavior in 2019.
Nick: Figure two on the bottom right shows our specified pool prepayments speeds by coupons on.
Nick: On aggregate speeds increased to eight 1% from seven 6% in the third quarter led by an increase in speeds from five and a half sixes in six months.
Nick: Please turn to slide 12, as we discuss the market for investing in MSR.
Nick: MSR market remains stable and well supported with bulk deals consistently receiving double digit competitive bids.
Nick: Some large scale bids and acquisitions in Q4 lifted 2020 for transfers to 662 billion UBB approximately the same amount in 2023. So the number of bulk bid opportunities dropped by about 25% year over year as you can see in figure one.
Nick: While demand for MSR continues to be strong from both bank and non bank portfolios. We expect there to be ample opportunities in 2020 five to add MSR at attractive spreads.
Nick: Please turn to slide 13, where we will discuss our MSR portfolio.
Nick: Figure one is an overview of our portfolio at quarter end, the details of which can be found on appendix slide 23.
Nick: The portfolio was 202 billion U S. D. At December 31, reflecting the settlement of $2 5 billion in <unk> through bulk and flow channels and portfolio recapture.
Nick: With mortgage rates, increasing in the quarter the price multiple of our MSR increased slightly to five nine times from five six times and 60 plus day delinquencies remain low at under 1%.
Nick: Our MSR portfolio with a low gross mortgage rate of 346% experienced a four 9% CPR in Q4 down <unk> four percentage points compared to Q3 as slower seasonal factors kicked up.
Nick: In order to facilitate comparison of our MSR prepayment rates with the larger universe, we map our portfolio into cohorts by mortgage rates, so that they resemble our MBS.
Nick: Figure to compare CPR is across those implied security coupons in our portfolio of MSR versus TBA.
Nick: You can see the Prepays remained low and steady for the majority of our portfolio with five and a half above slightly increasing.
Nick: Finally, please turn to slide 14, our return potential outlook slide.
Nick: The top half of this table is meant to show what returns. We believe are available on the assets in our portfolio.
Nick: We estimate that about 61% of our capital is allocated to servicing the static return projection of 11% to 14%.
Nick: <unk> capital is allocated to securities with a static return estimate of 14% to 15%.
Nick: With our portfolio allocation as shown in the top half of the table and after expenses. The static return estimate for our portfolio is between $9 eight to 12, 1% before applying any capital structure leverage to the portfolio.
Nick: 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 $10 eight to 14, 4% or a perspective quarterly static return per share of 39% to 52 seven.
Nick: We like that our current capital allocation is focused on MSR and believe it will result in strong returns for our stockholders.
Nick: Low prepayments are a positive tailwind for our servicing portfolio, but even if prepayments pick up we believe that the significant progress we have made it round point at our direct to consumer originations platform will serve as a hedge to our MSR portfolio.
Nick: Additionally, our focus on generating additional cost efficiencies in servicing, especially through technology and process improvements around point will contribute positively to the value of the MSR.
Nick: We continue to actively manage our MBS positioning to complement our MSR portfolio and aim to extract additional returns from historically wide nominal current coupon spreads.
Nick: We believe that our unique hedged MSR centric strategy will continue to generate attractive levered returns in 2025 and beyond.
Nick: Thank you very much for joining us today and now we will be happy to take any questions you might have.
Speaker Change: If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Again that is star one to ask a question.
Speaker Change: For just a moment to allow everyone an opportunity to signal for questions.
Speaker Change: Yeah.
Speaker Change: We will take our first question from Doug Harter with UBS.
Doug Harter: Thanks, and good morning, it's quite correct, a little bit on for Doug.
Doug Harter: I was hoping you could give us an update on how it's performed so far in the quarter.
Doug Harter: Yes. Good morning, Thanks for the question.
Doug Harter: It's been a reasonably quiet quarter, although I'll stress that it's early in the quarter. It's only been one month of course, but.
Doug Harter: Our total return is estimated to be up between about 152% as of last night.
Okay. Thank you.
And second how do you think of what leverage level impact your view on that.
Doug Harter: <unk> power and what what's the normalized range for sure.
Doug Harter: Okay.
Doug Harter: Thank you for the question this is Nick.
Doug Harter: As I mentioned in my prepared remarks, the our overall debt to economic ratio is really bought one measure that we <unk>.
Doug Harter: Look at in terms of our return potential and our earnings power and as you can see.
Doug Harter: Our our from our term return potential slide that overall, we are.
The the central tendency of our of our of our returns and in the range of our returns are still supportive of our dividend very much in the range of what it was.
Doug Harter: In prior quarters.
Doug Harter: So.
Doug Harter: The.
Doug Harter: The the leverage itself as is.
Doug Harter: <unk>.
Doug Harter: Determines.
Doug Harter: Some of the components of our of the debt to equity, but if you look at other components of our risk such as our <unk>.
Doug Harter: Mortgage spread risk we have you know as as again as I said in my prepared remarks.
Doug Harter: Quarter over quarter that increased into a more normal range and that was really you know that's really reflective of where how we feel about spreads and how they how they look right now and.
Doug Harter: Beyond that.
The overall mix of our assets of of having over 60% of our of our capital in MSR is very supportive of stable and in our opinion predictable.
Doug Harter: Returns for future periods.
Speaker Change: One thing I might add Marissa also is is that.
Speaker Change: The way that we had your MSR and hedging the correct coupon risk, but as rates rise, we need less MBS to hedge the current coupon risk of the portfolio right and as rates go down and we need more and so that has a direct impact in when we're keeping everything on.
Speaker Change: Changed our risk unchanged as rates move that has an impact on the overall leverage which is why Nick stresses that the leverage is just one component of the risks that we manage and measure.
Speaker Change: Thanks.
Speaker Change: And finally does it.
Speaker Change: Power outlook does that reflect the cost of volatility.
Speaker Change: So as I said those are static spreads.
Speaker Change: Scott.
Speaker Change: Thank you that's it for me.
Speaker Change: Thank you.
Speaker Change: We will take our next question from Mikael Goldberg with citizens JMP.
Mikael Goldberg: Hey, good morning, guys.
Speaker Change: Could you maybe expand a bit on your outlook for agency MBS spreads for this year and also how do you guys see the allocation to MSR versus MBS evolving throughout the year. Thank you.
Speaker Change: <unk>. Thank you for the question.
Speaker Change: You know it's it is what I would say is the we have seen in and we've made note of it and about that there has been a much more controlled responsive mortgage spreads.
Speaker Change: I would say really notably since November when you know the when.
Speaker Change: When we got through the the presidential election, and slightly before that when we when the fed first cut and I, yes, I think that the.
Speaker Change: That's really a reflection of the fact that there is a more predictable fed path than there has been there was an earlier parts of the cycle I still think this is still a very data dependent fed is full quarter to quarter.
Speaker Change: There's a lot of other things that that are being factored into the risk equation out there in the world, but the overall amount of spread risk has declined and you know there are there are good reasons to be positive about mortgages mortgage spread this year, I mean that supply and supply demand seems to be pretty much in <unk>.
Speaker Change: Once we have something like a <unk>.
Speaker Change: Net amount of supply in the low 200, billions, which has been reasonably absorbed by the market theres been better uptake by banks.
Speaker Change: I think the general consensus is theres the uptake by banks has has been you know more than what the market was generally assuming kind of a consistent amount of demand from money managers in flows into funds that buy mortgages.
Speaker Change: The RV of mortgages looks quite good relative to other spread assets in the world funding rates you know they were they you know they they see.
Speaker Change: Baidu, but towards the end of last year, but now they've come right back into the zone there've been in which is good of course.
Speaker Change: If the fed does cut more of this year the steeper yield curve is usually.
Speaker Change: Usually constructive for mortgage spreads because it encourages.
Speaker Change: Yeah, and it encourages institutions, mostly banks to go further out on the curve and by mortgages. So all of those things are a good point. So you know the our overall feeling is and where we're kind of keeping it down. The fairway here is that you know mortgages should be should continue to be constructive for us from a return perspective, and you know where spreads are right now we don't really need spreads.
Speaker Change: We say this every quarter, but its true we really don't need.
Speaker Change: But really do not need spreads to tighten to get performance.
Speaker Change: I think what the the the part of it that can be.
Speaker Change: You know that is difficult when you have a tremendous amount of volatility and that really has kind of come down. So overall I'd say, we are we're positive on mortgage spreads, but you know as we know from from the volatility that this this market.
Speaker Change: It has given us that there is that there is always something that can that can change that.
Speaker Change: However, one of the key parts of our strategy, which we can't really overemphasize is the core of our MSR that really does provide a lot of stability to our return profile and if you look at look at our returns over the last.
Speaker Change: Many quarters you can see we've had a lot of stability of book value and good economic returns and we think that will bode us well for the for the foreseeable future.
Speaker Change: Great. So.
Given that I'm guessing that the <unk>.
Speaker Change: <unk> allocation versus MBS is kind of going to be steady as she goes similar to what it's been and ring in the recent quarter or two.
Speaker Change: Correct, sorry, I didn't mean to not answer that question, yes, we do we don't expect to see a material change in our in our MSR allocation.
Speaker Change: We were always looking at the at the very at the asset allocation that we can that we can.
Speaker Change: To move asset allocation as we get cash flows to invest or new capital, but we don't see a material change in our in the allocation to MSR.
Speaker Change: Great. Thank you and if I can squeeze in one more any any thoughts on potential GSE reform and nomination of this new FHFA person to lead it.
William: Oh, Hi, this is William.
William: I don't think we have more information that once the market has regarding GSE reform, but I think we can break.
William: GSE reform question two questions actually.
William: What is the status of privatization and what is the status of the guarantee and the guarantee itself breaks into two sub questions what is.
William: Going to happen to existing securities that have a guarantee and what is going to have to.
William: Sure.
William: Respective securities.
William: Whether they will carry the guarantee or know once we have more detail about a.
William: About potential class, we can look at the implications through the lines of those two questions, which we really don't have any more information.
William: <unk>.
William: We don't want to speculate about what's going on.
William: Got you well, thank you very much and best of luck going forward.
William: Thanks, very much of a gap.
William: Okay.
Speaker Change: We will take our next question from George George with K B W.
William: Okay.
Frank: Hi, Good morning. This is actually Frank on for Bose just.
Frank: Just to start can you discuss the main differences between the AAD and the static return range you provided on slide 14.
Frank: Sure.
Speaker Change: Sure. Thank you Frank for the question.
Frank: I'll get started.
Frank: Yes.
Frank: You know that the return potential that we show on.
Frank: On Slide 14 is our is our actual portfolio at quarter end. It is projected out at it uses it is it is a mark to market.
Frank: Uh Huh, it's a mark to market basis, where everything in the portfolio is marked contemporaneously at that date and.
Frank: And valued at that date, so you know in our in our opinion I mean, it's it's a it's a good it's a good assessment of where.
Frank: The return potential of the static yields are to the forward curve when you take Ark, our entire portfolio marked on the same day.
Frank: And then.
Frank: And generate a.
Frank: Yield or a return potential E D is.
Frank: Is the word that we use contingency.
Frank: About it is that it's asynchronous so that the idea is something where.
Frank: If you have assets that are like ours, many of our mortgage pools, we bought long ago and the AAD reflects the purchase price or the you know the the return at that time, whereas the other components of our of our overall business structure such as our.
Frank: Our funding our repo are more contemporaneous so that you can have a real difference in timing between those things and it can create distortions to what to what and how we see the portfolio on a day to day basis and manage it on a day to day basis, if that makes sense to you.
Frank: The way I like to think about it Bose is that is that if you were to buy and sell the portfolio every day.
Frank: You would <unk> would look something more like what we have on slide 14.
Speaker Change: Great. That's very helpful. Thank you.
Speaker Change: And then just to stay on that slide the return of your MSR fell to like 11% to 14% from 12% to 16% last quarter given the higher rate.
Speaker Change: Environment is the driver of the lower return the increase in the Mark to market on the MSR this quarter.
Speaker Change: It's a very good question and it's a combination of things the biggest thing that it is is that you know.
Speaker Change: And this is again this is.
Speaker Change: A slice in time it is one one day and you know we manage our portfolio through time, but a component of the return of our MSR portfolio is hedged and that hedge is.
Speaker Change: Our our MBS securities or current coupon securities typically which add too which also add to the return of the strategy right. It's it's it's it's it's a paired strategy of MSR plus MBS and the MBS add return when rates go up as I mentioned in my comments.
Speaker Change: The amount of of MBS that we need to hedge that MSR decline. So overall, if you if you think about it that way.
Speaker Change: The the the leverage of that part of the portfolio goes down right. There theres less there there are less securities that are attached to the MSR. Consequently, the return potential well all else being equal will tend to go down you know as as that as that hedge is that hedge becomes.
A smaller part of the overall pair.
Speaker Change: Yeah.
Speaker Change: Great. Thank you very much I appreciate it.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: We will take our next question from Eric Hagen with BTG.
Speaker Change: Good morning. Good morning, this is Ed.
Speaker Change: And then Jay catch you guys saw on for Eric Thanks for taking my questions.
Speaker Change: Are you guys seeing any new financing counterparties or sources of leverage to support the MSR portfolio.
Speaker Change: Yeah.
Blake: Okay, Oh go ahead Blake.
Speaker Change: For the traditional lenders.
Speaker Change: There are some new entrants that are trying to gain traction into the market.
Speaker Change: We've seen a few requests.
Speaker Change: In bound calls for people, what it takes to MSR financing.
Speaker Change: Yes in general I would just add to what William just said there I think that that the depth of the market for MSR financing continues to grow and expand.
Speaker Change: As William said, there's more counterparties entering the market.
Speaker Change: All the time and.
Speaker Change: And so it's a very healthy healthy market.
Speaker Change: For that product right now.
Speaker Change: Great. Thank you and then can you also just share how much the costs have changed in response to the first 100 bps of rate cuts that we've seen.
Speaker Change: Which costs are you thinking of specifically.
Speaker Change: The MSR portfolio.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change:
Speaker Change: Yeah.
Speaker Change: I'm not sure I understand youre talking about.
Speaker Change: When you were talking about our financing costs.
Speaker Change: And yes. It can just back it up to maybe just kind of cost in general how they have shaped in response to the the 100 bps of cuts that we saw.
Speaker Change: Alright so.
Speaker Change: And all things like that.
Speaker Change: Yeah.
Speaker Change: Uh-huh, so so our financing costs on the MSR asset.
Speaker Change: Our floating rates are indexed to short term funding rates the sofa Bryan so as the fed has cut rates.
Speaker Change: Our funding costs.
Speaker Change: I have gone down right.
Speaker Change: Alright.
Speaker Change: <unk>.
Speaker Change: Just like.
Speaker Change: Do they have on the RMS side of the portfolio right.
Speaker Change:
Speaker Change: Lower sulfur rates also impact the float income that we have in our books that we have generated by the MSR asset as well, which offsets some of that.
Speaker Change: In general I would say that we are.
Speaker Change: Hedge the entire yield curve.
Speaker Change: Alright, and so.
Speaker Change: Changes in in rates in one part of the curve or another generally have a very small effect on our portfolio.
Speaker Change: Fully understanding what youre getting at so maybe we can follow up.
Speaker Change: More fully later.
Speaker Change: And I hope that.
Speaker Change: Hope that answers some of your questions.
Speaker Change: Yes. It does definitely thank you guys very much.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: We do not have any further questions I would like to turn the call back to Bill Greenberg for closing remark.
Speaker Change: I'd just like to thank everyone for joining us today and thank you all for your interest in two hours.
Speaker Change: This concludes today's call. Thank you for your participation you may now disconnect.
Speaker Change: [music].