Q1 2025 Annaly Capital Management Inc Earnings Call
Good morning, and welcome to the first quarter 2025 earnings call for <unk> Capital management, all participants will be in listen only mode.
So do you need assistance. Please signal a conference specialist by pressing Star zero right, especially in Star then zero on your telephone keypad.
After today's presentation there'll be an opportunity to ask questions.
That's a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Speaker Change: Please note. This event is being recorded I would now like to turn the conference over to Sean Kensal of Investor Relations. Please go ahead.
Sean Kensal: Good morning, and welcome to the first quarter 2025 earnings call for antibody capital management.
Speaker Change: Any forward looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the risk factors section in our most recent annual and quarterly SEC filings.
Sean Kensal: Actual events and results may differ materially from these forward looking statements.
Sean Kensal: We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings.
Sean Kensal: Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date hereof.
We do not undertake and specifically disclaim any obligation to update or revise this information.
Sean Kensal: During this call we may present, both GAAP and non-GAAP financial measures.
A reconciliation of GAAP to non-GAAP measures is included in our earnings release.
Sean Kensal: Content referenced in today's call can be found in our first quarter 2025, investor presentation, and first quarter of 2025 financial supplement both found under the presentations section of our website.
Sean Kensal: Please also note this event is being recorded.
David Finkelstein: Participants on this morning's call include David Finkelstein, Chief Executive Officer, and co Chief Investment Officer.
Serena Wolfe: Serena Wolfe Chief Financial Officer, Mike.
Speaker Change: Mike Scania co Chief investment officer, and head of residential credit.
Speaker Change: Yes, when you Boston had of agency and Ken Adler head of mortgage servicing rights.
David Finkelstein: And with that I'll turn the call over to David.
David Finkelstein: Thank you Sean good morning, everyone and thank you for joining US today I'll briefly review the first quarter and our performance before turning to the current environment given the elevated volatility we've seen post quarter end and then I'll provide an update on our outlook and positioning for each of our businesses. Serena will then discuss our financials before.
David Finkelstein: We're opening up the call to Q&A.
David Finkelstein: Now the first quarter look relatively benign in hindsight, the 10 year Treasury yields did trade in the 65 basis point range over the quarter and ultimately foreshadowed some of the rate volatility we experienced in April.
David Finkelstein: January and February were characterized by generally healthy fixed income demand and positive risk sentiment.
David Finkelstein: Levered conditions began to deteriorate somewhat march amidst discussion to the new administration's trade policy, which shifted the outlook and led to an underperformance in risk assets in our retracing the tightening in spreads from the first two months of the quarter.
Our portfolio performed well delivering a 3% economic return during the quarter and in addition, we increased our common stock dividend to 70 cents per share underscoring our earnings momentum.
David Finkelstein: Our capital allocation to agency increased slightly to 61% as we deployed accretive capital raised through our ATM into the sector economic leverage increased modestly to five seven turns at the end of the quarter they'll remained at the low end of our historical range.
Now turning to the macro landscape in April markets had been struggling to decipher competing narratives in recent weeks the shift in U S. Trade policy is further weighed on consumer and business confidence is likely to impact economic growth over the foreseeable future.
David Finkelstein: While inflation slowed in the first quarter terrorists should lead to higher goods prices over the medium term, which risks 2025, representing our second consecutive year of limited inflation progress for the fed.
David Finkelstein: Interest rates and financial assets broadly have exhibited meaningful volatility following the tariff announcements and in just the past few weeks, we've seen treasury yields two versus similar sized trading range as they experienced during the entirety of the first quarter and this has led to a cheapening and balance sheet intensive assets in a widening.
David Finkelstein: Agency MBS spreads in tandem with other spread products.
David Finkelstein: As we have conveyed in recent quarters, we believe it pays to be prudent given that we have earned our dividend at lower relative levels of risk and accordingly, we entered the year with our lowest economic leverage in a decade and enhanced our liquidity throughout the first quarter to $7 5 billion in total assets available financing combined with an app.
David Finkelstein: Actively managed and well hedged portfolio has prepared us well for the volatility that ensued in April.
David Finkelstein: Now to focus specifically on our businesses and beginning with agency $3 5 billion in notional portfolio growth in the first quarter was driven by purchases of Luckily intermediate coupon TBA, which lag relative to production coupons during the rate sell off in the fourth quarter and early part of Q1 you secured.
David Finkelstein: He is also offered a more favorable convexity profile and attractive carry his roles improved in the first quarter. Additionally, they should prove the most durable area to invest the economy continues to slow.
David Finkelstein: On the hedging side, we maintained a disciplined approach with respect to our interest rate exposure given the macro uncertainty the.
David Finkelstein: The prospect of regulatory reform led to a widening in swap spreads early in the first quarter, which allowed us to better balance our hedge exposure by shifting some of our longer dated swaps and the treasury futures. We also layered in a modest swaption position as implied volatility cheap it somewhat in the first quarter.
David Finkelstein: Post quarter end, the MBS widening which began in March and accelerated in April has been more pronounced versus swaps relative to treasuries and swap spreads have narrowed to historically tight levels nowadays.
David Finkelstein: Now it is important to know that throughout this recent volatility episode funding markets demonstrated stability and when macro stress further subsides, we do expect focus around M. B S returned to the fundamentals inexpensive valuations are muted prepayment environment durable financing markets for the agency.
David Finkelstein: Sector.
David Finkelstein: Now shifting to residential credit our portfolio ended the quarter at $6 6 billion in market value with $2 4 billion of capital.
David Finkelstein: The decrease in portfolio size of 340 million quarter over quarter is attributable to opportunistic sales of third party securities as well as an increased pace of securitizations in the first quarter.
David Finkelstein: Credit spreads began to widen in March it's AAA non QM spreads were approximately 20 basis points cheaper on the quarter with subsequent widening post quarter end and an encouraging sign of the residential credit sectors resilience. The new issue market remained open throughout the significant volatility experienced in April.
David Finkelstein: And spreads had since tightened from the peak experienced a couple of weeks ago.
David Finkelstein: Now as it relates to the housing market and specifically home price appreciation momentum continues to decrease as affordability is burdening potential borrowers.
David Finkelstein: In addition increases in available for sale inventory have weighed on shorter term supply and demand dynamics in the housing market is exhibiting signs of increased regional disparity several areas that experienced outsized HPA post COVID-19 are now displaying a modest reversal of those trends.
David Finkelstein: Spite the negative momentum that a portion of the market is exhibiting the national housing market appears to be on stable footing given record levels of borrower equity low delinquencies tight underwriting standards and the longer term deficit of single family homes relative to the size of the population in current demographics.
David Finkelstein: Oswald based corresponded channel lock in acquisition volumes remained strong in Q1 as we finished the quarter with $5 3 billion in locks and three 3.8 billion of fundings, our vigilance regarding the quality of our credit is best evidenced by our locked pipeline, which exhibited a 758 weighted average fee.
David Finkelstein: FICO and a 67% C L T V.
David Finkelstein: The Ob X securitization platform closed six transactions in Q1 totaling $3 1 billion, including our inaugural HELOC transaction as well as the non QM private placement.
David Finkelstein: Post quarter end, we priced two additional securitizations totaling $1 1 billion, reflecting the programmatic nature of the platform and since the beginning of the year, we manufactured 540 million proprietary credit assets at mid teens expected, our oes for Italy, and our third party funds.
David Finkelstein: Moving to the MSR business. The portfolio ended the first quarter relatively unchanged at $3 3 billion in market value comprising $2 7 billion of the firms capital.
David Finkelstein: During Q1, we settled 28 billion in principal balance and previously disclosed purchases, while adding approximately 3 billion in U P. B across our bulk flow acquisition channels, we were disciplined in growing the portfolio in the quarter as we expect supply to stay elevated throughout 2025, all else equal.
David Finkelstein: As the origination community should continue to monetize MSR, given historically compressed gain on sale margins.
David Finkelstein: As the mortgage origination and servicing industry consolidates, we've strategically aligned ourselves with industry, leading sub servicing and recapture partners that should create clear competitive advantages for our platform.
David Finkelstein: We believe that greater efficiency and technological investment in the mortgage industry provide the potential burnham's portfolio yield through increased recaptured capabilities and a superior borrower experience.
David Finkelstein: Our MSR valuation increased very modestly driven by marginally steeper sulfur curb and tighter spreads on observable MSR, consisting solely of deep out of the money collateral.
David Finkelstein: With a 3.23% aggregate borrower rate in less than 5% of the portfolio with a mortgage rate greater than 5%. Our MSR holdings are differentiated relative to the broader servicing market and our exposure to higher note rate MSR. The segment of the market that depreciated over the quarter is negligible contributing to a relative out.
David Finkelstein: Performance.
David Finkelstein: And lastly related to MSR fundamental performance of the portfolio continues to exceed our initial modeled expectations as <unk>.
David Finkelstein: Serious delinquencies or approximately 50 basis points the portfolio exhibited a 3.4% CPR over the quarter and increased escrow balances and resulting float income had provided positive tailwind.
David Finkelstein: Now all told while the outlook remains uncertain our portfolio is diversified liquid and actively managed which should allow us to perform across a variety of economic scenarios. We continue to believe this portfolio construct has significant synergies with the potential for superior risk adjusted returns as it.
David Finkelstein: Evidenced by delivering a positive economic return in each of the past six quarters and while volatility presents its challenges. We're encouraged by the underlying dynamics in this environment, including highly attractive new money returns steeper yield curve and declining financing costs.
Serena Wolfe: Now with that I'll turn it over to Serena to discuss the financials.
Serena Wolfe: Thank you David today, I will provide brief financial highlights for the quarter ended March 31st 2025.
Serena Wolfe: System with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics. My comments will focus on our non-GAAP E. A D and related key performance metrics, which exclude P. I E.
Serena Wolfe: My name is available for distribution push after the quarter was consistent with the prior quarter at 72 cents per share.
Serena Wolfe: Earnings were primarily driven by lower average repo rates, a full point by 6% compared to 4.93% in the prior quarter, along with higher coupon income on higher average investment balances.
Serena Wolfe: These increases were partially offset by lower swap income due to the unwinding of swaps, which were replaces future positions that do not have an interest component I D.
Serena Wolfe: Considering the continued strong earnings driven largely by reduced repo funding cost and higher average investment yields we increased our dividend from 65 to 70 cents per share for the first quarter.
Serena Wolfe: Given our outlook for 2025, we expect to maintain this level for the remainder of the year all else equal.
Speaker Change: As of March 31st 2025, our book value per share was $19 and she says a modest decline of less than 1% quarter over quarter.
Speaker Change: After accounting for as I mentioned and dividend, we achieved an economic return of 3% for Q1.
Speaker Change: Our individual businesses all contributed positively to our economic return despite the challenging macro environment in the latter part of Q1.
Speaker Change: For the quote out we saw gains in agency MBS resi credit and MSR portfolios of $1.89 810, and five cents per share respectively.
Speaker Change: However declines now hedge positions modestly outpaced these games at $2.14 per share.
Speaker Change: Over the last year, we have spent time on our earnings calls discussing the various additions and expansions of funding options available to our credit businesses.
Speaker Change: Our financing strategy is defined by a diversified structures and given our size and scale, we have access to a wide range of funding options, including bilateral repay them all in.
Speaker Change: In house broker dealer stores had repay securitization credit facilities and warehouse financing.
Speaker Change: We took advantage of thereabout funding markets during the quarter and added Tam to every pet book at attractive spreads.
Speaker Change: As a result, our Q1 reported weighted average repo that is extended to 50 days compared to 32 days as of the fourth quarter of 'twenty 'twenty four.
Speaker Change: Since the end of 2022 we have added $2 1 billion of warehouse capacity, including supplements, the new products and non mark to market and committed facilities within the residential credit business.
Speaker Change: This brings total capacity to $3 9 billion across 10 Counterparties as at March 31st 2025, with a utilization rate of 43%.
Speaker Change: Additionally, we have added $1 6 billion in capacity of the same period within our MSR business.
Speaker Change: This is consistent with portfolio growth, bringing the total available committed warehouse for MSR 1.8 billion across three counter parties as of March 31st 2025, with a utilization rate of 50%.
Speaker Change: After quarter end, we upsized, an existing credit facility within the residential credit business, bringing our current total capacity across both businesses to $5 8 billion.
Speaker Change: I believe financial strength is further evidenced in our unencumbered assets, which ended the first quarter at $6 3 billion, including cash and unencumbered agency MBS at $4 7 billion, which is approximately 60% of the dedicated capital at our agency business.
Speaker Change: In addition, we have approximately $1 2 billion in fair value of MSR that has been pledged to the committed warehouse facilities, but remains undrawn and can be quickly converted to cash subject to market advance rates.
Speaker Change: Together, we have approximately $7 5 billion in assets available for financing of approximately 600 million compared to the fourth quarter and representing approximately 60% of our total capital base.
Speaker Change: Finally, touching on Opex, our efficiency ratios increased moderately during Q1 due to the timing of certain expenses. However, we expect expenses to normalize and full year opex to equity ratios to align with historical levels, all things being equal.
Speaker Change: Now that concludes our prepared remarks, and well open the line for questions. Thank you operator.
Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and he would like to withdraw your question. Please press Star then two.
Speaker Change: Our first question will come from Bose, George with K B W. Please go right ahead.
George: Everyone. Good morning.
George: Can I get an update on your book value quarter to date.
Bose: Sure Bose good morning, as of Tuesday evening, our book value inclusive of the dividend. So economic return was off roughly three 5% and to give you context of how it has it all coming out of the Easter holiday weekend, the economic returns roughly off the board.
Bose: Okay, great. Thank you and then just can you talk about your outlook for spreads and and how does the whats happening in the swap market playing to that does it have more to do with Slops normalizing and also just any thoughts on what regulators might end up doing with the bank SLR and what that could mean for you know for the market.
Bose: Sure.
Bose: First talk about swap spreads because obviously a lot of factors that have driven mortgage widening in swap spread tightening is one of them, but also volatility as it relates to swaps.
Bose: It's important to back up and talk about how the small swaps mortgages bolt over really the past decade, beginning with post Dodd Frank swaps ultimately, we're all clear.
Bose: And as a consequence margin and mark to market on a daily basis. So effectively they date that eliminated credit risk. Another evolution. Obviously is the transition from LIBOR to sofa. So overnight treasuries is the benchmark, which also reduces any any any risk associated with that.
Bose: Instrument as a hedge and the last point to note is there synthetic and so theres no balance sheet risk associated with swaps. So effectively whats occurred over the last decade Bose as the swaps have become a risk free curve yield curve in the U S and as a consequence, you're best to carry.
Bose: As a hedge is going to be that risk free curve. So it's a very attractive hedge from a carry standpoint. However, it doesn't have the highest correlation to mortgages treasuries actually do exhibit greater correlation that's largely because of the balance sheet risks now the way we look at it is we're looking to balance.
Bose: Terry and correlation and strike the best risk adjusted return as edge.
Bose: We've done that effectively now what's occurred.
Bose: The very recent past is as we got to April 2nd beyond a lot of volatility ensued and as a consequence that flight to quality was more reflected in swap spread tightening as opposed to <unk>.
Bose: Treasury rally, albeit attrition so now since rallied back.
Bose: And that's what's driven the underperformance of agency relative to swaps. So our view is that as we do get to hopefully a better outcome on these trade negotiations you will see volatility decline.
Bose: Youll see swaps normalize widened.
Bose: That's our view, but it's going to be predicated on.
Bose: Greater confidence in the outlook as it relates to trade and also market volatility subsided.
Bose: Now your point about the regulatory environment, obviously coming into the year. There was a lot of anticipation about Reg reform is that did lead to swap spreads widening largely because of the anticipation that it would free up balance sheet on the part of banks and particularly our broker dealers banks, so that they could intermediate.
Bose: Balance sheet pension products with.
Bose: With greater capabilities and.
Bose: That didn't get put on the sidelines a little bit given the other priorities the administration, but our anticipation is that we will have a broad.
Bose: Tori reform coming down the Pike I think the Treasury Secretary you can anticipate third and fourth quarter to see the benefits of that considered viewed early this week.
Bose: The fed obviously has a new.
Bose: Regulatory.
Bose: We're coming in waiting conformation involvement.
Bose: Treasury as well focused on it as are the other parts of the the administration FDIC OCC and we do expect that to be a focus. So SLR is obviously on the table and then likely a full re proposal of Basil and game.
Bose: In other other accommodations to make balance sheet more friendly in the intermediation of the treasury market in other.
Bose: Sectors in markets to be more fluid. So we're hopeful and we'll wait to see and we do think it'll be a tailwind spread swap spread widening in the coming quarters does that help.
Bose: Yes, that's great. Thanks for all the color.
Bose: Sure.
Speaker Change: Our next question will come from Doug Harter with UBS. Please go ahead.
Bose: Yes.
Speaker Change: I think David you mentioned that you you came into the year with your lowest economic.
Speaker Change: Leverage yeah, just thinking now that spreads have widened and yeah, and how youre thinking about leverage today.
Speaker Change: Today, and whether this is an opportunity to increase it or you know with with volatility likely or potentially to remain high and you would kind of keep it as is.
Speaker Change: Sure Doug you break up the two opposing forces in terms about how.
Speaker Change: We look at leverage number one is that spreads are wider which would suggest you would take more risk.
Speaker Change: More leverage but on the other side of the equation, but a lot of that is driven by higher volatility and as a consequence, it makes taking leverage up more risky.
Speaker Change: So when we look at how we are positioned currently we're trying to balance those two competing forces and in positioning wise.
Speaker Change: Leverage has ticked up modestly this quarter, but we're still inside of six jurors and until we see leverage from Denver, sorry volatility come down or at least we can forecast it.
Speaker Change: We're probably going to keep things close to home.
Speaker Change:
Speaker Change: We're optimistic that things will continue to subside in terms of in terms of market conditions liquidity and volatility, but theres still a lot of uncertainty and so our inclination is to keep things close to the hole will let leverage drift a little bit and we're not going to we're not going to be overly defensive when we don't think we need to be.
Speaker Change: But we're going to keep it conservative for here Doug.
Speaker Change: I guess just a question on that right. If you wait until you see.
Speaker Change: No volatility kind of decline.
Speaker Change: Don't you risk you know kind of that that that is the spread movement tighter sudden now that is the bulk of widespread there so lot of higher volatility.
Speaker Change: Just kind of how are you.
Speaker Change: The balance of that offence and defense sure sure well first of all I'd say, if you look at our spread shocks for 25 basis point.
Speaker Change: Tightening in spreads the portfolio makes nearly 10% and right now spread relations are a little bit longer so that's a little bit over 10% more than sufficient opportunity to generate turn under that eventuality and yeah. It is it is a difficult.
Speaker Change: Puzzled to two says given the fact that you'll miss some of that spread tightening if you think about it.
Speaker Change: These two.
Speaker Change: Competing forces you want to move quickly, but but if you think about the alternative if all the sudden we do have a.
Speaker Change: Ration of the extreme volatility that materialize between April 2nd in April night, that's going to be quite painful and that's that's what we're tasked with being responsible about so the return will be will be certainly rewarding if spreads do Titan, but we want to make sure that the portfolio doesn't get unwieldy in terms of manager.
Speaker Change: Leverage and duration in the absence of that in.
Speaker Change: Retracement of some of the Communist sits in student test weaker thereabouts.
David Finkelstein: Great I appreciate those answers David Thank you. Thank.
Speaker Change: Thank you Doug.
Speaker Change: Our next question will come from Rick Shane with J P. Morgan. Please go ahead.
Rick Shane: Hey, guys. Thanks for taking my questions. This morning look you know, obviously large portfolio dealing with Ah <unk>.
Rick Shane: Incredible uncertainty and high degree of volatility.
It does and you're also in an environment, where I think.
Rick Shane: You're investing in at least nine different coupons.
Rick Shane: It looks like during the quarter you shifted incrementally.
Rick Shane: Towards a little bit more of the discount discount bonds.
Rick Shane: Is that sort of strategically where we think you should be going or expect that where we think you should but where we should expect that you are <unk>.
Rick Shane: Trending over the next two or three quarters.
Sam: Hi, Sam this is <unk>. Thanks for the question.
Overall, we feel like our best comment, particularly in the first quarter of <unk>, starting to look pretty attractive in the intermediate coupons and their intermediate coupons underperformed and I fell off as we saw in the fourth quarter and they were on a relative coupon basis pretty attractive.
Sam: Over the last month or so we still find the intermediate coupons are quite attractive.
Sam: We do have a gender bias towards Ah, they it's going lower rather than higher which again suggests we should be in intermediate coupons, but pay ups have come up a lot since the end of the fourth quarter. So pay ups are looking much more attractive now so we do like specified pools up in coupons, so when the opportunity.
Sam: I think that's up they will add some specified pools up in coupon TBA position.
Sam: The mainland intermediate coupons.
Sam: And Rick I'll, just add to <unk> point, we did add a lot of force in Florida.
Sam: Those are around the 93 to 95 dollar price bonds and if we do get a rally those assets will trade law for quite sometimes that will really benefit from that and then Conversely in higher coupons. If you think back to the fall in the 10 year rally to $3 65, or thereabouts speeds really accelerated on those premium coupon.
Sam: Awesome.
Sam: We're certainly sensitive to the refinance ability of the customer in higher coupons as well. So I think that's the right sweet spot.
Sam: Got it and do you think that you know we've been in an environment.
Sam: All mortgage borrowers are right bowls, all mortgage originators are right bowls and we've been in an environment for the last.
Sam: 18, or 24 months, where people have been financing homes with the expectation that they'll be able to refinance them very quickly.
Sam: In addition, the technology for refinance.
Sam: The industry structure is evolving do you think depth.
Sam: On a like for like basis.
Sam: We will see speeds substantially higher than we would have expected historically based upon modest moves it.
Sam: Up in the stack are based on more modest rate moves.
Sam: I'll start answer would be yes, we got a glimpse of their fab and a fall of last year as David mentioned rabid rates rallied and mortgage rates got below 6%.
Sam: Pets are Delaware thick, fast, which was roughly 75 basis points of incentive.
Sam: Non startups B, one month's speed up 38, CPR in six and a half with 125 basis points incentive.
Sam: Incentive band at almost 52 CPR. These are faster speeds than what we saw experienced in 2019, but not as fast as what we saw in 2020 one and the reason is that in 2021 where you were at historic low in Grad. So there was a lot of media effect, but the combination of higher loan size and a shift.
Sam: In order to nation from bank originators of nonbank originators.
Sam: Definitely made.
Sam: Keep us to de lever you and why it's much more negatively convex today that make Boston he called it.
Speaker Change: Got it it's interesting to hear the phrase media effect, which we have not heard for a while in this space, but it's a good point as well it's not a factor I was considering thank you guys very much.
Rick Shane: Thank you Rick.
Speaker Change: Our next question will come from Eric Hagen with BTG. Please go ahead.
Eric Hagen: Hey, Thanks, Good morning, guys, I think you'd talked about housing prices and some moderation there in certain areas. I mean, do you see weaker housing prices, becoming systemic under any scenarios, where do you think it's really more likely to be isolated and if it does stay relatively isolated do you think that.
Speaker Change: Could I have any impact in any way on agency MBS spreads are conditions in the securitization market.
Speaker Change: Yeah.
Speaker Change: Sure. Eric. This is this is Mike I'll take the first part of the question regarding housing I think when when talking about housing I think the first thing that you need to do is.
Speaker Change: Take a step back and assess what that market has done so housing prices are up 47% since year end of 2019 date outperformed significantly outperformed analysts' expectations and even over the last two and a half years with the mortgage rate at six and three quarters home price appreciation has still been very strong what you.
Speaker Change: We are now seeing as inventory has increased inventories up 18% year over year, but inventories up close to 50% from February of 2022, so longer term inventory still 25% below where we were pre COVID-19, but shorter term it.
Speaker Change: Increase in what you're seeing is this spring selling season is weaker than the past seasons I'd just take home sales. It's the lowest existing home sales that we've seen since March of 2009, and you're hearing it on the builder calls that they it's more than just incentives now now they actually need to decrease pricing.
Speaker Change: And I think a lot of that is just you know youre seeing a little bit of pullback from some outsized HPA, where youre seeing it be it's more regional in nature Youre seeing a lot in the south of Latin and South East.
Speaker Change: Florida is pretty weak, but Florida was also up 60% since since 2019, but a lot of it is just youre seeing it from short term increases in inventories at Texas, Florida, Georgia, you're seeing in the Carolinas little bit in Colorado and Arizona.
Speaker Change: On the other side of that the northeast is very strong New York, New Jersey up six 7% you're seeing the Midwest is also strong as well. So I think shorter term you may see some pullback here H P. A may be flattish or maybe no negative.
Speaker Change: Throughout the throughout the year, but I think as Dave mentioned in the script, there's still a lot of longer term.
Speaker Change: The reason is why we're constructive on housing delinquencies are still relatively low mortgage credit availability is still tight.
Speaker Change: You are seeing in terms of longer term inventory. We think it's short three to 4 million units and then when you think about borrower equity housing markets 55 trillion. There's only 13 trillion dollars of first lien debt. So I think longer term, we feel we feel constructive but over the over the near term just given the outsized H P. Eight.
Speaker Change: You are going to see some some pullback in terms of what that means for the securitization market. We have seen delinquencies increase we'll will relate that to the non QM market, but I think in actual losses. It. It's been it's been nominal and it's because of the equity that you see within the Securitizations and within the Pls market those borrowers.
Speaker Change: Have anywhere from 25 to 30 points of equity. So I think that housing would really need to depreciate and decelerate you know for the pls market to be impact.
Eric Hagen: And Eric your second part of the question was that related to there is a widening in credit.
Speaker Change: Credit spreads will agency followed sympathy or.
Speaker Change: Yeah, Yeah, essentially yeah exactly.
Speaker Change: Yes. So obviously there are two different markets and typically two different buckets across buyer.
Speaker Change: Buyers.
Speaker Change: Mortgage backed securities, but yes, certainly to the extent east Rajeev credit does does cheap in and it's not really deemed.
Speaker Change: Credit event.
Speaker Change: It would be more competitive with agency, but generally we think there's appetite certainly for the resi credit sector.
Speaker Change: Agency buyers.
Speaker Change: We'll look at agency based on OAS volatility and all the metrics that you assess agency MBS relative to.
Speaker Change: And Eric I would just add in terms of if you wanted to think about the resiliency of the pls market and what we have recently seen we were out with our non QM six transaction, we went out with that market.
Speaker Change: All out in the market on April 1st we ended up pricing that on April seven so during that time period, you saw the S&P 500 was down around 10% and we were still able to price a transaction in the middle of Liberation day.
Speaker Change: With equity markets effectively catering.
Speaker Change: And doing it at a level that we still thought was relatively accretive to our cost of funds.
Speaker Change: The warehouse, we had over 20 investors in that in that transaction. So I think the pls market is different than where it was call. It four to five years ago. If you asked us would you be able to print a transaction in that type of volatility you know 345 years ago I think the answer would've been no, but I think the growth of the market and the resiliency in that.
Speaker Change: Number of sponsors in terms of your investors I think has certainly increased.
Speaker Change: Yeah.
Speaker Change: Really helpful color from you guys as always.
Speaker Change: One more if I may just because.
Speaker Change: There's so much going on right now I mean lots of speculation around the G. S. He's getting released from Conservatorship, we're not looking out you know, we're not overlooking any of the complexities with respect to our release, but if it eventually resulted in the G. S. He's having a smaller more nimble footprint in the mortgage market I mean first what do you think that could mean for the level in the.
Speaker Change: The volatility of MBS spreads and what are the opportunities more broadly in the market that you think could be most attractive against that backdrop.
Speaker Change: Well certainly it's a topic.
Speaker Change: A lot of.
Speaker Change: Attention right now.
Speaker Change: As we see it conservatorship shouldn't last forever.
Speaker Change: But what we've heard from policymakers is that to the extent the gse's or privatized it needs to be done thoughtfully and carefully and I think that the FHFA director is aligned with the Treasury Secretary.
Speaker Change: I think our Pulte said just the other day that first and foremost is the objective is to make sure that anything that's done doesn't affect the mortgage market in a negative way. So we've been encouraged with what we've heard thus far and given the other priorities on the administration's played some trade to taxes to immigration.
Speaker Change: It's further out the horizon that we think it'll it'll come to the forefront now as it relates to the gse's footprint under a scenario, where they're no longer in conservatorship, yes. They could have a smaller footprint, which is generally good for both our agency business and our residential credit business I think we talked about on our last call that we'd be.
Speaker Change: We would be more competitive from a resi credit standpoint, with a lot of the products that the GSE do currently guarantee I think we noted that 20% of them.
Speaker Change: Existing.
Speaker Change: Our wheelhouse for the GSC uses what's considered noncore second homes investor properties and other types of loans and we would welcome the opportunity to compete to to acquire and securitize those products and then a smaller footprint and agency only helps the supply and demand dynamics of the agency market.
Speaker Change: Generally we feel pretty good about that.
Speaker Change: Thank you guys I appreciate you.
Eric Hagen: Thank you Eric.
Speaker Change: Our next question will come from Jason Weaver with Jones trading. Please go ahead.
Jason Weaver: Hey, good morning, guys. Thanks for taking my question.
Jason Weaver: You mentioned the allocation shift towards the agency with the distribution of R&D credit in the quarter, but can you talk about today, where you see relative attractiveness and capital deployment.
Jason Weaver: Sure Agency, you know as spreads have cheap and some of that is driven by ball, but generally OAS has a wider and that's where the marginal dollar is going given the returns in the agency market will still continue to focus on the obs loan acquisition to two securitizations because that's a very good return for us and we.
Jason Weaver: Expect to grow Youll be X.
Jason Weaver: Platform. However, it could come at the at the cost of our third party portfolio much like you saw in the first quarter, where we grew obs, but we've reduced third party securities primarily CRT as well as Nplr PL.
Jason Weaver: We'll see how spreads evolved to.
Jason Weaver: To determine that but generally agencies, where the marginal dollar is going as it relates to MSR, we have grown the portfolio nicely, we didn't grow up much in the first quarter.
Jason Weaver: The MSR portfolio for US is just kind of quietly lied in the graph laid in the grass and generated really strong returns because of the low no rate low delinquency.
Jason Weaver: Attributes of that portfolio and it's just been very stable for us.
Jason Weaver: Like opportunities to continue to buy.
Jason Weaver: MSR, but those do tend to be episodic, we expect there to be a reasonable amount of supply coming and growth will be dependent on pricing for the most part, but generally right now the marginal dollars is going to be allocated to agency, but we'll make sure we keep.
Jason Weaver: Overall level of diversification in the portfolio that has benefited.
Jason Weaver: The shareholder.
Jason Weaver: The past couple of years, it's worked out quite well.
Jason Weaver: We'll be focused on.
Speaker Change: That's helpful. Thank you and as a follow up I Wonder if you could talk about the home equity securitization transaction and what you learned from that.
Jason Weaver: Where you see investor demand evolving there.
Jason Weaver: Alright, Thanks, Jason Yeah, So that transaction I think actually went very well for us we tightened that transaction I think close to 15 to 20 basis points relative to our IP Ts, we priced the AAA asset at silver plus 160.
Jason Weaver: Blended cost of funds there was about 85% advance rate so for plus 170, when we look at that relative to our cost of funds within warehouse.
Jason Weaver: It's probably a 5% better advance rate and maybe call. It 25 30 basis points better in terms of rate in terms of your cost of funds. So very accretive for US. There you know the type of he lots that you know that.
Jason Weaver: We're focused on their full documentation, it's bank quality credit. So we're not participating in some of this alternative documentation that at some of our peers and other competitors have been.
Jason Weaver: I had been had been looking to do.
Jason Weaver: I think for us it just it just shows that there there is liquidity out there and I think what is unique about helocs and the ability to sell lots of the securitization market is it is a floating rate product. So when you look at floating rate assets within the pls market within the resi Pls market really it's only CRT and then maybe there's a small creation.
Jason Weaver: Loaders off prime jumbo deals, but there was a lot of demand from accounts that historically did not participate in our non QM transactions with our fixed rate, but did participate in the HELOC transaction because of the floating rate nature. So I think we feel very good about the deal in about future purchases and our ability to access securitization for <unk>.
Jason Weaver: Funding there.
Jason Weaver: I appreciate that Mike Thanks for all the color guys.
Jason Weaver: Thank you Jason.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: Our next question will come from Trevor Cranston with citizens JMP. Please go ahead.
Speaker Change: Alright. Thanks.
Speaker Change: On the agency portfolio can you guys talk a little bit about what you're seeing in terms of the.
Speaker Change: <unk> demand dynamic in the near term.
Speaker Change: And in particular, if you can maybe talk about what you're seeing from foreign investors and what the outlook is for that segment of the market. Thanks.
Speaker Change: Sure before.
Speaker Change: Recent bout of volatility.
Speaker Change: What's a pretty strong demand from fixed income funds because fixed income flows were very strong.
Speaker Change: That was very high CMO creation.
Speaker Change: Because demand for Florida.
Speaker Change: Florida is.
Speaker Change: Very strong and across a wide range of accounts and that was reasonable demand from banks back out at about 20 billion in the first quarter and rates are also had reasonable demand.
Speaker Change: As far as foreign accounts, we have not seen a lot of demand for current accounts, but they're usually from places like Canada.
Speaker Change: UK, but just mostly money manager demand I don't think that's any different from fixed income flows that you see in the U S. What we have not seen any reasonable size.
Speaker Change: As demand from Asian accounts.
Speaker Change: We think that we need another 25 to 50 basis point cut in the front end of fed cuts before do you see the Asian demand in March.
Speaker Change: My old boss all of the staff.
Speaker Change: Trade War and tariff change that equation, it's not clear to me at this point, we have enough information to go one.
Speaker Change: One way or the other.
Speaker Change: Okay got it that's helpful.
Speaker Change: And then on the on the non agency side of things.
Speaker Change: With all the rate and spread volatility we've seen in April.
Speaker Change: Has that had any impact on sort of the pace of new loan acquisitions in that business and how should we think about that for the early part of the second quarter.
Speaker Change: Yeah. Thanks, Kevin Yeah. It's it's a really good question I would say it has and really what we're doing is when you experience a time like this where you're seeing volatility you're seeing increase in spreads, but what we will do is we'll build in a higher margin or higher gross margin relative to what we had been doing historically, so I think in times like this it's prudent for us.
Speaker Change: It's one of the reasons why the ROE is the business increased in terms of on our investor deck, because we need to make sure that we have enough buffer.
Speaker Change: Our ability to execute these transactions and I think it's also a little bit in terms of building a little bit more margin just given are little bit cautious on the consumer as well. So I would say our lock volume is off.
Speaker Change: But it's not off it's not off significantly where we're still.
Speaker Change: Platform that has the ability.
Speaker Change: Were there some elasticity in terms of our pricing, but I would say, yes, we have a little bit more of a defensive posture given securitization spreads and given the volatility that we're seeing and we do that through our margin and that's pretty pretty reactive function.
Speaker Change: Okay makes sense. Thank you guys.
Trevor: Thank you Trevor.
Trevor: With no further questions. This will conclude our question and answer session I would like to turn the conference back over to David Finkelstein, Chief Executive Officer for any closing remarks.
Trevor: Thank you Ryan and thank you everybody for joining us today have a good rest of the spring and we'll talk to you soon.
Trevor: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Trevor: Yeah.
Trevor: [music].