Q2 2025 Two Harbors Investment Corp Earnings Call

Please stand by.

Operator: Good morning.

Margaret Karr: My name is Jennifer, and I will be your conference facilitator.

Margaret Karr: At this time, I'd like to welcome everyone to two second quarter 2025 earnings calls. All participants will be in open only mode.

Good morning. My name is Jennifer, and I will be your conference facilitator.

at this time, I'd like to welcome everyone to 2 second quarter 2025 earnings call

Margaret Karr: After the speaker's remarks, there will be a question and answer period.

All participants will be announced in the only mode.

Margaret Karr: I would now like to turn the call over to Ms. Maggie Karr. Good morning, everyone, and welcome to our call to discuss two second quarter 2025 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 William Dellal, our Chief Financial Officer.

After the speakers remarks, there will be a question and answer period.

I would now like to turn the call over to miss Maggie Carr.

Margaret 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 2INV.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. These are described on page 2 of the presentation and in our Form 10-K and subsequent reports filed with the SEC.

Good morning, everyone, and welcome to our call to discuss Two Harbors Investment Corp.'s second quarter 2025 financial results. With me on the call this morning are William Greenberg, our President and Chief Executive Officer; Nicholas Letica, our Chief Investment Officer; and William Dellal, our Chief Financial Officer.

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 2 inv.com, in our earnings beliefs 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.

Margaret Karr: except as may be required by law to does not update forward-looking statements and disclaims any obligation to do so.

These are described on page 2 of the presentation and in our form 10K and subsequent reports filed with the SEC.

William Greenberg: I will now turn the call over to Bill. Thank you, Maggie. Good morning, everyone, and welcome to our second quarter earnings.

Except as may be required by law to does not update. Forward-looking statements and disclaims any obligation to do. So I will now turn the call over to Bill

Thank you, Maggie.

Good morning, everyone, and welcome to our second quarter earnings call.

William Greenberg: Please check the slide. Fixed income and equity markets proved resilient in the second quarter, rebounding from poor performance in early April as the uncertainty of fluctuating tariff and trade policies roiled markets. spiking the VIX index to a multi-year high.

Please turn to slide 3.

Fix income and Equity markets, proved resilient in the second quarter rebounding from poor performance in early April as the uncertainty of fluctuating tariff and trade policies, World Markets.

Spiking the VIX Index to a multi-year high.

William Greenberg: quarter progress. Tariff Tensions and the macro environment recovered steadily, leading the S&P to a record high and a significant recovery in the performance of agency R&D. We remain disciplined in our approach to risk, keeping our interest rate and spread exposures low across the curve. Utilized, Leveraged, Judicious. Preserved Ample Liquidity, which allowed us to navigate these periods of heightened market volatility, not seen since last year. The second quarter, including the lost contingency accrual of $1.92 per share, we experienced a total economic return of negative 14.5 percent and minus 1.4 percent without fees.

As the quarter progressed.

The Tariff tension eased and the macro environment recovered steadily leading, the S&P to a record high, and a significant recovery in the performance of agency, rmbs spreads.

We remain disciplined in our approach to risk, keeping our interest rate and spread exposures low across the Curve.

We utilized leverage judiciously and preserved ample liquidity, which allowed us to navigate these periods of heightened market volatility not seen since last October.

For the second quarter, including the loss, contingency approval of a 1.92 cents per share. We experienced a total economic return of negative -4.5 and minus 1.4% without the approval.

William Greenberg: first half of the year. results in a total economic return on book value of negative 10.7%. 1.9%.

for the first half of the Year, this results in a total economic return on Book value of -10.3 and 2.9%, excluding the acrel

William Greenberg: Go to slide four. Ten-year U.S. Treasury rates ultimately settled near where it began the quarter, as you can see in Figure 1, but not before moving through a wide range, from a low of 3.85% in early April to a high of 4.62% in late May. spread between 10-year and 2-year, U.S. Treasuries widened to 51%. creating a steeper curve that continues to support attractive opportunities. for RMBS and MSR Portfolio. We believe returns are compelling and we expect further strengthening of the supply-demand dynamic. potentially leading to spread. Mortgage rates generally track the treasury rate environment. hire in April and May before stabilizing.

please turn to slide 4.

settled near where it began the quarter, as you can see in Figure 1, but not before moving through a wide range, from a low of 3.85% in early April to a high of 4.62% in late May.

The spread between 10 year and 2 year us treasuries widened to 51 basis points. Creating a steeper curve that continues to support attractive opportunities for rnbs and MSR portfolios.

In this environment, We Believe returns are compelling. And we expect further strengthening of the supply demand Dynamics, potentially leading to spread tightening.

mortgage rates generally tracks the treasury rate environment moving higher in April and May before stabilizing in June

William Greenberg: 30-year fixed rate mortgage rose from 6.6% at its low to a high near 6.9%. ending the quarter in the 6.7 to 6.8. While still high by recent COVID era standards, rates remained below their 2023 peak levels. This helps housing activity remain reasonably well supported.

The 30-year fixed rate mortgage Rose from 6.6% at its low to a high near 6.9%.

And ending the quarter in the 6.7 to 6.8% range.

While still high by recent Co era standards rates remained below their 2023 Peak levels, which has helped housing activity, remain reasonably well supported.

William Greenberg: The Federal Reserve maintained its cautious stance and left rates unchanged, even in the face of increases in inflation and mounting political pressure. Several members of the FOMC have suggested one to two rate cuts likely occurring later this year, and the market similarly projects $50 to $75. cuts in the second half of 2025, as you can see in the blue line. If the Fed does indeed cut rates in the latter half of this year, we expect RMBS and MSR portfolios to respond positively. Majority of our MSR portfolio still more than 300 basis points away from the refinancing window.

The Federal Reserve maintained its cautious stance and left rates unchanged even in the face of increases in inflation and mounting political pressures.

Several members of the FOMC have suggested 1 to 2 rate cuts, likely occurring later this year. The markets similarly project 50 to 75 basis points of cuts in the second half of 2025, as you can see in the blue line in Figure 2.

If the Fed does indeed cut rates in the latter half of this year, we expect rmbs and MSR portfolios to respond positively.

William Greenberg: Do not expect a few cuts in the front end of the yield curve to materially alter mortgage rates or...

With the majority of our MSR portfolio, still more than 300 basis points away from the refinancing window.

We do not expect a few Cuts in the front end of the yield curve to materially, alter mortgage rates, or prepayments.

William Greenberg: We are strengthening our direct consumer originations platform at RoundPoint, consistent with the market opportunities. in order to recapture loans in our portfolio.

We are strengthening our direct consumer. Originations platform around points, consistent with the market opportunity in order to recapture loans in our portfolio. That may refinance

William Greenberg: All returns to slide five. In the second quarter, we funded $48 million UPB in first liens, up from $29 million UPB in the first quarter. Although starting from a low base, this increase of 68% outpaced the overall trend in mortgage origination. Microsoft Funded Loans Rising Nationwide 16% Quarter Over Quarter We are encouraged by the growth in our first lien originations, despite the fact that most of our portfolio does not have an economic incentive to move or re-invest. Additionally, we continue to actively market second liens to our servicing customers to help them extract home equity most effectively.

Please turn to slide 5.

In the second quarter, we funded 48 million upb in first Lanes up from 29 million upb in the first quarter.

Although starting from a low base, this increase of 68% outpaced, the overall trend in mortgage originations, which saw funded loans Rising Nationwide. 16% quarter over quarter,

We are encouraged by the growth of our first lean originations. Despite the fact that most of our portfolio does not have an economic incentive to move or refinance.

Additionally, we continue to actively Market, second liens to our servicing, customers to help them extract home equity, most efficiently.

William Dellal: brokered $44 million UPB.

William Greenberg: We have begun originating second liens in our own name, which we can ultimately choose to hold, sell, or sell. This activity not only increases revenue and improves recapture... We have also noticed significantly slower prepayments for MSR borrowers who have second liens on top of their first.

We brokered 44 million u-pb and second liens in the quarter. And we have begun originating, second liens in our own name, which we can ultimately choose to hold sell or secure a tots.

This activity not only increases revenue and improves recapture rates, but we have also noticed significantly slower. Prepayments for MSR borrowers, who have second liens on top of their first.

William Greenberg: Page 9 of 9 I'd like to mention some of the really interesting things we are doing in technology in order to increase efficiencies, reduce costs, and most importantly, create better homeowner experience. We are not alone in seeing the large opportunity that AI technologies can bring to the servicing and origination. And we are making significant investments in time and resources in order to achieve the benefits that these technologies promise. Our initial focus has been within our contact center, and we are currently implementing AI in many areas across the platform. We use human emulation bots to move data across applications and to perform other repetitive tasks.

This slide 6.

I'd like to mention some of the really interesting things we are doing in technology, in order to increase efficiencies, reduce costs, and most importantly, create better homeowner experiences.

We are not alone in seeing the large opportunity that AI technologies can bring to the servicing and origination businesses. We are making significant investments in time and resources in order to achieve the benefits that these technologies promise.

Our initial Focus has been within our contact center and we are currently implementing AI in many areas across the platform.

William Greenberg: Mothers Recognition utilizes OCR technologies to help perform data validation. H-Recognition applications allow us to perform comprehensive analysis. on our customer service call. We are using generative AI technology to create automatic call summaries. We save significant time for our contact center employees while improving accuracy.

We use human emulation Bots to move data across applications and to perform other repetitive tasks.

Image recognition, utilizes OCR Technologies to help perform data validation.

Speech recognition applications allow us to perform comprehensive analysis and statistics on our customer service calls.

And we are using generative AI technology to create automatic call summaries, which save significant time for our contact center employees while improving accuracy.

William Greenberg: Conversational AI, which we are just beginning to explore, includes allowing customers to interact more fully with customized AI interfaces for simple. calling in live people for more complex problems. As we look towards the future, we are also actively evaluating the application of AI on the origination side to automate the application and fulfillment.

Conversational AI, which we are just beginning to explore includes allowing customers to interact. More fully with customized AI interfaces for simple situations and calling in live people for more complex problems.

As we look towards the future, we are also actively evaluating the application of AI on the origination side, the automate, the application, and fulfillment process.

William Greenberg: I like to say that AI is just the newest form of technology, and we know that this technology is integral to success in operating our business going forward. Looking ahead, we believe the combination of our investment portfolio and operating company allows us to be dynamic and responsive as opportunities emerge across the mortgage The strength of our platform and the depth of experience across our customers.

I like to say that AI is just the newest form of technology, and we know that this technology is integral to success in operating, our business going forward,

Looking ahead, we believe the combination of our Investment Portfolio and operating company allows us to be dynamic and responsive as opportunities emerge across the mortgage Finance space.

William Dellal: We are confident in our ability to navigate and lead through changing market cycles, creating long-term value for our stockholders, customers, and business partners. With that, I'd like to hand the call over to William to discuss our financial... Thank you both.

Through changing Market Cycles, creating long-term value for our stockholders, customers and business partners.

With that, I'd like to hand the call over to William to discuss our financial results.

William Dellal: Please turn to slide 7. As Bill mentioned, in the quarter, we took a lost contingency accrual of $199.9 million, or $1.92 per share, related to the ongoing litigation from the termination. Management Agreement with PRCM Advisor. On May 23, the court ruled that Two Harbors did not have grounds to terminate its management agreement for costs. consultation with our independent accountants and legal advisers. determined that the loss was not probable and estimable under ASC 450. which is the accounting standard that governs loss. The amount of the lost contingency accrual is the same $140 million that we initially reserved in 2020, related to the non-renewal of the Management before reversing the accrual in connection with the subsequent termination for cost.

Thank you, Bill.

Please turn to slide 7 as Bill mentioned in the quarter. We took a loss, contingency approval of 199.9 million or

192 per share related to the ongoing litigation from the termination of our management agreement, to its trcm advisors and 2020.

On May 23, the Court ruled that 2 Harbors did not have grounds to terminate its management agreement for costs. And so we in consultation with our independent accountants and legal advisors

Determine that the loss was not probable and estimable under ASC 450.

Which is the accounting standard that governs loss, contingencies.

The amount of the loss contingency or cruel is the same 140 million between initially reserved in 2020.

Related to the non-renewal of the management agreement.

William Dellal: Current accrual also includes an assumed statutory pre-judgment interest at the simple rate . No other potential losses are probable or estimable. We are waiting for trial. set to resolve certain claims related to intellectual property and on the issues of potential damages for the contract termination. The parties have also agreed to participate in a voluntary vote. Including the accrual, the book value decreased to $12.14 per share, representing a negative $14.5% quarterly each month. Excluding this accrual, our total quarterly economic return would have been negative 1.4 Please turn to slide. Including the loss contingency accrual, the company incurred a comprehensive loss $221.8 million or $2.13 per share.

before reversing the approval in connection with the subsequent termination for cause

The current approval also includes an assumed statutory prejudgment interest at the simple rate of 9%.

No other potential losses are probable or estimable at this time.

We are waiting for trial date to be set to resolve, certain claims related to intellectual property, and on the issues of potential damages for the contractor. Termination.

The parties of also agreed to participate in voluntary mediation.

Including the equal.

Book value decreased to 122.414%. Quarterly economic return.

excluding this approval or

a total quarterly economic return with the negative 1.4%.

Please turn to slide 8.

Including the loss contingency rule. The company incurred, a comprehensive loss of 221.8 million or 2.13 cents per share.

William Dellal: Excluding the accrual, we would have incurred a comprehensive loss of $21.9 million, or $21.7 Net Interest in Service. which is the sum of GAAP net interest expense and net servicing income before operating. was higher in the second quarter by $3.1 million. driven by an increase in our agency RMBS portfolio. Higher Float Income. This was partially offset by lower servicing fee income from MSR portfolio. like the higher. Mark-to-market gains and losses were lower in the quarter by $93.4 million. As a reminder, this column represents the sum of investment securities net gains and Change in OCI, Net Swap and Other Derivative Gains and Losses, and Net Servicing Asset Gains.

Excluding the AC, we would have incurred a comprehensive loss of 21.9 million or 21 cents per share.

That interesting servicing income.

The sum of GAAP net interest expense and net servicing income before operating costs was higher in the second quarter by $3.1 million.

Driven by an increase in our agency RMBS portfolio and higher float income on MSR.

This was partially offset by lower servicing fee income from MSR portfolio runoff.

A slightly higher financing costs.

Mark-to-market gains and losses were lower in the quarter by 93.4 million. As a reminder, this column represents for some of investment Securities, net, gains and losses, and change in oci.

Net swamp and other derivative gains and losses, and net servicing asset, gains and losses.

William Dellal: In the second quarter, mark-to-market gains and losses were impacted by unfavorable market movements on MSR, swaps, TBAs, and futures. Partially offset by overall positive market movements on agency R&D.

And the second quarter Mark to market gains and losses were impacted by unfavorable Market movements on MSR swaps, tbas and Futures partially offset by overall positive Market movements on agency rmds.

William Dellal: You can see the individual components of net interest and servicing income and mark-to-market gains and losses on the appendix slide.

William Dellal: please turn to slide nine. RMBS funding markets remain stable and available throughout the quarter, with repurchase spreads up to around SOFR plus 20 basis points. Quarter end or weighted average dates to maturity for Agency RMBS repo was 60 days.

you can see the individual components of net interest and servicing income and mark-to-market gains and losses on the pendex, slide, 22,

Please turn to slide 9.

Our MBS funding markets remain stable and available throughout the quarter. It was repurchased spreads of around SOFR plus 20 basis points.

William Dellal: issued a baby bond in the second quarter with the intention of using the proceeds, in part, for the refinancing or repayment of our 6.25% senior notes due in 2022. In total, we issued $115 million aggregate principal amount of 9.38% senior notes that are due in 2030 for net proceeds of $110.8 million.

Quarter end or weighted average days to maturity for our agency. Rmbs repo was 60 days.

We issued a baby bond in the second quarter with the intention of using the proceeds, in part, for the refinancing or repayment of our 6.25% senior notes due in 2026.

In total we issued 115 million aggregate, principal amount of 9 and 38%, senior notes that are due in 2030, for net, proceeds of 110.8 million.

William Dellal: The financial MSR, including the MSR assets, and related servicing advance obligation.

William Dellal: across five. $1.8 billion of outstanding borrowings under bilateral We ended the quarter with a total of $837 million in unused MSR asset financing.

Outstanding. Borrowings under bilateral facilities.

William Dellal: Our servicing advances are fully financed and we have an additional $61 million in available I will now turn the call over to next. Thank you, William.

We entered the quarter with a total of 837 million and unused MSR asset financing capacity.

Our servicing advances are fully financed and we have an additional 61 million in available capacity.

I will now turn the call over to Nick.

Nicholas Letica: Please turn to slide. Our portfolio on June 30th was $14.4 billion, including $11.4 billion in federal positions and $3 billion in TBA. Our economic debt to equity increased to seven. which includes the effect of the lost contingency accrual on our book. We brought our debt-to-equity and mortgage spread risk down in early April in response to market volatility and spread wide. As volatility subsided, we brought our leverage and spread risk back up, and we feel comfortable with today's level, given the attractive opportunities in both agency RMDS and MSRC. As you can see in Figures 2 and 3, we continue to manage our exposure to rates across the curve very closely.

Thank you, William.

Please turn to slide 10.

Our portfolio on June 30th was 14.4 billion, including 11.4 billion in subtle positions and 3 billion in tbas

Our economic debt-to-equity increased to 7 times, which includes the effect of the loss contingency approval on our book value.

We brought our debt-to-equity and mortgage spread risk down in early April in response to market volatility and spreads widening.

As volatility subsided, we brought our leverage and spread risk back up and we feel comfortable. With today's level, given the attractive opportunities in both agency rmds and MSR spaces

Nicholas Letica: You can see more detail on our risk exposures on appendix slide.

As you can see in Figures 2 and 3, we continue to manage our exposure to rates across the curve very closely.

Nicholas Letica: Please turn to slide 11. Agency RMVS spreads to interest rate swaps widened meaningfully in April, tracking overall market quality. before retracing over the following two months.

You can see more detail on our risk. Exposures on appendix slide 19.

Please turn to slide 11.

Nicholas Letica: As shown in Figure 1, a preferred volatility gauge, two-year options on 10-year swap rates, peaked at 104 basis points in mid-April and declined to end the quarter at 94 basis points. four basis points lower than the end of the first quarter. Edged agency RMVS performance varied across the entire coupons outperforming lower, longer duration. Current coupon nominal spreads widen by three basis points to 171, while option-adjusted spreads spin as 12 basis points wider at 81. Reflecting the Drop in Applied Volatility.

Agency rmds spreads to interest rate swaps, wide and meaningfully in April tracking. Overall Market volatility before retracing over the following 2 months.

As shown in Figure 1, a preferred volatility gauge to your options, on tenure swap rates. Peaked at 104 basis points in mid-april and decline to end the quarter at 94 basis points 4 basis points, lower than the end of the first quarter.

Edged agency RMDS performance varied across the coupon stack, with higher coupons outperforming lower, longer-duration coupons.

Nicholas Letica: As you can see in Figure 2, spreads across the curve, both nominally and on an option-adjusted basis, shifted up with larger pickups in OAS. quarter end considering the drop in implied rate volatility and that mortgage spread volatility had fallen to its lowest level in the post-COVID period.

Current coupon nominal spreads widened by 3 basis points to 171 while option adjusted spreads finished. 12 basis points wider at 81 basis points, reflecting the drop in implied volatility.

As you can see in Figure 2, spreads the curve, both nominally and on an option-adjusted basis, shifted up, with larger pickups in OAS.

Nicholas Letica: Spreads versus swaps looked and continue to look very attractive on a historical and return potential.

At quarter end, considering the drop in implied rate, volatility, and that mortgage spread volatility had fallen to its lowest level in the postcovid, period, spreads versus swaps looked, and continue to look very attractive on a historical and return potential basis.

Nicholas Letica: Please turn to slide 12 to review our agency RMBS portfolio. Figure one shows the hedge performance of TDAs and specified pools we own throughout this quarter. Higher coupons generally outperformed lower coupons and specified pools outperformed TBAs in the lower coupons we owned, while 6% and 6.5% TBAs outperformed specified pools. We have seen some strength in higher coupon dollar rolls, particularly in six. fueled by historically strong demand for CMO floaters, with CMO issuance accounting for over 85% of the net issuance in 60s and 70s. On the margin, we shifted our exposure up in coupon in the quarter, which you can see in appendix slide 18.

Please turn to slide 12 to review our agency RMDS portfolio.

Figure 1 shows, the Hedge performance of tbas and specified pools. We own throughout this quarter.

Higher coupons, generally outperformed, lower coupons, and specified pools outperformed. Tdas in the lower coupons, we owned while 6 and 6 and a half percent, tbas outperformed, specified pools.

We have seen some strength and higher coupon, dollar roles particularly in 6, and a halfs fueled by historically, strong demand for CMO floaters with CMO issuance accounting for over 85% of the net issuance in sixes and 6 and a half.

Nicholas Letica: We also increased our exposure to mortgage derivatives, which positively contributed to our. Figure 2 on the bottom right shows our specified pool prepayment speeds by coupon, which in aggregate increased from 7.4 to 8.6% CPR. Most of the coupons in the stack experienced a mild, absolute increase in speeds, resulting from a pickup in turnover rates from seasonal cash . Higher coupons, particularly TBAs, displayed larger speed increases due to lower mortgage rates in March into early April. We observed fast processing speeds for agency collateral, reducing the lag time from application to closing. Six-and-a-half percent TDAs in particular showed a large pickup in speeds, similar to the prepayment response we observed last fall when they briefly went in the market.

on the margin, we ship at our exposure up in coupon in the quarter, which you can see in the appendix slides 18,

We also increase our exposure to mortgage derivatives, which positively contributed to our performance.

Figure 2 on the bottom, right shows our specified pool prepayment speeds by coupons which in aggregate increased from 7.4 to 8.6% CPR.

Most of the coupons in the stack experience a mild. Absolute increase in speeds resulting from a pickup and turnover rates from seasonal factors.

Higher coupons, particularly tbas, displayed larger speed increases due to lower mortgage rates in March into early April.

We observed fast processing speeds for agency collateral. Reducing the lag time from application to closing.

6 and a half percent. Tdas, in particular showed a large pickup in speeds, similar to the prepayment response. We observed last fall. When a briefly went in the money,

Nicholas Letica: Please turn to slide 13. The MSR market remains very well supported, with bank and non-bank servicers aggressively bidding for a declining amount of supply. As you can see in Figure 1, the volume of MSR available in the bulk market has continued to trend lower from the peak years of 2022 and 2023, with supply about 30% lower year over year.

please turn to slide 13.

The MSR Market remains very well supported with bank and non-bank services aggressively bidding for a declining amount of supply.

Nicholas Letica: That said, we have still been able to find pockets of opportunity in the bulk market. Figure 2 is a chart that we periodically update for our earnings deck, which shows that with mortgage rates at their current level of around 6.75%, only 0.7% of our MSR portfolio is considered in the money.

As you can see in Figure 1, the volume of MSR available in the bulk market has continued to trend lower from the peak years of 2022 and 2023, with supply about 30% lower year-over-year.

That said, we have still been able to find pockets of opportunity in the bulk market.

Figure 2 is a chart that we periodically update for our earnings deck, which shows that with mortgage rates at their current level of around 6.75%, only 0.7% of our MSR portfolio is considered in the money.

Nicholas Letica: Transcripts provided by Transcription Outsourcing, LLC. Importantly, prepays have remained below our projections for the majority of our portfolio.

Nicholas Letica: Please turn to slide 14, where we will discuss our MSR report. Figure one is an overview of our portfolio at Quarter End, further details of which can be found on appendix slide 25. In the second quarter, we purchased $6.4 billion UPP of MSR through three bulk. The price multiple of MSR was unchanged quarter over quarter at 5.9 times and 60 plus day delinquencies remained low at under $100. Figure 2 compares CPRs across implied security coupons in our portfolio of MSR versus TBA. Quarter over a quarter, our MSR experienced a 1.6 percentage point pickup in prepayment rates to 5.8%.

Importantly, prepays have remained below our projections for the majority of our portfolio.

Please turn to slide 14 where we will discuss our MSR portfolio.

Figure 1 is an overview of our portfolio at quarter end further, details of which can be found on appendix slide 25

In the second quarter, we purchased $6.4 billion UPB of MSR through three bulk purchases.

The price multiple of MSR was unchanged quarter over quarter at 5.9 times and 60 plus day delinquencies. Remained low at under 1%.

Bigger, 2 compares CPRs across implied security coupons and our portfolio of MSR versus TBAs.

Nicholas Letica: The increase was anticipated owing to stronger seasonal factors, though the speed was slower than model expectations.

Nicholas Letica: Overall, prepayment rates on our low-coupon MSR are expected to remain very slow on a historical basis, which will remain a tailwind for our portfolio.

Nicholas Letica: Finally, please turn to slide 15, our Return Potential and Outlook slide. This is a forward-looking projection of our expected portfolio. which contemplates the effect of the lost contingency accrual on our portfolio. As you can see on this slide, the top half of this table is meant to show what returns we believe are available on the assets in our portfolio. We estimate that about 72% of our capital would be allocated to servicing with a static return projection of 11 to 14%. The remaining capital would be allocated to securities with a static return estimate of 12 to 17.

Quarter over a quarter, our MSR experience showed a 1.6 percentage point pickup in prepayment rates to 5.8%. The increase was anticipated due to stronger seasonal factors; however, the speed was slower than model expectations overall. Prepayment rates on low coupon MSRs are expected to remain very slow on a historical basis, which will remain a tailwind for our portfolio.

Finally, please turn to slide, 15, our return potential and Outlook slides.

This is a forward-looking projection of our expected portfolio returns which contemplates the effect of the loss contingency approval on our portfolio.

As you can see on this slide, the top half of this table is meant to show what returns we believe are available on the assets in our portfolio.

we estimate that about 72% of our Capital would be allocated to servicing with a static return projection of 11 to 14%

Nicholas Letica: with our portfolio allocations shown in the top half. And after expenses, the static return estimate for our portfolio would be between 8.8 to 12.1% before applying any capital structure leverage to the portfolio. After giving effect to our unsecured notes and preferred stock, we believe that the potential static return on common equity falls in the range of 9.4% to 15.3% or a prospective quarterly static return per share of 28% to 46%.

The remaining Capital would be allocated to Securities with the static return. Estimate of 12 to 17%.

With our portfolio allocation shown in the top half of the table, and after expenses, the static return estimate for our portfolio would be between 8.8% to 12.1% before applying any capital structural leverage to the portfolio.

After giving effect to our unsecured notes and preferred stock, we believe that the potential static return on common equity falls in the range of 9.4% to 15.3%, or a prospective quarterly static return per share of $0.28 to $0.46.

Nicholas Letica: Looking ahead, ongoing tariff threats and trade negotia- as well as geopolitical tensions will continue to weigh on the market. As always, we are mindful of the many sources of volatility that can impact our portfolio. However, we believe there is also opportunity in this environment. The resilience that markets demonstrated in the second quarter is a reminder of the global demand for investment, be it in equities or fixed income spread products like mortgage-backed securities. Spreads for agency RMDS, particularly when hedged with interest rate swaps, remain historically wide and offer good relative value to other high-quality spread assets like corporate bonds.

Looking ahead, ongoing tariff threats and trade negotiations, as well as geopolitical tensions, will continue to weigh on the market.

As always, we are mindful of the many sources of volatility that can impact our portfolio. However, we believe there is also opportunity in this environment.

The resilience that markets demonstrated in the second quarter is a reminder of the global demand for Investments. Be it an equities or fixed income spread products like mortgage back securities?

Nicholas Letica: Supply and demand is balanced with demand diversified between money managers, banks, REITs, and overseas buyers. Demand from depository institutions should increase as regulatory reform proceeds as Our core strategy of low-coupon MSR paired with agency RMVS is well-positioned to benefit from both stable prepayments and wide agency coverage.

Threats for agency rmds. Particularly when hedge with interest, rates swaps remain historically wide, and offer, good relative value to other high-quality spread assets, like corporate bonds.

The client demand is balanced with demand Diversified between money, managers Banks rates and overseas buyers.

Demand from depository institutions, should increase of regulatory reform proceeds as anticipated.

William Greenberg: Additionally, RoundPoint's direct-to-consumer franchise enhances MSR returns through efficient recapture, should we enter a faster pre-purchase.

Our core strategy of low coupon MSR paired with agency. Rmds is well, positioned to benefit from both stable, prepayments and wide agency spreads.

Operator: Taken together, we are confident that our portfolio construction should drive attractive risk adjusted returns across a range of market Thank you very much for joining us today and now we will be happy to take any questions you might have. Thank you.

Additionally round points direct to Consumer franchise. Enhances MSR returns through efficient recapture should we enter a faster prefix environment?

Taken together. We are confident that our portfolio construction should drive attractive risk-adjusted returns across a range of market conditions.

Thank you very much for joining us today and now, we will be happy to take any questions you might have.

Operator: If you are dialed in via the telephone and 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.

Operator: We'll pause for just a moment to allow everyone an opportunity to ask a question.

Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow signal to our equipment. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to ask a question.

Douglas Harter: We'll go first to Doug Harter with UBS. Thanks. And good morning. So your leverage increased this quarter, you know, I guess as a result of the litigation reserve. Can you just talk about, you know, is that kind of the new level of leverage that we should be thinking about? Are there still more portfolio actions to come to kind of bring it back to the prior level of leverage rate?

We'll go first to Doug Harder with UBS.

Hot thanks um and good morning. Uh so your leverage increased this quarter, you know I guess as a result of the litigation Reserve can you just talk about um, you know, is that kind of the new level of Leverage that we should be thinking about? Are there still more portfolio actions uh to to come to to kind of bring it back to the prior level uh leverage range.

Nicholas Letica: Hey, Doug, this is Nick. Thank you for the question. So the, you know, we ended the quarter at a leverage of seven times. And, you know, the range that we have discussed in these calls in the past, and is really been a, you know, range that we quote a range of about five to eight as a as a leverage target. If you look at our leverage historically, even in that chart that's on that page, you will see that we've been at seven times in the not too distant past, right. So it really is, it's very much within the range of the leverage that we operate in the, you know, by by quarter end, and and through the quarter, you know, we really did like the risk in the market, we really, you know, we believe that mortgages versus swaps look quite attractive.

The range that we have discussed in these calls in the past and is has really been a, you know, a range that we quote a range of about 5 to 8 as a as a leverage Target. If you look at our leverage historically, even in that chart. That's uh on on that page. You'll see that we've been at 7 times in the not too distant past, right? So it really is. It's very much within the range of of the leverage that we operate in.

Douglas Harter: And so we felt it was, it was, you know, it was it was right from a portfolio management standpoint to increase our leverage. through the quarter. And that seven times, as you say, is inclusive of the $200 million loss reserve that affects our book value. If you were to add that back into our capital, our leverage would drop to about 6.3. But in any case, the leverage, we feel very comfortable where the leverage is at seven times. And we'll govern portfolios, we always do. It will depend upon where spreads are in the market, what the opportunities, where the opportunities are, and we will move the leverage around accordingly based upon market opportunities and our capital Great, appreciate that.

The you know by by quarter end and and through the quarter, you know, we really did like um, the risk in the market. We, you know, we believe the mortgages versus swaps look quite attractive and so we felt it was. It was, you know, it was, it was right from a portfolio management standpoint to increase our Leverage.

Through the quarter and that 7 times as as you say, uh, is inclusive of the $200 million loss Reserve that affects our book value. If you were to, if you were to, you know, add that back into our uh Capital, our our leverage would drop to about 6.3% where the Le leverages at 7 times and you know we'll govern you know portfolios we always do it, will depend upon where spreads are in the market, what the opportunities where the opportunities are and we will move the leverage around accordingly based upon

Market opportunities and and our Capital base.

Douglas Harter: And is there any way you could give us an update on, you know, economic return performance so far in July? Yeah, good morning, Doug. Quarter to date through last Friday, we were up about one and a half. That's on economic return, just to be clear. Gas Economic Return on Investment. Perfect.

Great, appreciate that. Um, and is there any way you could give us an update on, you know, economic return performance. Uh, so far in July?

Yeah, good morning, Doug, um, quarter to date, um, through last Friday. Um we were up about 1 and a half percent.

That's on economic return, just to be clear, right?

Yes, economic return on the new book value.

Operator: Thank you, guys.

Perfect. Thank you guys.

Thanks though.

Bose George: The next two, Bose George with KBW. Hey, everyone. Good morning.

The next 2 Bose George with KBW.

Nicholas Letica: Can you remind us, you know, on slide 15, you guys have the breakout of the expected returns. Actually, what are the main drivers, the differences between that and the EAD? So the... The EAD is based on historical purchase yield. of the assets. And as a result, I always like to say that the EAD calculations are asynchronous among assets in the portfolio. Right, because it depends on the yield on which it was on the day that it was purchased. Whereas the return outlook slide is all meant to reflect the forward-looking mark-to-market yield. at current prices. We show a range of returns on slide 15 to reflect things like, you know, potential fluctuations in prepayment speeds, potential fluctuations in funding spreads, as well as potential fluctuations in leverage of the securities, right?

Hey everyone, good morning. Um can you can you remind us you know on slide 15 you guys have the breakout of the um you know of the expected returns actually what are the main drivers? The differences between that and the the EAD um metric.

so the, uh,

the EAD is um, um based on historical purchase yields

Of of the assets.

Right. Um, and as a result, I I always like to say that it is that the the uh, the Ed calculations are asynchronous among

Assets in the portfolio.

right, because it depends on on the yield on which it was

Um, on the day that it was purchased, whereas the return Outlook slide is all meant to reflect, uh, the forward-looking mark-to-market yields.

Um, at current prices.

Nicholas Letica: But the main difference is the timing and the market prices at which the assets are utilized in the calculation.

Right? We show a range of Returns on slide, 15 to reflect things like um you know um potential fluctuations in prepayment speeds, plus potential fluctuations in funding spreads as well as potential fluctuations in in leverage of the Securities, right? Um,

um but but the main difference is the timing and the market prices at which um the assets uh are utilized

In the calculation of the yields.

Bose George: Okay, that makes sense. And just given where the EAD has been trending, so in the back half of the year, does it make sense that it's probably continues to trend sort of below the economic return? Oh.

Okay, that makes sense and just given where the EAD has been trending. So, the back after the year is, does it make sense that it's probably continues to Trend sort of below? Um, the economic return

Bose George: I, excuse me, hi, Bose. Yes, I think that's the case because spreads have widened recently and so the idea of old securities that were... previously would not reflect that change. Okay, yep, that makes sense. Thanks.

um,

I Excuse me, hypos yes, I think that's the case because spreads have have lined in recently. And so the idea of old old Securities that were purchased previously would not reflect that um, change in market value.

Bose George: And then just one follow-up on Doug's question on the leverage. Does your view on leverage change once that capital that's reserved sort of, you know, goes out the door? I mean, is there... you know, because right now, as you noted, your sort of optical leverage is different from kind of your real leverage, because you still have that cash.

Okay. Yep, that makes sense. Thanks, and then, just 1 follow-up on Doug's question on The Leverage, you know, does your view on Leverage change once that Capital? That's reserved sort of, you know, goes out the door. I mean is there

Nicholas Letica: So you're just curious how that whether there's any change once you know, some are part of the No, I mean, Bose, this is Nick. As a general rule, no, it doesn't really change our view on leverage. It just, you know, we will manage the portfolio according to the amount of capital that we have. But as far as a general view about leverage, no, it doesn't. You know, it doesn't change the way we look at the market. Yeah, it may change. Right, it will it will it you know, it could potentially change. It's a it's another factor and how we manage the composition of our assets.

Yeah because right now as you noted your sort of optical Leverage is different from you know kind of be a real leverage because you still have that cash. So yeah just curious how that whether there's any change once you know some are part of that is paid out

No. I mean, I suppose this is Nick. Um, as a general rule, no, it doesn't really change our view on leverage. It just, you know, we will...

Manage the portfolio according to the amount of capital that we have.

um,

you know, it it doesn't change the way we look at the market.

Yep. Okay.

Right. It will— it will, you know, it could potentially change.

Nicholas Letica: But as a as an overall rule, no, I do not think it would it will govern you know, how we how we do leverage in total. Okay.

It's a it's another factor and how we manage the composition of our assets but as a as an overall rule know I do do not think it would it will govern. You know how we how we view leverage in total

Bose George: Okay, great. Thanks.

Okay. Okay, great. Thanks.

Thanks bows.

Trevor Cranston: We'll go next to Trevor Cranston with Citizens JMP.

Well, good next to Trevor Cranston was citizens jmpp.

Trevor Cranston: Good morning, Trevor. Thanks. Good morning.

William Greenberg: Bill, in your prepared comments, you mentioned the small amount of originations you guys have done in second liens, and I think you said that's a product you guys could hold or sell in the future. Obviously, it's a small number right now, but I was curious if you could comment on, is that a product you guys are actually interested in building into the investment portfolio or in the near term, or is that something that's more likely to just be sold off to third parties? Yeah, thanks for the question. You know, I think it's a question about risk and reward, right?

Morning, Trevor. Thanks. Good morning. Um, Bill and you're a prepared comments. You mentioned. Um, you know the the small amount of originations you guys have done in in second liens and I think you said you know that's a product you guys could hold or sell in the future.

Um, obviously it's a small number right now, but I was curious, if you could comment on, you know, is that is that a product? You guys are actually interested in building into the Investment Portfolio or in the near term or is that something that's more likely to just be sold off to third parties? Thanks.

William Greenberg: So, if the yields available on the securities are attractive, we will hold them as we create them. And if we feel that we can extract more value by selling them either in bulk or on flow or in a securitized form, then we'll do that. You know, really, it's just another set of tools in our tool belt to be able to use. And if it's an attractive asset class, we will take advantage of that. But to be able to have multiple outlets for the product is important to us. And so, we'll look at all the opportunities.

Yeah, thanks for the question. You know, I think it's a, it's a question about, um, about risk and, and, and reward, right? So, if the, if the yields available on the Securities are attractive, we will we will hold them as we as we create them. And if we feel that that we can extract more value by selling them, um, either either in

Bulker on flow or in a securitized form, then we'll do that. Um, you know, really it's just another another set of tools in our, in our tool belt, to be able to use. And and if it's an attractive asset class, we will we will take advantage of that. But uh, but to be able to have multiple outlets for the product, is important to us. And so, we'll, we'll look at at at all the opportunities, um, on a real-time basis.

William Greenberg: Got it. Okay, that makes sense.

Nicholas Letica: Then you guys also made a comment about some increased exposure to mortgage derivatives, contributing to performance this quarter.

Got it. Okay, that makes sense. Um,

Nicholas Letica: Can you just elaborate a little bit on kind of where you guys have been active in the mortgage derivatives Sure, Trevor, this is Nick. Thank you for that question. You know, at the beginning of the year, we did add another team member to focus on derivatives, which, you know, to date has mostly taken the form of growing our inverse IO exposure on the book. But, you know, over the quarter, I think we may have allocated about $50 million invested in that sector. But it's still, you know, under 5% of the securities capital. So it's still, you know, a small component of the book.

Then you guys also made a comment about some increased exposure to mortgage derivatives contributing to performance this quarter. Um, can you just elaborate a little bit on kind of where you guys have been active in the mortgage derivative space? Thanks.

Nicholas Letica: It's just another sector of the market as, you know, given the level of expertise we have in prepayments and managing risk across the agency mortgage sector, it's a sector which we felt does have opportunity. And, you know, we have a very skilled group of people here to manage that part of the book. So it's something that, you know, we do believe we're going to continue to have a lot of focus on in the, you know, upcoming quarters. But as a total of amount of our risk, you know, it's still a fairly small amount. Yeah. Okay.

Sure, Trevor. This is Nick. Um, thank you for that question. You know, at the beginning of the year, we did add another team member to focus on derivatives uh, which, you know, to date has mostly taken the form of growing, um, our inverse IO exposure, on the book. But, you know, over the quarter, I, I think we may have, um, allocated about $50 million invested in, in that sector. Uh, but it's still, you know, under 5% of the Securities Capital. So it's still a, you know, a small component of the book. Um, it it's just another sector of the market, as, you know, given given the level of expertise we have

In prepayments and managing risk across the mortgage, the agency mortgage sector, was it. It's a sector which we felt. It does have opportunity. And, uh, you know, we have a very skilled uh, group of people here to, to, to manage, uh, uh, that part of the book. So, um, it's something that, you know, we do believe we're going to have continued to have a lot of focus on on in the uh, you know upcoming quarters. Um, but um, as a total of amount of our risk, it, you know, it's it's still a fairly small amount

Nicholas Letica: I appreciate the comments.

Harsh Hemnani: Thank you. We'll go next to Harsh Hemnani with Green Street.

Yeah, okay. I appreciate the comments. Thank you guys.

Thanks.

Well, the next two harsh. Manny with Green Street.

Harsh Hemnani: Morning, Harsh. Thank you. Hey, good morning.

Thank you.

William Dellal: Can we talk about financing strategy and maybe the thought process behind moving part of the financing from repo to unsecured this quarter? Good morning, Harsh.

Hey, good morning. Uh, can we talk about financing strategy? And maybe the thought process behind moving part of the financing from really go to unsecured this quarter?

William Dellal: It's William Dellal. The reason we did the unsecured baby bond was to start to pre-finance. issuance of the baby bond, which is to pre-fund part of the Thank you.

Um, the good morning harsh, it's William Dow.

Um,

The reason we did the um unsecured baby Bond was to, to start to pre-finance the, uh, maturity for convertible. And some of the warehouse lines that we used to use are now kind of Warehouse repost. So that's why there's some change there. But basically the big changes, the issuance of the baby.

Bond, which is to, uh, refund part part of the convert maturity.

Got it. Thank you. That's all from me.

Thank you.

Kenneth Lee: We'll go next to Kenneth Lee with RBC Capital Markets. Hey, good morning. Thanks for taking my question. Morning.

We'll go next to Kenneth Lee with RBC Capital markets.

Kenneth Lee: Just talk about thoughts around potential impact of a steepening yield curve on the portfolio, and then in particular, just further expand upon the potential benefits there to the MSRs. Thanks.

Particular, uh, just further expand upon the potential benefits there to the MSRs. Thanks.

Nicholas Letica: Hey, Ken. It's Nick. Thank you for the question. In general, as you know, as we have have said, you know, we do hedge across the yield curve in general. So we don't have a particularly strong view about the curve or our risks don't really reflect a particularly strong view across the curve. And if you look at the appendix slides that show our general curve exposure, you can see they're fairly small. So, you know, as a broad measure to our performance, we are hedged across the curve. That being said, steeper yield curves are usually good things for mortgage spreads, because it does incent depository institutions frequently to go out on the curve and invest, and particularly in one of their prime assets are mortgage-backed securities.

Hey Ken. Uh, this is Nick. Thank you for the question. Um in general as you know, as as we um

I have said, you know, we do hedge across the yield curve in general. So we don't have a particularly strong view about.

The curve of our wrists doesn't really reflect a particularly strong view across the curve. And if you look at...

Nicholas Letica: And the history will tell you that when the Fed cuts and the yield curve steepens, that you tend to see more participation by banks in our sector, and that drives spreads tighter. So, there's a secondary effect of that.

Nicholas Letica: The actual, you know, the implications on MSR are, you know, again, built into our risks. MSR is an asset that is, you know, like an I.O. and that it's prepayment sensitive. I think everybody knows that. But also, a large component of the value of MSR is also the float income, right, which is tied to the front end of the curve. So, to the extent that the curve steepens, if front-end rates go down, that will drive the price of MSR down. And in fact, that's one of the reasons why MSR these days, our low gross WAC, still has as much, you know, doesn't have much negative duration, but it does have negative duration.

The appendix slides that show, our general curve exposure, you can see there fairly small. So, you know, as, as a, as a, as a broad measure to our performance, we are hedged across the curve. That being said, steeper yield curves are usually good things for mortgage spreads because it does incense depository institutions frequently to go out on the curve and invest and and particularly and 1 of their Prime assets are mortgage back Securities. And in the history will tell you that when the FED cuts and the yield curve steepens that you tend to see more participation by banks in our sector and that drive spreads tighter. So there's a secondary effect of that. Um, the actual, you know the the implications on on MSR are you know again built into our risk. So your MSR is an asset that is you know, like an IO and that it's prepayment sensitive. I think everybody knows that but also a large component of the value of MSR is also

Nicholas Letica: And a big component of that is the front rates and the effect on float income.

Nicholas Letica: So, the effect is that if you do get into a steeper yield curve environment, on MSR, there are two counterbalancing effects. The first is that the float income will go down. The second is that if the curve steepens, that also forward rates for longer forward rates typically go higher, which means that prepayment assumptions go lower. So, there's a little bit of a balancing, but those two things will govern how the price action of MSR performs over time.

So the float income, right? Which is tied to the front end of the curve. So to the extent that the curve steepens. If front end rates, go down, that will take that will drive the price of MSR down. And in fact that's 1 of the reasons, why MSR these days are low gross wax, still has as much, you know, uh, doesn't have much negative duration, but it does have negative duration and a big component of that is that is that is, is the, is the front rates and the effect on floating income. So, the effect is is, you know, is that, uh, if you do get into a steeper yield curve environment on MSR, they're really, they're 2 counter balancing effects. The first is that the floating income will go down. The second is of the curve steepens that does, uh, that also forward rates for for longer forward rates, typically go higher, which means that prepayment assumptions. Go lower. So, there's a little bit of a balancing but those 2 things will govern, uh, how the the price action of the MSR, um, uh, performs over time.

Nicholas Letica: Gotcha, very helpful there.

Nicholas Letica: And just on my follow-up here, just wondering if you could talk a little bit more about your risk appetite. I think you said that in the quarter, you took on, you like the risk. markets and looking at the risk exposures it looked as if there's some quarter-over-quarter slight increase in rate of growth. Spread. Just want to get a little bit more color around your appetite for risk in the current market.

Got you very helpful there and just on on on my follow up here. Um just wondering if you could talk a little bit more about your your risk appetite, I I think you you said that in the quarter, um you took on you like the risks in in the markets and and looking at the risk exposures it

Nicholas Letica: Thanks. Our rate exposure, quarter over quarter, is virtually unchanged. Our spread risk from quarter end to quarter end is also pretty close, if you measured by our spread risk on the appendix slide and on the main portion. Overall, I would say, risk right now, we like the market. We like what mortgage spreads are. If you look at mortgages hedged with swap spreads, they are generous historically, and even on an OAS basis, they look... They look pretty cheap relative to the amount of spread volatility that we've seen. As I said in my prepared remarks, spread volatility has declined to the lowest levels since the pre-COVID time period.

It looked, as if there's some court over quarter, slight increase in rate exposure, maybe on change, on spread. I just want to get a little bit more color around your appetite for risk in the current market. Thanks?

Our rate exposure in quarter of a quarter is is virtually unchanged. Um, the um, you know, in our spread risk from, you know, quarter end to quarter end is also pretty close. What if you measure measured by our, uh, our our spread risk, um, on the appendix slide and and on the main portion, uh, overall I would say, you know, risk right now. We, we like the market, we like 1 mortgage, spreads are. Um, you know, if you if you look at mortgages hedge with swap spreads, uh they are generous um historically and uh, even on an OAS basis, they look

Nicholas Letica: We had a bit of a spike in the early part of April when the market was quite volatile and the VIX hit that bit of a multi-year high. But the market settled right back down to where it was before that, and we're in a good place. I mean, I realize rate volatility right now has been fairly low. Even once we got through that beginning part of the second quarter and for the third quarter so far, we've been in a pretty tight range of rates. We like where spreads are, and our MSR continues to perform quite well, and the market is extremely well supported right now in terms of demand.

They look pretty cheap relative to the amount of spread volatility that we've seen. As I said in my prepared remarks, you know, spread volatility is decline to the lowest levels, you know? Since uh, the preco time period, we had a bit of a spike at the, in the early part of April, when, you know, when the market was quite volatile and the vix, you know, hit that, you know, bit of a multi-year high, but the market settled, right? Back down to where it was before that, and, and it's in this, you know, we're we're in a good place. I mean to realize the rate volatility right now has been fairly low. We, you know, throughout, even once we got through that beginning part of, uh, the second quarter and, you know, for the the third quarter so far or, you know, we've been at a pretty tight range of rates, you know, we, we like, we're spreads are and, you know, the MSR, our MSR continues to perform quite well.

Well, the market is extremely well supported right now, um, you know, in terms of demand.

Nicholas Letica: Great, very helpful there.

Nicholas Letica: Thanks again.

Great, very helpful there. Thanks again.

Thank you.

Jason Weaver: We'll go next to Jason Weaver with Jones Trading. Hi, good morning. Thanks for taking my question. In your prepared remarks you mentioned something about, you know, maybe your outlook for the mortgage rationation market and how that might affect the sort of MSR appetite, the opportunity set there in the competitive landscape going forward. We've been saying for a little bit now that our mortgage origination effort is still small. As we said in the prepared remarks, only 0.7% of our portfolio is eligible for refinance from a rate and term perspective, and so we're trying to be mindful of the cost attached to growing that effort too large, too fast, because that would create a drag on our earnings.

We'll go next to Jason Weaver with Jones trading.

Hi, good morning. Thanks for taking my question.

Uh, in your prepared remarks, you mentioned, um, something about, uh, you know, maybe your outlook for the mortgage origination market and how that might affect the sort of MSR appetite the opportunity set there and the competitive landscape going forward.

A little bit now that our that our mortgage origination effort is still small.

William Greenberg: But we're trying to do things within the business in order to be able to scale more quickly. Originating second liens is part of that. you know, utilize having more loan officers. making loans and making second liens and brokering second liens while there's not a lot of first lien activity, right? So we can share some of that and then, you know, should rates fall later, we can transfer some of those things back to first liens right from seconds where the loan sizes are bigger and there will be more opportunity. should rates fall.

Um, and as we said in the prepared markets you know only 0.7% of our portfolio is eligible for refinance from a rate interpretive. And so, you know, we're trying to be mindful of of the cost attached to to Growing that effort, um, to large too fast, um, because that would create a drag on our, on our earnings. Um, but you know, we're trying to do things within the within the business in order to be able to be able to scale more quickly. Um, originating it, uh, secondly is is, is, is part of that and we can, you know, utilize having more loan officers, um, um,

William Greenberg: Transcripts provided by Transcription Outsourcing, LLC. And I think we'll watch the market going forward and we'll be ready to react.

Making loans and making second loans and brokering second Lanes. Um, while there's not a lot of firstly inactivity, right? So we can share some of that and then, you know, it should rates fall later, we can we can transfer some of those things. So uh uh back to First Lanes, right from seconds, where the loan sizes are bigger and there will be more opportunity. Um, should rates fall, uh, um and we get into an environment where more loans are eligible for refinance. So, you know, we're trying to balance those, those factors of of, of costs, and, and, and opportunity. Um, and, and I think, um, you know, we'll watch the market going forward, and we'll be ready to react, uh, as rates move.

Jason Weaver: Got it. Thank you for that.

William Greenberg: And I was wondering, can you provide maybe some more clarity or some bracketing around what you expect on timeline for resolution of the PRCM litigation, as well as if you have a ballpark for what the claims are for you against IP? Unfortunately, I can't really say a lot more than what William said in his prepared remarks. A trial date has not been set yet, so we are waiting for the next stages to occur. When there is something to update you and the rest of the market on, we will, of course, do that as soon as we can.

Got it, thank you for that. Um, and I was wondering, can you provide maybe some more clarity, or some bracketing around, what you expect on timeline, for resolution of the prcms are for you against, uh, IP

Well, look, unfortunately, um, I appreciate the question I really do. I'm unfortunately, I can't really say a lot more than what William said in in his prepared remarks. Um, you know, a trial date has has not been set yet. Um, and so, you know, we we are waiting for for the next stages to occur. When there is something to to, to update you and the rest of the market on, um, we will, of course, um, do that. Um, you know, as soon as we can

Operator: All right, thank you. Appreciate the time. Yep. Thank you.

All right, thank you. Appreciate the time.

Yep, thank you.

Rick Shane: We'll go next to Rick Shane with J.P. Morgan. Thanks for taking my questions this morning. I'd like to talk a little bit about the expense structure. You know, just servicing costs down sequentially, down year over year, comp and op-ex down sequentially. I assume that there's, in the first quarter on the comp side, some sort of annual stuff that comes through, and that's what drives it.

We'll go next to Rick Shane with JP Morgan.

William Dellal: But particularly as you are expanding your investment in AI, can you help us understand what will be expense, what will be capitalized, and how you see that driving your expense lines going forward? Morning Rick. A lot of what we're doing is going to be expense rather than capitalize. The rules for capitalizing are quite strict. The material we're doing now is likely to be expensed, which is why our expense ratio is tended to stay constant or even creep up a little bit.

All right, thanks for taking my questions this morning. Um, I'd like to talk a little bit about the expense structure, um, you know, just, you know, servicing costs down, sequentially down year-over-year, uh, comp, uh, and Opex down sequentially. I assume that there's in the first quarter on the comp side, uh, some sort of annual stuff that comes through, and that's what drives it. But particularly as you are expanding your investment in AI, uh, can you help us understand what will be expense? What will be?

Capitalized and how you see that driving your expense lines going forward?

Uh, good morning, Rick. Um, a lot of what we're doing is going to be expensed, uh, rather than capitalize the rules for capitalizing or quite strict the, the material we're doing now is likely to be expressed, which is why our expense uh, ratio send it to, to say constant or even creep up a little bit.

William Dellal: So when we think about a good plan... So when we think about expenses for the second half, the combined expense between servicing costs and comps benefits and OPEX was 45 million in the second quarter. Is that a decent run rate to build off of into third, fourth, and into 2026? I think we're going to be in that box.

but so, when we think about,

When we think about expenses for the second half, the combined expense between servicing costs, compensation benefits, and Opex was $45 million in the second quarter. Is that a decent run rate to build off of into the third, fourth, and into 2026?

I think we're going to be in that ballpark. Yes.

Okay.

William Dellal: And in terms of the AI build-out, you know, it's an interesting, I think, challenge for companies of your size balancing off-the-shelf versus you know. bespoke, internally developed solutions. Help us understand how that works in your business, please. Look, I think it works the same way it works, really, almost everywhere there's going to be. There's lots of activity and lots of development and lots of products being brought to market in real time and changing rapidly in this space that can help us do all kinds of... University Um Resources from other companies rather than building Ourselves, but some simple things that we could do ourselves that are you know particularly you know, bespoke for our needs, we are likely to do, but I'd say the bulk of it is probably going to be from.

um, and in terms of the AI buildout, you know, it's it's an interesting, um, I think challenge for companies of your size, um, balancing Off the Shelf versus um,

You know.

Bespoke, internally developed solutions help us understand how that works in your business, please.

Um look, I think it works the same way. It works really almost everywhere. There's going to be you know, there's there's there's lots of activity and lots of development and lots of products, um, being brought to Market, um, um, in real time and changing rapidly uh, in this space. Um, um, that can help us do all kinds of uh um um, efficiencies and, and cost savings and improved, our experience. Um, so it's changing very, very rapidly. Um, I'd say it's more likely that we will be accessing some of those

Building, uh, ourselves. But some simple things that we can do ourselves that are that are, you know particularly, um,

You know, bespoke for our needs. Um, we are likely to do, but I'd say the bulk of it is probably going to be from third parties.

William Dellal: Okay, thank you very much. to our particular needs. The main bulk of the total research party. Thank you.

Got it. Okay, thank you very much part of the stuff that we take some of, it requires a little bit of customization and

To our particular needs. But the, the main bulk of it will be search party.

Thank you.

Jason Stewart: We'll go next to Jason Stewart with Janet. Hey, thanks. Following up on Trevor's question on second liens in the balance sheet, you know, as production ramps on the on the core business, is there any possibility or intent to retain PLS? Or is the goal to continue to sell that? I think there is a possibility for that and I think that's one of the things that we're looking at as we grow the origination effort and the products that we offer and the outlets that we will access to do those things, whether it's selling and some of it could involve retaining some of that stuff.

We'll go next to Jason Stewart with Janie.

Hey thanks. Um, following up on Trevor's question on second liens in the balance sheet, you know as production ramps. Um, on the on the, The Core Business. Is there any possibility or intent to retain POS or is the the goal to continue to sell that?

William Greenberg: So, yeah, I think that's one of the things that we're looking at. Okay. And I assume that you look at it the same way as you describe seconds, meaning, you know, it's got to hit certain economic return hurdles, you know, etc. Is there any other strategic thought behind shifting the balance sheet from primarily agency to private label credit? Well, I think, you know, it would still be primarily agency. I don't think we would talk about expanding our non-agency exposure to a level that it primarily that so you know as a as a as a minority interest in in the portfolio of other Okay, thank you.

Um, I think there is a possibility for that, and, and I think that's 1 of the things that we're looking at, as we, as we grow the origination effort and the products that we offer, um, and the outlets that we will access to do those things, whether it's it's selling it and some of it could could involve uh, retaining some of that stuff. So, yeah, I think that's 1 of the things that we're looking at.

Okay, and I assume that you look at it the same way as you described seconds, meaning, you know, it's got to hit certain economic return hurdles, you know, etc. Is there any other strategic thought behind shifting the balance sheet from primarily agency to private label credit?

Well, I think I think, you know, it would still be primarily agency. I don't think we were talking about expanding our, our non- agency exposure to a level that it would be, you know, primarily that. So, you know, as a, as a, as a minority interest in, in the portfolio of of other, um um, you know, kinds of asset class with with, with predominantly similar risks, um, but some slightly different ones, you know, I think it has has a, has a benefit, uh, in the portfolio. Um, and so that's the way we're going to look at it.

Okay, thank you.

Operator: Thank you.

Thank you.

Operator: At this time, there are no further questions.

William Greenberg: I'll turn the call back to Bill for any additional or closing remarks. Thank you everyone for joining us today, and as always, thanks for your interest in Two Harbors.

At this time, there are no further questions. I'll turn the call back to Bill for additional or closing remarks.

I want to thank everyone for joining us today and as always, thanks for your interest in 2 harbors.

Operator: This does conclude today's conference. We thank you for your participation.

This does conclude today's conference. We thank you for your participation.