Q3 2025 Two Harbors Investment Corp Earnings Call

Speaker #3: Good morning . My name is Taryn , and I will be your conference facilitator at this time , I would like to welcome everyone to the two third quarter 2025 earnings call .

Taren: Good morning. My name is Taren, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Q2 2025 earnings call. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question and answer period. I would now like to turn the call over to Maggie Karr.

Speaker #3: All participants will be in a listen-only mode after the speaker's remarks. There will be a question and answer period. I would now like to turn the call over to Maggie Carr.

Speaker #4: Good morning, everyone, and welcome to our call to discuss the third quarter 2025 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer.

Maggie Karr: Good morning, everyone, and welcome to our call to discuss Q2 and Q3 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. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website, as well as the investor relations page of our website at twoharborsinvestment.com. In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.

Speaker #4: 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 two .

Speaker #4: IMDb.com . In our earnings release and presentation , we have provided reconciliations of GAAP to non-GAAP financial measures , and we urge you to information in conjunction with today's call .

Speaker #4: As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.

Speaker #4: These are described on page two of the presentation and in our review of this Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, we do not update forward-looking statements and disclaim any obligation to do so.

Maggie Karr: These are described on page 2 of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, Two Harbors Investment Corp. does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill.

Speaker #4: I will now turn the call over to Bill .

Speaker #5: Thank you . Maggie . Good morning , everyone , and welcome to our third quarter earnings call in August , we reached a settlement in the litigation with our former external manager arising from our internalization in 2020 .

Bill Greenberg: Thank you, Maggie. Good morning, everyone, and welcome to our third-quarter earnings call. In August, we reached a settlement in the litigation with our former external manager, deriving from our internalization in 2020. In particular, we agreed to make a one-time payment of $375 million in exchange for a release of all claims, including ownership claims related to our intellectual property. The settlement payment was funded through a combination of portfolio sales, cash on hand, and available borrowing capacity. Importantly, we continue to have ample liquidity following the payments, and our risk metrics are in line with how we have managed the portfolio historically. With this matter now fully behind us, we are glad to move forward with clarity and certainty of purpose.

Speaker #5: In particular , we agreed to make a one time payment of $375 million in exchange for a release of all claims , including ownership claims related to our intellectual property .

Speaker #5: The settlement payment was funded through a combination of portfolio sales , cash on hand and available borrowing capacity . Importantly , we continue to have ample liquidity following the payment and our risk metrics are in line with how we have managed the portfolio historically .

Speaker #5: With this matter now fully behind us , we are glad to move forward with clarity and certainty of purpose . During the quarter , we took a number of steps to adjust our portfolio , largely on a pro rata basis to address our lower capital base and higher structural leverage .

Bill Greenberg: During the quarter, we took a number of steps to adjust our portfolio, largely on a pro-rata basis to address our lower capital base and higher structural leverage. We sold some agency securities, bringing the agency RMBS portfolio to $10.9 billion from $11.4 billion. We also sold $19.1 billion UPB of mortgage servicing rights and another approximately $10 billion of UPB that will settle at the end of this month, in both cases slightly above our marks. Furthermore, these sales were done on a servicing-retained basis with a new subservicing client establishing a significant and important relationship. These transactions validate our efforts to meaningfully grow our third-party subservicing business and confirm the thesis that we envisioned when we first acquired RoundPoint Mortgage Servicing Corporation, specifically that, given our history as mortgage servicing rights investors, we are an ideal subservicing partner for other mortgage servicing rights owners.

Bill Greenberg: With those additions, we will have roughly $40 billion of true third-party clients using RoundPoint Mortgage Servicing Corporation as a subservicer. In addition, RoundPoint Mortgage Servicing Corporation will soon be set up to service Ginnie Mae loans too, allowing further growth in our subservicing business. Additionally, we intend to redeem the full $262 million UPB of our outstanding convertible notes when they mature in January 2026, which will reduce our structural leverage to be in line with historical levels. We plan to fund this redemption with cash on hand and by drawing down our mortgage servicing rights facilities. If we were to pay down the convertible notes today, we would still have in excess of $500 million of cash on our balance sheet. Lastly, the reduction in our capital base has also had the effect of increasing our expense ratio.

Bill Greenberg: While we are always intently focused on improving efficiencies and lowering costs, we are acutely aware of the impact today. We have already undertaken efforts to reduce our cost structure in light of the settlement payments, and we have line of sight into significant amounts of savings already. We will have more to say about this in coming quarters. We are confident that after all of our portfolio adjustments, we will continue to be well-positioned to execute on our MSR-focused investment strategy to enhance and grow our servicing and origination activities and to deliver long-term value for our stockholders. Please turn to slide 3. For the third quarter, including the litigation settlement expense of $1.68 per share, we experienced a total economic return of negative 6.3% and a positive 7.6% without the expense.

Bill Greenberg: For the first nine months of the year, this results in a total economic return on book value of negative 15.6% and positive 9.3% excluding the expense. Please turn to slide 4. Performance across the fixed-income market was positive in the third quarter. Though inflation readings continue to run above the Fed's target and the full impact of recent increases to tariffs on forward inflation were still unclear, the Fed cut rates by 25 basis points in September, the first cut since November 2024, as Chair Powell cited emerging downside risks in the labor market. The Fed's own guidance of another 50 basis points of cuts by year-end aligned with the market consensus, as you can see in the blue line in figure 1.

Bill Greenberg: Net changes across the yield curve were small over the quarter, as you can see in figure 2, with 2-year yields lower by 11 basis points to 3.61 and 10-year yields down by 8 basis points to 4.15. Equity markets were also buoyed by Fed cuts, with the S&P 500 up almost 8% by quarter-end after setting all-time record highs early in the quarter. Please turn to slide 5. As I mentioned earlier, in the third quarter, we signed a term sheet with a new subservicing client, which will bring our combined subservicing UPB to approximately $40 billion and will bring the total of our own servicing down to approximately $165 billion. We are particularly encouraged by the robust growth in our direct-to-consumer origination platform, especially since most of our portfolio is not economically incentivized to move or refinance.

As I mentioned earlier in the third quarter, we signed a term sheet with a new subsurface and clients who will bring our combined sub-servicing upb to approximately 40 billion dollars and will bring the total of our own servicing down to approximately 165 billion.

We are particularly encouraged by the robust growth in our direct to Consumer originations platform.

Bill Greenberg: Our originations team recorded the most-ever locks for the month of September, and in the third quarter, we funded $49 million of UPB in first and second liens, which gives us increasing confidence that our DTC efforts are working as intended and can provide a meaningful pickup in portfolio recapture and economic returns. Indeed, at quarter-end, we had an additional $52 million UPB in our origination pipeline. Additionally, we brokered $60 million UPB in second liens in the quarter, a significant pickup from the $44 million we did in Q2 and also a record high for us at RoundPoint. As interest rates have tended lower post-quarter end, we are very optimistic about the additional value that RoundPoint can bring to shareholders. Lastly, I want to mention again the improvements that we are making in the technology platform at RoundPoint.

Especially, since most of our portfolio is not economically incentivized to move or refinance.

Our originations team recorded, the most ever locks for the month of September.

And in the third quarter, we funded 49 million of upb in first and second liens and which gives us increasing confidence that our DTC efforts are working as intended and can provide a meaningful pickup in portfolio, recapture and economic returns

Indeed a quarter end, we had an additional 52 million upb in our origination pipeline.

Additionally, we brokered 60 million upb in second liens in the quarter. A significant pickup from the 44 million. We did in Q2 and also a record high for us at Round points.

As interest rates have tended lower post quarter ends, we are very optimistic about the additional value that roundpoint can bring to shareholders.

Bill Greenberg: AI and other applications continue to allow us to improve customer and borrower experiences and quality. These efforts allow us to achieve more economies of scale and to recognize the benefits of our investments immediately, which are important components of our drive to reduce servicing and corporate costs. Looking ahead, we now have a clean slate to capitalize on opportunities in our MSR and MBS portfolio and to drive growth in servicing and originations. We believe that with our stock trading at a discount to book, it is significantly undervalued. With the uncertainty created by the litigation behind us, with the quality of assets that we hold, and with several of our peers trading at premiums to book, we see no reason why we should trade at an 11% discount to book as we were at quarter-end. We still see mortgage spreads as being very attractive despite the recent tightening.

Lastly, I want to mention again the improvements that we are making in the technology platform at Round points.

AI and other applications continue to allow us to improve customer and borrower experiences and quality.

These efforts allow us to achieve more economies of scale and to recognize the benefits of our investments immediately, which are important components of our drive to reduce servicing and corporate costs.

Looking ahead, we now have a clean slate to capitalize on opportunities in our MSR and MBS portfolio and to drive growth in servicing and originations.

we believe that with our stock trading at a discount to book, it is significantly undervalued

with the uncertainty created by the litigation behind us.

With the quality of assets that we hold and with several of our peers trading at premiums to book,

We see no reason why we should trade at an 11% discount to book as we were a quarter end.

Bill Greenberg: However, we view the risks to MBS performance as being symmetric and therefore very supportive of our strategy in particular with its large allocation to hedged MSR, which is designed to have less sensitivity to fluctuations in mortgage spreads than portfolios without MSR. We are very optimistic about the attractive investment opportunities available in the market for our strategy. With that, I'd like to hand the call over to William to discuss our financial results.

We still see more mortgage spreads as being very attractive, despite the recent tightening.

However, review the risks to MBS performance as being symmetric and therefore very supportive of our strategy in particular with its large allocation to hedge MSR which designed to have less sensitivity to fluctuations in the mortgage spreads than portfolios without MSR.

We're very optimistic about the attractive investment opportunities available in the market for our strategy.

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

William Dellal: Thank you, Bill. Please turn to slide 6. This quarter, in connection with the settlement agreement with our former external manager, we recorded a $175.1 million litigation settlement expense, or $1.68 per weighted average common share. This expense is the difference between the $375 million cash payment made to our former external manager, less the related loss contingency accrual recorded in the second quarter of $199.9 million. You can see this reflected on this slide in the call-out boxes. Including this expense, our return on book value is a negative 0.63%. Excluding this expense, our return on book value would have been a positive 7.6%. Please turn to slide 7. Including the litigation settlement expense, the company incurred a comprehensive loss of $80.2 million, or $0.77 per share. Excluding the expense, we would have generated comprehensive income of $94.9 million, or $0.91 per share.

Thank you, Bill.

this quarter in connection with the settlement agreement, with our former external manager, who recorded the 175.1 million litigation settlement expense,

Or a168 cents per weighted average comma share.

This expense is the difference between the 375 Million Dollar Cash payment made to our former external manager. Leslie related loss contingency approval recorded in the second quarter of 1199.9 million.

You can see this reflected on this slide in the callout boxes.

Including this expense or return on Book. Value is a negative -.63 excluding the 6 P or return on Book, value with have been a positive 7.6%.

Please turn to slide 7.

William Dellal: Net interest and servicing income, which is the sum of GAAP net interest expense and net servicing income before operating costs, was slightly higher in the third quarter by $2.8 million, driven by higher float and servicing fee income and lower financing costs. This was partially offset by lower interest income on agency RMBS. Marked-to-market gains and losses were higher in the quarter by $111.3 million. As a reminder, this column represents the sum of investment securities net gains and losses and change in OCI, net swap and other derivative gains and losses, and net servicing asset gains and losses. In the third quarter, we experienced marked-to-market gains on agency RMBS, TBAs, and swaps, partially offset by marked-to-market losses on MSR and futures. You can see the individual components of net interest and servicing income and marked-to-market gains and losses on appendix slide 21. Please turn to slide 8.

Including the litigation settlement expense the company, incurred, a comprehensive loss of 80.2 million or 77 cents per share. Excluding the expense we would have generated comprehensive income of 94.9 million or 91 cents per share.

that's interesting, servicing income which is a sum of gaap, net interest expense, and net servicing income before, operating costs was slightly higher in the third quarter by 2.8 million,

Driven by higher float and servicing fee income and lower financing costs.

This was partially offset by lower interest income on agency rmps.

Mark-to-market gains and losses were higher in the quarter by $1,001.3 million.

As a reminder.

This column represents the sum of investment Securities that gains and losses, and changing oci. Net swamp and other derivative gains, and losses, and net servicing asset, gains and losses. And the third quarter, we experience more to market gains on agency rmbs, tbas and swaps, partially offset by more to Market losses, on MSR and futures.

You can see the individual components of net interest and servicing income and mark-to-market gains and losses on appendix slide 21.

William Dellal: On the left-hand side of the slide, you can see a breakdown of our balance sheet at quarter end. After the litigation settlement payment of $375 million and after the sale of $19.1 billion UPB of MSR, we ended the quarter with cash on balance sheet of $770.5 million. As Bill mentioned, we plan to redeem the full $261.9 million of our outstanding convertible notes when they mature on January 15, 2026. As a reminder, in the second quarter, we defeased part of this maturing debt with the issuance of a baby bond for net proceeds of $110.6 million. Until the maturity of the convertible debt, we will use the cash on balance sheet to lower our MSR borrowings. RMBS funding markets remained stable and available throughout the quarter, with repurchase spreads at the rate of SOFR plus 20 basis points.

Please turn to slide 8.

On the left hand side of the slide, you can see a breakdown of our balance sheet at quarter amp.

After the litigation settlement payment of 375 million. And after the sale of 19.1 billion, upb of MSR, we ended the quarter with cash, on balance sheet of 770.5 million

William Dellal: At quarter end, our weighted average days to maturity for our agency RMBS repo was 88 days. We financed our MSR, including the MSR asset and related servicing advance obligations, across six lenders with $1.7 billion of outstanding borrowings under bilateral facilities. We ended the quarter with a total of $939 million in unused MSR asset financing capacity. Our servicing advances are fully financed, and we have an additional $78 million in available capacity. I will now turn the call over to Nick.

Nick Letica: Thank you, William. Please turn to slide 9. Our portfolio at September 30 was $13.5 billion, including $9.1 billion in settled positions and $4.4 billion in TBAs. After adjusting the portfolio for our lower capital base, we slightly increased our economic debt-to-equity to 7.2 times. We are comfortable at this current leverage level. Though spreads have contracted, they still look attractive on a levered basis versus swaps, especially in the context of diminished interest rate and spread volatility. Furthermore, positive demand technicals, such as robust flows into bond funds and buying by REITs, are likely to persist as the Fed continues to cut interest rates. That said, spreads have normalized quite a bit, and while they are less volatile, we see spread changes to be more two-sided.

Nick Letica: Consequently, by quarter end, we reduced the portfolio's sensitivity to spread changes from 4.2% to 2.3% of common book value if spreads were to tighten by 25 basis points, which you can see in chart 3. This quarter, despite leverage increasing, we actually reduced our risk exposure. You can see more details on our risk exposures on appendix slide 18. Please turn to slide 10. Given the stability of rates and broad consensus that the Fed is on a gradual path toward lowering rates further, implied volatility declined to its lowest level since mid-2022. As you can see in figure 1, our preferred volatility gauge of 2-year options on 10-year swap rates, shown by the green line, closed the quarter at 84 basis points, down 10 basis points, and back to just above its average level over the past 10 years.

Nick Letica: If you look back to 2022 when volatility was last here, spreads versus swaps were tighter. We see attractive static returns with volatility at this level between 15% and 19% for the securities portion of our portfolio, which we will see in the return potential slide shortly. RMBS performance was positive across the 30-year coupon stack, with the best performance concentrated in the belly coupons, such as four and a halves and fives. The excess return of the Bloomberg U.S. mortgage-backed securities index was positive 82 basis points, the best performance since Q4 2023. You can see spreads across the curve both nominally and on an option-adjusted basis in figure 2. During the quarter, the nominal spread for current coupon RMBS tightened by 26 basis points to 145 basis points to the swap curve, while option-adjusted spreads finished 14 basis points tighter at 67 basis points.

Nick Letica: Please turn to slide 11 to review our agency RMBS portfolio. Figure 1 shows the performance of TBAs and specified pools we owned throughout this quarter. Specified pools outperformed TBAs, led by four and a halves and fives. We rotated the portfolio down in coupon, reducing our 6 to 6.5 position in TBAs and specified pools by approximately $1.8 billion and increased our 5 to 5.5 position by approximately $1.6 billion. We also opportunistically sold approximately $1.3 billion of specified pools versus TBAs across several coupons. You can see this detail on appendix slide 17. We have continued this downward rotation into this quarter as the rally in rates continues. In September, primary mortgage rates dropped to their lowest levels of 2025, finishing the quarter for a sustained period around 6.25%, aided by the drop in U.S.

Nick Letica: Treasury rates, as well as a strong performance of current coupon RMBS spreads and firm primary secondary mortgage spreads. We are seeing the effects of the rate drop on refinancing activity, with large month-over-month increases for refinanceable coupons prepayment speeds, as reported in early October. Thus far, the pickup in speeds has followed the pattern seen in recent prepayment episodes, such as when rates dropped about a year ago. With rates remaining about here, we expect to see further pickups in speeds as borrower refinance activity fully works its way through closings. Figure 2 on the bottom right shows our specified pool prepayment speeds by coupon, which, despite the drop in primary rates, decreased to 8.3% from 8.6% CPR.

in September primary mortgage rates, dropped to their lowest levels of 2025, finishing the quarter for sustained, period around 6.25% aided by the drop in US Treasury rates as well as a strong performance of current coupon, rmbs, spreads and firm primary, secondary mortgage spreads

Nick Letica: This is a result of having the majority of our pool holdings in lower coupons, as well as in call-protected securities that did not experience the large increases seen for generic collateral. Please turn to slide 12. You can see that the volume of MSR in the bulk market has remained lower than in prior years. The market continues to be well-subscribed, with bank and non-bank portfolios continuing to compete for greater scale in MSRs. Figure 2 is a chart we periodically update, which shows that with mortgage rates at their current level, still only about 3% of our MSR portfolio is considered in the money. If mortgage rates were to drop to 5%, the portion of our portfolio in the money would rise to about 9%.

This is a result of having the majority of our pool Holdings in lower coupons as well as. In call protected securities that did not experience the large increase of seen for generic collateral.

Nick Letica: As Bill highlighted, RoundPoint's direct-to-consumer origination platform has been growing, consistent with the market opportunity to recapture loans in our portfolio that may refinance. When interest rates dropped in September, we saw the benefits of these efforts, and our platform is poised and ready to do more. Please turn to slide 13, 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 24. In the second quarter, we settled about $700 million from flow acquisitions. As Bill said, we also committed to sell approximately $30 billion UPB of low-gross WACC MSR on a servicing-retained basis as part of our portfolio reallocation.

As Bill highlighted round points direct to Consumer, originations platform has been growing consistent with the market opportunity to recapture loans in our portfolio. That may refinance.

When interest rates dropped in September, we saw the benefits of these efforts and our platform is poised and ready to do more.

Please turn to slide 13, 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 24.

Positions.

Nick Letica: Being able to sell it retained with a large new subservicing client benefits us not only by being able to leave those loans at RoundPoint and retain the economies of scale, but also gives us an important lever in efficiently managing our assets. Though we like our MSR portfolio, should we want to redeploy capital away from low-gross WACC MSR into, say, high-gross WACC MSR, selling it to a subservicing client is ideal. The price multiple of our MSR was down slightly quarter over quarter to 5.8 times, in line with the drop in mortgage rates, and 60-plus-day delinquencies remain low at under 1%. Figure 2 compares CPRs across implied security coupons in our portfolio of MSR versus TBAs. Quarter over quarter, our MSR portfolio experienced a de minimis pickup in prepayment rates to 6%.

As Bill said, we also committed to sell approximately $30 billion UPB of low, gross whack MSR on a servicing retained basis as part of our portfolio reallocation.

Being able to sell it retained with a large new sub-servicing client. Benefits us not only by being able to leave those loans at roundpoint and retain the economies of scale but also gives us an important lever and efficiently managing our assets.

Though, we like our MSR portfolio, should we want to redeploy Capital away from low gross. Whack MSR into say, hi gross. Whack MSR selling it to a sub-servicing client is ideal.

The price multiple of our MSR was down slightly quarter over quarter to 5.8 times, in line with the drop in mortgage rates. Sixty-plus day delinquencies remain low at under 1%.

Figure 2 compares CPR across implied security coupons in our portfolio of MSR versus TBAs.

Nick Letica: Importantly, prepays have remained below our projections for the majority of our portfolio, which is a positive tailwind for returns. Finally, please turn to slide 14, our return potential and outlook slide. This is a forward-looking projection of our expected portfolio returns, which incorporates all of our recent portfolio adjustments. Please note, while the $262 million convertible note is shown in the table, the projections assume that it is redeemed at its maturity in January. As you can see on this slide, the top half of the table is meant to show what returns we believe are available on the assets in our portfolio. We estimate that about 68% of our capital is allocated to servicing, with a static return projection of 11% to 14%. The remaining capital is allocated to securities, with a static return estimate of 15% to 19%.

Quarter over quarter, our MSR portfolio experienced a diminutive pickup and prepayment rates increased to 6%.

Importantly prepaids have remained below our projections for the majority of our portfolio, which is a positive Tailwind for returns.

finally, please turn to slide 14, our return potential and Outlook slide

This is a forward-looking projection of our expected portfolio returns which incorporates all of our recent portfolio adjustments, please note while the 262 million convertible note is shown in the table, the projections assume that it is redeemed at its maturity in January.

As you can see on this Slide, the top half of the table is meant to show. What returns We Believe are available on the Assets in our portfolio.

We estimate that about 68% of our capitals. Allocated to servicing with a static return projection of 11 to 14%

Nick Letica: 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 9.1% to 12.6% 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 9.5% to 15.2% or a prospective quarterly static return per share of $0.26 to $0.42. With agency securities showing a higher range of prospective static returns than MSR, astute investors might ask the question as to why we don't sell more MSR and rotate into MBS. One reason is that the marginal cost of owning MSR is lower than its average cost, and so lowering our exposure there would have the effect of increasing costs.

The remaining capitals allocated to Securities with a static return, estimate of 15 to 19%.

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 9.1 to 12.6% 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 9.5 to 15.2% or a prospective quarterly, static return per share of 26 to 42 cents.

With agency security showing a higher range of prospective static returns in MSR, astute, investors might ask the question as to why we don't sell more MSR and rotate into MBS.

Nick Letica: Another reason is that we believe that the quality of the returns on the MSR side is higher, mostly consisting of very low-rate, easy-to-hedge cash flows with lower convexity risk than MBS. While we do think there is a lot of opportunity in MBS, especially given the level of implied volatility, we think our capital allocation is just where we want it to be. To conclude, returns remain attractive and supportive of our core strategy of low mortgage rate MSR paired with agency RMBS. The MSR market continues to benefit from historically high levels of interest and participation from bank and non-bank originators and investors. Though mortgage rates have dropped and prepayment rates for refinanceable coupons are on the rise, our low mortgage rate MSR portfolio remains hundreds of basis points out of the money. Thus far, the exposure the portfolio has to higher-rate, newer production servicing has grown very modestly.

1 reason, is that the marginal cost of owning MSR is lower than its average cost and so lowering our exposure. There would have the effect of increase in costs.

Another reason is that we believe that the quality of the Returns on the MSR side is higher mostly consisting of very low rate, easy to hedge cash flows with lower, convexity risk than MBS,

While we do think there is a lot of opportunity in MBS, especially given the level of implied volatility, we think our capital allocation is just where we want it to be.

to conclude returns, remain attractive and supportive of our core strategy of low mortgage rate, MSR paired with agency rmbs,

the MSR Market continues to benefit from historically high levels of interest and participation from bank and non-bank Originators and investors

Though mortgage rates have dropped and prepayment rates for refinance will coupons are on the rise, our low mortgage rate MSR portfolio remains hundreds of basis points out of the money.

Nick Letica: Given RoundPoint Mortgage Servicing Corporation's capability to refinance and recapture these loans, we look forward to continued growth in this part of our MSR portfolio. We continue to be optimistic that our portfolio construction of MSR paired with agency RMBS should generate attractive risk-adjusted returns over a wide range of market scenarios. Thank you very much for joining us today, and now we will be happy to take any questions you might have.

Thus far the exposure of the portfolio has to higher rate, newer production servicing has grown very modestly given round points capability to refinance or recapture these loans. We look forward to continued growth in this part of our MSR portfolio.

We continue to be optimistic that our portfolio construction of MSR paired with agency, rmvs should generate attractive risk-adjusted returns or a wide range of Market scenarios.

Taren: If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, you may press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Bose George with KBW. Please go ahead.

Thank you very much for joining us today. We will be happy to take any questions you might have.

if you would like to ask a question, please signal by pressing star 1 on your telephone keypad,

If you are using a speaker-phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, you may press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal.

[Analyst 1]: Good morning. What are the key drivers of the increase in the EAD in the third quarter relative to the second quarter? Can you just remind us what are the drivers that take you from the low end to the high end of your guided range?

We'll take our first question from Bose, George with KBW. Please go ahead.

Hey everyone, good morning. Um, actually first what are the key drivers of the increase in the EAD in the third quarter, relative to the second quarter? And then can you just remind us? You know what are the drivers that take you from the you know the low end of the high end of your guided range.

William Dellal: Hi, Bose. On the EAD, I think it's the, if we look at the cost of our financing asset, financing securities, that's what has come down to allow the EAD to go up. The asset yields on EAD are roughly constant, but the financing rates have come down. Of course, there's no marked-to-market, so this is just as a result of rejiggering the portfolio.

Um on the EAD I think it's the uh if we look at our the cost of our financing asset uh financing Securities that's what has come down to allow the NAD to go up to the asset yields on the ad or roughly constant. But the financing rates have come down. Of course, there's no mark-to-market. So this is just as a result of uh, rejuvenating the portfolio.

[Analyst 1]: Just as a follow-up to that, with short rates coming down, you know, as the Fed cuts, is that trend continuing, or just in terms of what happens to the EAD over the next, say, quarter or two?

William Dellal: I don't think it's a trend that will continue. It's largely as a result of the change in the mix of the liabilities between TBAs and the financing on TBAs and spec pools.

And actually just as a follow up to that with short rates coming down, you know, as the FED Cuts is that like is that Trend continue or just in terms of what happens to the EAD over the next say quarter or 2?

[Analyst 1]: Okay, great. Thanks. Can you give us an update on your book value quarter to date?

Um, I I I don't think it's it's a trend that will continue its largely as a result of the change in the mix of the liabilities between tbas and uh the financing on tbas and um, respectful.

Bill Greenberg: Yeah, sure. Good morning, Bose. As of last Friday, our book value was up about 1%.

Okay. Okay, great thanks. And then can you give us an update on your book value? According to date,

[Analyst 1]: Great. Thanks.

Yeah. Sure, good morning Bose, um, as of last Friday, our book value was up about 1%.

Bill Greenberg: Thanks, Bo's.

Great, thanks.

Taren: We'll take our next question from Doug Harter with UBS. Please go ahead.

Thanks bows.

We'll take our next question from Doug Harter with UBS.

[Analyst 1]: Thanks. I know leverage is just one metric you look at, but can you talk about the various risk metrics as you think about the size of the portfolio, kind of following the settlement?

Please go ahead.

Uh, thanks. Uh, you know, I know Leverage is just 1 metric. You look at but can you talk about the various

you know, risk metrics, as you think about the size of the the portfolio, you know, kind of following the, the settlement

Bill Greenberg: Sure. Hey, Doug, this is Nick. Thank you for the question. As you know, we look at a lot of risk metrics in managing the portfolio, and as I said in my prepared remarks, this quarter, our economic debt-to-equity did go up while we, by quarter end, had taken down our overall spread risk. It's a slew of things that we look at when we manage a portfolio. It's clearly first and foremost, the returns that are available on the asset classes that we have in the portfolio and what seems to be the ideal mix in the context of the market that we are in. All of those kind of things come into play, whether it's the amount of leverage that's available in the market, the financing rates clearly, but most importantly, the asset yields versus the risk that each security sector has.

Sure. Uh hey Doug this is Nick. Thank you for the question. Um yeah as you know we look at a lot of risk metrics and managing the portfolio and as I said in my prepared remarks

You know this quarter uh, our economic debt to equity did go up while we uh by quarter and had uh, taken down our overall spread risk. Um, you know, it's a it's a slew of things that we look at, uh, when we manage a portfolio. It's, you know, clearly first and foremost, the, the returns that are available on the asset classes that we, we have in the portfolio and and what seems, and what, you know, seems to be the ideal mix in the context of the market that we are in the, um, uh,

Bill Greenberg: Each quarter and each and every day, we look to maximize the return that we can generate from the portfolio versus the amount of risk that each asset has. I might just add here, Doug, Nick made a comment in his prepared remarks about the difference between leverage ticking up a little bit while our mortgage spread risk went down, right? That's a good example of not being too focused on one metric versus another. Both of those things are important as we look at the overall leverage, the overall liquidity, overall what I will call drawdown risk, different scenario analyses that we look at depending on volatility of interest rates and volatility of spreads and so forth. All of those things get mixed into our decisions about how we manage the risk of the portfolio, especially in the context of the returns available as Nick said.

The, you know, all of, you know, all of those kind of things, you know, come into play, whether it's, you know, the amount of Leverage that's available in the market, um, the uh, the financing rates clearly. Um, but, you know, just most importantly, the, the asset yields versus the risk that each security sector has. And you know, each each quarter and each each each and every day, uh we look to, you know, maximize

the, the return that we can generate from the portfolio versus the amount of risk that each asset has

yeah, I I might just add here Doug, you know, Nick made, uh, made a comment in his prepared remarks about the um,

[Analyst 1]: Thanks. Bill, you mentioned that you were looking at, you know, to try to implement some cost saves on the corporate expense side. On your return potential slide, does that factor in potential cost saves, or is that, you know, kind of where your costs are today?

the difference between, you know, leverage picking up a little bit while our mortgage spread risk went down, right. And that's a good example of of not being too focused on 1 metric versus another up. Both of those things are important. As we look at the overall leverage overall liquidity. Uh, overall, but I will call draw down risk, you know, different scenario, analyses that we look at, depending on volatility of interest rates to volatility of spreads and so forth. So all those things get get mixed in uh to our decisions about how we manage the the risk of the portfolio especially in the context of the returns available as Etc.

Bill Greenberg: No, that's where they are today.

[Analyst 1]: There would be potential upside to that number as those cost saves are realized?

Thanks, and Bill, you mentioned that you were looking at, um, you know, to try to implement some cost saves on the corporate expense side. Uh, you know, on your return potential slide. Does that factor in potential cost saves, or is that, you know, kind of where your costs are today? Um, so that's where they are today, potential ups.

Bill Greenberg: Yes, I think so.

So there would be potential upside to that number, as those cost saves are realized.

[Analyst 1]: Great. Thank you.

Yes, I think so.

Taren: We'll take our next question from Rick Shane with JPMorgan. Your line is now open.

Great. Thank you.

[Analyst 2]: Hey, guys. Thanks for taking my question this morning.

Thank you, we'll take our next question from Rick. Shane with JP Morgan. Your line is now open.

[Analyst 1]: No problem.

[Analyst 2]: In looking at chart or slide 17, what stands out to me is that for the third quarter in a row at least, you are tactically net short the coupon 50 basis points below the coupon where you have the highest concentration. Can you help us understand, as an equity guy, I'm just trying to understand what's going on there, what drives that strategy?

Hey guys, thanks for taking my question. This morning, um, in looking at chart or slide 17. Um, what stands out to me, is that for the third quarter in a row, at least you are tactically, net short, the coupon 50 basis points. Below the coupon where you are. You have the highest concentration,

Bill Greenberg: Hey, Rick. Thank you for that question. A lot of what drives that coupon exposure, and we do manage it, of course, but it is how rates move and where the current coupon sits relative to our risk exposures and our MSR and the rest of our portfolio. As rates rally, you can see in that table, we do show what we believe is the effective offset to our mortgage loans by the current coupon exposure of the MSR and the other negatively derated assets in our portfolio. As rates rally, that negative number migrates down in coupon, and we manage that through time.

Can you help us understand? I, I, as an equity guy, I'm just trying to understand what's going on there. What drives that strategy?

Move and where the current coupon sits relative to our risk, exposures and our MSR and the rest of our portfolio. So, you know, as rates rally, uh, you can see in that table, you know, we do show, what we believe is the effective uh, um uh what the effect of offset to our mortgage Longs by uh the the current coupon exposure of

Bill Greenberg: As I said in my prepared remarks, we had gone down in coupon in terms of our mortgage holdings, and a lot of that was just in response to the fact that rates are rallying and we need to offset the current coupon risk in our MSR portfolio as that happens. I will say that we don't get overly, the word I used, I think the word I typically use is fussed with a 50 basis point coupon swap. There are times when there can be an extreme value difference in 50 basis points, but the truth of the matter is that we sort of look at these risks a little bit on a bucketed basis, and it's not, there's not really a, I wouldn't say that there's a strong strategic reason why that 50 basis point exposure is the way it is.

Bill Greenberg: It's just looking at the overall context of where spreads are and where spec pools are for those respective coupons and managing that risk on an overall basis. We try to keep the exposure relatively tight around those current coupons because if tomorrow we walked in and rates were up 25 basis points, that exposure in our MSR would shift up in coupon, and that chart would change to a reasonable degree. We kind of look at it in that sense of nearby coupons rather than just looking at a specific coupon, if that makes sense.

Uh the MSR and and the and other, you know uh negatively derated Assets in our portfolio and and as rates rally, you know, that that uh, negative number you know migrates down in coupon and we manage that, you know, through time and as I said in my repair remarks, you know, we had, we had, um, gone down in coupon, in terms of our mortgage Holdings and um, that a lot of that was just in response to the fact that rates are rallying. And, you know, we need to offset the current coupon risk in our in our MSR portfolio as that happens. So, um, you know, I will say that, you know, we don't get overly the word I use. I think, uh, the word I typically use is fussed with 50 basis. Point coupon swap. Um, there are times when there can be an extreme, you know, value difference in 50 basis points. But the truth of the matter is that, you know, we sort of look at these, these risks a little bit on a bucketed basis and, um, it's not, you know, there there's not really a, I wouldn't say that there's a strong strategic reason. Why? That that's 50 basis points.

[Analyst 2]: It totally does. It's very helpful, and I have learned two new words to add to my mortgage glossary, derated and fuss. I appreciate all of that, and thank you for taking my questions this morning.

Georgia is the way it is. It's just looking at, you know, the overall context of where spreads are and where spec pools are for those respective coupons and managing that risk on a, on an overall basis. But, uh, you know, we we try to keep the exposure relatively tight around those current coupons because, you know, tomorrow we walked in and rates were up. 25 basis points that exposure in our MSR would shift up in coupon and that and that chart would would change, you know, to a reasonable degree. So we kind of look at it on in that sense of nearby coupons, rather than just uh, looking at it a specific coupon if that makes sense.

Bill Greenberg: Thank you.

[Analyst 2]: Thanks, Rick.

It totally does it's it's very helpful and uh I have learned to new words to add to my mortgage glossery, dated and fuss. Uh so I appreciate all of that and uh thank you for taking my questions this morning.

Taren: We'll take our next question from Trevor Cranston with Citizens JMP. Your line is now open.

Thank you. Thanks sir.

[Analyst 3]: Hey, thanks. Good morning. Can you guys give us a little bit of color in terms of what you're seeing on growth opportunities of the subservicing business? In particular, I guess I'm curious if you think further growth in subservicing is likely to be in combination with MSR sales like we saw this quarter, or if you're seeing other opportunities beyond that. Thanks.

We'll take our next question from Trevor Cranston with Citizens. JMP, your line is now open.

Hey, thanks. Good morning.

Um,

can you guys give us a little bit of color in terms of what you're seeing on growth opportunities of the sub-servicing business? Um, and in particular, I guess I'm curious if you think, you know, further growth and sub-servicing is is

Bill Greenberg: Yes, thanks very much for the question. I think growing a subservicing business typically takes a long time. These are pretty sticky relationships that people have with their subservicers. We have been doing the hard work of maintaining and developing relationships and explaining to the world why we are an ideal partner for this sort of thing. I think as other consolidation has occurred in the subservicing market, there are opportunities for us to pick up some either clients that are dissatisfied with their current subservicer or people who might feel that they have too much concentration risk as the number of subservicers in the world has decreased.

Likely to be in combination with um MSR sales like we saw at this quarter or if you're seeing other opportunities beyond that. Thanks.

Yes, thanks very much for the question. Um, you know, I I I think,

Bill Greenberg: We are out there trying to attract those customers with the value proposition that, as investors ourselves, as MSR owners, as someone who can be more nimble with the portfolio and who knows where the money is contained in subservicing and can extract that for the benefit of owners. I think that is a story that is resonating and starting to resonate with other subservicing clients. We sold $30 billion of MSR to a client to seed a relationship like this. That was good. We sold the amount of servicing that we wanted to sell at this time. That is not to say that we would not be open in the future for other sorts of opportunities to seed other subservicing relationships.

Yep, uh, growing a sub-servicing business. Um, typically takes a long time. These are, these are, uh, pretty sticky relationships, um, that people have with their sub services. And so, you know, we've been doing the hard work of, of maintaining, and developing relationships and, and explaining to the world, why we are an ideal partner for this sort of thing? So, you know, I think, as you know, other consolidation has occurred in the sub-servicing market. Uh, there are opportunities for us to pick up some either. Some clients that are dissatisfied with their current subservicer, or people who might feel that they have too much concentration risk, um, as the number of subservient. And so, um, you know, we're out there, um, you know, trying to attract those, those customers with, with the value proposition that that, as, you know, investors ourselves as MSR owners as someone who can be more. Um,

More more Nimble with uh, with the portfolio and who knows where the money is, is uh, uh um, contained in in sub-servicing and can extract that for the benefit of owners. Um, you know, I think that's a story that's that's resonating and starting to resonate with with other sub-servicing clients

Bill Greenberg: One way that we can effectuate being able to modify our servicing portfolio, say if we wanted to move up in coupon from low-gross WACC to high-gross WACC, one very good way to do that would be to seed another subservicing relationship and then recycle that capital into new servicing that is higher WACC that gives us different opportunities or might be cheaper in some ways. It is another tool in our tool belt in order to be able to manage the portfolio and to grow the business together.

Um, you know, we sold, you know, 30 billion of MSR to a client to see uh, a relationship like this. That was good. We sold the amount of servicing that we wanted to sell, um, at this time. Um, that's not to say that we wouldn't be open um um in the future, for other sorts of opportunities to see other sub-servicing relationships. You know, 1 way that we can effectuate.

[Analyst 3]: Got it. Okay, that's helpful. Looking at the return estimates on slide 14, I was just curious specifically on the securities portfolio. It looks like it went up a couple hundred basis points from last quarter, even though spreads are tighter. I was wondering if you could just sort of walk us through the math on why that went up. Thanks.

Bill Greenberg: Sure, Trevor. I'm happy to do that, and that's a very good question. I just want to remind everyone that the spreads that we use in that calculation are actually on our actual portfolio at quarter end, as opposed to a stylized version of a levered spread that you see elsewhere in the market. As you know, there's a wide variation of mortgage spreads available, and for mortgage-backed securities, it depends where you are in the coupon stack. Obviously, lower coupons have tighter static returns. Higher coupons have higher static returns generally. From quarter to quarter, as the portfolio shifts around and spreads shift around, even if spreads move in one direction or another, those numbers can go in opposite directions. It does include, as I said, everything we have in our portfolio.

Got it. Okay, that's helpful. Um, and then looking at, uh, the return estimate on, uh, slide 14, um, I was just curious specifically on the Securities portfolio. Um, you know, it looks like it went up a couple hundred basis points from last quarter, uh, even though spreads are tighter. I was wondering if you just sort of walk us through the, the, the math, on why that went up.

Thanks.

Sure, Trevor up happy to do that. And that's a very good question. The I just want to remind everyone that the spreads that we use in that calculation are actually, um, on our, it's on our actual portfolio at quarter end as opposed to a, you know, stylized version of a levered, you know, uh, levered spread that, um,

Bill Greenberg: Our portfolio is predominantly mortgage-backed security pools, TBAs, things of that nature, but we do have other things in our portfolio like dust bonds. We have derivatives like IOs or inverse IOs, for example, and that's a sector that we have added to in the last six months, still a small portion of the portfolio, but have added to that. All of those things mix in to generate those yields from quarter to quarter. We also have assumptions that we apply to generate those ranges. As we've said before, we have some financing assumptions up and down. We have some leverage assumptions up and down and some prepay assumptions up and down. All of those things go into that mix to generate that return estimate that you see on that page.

That, you know, that that's that uh uh, you know, you see elsewhere in the market but um, you know, and as you know, there's a wide variation of mortgage spreads available and you know, from mortgage back Securities. It depends where you are in the coupon stack, obviously lower coupons have you know, tighter static returns higher coupons have higher static returns generally. So you know, from quarter to quarter as the portfolio shifts around and spreadsheet around. Even if spreads move in 1 direction or another, you know that those numbers can can go in opposite directions and of course, it does include, you know, as I said everything, we have in our portfolio. Our portfolio is predominantly, mortgage back security pools. Tbas, things of that nature. But we do have other things in our port.

[Analyst 3]: Okay, that makes sense. Thank you.

Portfolio like dust bonds. We have derivatives like iOS or inverse iOS, for example. And that's a sector that we have, you know, added to in the last 6 months, you know, still a small portion of the of the portfolio but have added to that all of those things, you know, mix into generate those yields from quarter to quarter. And of course we also have assumptions that we apply to generate those ranges as we've said before you know we have some financing assumptions up and down. We have some uh leverage assumptions up and down and um some prepaid assumptions up and down and all of those things go into that mix to generate that uh that return estimate um that you see on that page.

Taren: We'll take our next question from Harsh Hemnani with Green Street. Please go ahead.

Okay, that makes sense. Thank you.

We'll take our next question.

[Analyst 1]: Thank you. Maybe on the direct-to-consumer origination platform, right, originations have been growing, and I think the strategic story there is as prepayment speeds rise, the origination business could be a good hedge to MSRs. Given sort of the cost-saving strategies you've highlighted, does that impede the ability at all of the origination business to ramp up at the right time to be able to provide that hedge?

With Green Street, please go ahead.

Thank you.

Oh, maybe.

Bill Greenberg: Good morning, Harsh. Thanks for the question. I have two thoughts about your question. The first is that we've always said that the direct-to-consumer origination platform isn't meant to hedge the entire interest rate risk of the mortgage servicing rights portfolio, but only to hedge that part of it which is faster than expected speeds, right? We all know that when rates go lower, prepayments are going to go up and originations are going to go up and mortgage servicing rights values are going to go down, and we hedge that with financial instruments. It's only the part where speeds are faster than expected that we are expecting the direct-to-consumer origination business in order to be able to add materially.

On the director consumer who origination platform, right? Originations have been growing and I think the Strategic story there is as prepayment speeds rise to the origination business, could be a good hedge to msrs, uh, given sort of the cost-saving strategies. You've highlighted. Uh, do you does that impede the ability at all of the origination business to ramp up at the right time to be able to provide that hedge?

Bill Greenberg: Certainly, I'm well aware that you can't cut costs, you can't cut your way to growth, and we have to be very smart about how we're going to invest in technology and our ability to scale as mortgage rates go lower. That's why it's not a simple exercise of just cutting a certain amount across the board. Technology investments and improvements are going to be key to being able to maintain or retain that ability in order to get those benefits as rates fall. We're going to be careful about that and continue to make the investments that we need to make as well.

Good morning harsh. Thanks for the question. Um, I have 2 thoughts about about your question. The first is that, you know, we've always said that the DTC platform isn't meant to to hedge the entire interest rate risk of the MSR portfolio, but only to hedge that part of it, which is faster than expected speeds. Right? And so, you know, we all know that when rates go lower prepayments are going to go up and originally going to go up and and it's, our values are going to go down and we hedge that with financial instruments. It's only the part where we are faster than expected that uh that we are um um expecting um the DTC origination business in order to uh, be able to add materially

Bill Greenberg: One thing I will say about the direct-to-consumer origination platform and the recapture rates that we've seen so far, while it is small, Nick said in his prepared remarks that only 3% of our portfolio is refinanceable from a rate and term perspective with mortgage rates here, but we've already seen recapture rates, not just record amounts and absolute levels, as I said in my prepared remarks, but also the recapture rates are higher than we have been modeling into our cash flows for these levels of rates and for the portfolio composition that we have. We're real excited and optimistic about the benefits that that program is already producing.

Um, you know, it's look certainly, um, you know I'm well aware that that, you know, you can't cut costs and you know, you can't cut your way to growth. And we have to be very smart about how we're going to invest in technology and our ability to scale as mortgage rates. Go lower. And so, um, you know, that's why it's not as simple. Uh, um, exercise of just, you know, cutting a certain amount across the board. Um, technology Investments and improvements are going to be key to be able to, uh, maintain or retain that ability in order to get those, uh, those benefits as as rates fall. And so, you know, we're going to, we're going to be careful about that and continue to make the Investments that we need to make as well. You know, 1 thing I will say about about the DTC platform and the recapture rates that we've seen so far.

[Analyst 1]: That's excellent. Thank you. Maybe as I look at the coupon positioning, it seems like the higher coupons, you mentioned this in the prepared remarks, there seems to be a spread trade there where you're long specified pools and short TBAs to be able to capitalize on differences in prepay speeds there. It seems like it's not necessarily the opposite, but somewhat flipped in sort of the intermediate coupons at the fives and the five and a half, where exposure to TBA is higher. Can I maybe read into that as assuming that where current mortgage rates are, you feel like for the next quarter or so they hang out around here?

You know, while it is small, you know, Nick said is prepared remarks is only 3% of our portfolio, is refinanced from a rate and term perspective with mortgage rates here, but we've already seen recapture rates and that we're not just record amounts in absolute levels as I said in my prepared remarks, but also the recapture rates are are are higher than we uh, than we have been modeling into our cash flows um, for these level of rates and for the portfolio composition that we have. So we're real, we're real excited. And optimistic about uh, the benefits of that program is is already producing.

Exactly. Thank you. Uh, and then maybe if I look at the coupon positioning, uh, it seems like the higher coupons, you know, you mentioned this in the prepared. Remarks, there seems to be a spread trade there where, you know, your your long specified pools and short TDS to be able to, uh, you know, capitalize on differences in prepaid speeds there. Uh, but it seems like it's, you know, not not necessarily the opposite, but somewhat flipped in, in sort of the intermediate coupons at the 5 and the 5 and a half where exposure to TB is higher, is that?

Can I maybe read into that as assuming that where current mortgage rates? Are you feel like for the next quarter or so they hang out around you?

Bill Greenberg: Hey, Harsh. No, I don't think you should read into that conclusion. The TBAs, as you know, as I mentioned, rates have moved a reasonable amount, and we did rehedge with rates going down. We did migrate our exposure down along with our MSR and current coupon exposure. As far as the TBA concentration in those five, five and a halves, it's a mix of the fact of adjusting the portfolio at a moment in time and also just how we see where specified pools are relative to TBAs at that juncture. We do employ a lot of TBAs to hedge our current coupon risk because it's easy to transact, easy and fast, and just allows us the maximum flexibility with that stuff. It's not necessarily a long-term commitment or a statement to how we feel about the specific trade-offs between spec pools and TBAs and those coupons.

Hey harsh. Um, I you know, I know, I don't think you should read that read into that, uh, that that's inclusion. The, you know, the, you know, tbas as as, you know, as I mentioned, um, you know, REITs have, you know, have moved to reasonable amount and, um, you know, we did um, re you know, rehage, uh, with rates going down, you know, we we did migrate our exposure down along, with our our MSR and current current coupon exposure. Um, you know, as far as the, um, the the TBA concentration and those 5 5 and a halfs. Um, it's a, you know, it's a mix of the fact that, you know, of adjusting the portfolio. A moment in time and also, just how we see where specified pools are.

Bill Greenberg: It's a moment in time, and as we see value in specified pools, and depending on how roles are trading, we'll make the determination as to whether we want that exposure in one or the other. We do typically leave a fair amount of TBA exposure in those current coupon-esque type securities, so we have that flexibility.

[Analyst 1]: All right. Thanks.

Um, relative to tbas, you know, at that, at that juncture. Um, you know, the, we do employ a lot of tbas to hedge. Our current coupon risk because it's, you know, it's easy to transact easy and fast um, and, uh, just allows us, you know, the maximum flexibility with that stuff. But it, it's not necessarily A a long-term commitment or a statement to, you know, how we feel about, you know, those specific, um, the trade-offs between spec pools and tbas, and those coupons. It's, it's a, it's a moment in time and and, you know, as we see value in specified pools um, and as, and depending on how roles are trading, we'll make the determination as, to whether we want that exposure in, in 1 or the other. But, you know, we do, typically leave a fair amount of TBA exposure in those current coupon type security. So, we have that flexibility.

All right, thanks.

Taren: We'll take our next question from Merrill Ross with Compass Point Research. Please go ahead.

We'll take our next question from Merrill. Ross, with compass points research. Please go ahead.

[Analyst 1]: Good morning. Thank you. I wanted to talk about the mortgage servicing rights sales. First, it seems like that was broken into 19 in the third quarter, and there's the balance that'll be transacted or has been transacted in the fourth quarter here.

Bill Greenberg: That other $10 billion is scheduling the end of this month.

Uh, good morning, thank you. I wanted to talk about the MSI sales first. Um, it it seems like that was the broken into 19 in, um, the the third quarter. And there is a balance that will be transacted or has been transacted in in the, in the fourth quarter here,

Is that that other 10 billion?

[Analyst 1]: Right. Okay. What were the characteristics of those MSRs? I look at it, it seems like this is a financial investor, right? That makes sense. They're looking for very low coupons. Is that correct?

That other 10 billion is, is, is scheduling the end of this month.

Okay. And then, um,

Bill Greenberg: These were low coupon sales, yeah. Look, our entire portfolio is really centered around the low coupon portfolio. This was in that part of the portfolio for sure, yes.

the over the characteristics of those msrs. I look at it, it seems like this is a financial investor, right? It makes sense. And they're, they're looking for a very low coupon. Is that correct?

These were low coupon sales. Yet look our entire portfolio is is really centered around the low coupon.

yeah, you know, this was this was

[Analyst 1]: Right. It just seems that the ones that you added on a flow basis can't be that low because mortgage rate's not that low anymore. You've got a little bit of a rotation from these sales into slightly higher coupons. It seems from what you said you're willing to do that because the DTC is a better hedge against that high MSR value that you spoke about. Is that right?

This was in that part of the portfolio, for sure. Yes.

hey, it just seems that the

Bill Greenberg: That's correct. In fact, if you look at slide 13, you can see the gross coupon rate of our portfolio increased from 3.53% to 3.59%, right?

You added on the flow basis. You know, it can't be that low because mortgage rates are not that low anymore. So you've got a little bit of a rotation from these sales into slightly higher coupons. But it seems from what you said you're willing to do that because the DTC is a better hedge against that client MSR value they spoke about.

[Analyst 1]: Right.

Bill Greenberg: This is a small change given that the additions that we've added weren't that big. It also speaks a little bit to the fact that we sold generally stuff that was on average lower than the average, right? That was the impact, a six basis point rise in the gross coupon. Given what I said about the DTC thing, this is something that we are totally comfortable with and desirous of because we think that that higher coupon part of the MSR curve can be attractive to us given the recapture rates that we're seeing on the portfolio that we have.

That's correct. I mean it it you know, in fact if you look at slides 13, you can see the gross coupon rate of our portfolio increased from 3.53 to 3.59.

Right. So this is a a small, uh, a change given given that the addition to that, we've added um, weren't that big. Um, but it also speaks a little bit to the fact that we sold um, generally stuff that was on average lower than the average.

[Analyst 1]: Right. Right. The sales that are going to settle would be pretty similar and have a smaller, but directionally correct, impact.

Right. If not rate and so so that that was the impact was a 6 basis. Point rise in the growth group on. But give what I said about the DTC thing, this is something that we are totally comfortable with and desirous of because we think that, um, that higher coupon part of the, of the MSR curve, um um can be uh attractive. So I was given the the the recapture rates that we're seeing on the portfolio that we have,

Bill Greenberg: Yeah.

[Analyst 1]: On the gross coupon, right?

Right. Right. Right. Right. And so, um, the sales that are going to settle will be pretty similar, and it has to be, you know, with a smaller but directionally correct impact.

Bill Greenberg: Yeah.

[Analyst 1]: Okay, thank you.

Yeah, on the growth. That's fine, right?

Bill Greenberg: Thanks, Meryl.

Taren: will move to our next question from Eric Hagen with BTIG. Please go ahead.

Thanks Marl.

[Analyst 3]: Hey, thanks. Good morning. Maybe following up a little bit there. How do you see MSR valuations responding to a further drop in interest rates? MSR valuations seem to be really strong right now. Do you see the same sources of demand holding up in a refi event? How would you guys potentially respond to even higher MSR valuations at lower interest rates?

We'll move to our next question. From Eric Haugen with btig. Please go ahead.

Hey, thanks. Good morning. Maybe following up a little bit there. I mean, how do you see MSR valuations responding to a further drop in interest rates? I mean, MSR valuations seem to be really strong right now. Do you see the same sources of demand holding up in a refi event? And how would you guys potentially respond to even higher MSR valuations at lower interest rates?

Bill Greenberg: Yeah. First of all, I would say that, you know, with our gross WACC of our portfolio at 360, right, that is still, you know, almost 300 basis points out of the money, right? At these level mortgages, even 50 lower, 100 lower, this is still not going to have large impacts on the refinanceability of that portfolio. I mean, certainly, the way the MSR market and mortgage market works is that when rates decline, you know, prepayment expectations do go up, even albeit slightly given the gross WACC of the portfolio, but the MSR prices will go down. We all know that, and that's in our models, in our estimates, it's in the way that we hedge the asset. That seems to be something that I'm not worried about at the moment, right?

Yeah. So um

First of all, I would say that.

You know, with our gross whack of our portfolio at $360 million, right? That is still, you know, almost 300 basis points out of the money.

Right? So at these level of mortgage even 50 lower 100 lower, this is still not going to have um large impacts on on the refinance ability of that portfolio. I mean certainly the way the more the MSR Market mortgage Market works is that when rates decline you know, prepayment expectations do go up, even

Bill Greenberg: If you're asking about how I think supply will or demand will function in that, you know, in a 50 lower, 100 lower, you know, I don't see it particularly changing given the, what I said, the low gross WACC nature of it. The cash flows are still slow and stable and easy to hedge. Typically, what you see in refinance environments is that originators are able to hold their MSR as they're originating it, and the supply-demand switch really only reverses once rates start to rise after refi rates. I think we're a long way from that. There continues to be, you know, very strong demand from various market participants for the low gross WACC MSR that we hold.

Even even, albeit slightly given the gross back of the portfolio, but the MSR prices will go down and we all know that, and that's in our, it's in our models, and our estimates. It's in the way that we hedge the asset. And so that seems to be a be, uh, something that I'm not worried about at the moment, right? If you're asking about how I think Supply will or demands will function in that, you know, in the 50 lower 100 lower, you know? I I don't see it particularly changing

Given what I said, the low gross back nature of it, the cash flows are still slow and stable and easy to hedge.

you know typically uh what you see in in

Bill Greenberg: I'll follow up with what Bill said, Eric, and that's just that, you know, if you look at the progression of technology and the ability to reach, you know, mortgage holders and be able to recapture, I think that, you know, there have been substantial improvements in that, I think, across the industry. I think there's a greater ability by servicer, you know, holders of servicing to recapture and retain the value of MSR compared to, you know, other points, you know, in the last 20 years of refi events. Not that it's, you know, perfect, but it is definitely better. I completely agree with everything Bill said. I think that there's, I think that the hands that the MSR are in are very solid.

Refinance environments. Is that is that Originators um are able to hold their MSR um um as they're originating it and and the the supply demands um switch really only uh reverses once great start to rise after referrals. So I think we're a long way from that. Um the continues to be um you know, very strong demands from from uh from various Market participants um for for the low growth whack uh MSR that we hold.

Yeah, and I'll I'll um, I'll I'll, you know, follow up with what bills from what Bill said Eric and that's just that, you know, if you look at the progression of technology and and the ability to to reach um you know mortgage holders and and be able to recapture, I think that you know there has been substantial improvements in that I think across the end industry. So I mean I I think there's a greater ability by

[Analyst 3]: Yep. That's helpful. Hey, I mean, on that point about kind of market evolution, I mean, a question about the mortgage servicing rights repo financing. It feels like the mortgage servicing rights market has matured a lot. You know, the size and the scale for you guys has improved considerably. I mean, can you remind us the maturity on that mortgage servicing rights repo and the revolving credit facility? Do you think there's going to be any opportunities to maybe optimize the financing there next year?

Um, servicer, you know, holders of servicing to to recapture and and retain the value of MSR compared to, you know, other points, you know, through in the last, uh, 20 years of a refi events. Um, you know, not not that it's, you know, perfect, but it is definitely better. So, I mean, I, I completely agree with everything Bill said. I think that there's I think that the hands that the MSR in are in are very solid.

Yep, that's helpful. Hey, I mean, on that point about kind of market evolution, I mean, a question about the MSR repo financing. It feels like the MSR market has matured a lot. You know, the size and the scale.

For you guys has improved considerably. I mean, can you remind us the maturity on that MSR repo and the revolving credit facility and do you think there's going to be?

Any opportunities to maybe optimize the financing their next year?

William Dellal: Our maturities are roughly in the range from one to two years. They do roll. When they roll closer, we do renew them. We will look for opportunities to see if we can improve the yield on the MSR, but basically, it seems to be static right now.

our maturities are roughly, uh,

In the range from 1 to 2 years. Uh, they do roll when they roll closer, we we do, um,

We do, uh, renew them. Um,

Bill Greenberg: Yeah. To follow up on that, we continue to field incoming calls from people wanting to enter the space and provide financing on the asset. I agree with your comment there, Eric, that the market has matured a lot since the financing on the asset really opened up in 2018, 2019, and there continues to be more and more participants wanting to participate and spread. Spreads are well supported. I wouldn't say that they're really going down a lot here, but they're well supported and stable at the levels that we're at.

We will look for opportunities to see if if the if we can uh improve the yield on the on the MSR but basically it seems to be static right now.

Yeah, to to follow up on that. You know, we are we we continue to to feel the incoming calls from people wanting to enter the space and provide financing on the assets. So so you know, I agree with your comments there, Eric that, that the, the market has matured a lot. Um, you know, since the financing on the asset, you know, really opened up, um, you know, in 2018209, and there's there continues to be more and more participants wanting to, uh, to participate and and spread. Um, um, our well supported. I, I wouldn't say

[Analyst 3]: I appreciate you guys. Thank you.

their the that that they're really going down a lot here, um, but but they're they're well supported and stable at the levels that we're at,

Bill Greenberg: Appreciate you, Eric.

Yep, I appreciate you guys. Thank you.

Taren: As a reminder, if you would like to ask a question, you may press star one on your telephone keypad to join the queue. We'll move to Bose George with KBW for our next question.

Appreciate you, Eric.

As a reminder, if you would like to ask a question, you may press *1 on your telephone keypad to join the queue.

[Analyst 1]: I just wanted to follow up on.

We'll move to Bose George with KBW for our next question.

Bill Greenberg: Hey, Bo's.

[Analyst 1]: Yeah, I wanted to follow up. MSR

Operator: What's the valuation of the flow mortgage servicing rights that you are originating versus your existing portfolio? Also, can you remind us, can you reflect the value of recapture in the value of the originated mortgage servicing right, and how does that differ for originated versus bulk mortgage servicing rights that you purchase?

Maggie Karr: I'm not sure I understood the second part of the question about whether we include recapture in our valuations. You know, we mark our portfolio to the market price, to where we think the thing would transact in the market, right? Whether the cash flows include recapture cash flows or not is something that impacts the yield or the prospective return of the thing. It doesn't impact the price or the mark, if that makes sense.

Yeah, wanted to follow up on the MSR discussion. What's the valuation of the flow? Um, msrs that you are originating versus, um, you know, your existing portfolio and also can you remind us? Can you reflect the value of recapture in the value of the originated MSR, and how does that differ for originated versus, you know, bulk MSR that you purchase?

Well, so, um, I'm not sure your students, the second part of the question about whether we include recapture, um, in our, um, in our valuations, you know? Um, we mark our portfolio to the market price, right, to where we think the thing would transact in the market, right? And so whether the cash flows include, um, you know, recapture cash flows or not is something that, um,

That impacts the yields or the prospective Return of the thing, it doesn't impact the the price or the Mark, if that makes sense.

Operator: Yeah, it does. I guess there's not a specific recapture assumption that goes in there. There's a broader cash flow assumption that has an embedded recapture feature. Is that the way to think about it?

Yeah, no, it does. But I guess there's not a specific recapture assumption that sort of goes in there. There's the cash flow, a broader cash flow assumption that sort of has an embedded recapture feature, is that right?

Maggie Karr: I would just reiterate that that doesn't impact the mark that we value the asset at, because if we had a different assumption, we would have other different assumptions, typically in discount rates, which would get us to the same market price estimate.

Way to think about it.

Yeah, I guess, but again, I would just reiterate that that doesn't impact the mark that we value the asset at. Because if we had a different assumption, we would have...

Operator: Okay. No, that makes sense. In terms of the valuation, is there, yeah, where's sort of the originated mortgage servicing rights, you know, valued at now versus sort of the lower coupon stuff?

Other different assumptions typically in discount rates, which would get us to the same market price estimates.

Yeah, yeah, yeah. Okay, so that makes sense. And then just in terms of the valuation, is there? Yeah, whereas sort of the originated MSR, you know, valued at now versus sort of the lower coupons stuff.

Maggie Karr: Yeah. I mean, we don't, if you look at the price multiple that we have on the whole portfolio, it's 5.8 times on a weighted average basis for the whole portfolio. There's a whole curve of prices, of price multiples as coupons change. Certainly, as the WACC, as the note rate increases, that multiple on those servicing levels will go down, right? High WACC stuff, over long periods of time, you can look at the money servicing, typically trades on average between 4.5 and 5 multiple depending on lots of things. As a base rule of thumb, that's something where at the money servicing always trades. This market is not inconsistent with that level.

Yeah, you know? I mean, um,

we don't, we we

if you look at the price multiple that we have on the whole portfolio, it's 5.8 times on the, on the, on the, on a weighted average basis for the whole portfolio and, you know, there's a whole curve of of of

Prices of price multiples, um, as coupons change. So certainly, as, uh, as the WAC, as the note rate increases, that malt on those servicing levels will go down.

Right. Um,

Operator: Okay, great. Thanks.

Um, you know, so high wax stuff, you know, you know, like over long periods of time. You can look at the money servicing, um, you know, typically trades, you know, on average between 4 and a half and 5 mol depending on on lots of things. But, you know, as as, as a, as a base rule of thumb, um, that's something we're at the money servicing, always trades. And, and that, and this Market is, is not inconsistent with that level.

Okay, great. Thanks.

[Operator]: There are no further questions at this time. I'd like to turn the conference back over to Bill for any additional or closing remarks.

Maggie Karr: I'd just like to thank everyone for joining us today, and thank you as always for your interest in Two Harbors Investment Corp.

There are no further questions at this time. I'd like to turn the conference back over to Bill for any additional or closing remarks.

[Operator]: This concludes today's call. Thank you again for your participation. You may now disconnect and have a great day.

Just like to thank you everyone, for joining us today. And thank you, as always for your interest in 2 harbors.

This concludes today's call. Thank you again for your participation.

You may now disconnect

Taren: Please stand by. The conference will begin shortly.

Please stand by the conference. Will begin shortly.