Eric Hagen

Eric Hagen inquired about the current conditions for applying repo financing to retained tranches from non-QM and RTL securitizations, asking if terms have improved, if more leverage could be applied, and what the potential returns would look like.

Answer

Mark Tecotzky, Co-Chief Investment Officer, and Larry Penn, President and CEO, noted that the repo market functioned well with relatively low financing spreads. Tecotzky stated that retained tranches are inherently levered and have price volatility, making additional repo leverage undesirable. Penn emphasized using unsecured notes and preferred equity for financing, targeting 20%+ ROE with moderate leverage.

Eric Hagen of BTIG inquired about the relative attractiveness and risk-adjusted returns of the Residential Transition Loan (RTL) space versus the Non-QM market, considering their different funding and leverage profiles.

Answer

Co-CIO Mark Tecotzky stated that EFC likes both products and sees no material difference in their expected returns, though he noted Non-QM offers a broader set of strategic options like securitizations and call options. CEO Laurence Penn added that the Non-QM securitization market is highly developed and that EFC is now exploring a securitization structure for its RTL portfolio as well, highlighting the firm's focus on optimizing financing for all its assets.

Eric Hagen of BTIG asked why the Agency portfolio is not a more attractive allocation at current valuations and followed up on non-QM delinquencies, questioning if there is an expectation to buy delinquent loans out of securitization trusts.

Answer

Co-Chief Investment Officer Mark Tecotzky explained that EFC's strategic focus is on credit and vertical integration, which offers a superior return profile for its permanent capital vehicle compared to the Agency strategy. Regarding delinquencies, he clarified there is no expectation for EFC to buy loans out of its securitization trusts. As a risk retainer, the company's strategy is to work out and resolve these loans while they remain within the securitization.

Eric Hagen asked how the strategy of retiring preferred stock and increasing the use of unsecured debt would impact the company's leverage optics and overall philosophy for managing secured leverage.

Answer

Co-Chief Investment Officer Mark Tecotzky confirmed that retiring the high-cost floating-rate preferred stock was a clear-cut decision. He detailed their ample financing capacity from new secured facilities, unencumbered assets, and cash, suggesting recourse leverage could increase into the 'low 2s' in the near term. He added that using more unsecured debt would make them more comfortable with higher leverage and that a long-term goal is to replace short-term repo with longer-term financing to build a more robust company.

Eric Hagen asked about the market's focus on private credit, its potential impact on other asset managers, and the knock-on effects on residential and commercial mortgage markets, including whether it affects underwriting or demand for whole loans. He also questioned the sensitivity of non-QM origination volume to secondary market spread backups and the stability of non-QM spreads amidst a steeper yield curve.

Answer

CEO Sreeniwas Prabhu explained that much of the private credit concern is in corporate credit, with institutions generally underinvested in asset-backed and mortgage credit. He noted that while commercial real estate faces true delinquencies, the mortgage and ABS sectors haven't seen similar issues. Regarding non-QM origination, Mr. Prabhu stated that volumes are driven by IRRs and are less affected by range-bound rate fluctuations. He acknowledged that a steeper yield curve could shift origination towards hybrid mortgages, but this hasn't significantly impacted their non-QM space yet. He expects securitization and origination to remain healthy as long as spreads stay within a 25-40 basis point range.

Eric Hagen asked about the market's focus on private credit, its potential impact on other asset managers and the residential/commercial mortgage markets, and how it might affect underwriting or demand for whole loans and securitized products. He also questioned the sensitivity of non-QM origination volume to secondary market spread backups and the stability of non-QM spreads in a steeper yield curve environment.

Answer

CEO Sreeniwas Prabhu clarified that much of the private credit money went into corporate credit, not asset-backed or mortgage credit, where institutions are generally underinvested. He stated that issues seen in corporate private credit haven't bled into the mortgage or ABS space, distinguishing it from commercial real estate. Mr. Prabhu added that non-QM origination volumes are less sensitive to spread backups in a range-bound rate environment, driven by IRRs, and that while a steeper yield curve could lead to hybrid mortgages, non-QM spreads within a 25-40 basis point range would support healthy securitization and origination.

Eric Hagen of BTIG inquired about the valuation differences between bank statement and DSCR loans in the current macro environment, AOMR's appetite for each, and the strategy and mechanics behind potential resecuritizations, including warehouse funding costs.

Answer

CEO Sreeniwas Prabhu explained that while DSCR loans offer better returns, they are under more scrutiny due to their link to investment properties, though the current mix will be maintained. CFO Brandon Filson addressed resecuritizations, stating they would be a 'same-day' transaction to avoid market risk and primarily serve to relever older, deleveraged deals to free up capital. He also confirmed that warehouse funding costs are improving, with spreads tightening from over 210 basis points to as low as 165-190 basis points.

Eric Hagen from BTIG asked whether GAAP or economic book value is the more relevant benchmark for accretive opportunities. He also questioned if the company would use cash from securitizations or unsecured debt to repurchase stock.

Answer

Chief Financial Officer Brandon Filson stated that while economic book value is important, the company is increasingly focused on GAAP book value for evaluating opportunities. He explained that using capital for stock repurchases is not currently favored because deploying it into new loans generates a higher return on equity (15-20%) compared to the dividend yield (~13%), making new investments more accretive.

Eric Hagen asked about the potential for stock buybacks given current valuation levels, the liquidity sources available, and the company's stance on loan modification activity.

Answer

CFO Brandon Filson explained that while stock buybacks are monitored daily, they are not currently planned due to recent stock volatility and overhang, though this could be reconsidered. CEO Sreeniwas Prabhu addressed delinquencies, noting that loan modification activity is very low. He explained that due to significant home price appreciation, borrowers are more likely to refinance than require a modification, which mitigates credit issues.

Eric Hagen asked for clarification on the historical context of MBS haircut levels and whether further reductions are possible due to GSE efforts to reduce market volatility. He also questioned ARMOUR's current coupon stack strategy, appetite for current coupons, and how many Fed rate cuts are currently priced into the mortgage basis.

Answer

Co-Chief Investment Officer Sergey Losyev explained that while FICC provides guidance, ARMOUR has worked with counterparties to bring bilateral repo haircuts closer to the 2.75% weighted average, with 80% of the repo book at 3% or lower. He noted a shift away from current coupons towards deeper discount and premium coupons, adopting a 'barbell approach.' He estimated the market expects a little over two Fed cuts by year-end, with June having a near 100% probability, which is seen as favorable for the MBS market.

Eric Hagen asked about the current MBS haircut levels relative to historical norms and whether GSE actions could further reduce them. He also questioned the appetite for current coupons versus lower coupons, considering originator aggressiveness in refinancing and prepayment risk. Finally, he asked how many Fed cuts are currently priced into the mortgage basis for the remainder of the year.

Answer

Co-Chief Investment Officer Sergey Losyev stated that 80% of the repo book is at 3% haircut or lower, with a weighted average of 2.75%, and they hope for further reductions. He noted a shift away from current coupons towards deeper discount coupons and seasoned collateral, while premium coupons remain a core holding due to historical OAS spreads. He estimated the market expects a little over two Fed cuts by year-end, which would be positive for MBS.

Eric Hagen from BTIG asked about the impact of Fed rate cut expectations on MBS spreads, specifically if spreads would widen if expectations are walked back or tighten once cuts are delivered. He also inquired about the stock valuation levels during the capital raise and share buyback transactions in the quarter.

Answer

Co-Chief Investment Officer Sergey Losyev confirmed that both scenarios are possible: a pause in easing could cause volatility and widening, while delivered cuts could unlock bank demand and lead to tightening. CEO Scott Ulm and CFO Gordon Harper explained that share buybacks occurred around a $14.40 average price during a dislocation, while capital was raised at good valuations, highlighting the company's dynamic approach to equity management.

Eric Hagen questioned what is currently priced into MBS spreads regarding Fed rate cuts and the company's strategy for capital raises and stock buybacks.

Answer

Co-Chief Investment Officer Sergey Losyev confirmed that MBS spreads would likely widen if Fed rate cut expectations are walked back and tighten if cuts are delivered, citing potential bank demand and the spread between current coupon mortgages and T-bills. CEO Scott Ulm and CFO Gordon Harper discussed the company's commitment to both selling and buying stock, noting that buybacks occur during dislocations, with recent repurchases averaging around the $14.40 handle.

Eric Hagen of BTIG, LLC inquired about the value of hedging the short end of the yield curve and using swaptions. He also asked how much the duration gap might extend if rates rose 50 basis points and how the company would respond.

Answer

Co-Chief Investment Officer Sergey Losyev responded that they express their view on the stable short end of the curve through a 'bull steepener' bias and do not currently use swaptions, preferring to express volatility views via the current coupon basis. He assured that they manage duration risk dynamically and would not allow it to extend to a level that would compromise liquidity, implying they would rebalance the portfolio as needed.

Eric Hagen asked how the dislocation in swap spreads affects hedge rebalancing and how potential relief on the supplementary leverage ratio (SLR) could impact supply and demand for repo funding.

Answer

Desmond Macauley, an executive, explained that ARMOUR maintains a diversified hedge book, having increased treasury-based hedges to 30% in Q1, and is comfortable with the current mix. He noted the firm expects swap spreads to normalize eventually. Scott Ulm, an executive, added that SLR relief would make high-quality, low-ROE assets like Agency MBS and repo more attractive for banks to hold, which should improve overall repo market conditions and liquidity.

Eric Hagen of BTIG inquired how the current dislocation in swap spreads influences ARMOUR's hedge rebalancing strategy and how potential relief on the supplementary leverage ratio (SLR) might affect repo funding.

Answer

Executive Desmond Macauley explained that ARMOUR maintains a diversified hedge portfolio, having increased its treasury-based hedges to 30% in Q1. The company is comfortable with its current 70% allocation to swaps, anticipating an eventual normalization. Executive Scott Ulm added that SLR relief would make holding high-quality, low-ROE assets like Agency MBS and repo more attractive for banks, which should improve the overall availability of repo funding.

Eric Hagen from BTIG asked about the current value of pay-ups on specified pools relative to history and whether the steeper yield curve is supporting repo market liquidity and demand for term repo.

Answer

Sergey Losyev responded that specified pool pay-ups have appreciated significantly, prompting the company to increase its use of TBA dollar rolls to diversify and await better entry points. He also noted that the repo market has been extremely well-behaved post-year-end, with competitively priced funding that is beneficial for Agency MBS returns.

Eric Hagen asked which series of preferred stock MFA is issuing for the buyback program and about the optimal mix of preferred versus common stock in the capital structure. He also inquired about the non-QM securitization spread levels needed for re-securitization to be beneficial and if the opportunity diminishes with wider spreads.

Answer

Mike Roper (CFO) specified that approximately 160,000 Series C and 50,000 Series B preferred shares were issued, noting room for more preferred in the capital structure, especially if the market becomes more attractive. Bryan Wulfsohn (President and Chief Investment Officer) clarified that the re-securitization opportunity exists due to attractive spreads and natural delevering. He stated that the strategy wouldn't materially change even if spreads widened by 25-50 basis points, as delevering still creates opportunity.

Eric Hagen asked about the specific series of preferred stock being issued for the common stock buyback program and the company's broader view on the optimal mix of preferred versus common stock in its capital structure. He also questioned how tight non-QM spreads need to be for re-securitization to be beneficial and if the opportunity diminishes with wider spreads.

Answer

CFO Mike Roper confirmed that approximately 160,000 shares of Series C and 50,000 shares of Series B preferred stock were issued during the quarter, with Series C being issued more regularly. He noted there is room for more preferred stock in the capital structure, but the market has been somewhat closed, making the ATM program useful for marginal issuance. President and Chief Investment Officer Bryan Wulfsohn explained that the re-securitization opportunity exists due to both attractive spreads and natural delevering of existing structures. He added that the strategy would likely still be viable even if spreads widened by 25-50 basis points, depending on the extent of delevering, and would not materially change their approach.

Eric Hagen from BTIG questioned the performance of single-family rental and transitional loans, asking if developers are achieving expected outcomes. He also asked which loan origination vintages carry higher relative risk and what catalysts beyond lower rates could accelerate calls on the non-QM portfolio.

Answer

President & CIO Bryan Wulfsohn stated they have not seen material pressure on developer exits and that risk has been 'vintage agnostic' due to low LTVs. CEO Craig Knutson and CFO Michael Roper explained that calling non-QM deals is a financial exercise where, in addition to lower rates, the deleveraging effect of a call can unlock capital and increase portfolio ROE, making it attractive even if not deeply 'in the money' for a simple reissue.

Eric Hagen of BTIG questioned the source of the convexity risk shown in the interest rate sensitivity table and asked about the specific drivers of defaults in the Lima One portfolio, including any potential impact from tariffs.

Answer

President and CIO Bryan Wulfsohn explained that the negative convexity is driven by both the non-QM and agency portfolios and that their modeling is conservative. He detailed that BPL defaults stem from various factors like high interest costs and project delays, not a single cause. He added that tariffs are not expected to have a material impact on delinquencies, though contingencies are being increased.

Eric Hagen asked about the economic trade-offs of calling seasoned securitizations, the impact of higher Non-QM prepayments on returns and earnings, and the level of unfunded commitments in the Lima One portfolio.

Answer

CEO Craig Knutson explained that calling deals, despite higher new coupon rates, can be highly accretive to ROE by increasing leverage. President & CIO Bryan Wulfsohn noted that higher prepays on loans held at a discount are economically positive for book value but can negatively impact distributable earnings. Executive Harold Schwartz estimated unfunded commitments at approximately $600 million, which are largely self-funding.

Eric Hagen of BTIG inquired about Lima One's loan warehouse capacity for retaining loans if the securitization market slows. He also asked about the factors and constraints influencing the decision to increase the agency portfolio and its leverage.

Answer

President & CIO Bryan Wulfsohn stated that MFA and Lima One have ample capacity, with over $1 billion in potential borrowing available outside of securitization. He added that the agency portfolio could grow from $1 billion to $1.5-$2 billion if spreads remain attractive, as it serves as a complementary asset to the credit portfolio.

Eric Hagen asked about the impact of the focus on affordability and lower mortgage rates on the residential transition lending (RTL) business, and what catalysts might lead to allocating more capital to CoreVest. He also sought clarification on the $10-$15 million expense savings and broader guidance for full-year expenses.

Answer

CEO Chris Abate stated that CoreVest's focus is on profitability for shareholders, with much of its volume supported by JV partners like CPP, generating asset management fees and co-investing. President Dash Robinson added that affordability initiatives could be a tailwind if they streamline local hurdles for developers, as there's pent-up demand for refurbished homes and consumers prefer turnkey housing. He noted that smaller investors, CoreVest's target audience, could benefit if larger players are sidelined. CFO Brooke Carillo clarified that the $10-$15 million expense savings are annualized back-office run rate costs for 2026, concentrated across corporate and CoreVest segments. She explained that 45% of the $200 million 2025 OpEx was fixed, and incremental volume in 2025 (+$12 billion) was supported by a $30 million OpEx increase, implying a marginal cost per loan of about 25 basis points, which they aim to reduce further.

Eric Hagen asked about the impact of the focus on affordability and lower mortgage rates on the residential transition lending (RTL) business, and potential catalysts for allocating more capital to CoreVest. He also inquired about the previously mentioned expense savings and broader full-year expense guidance.

Answer

CEO Chris Abate stated that CoreVest's focus is on profitability for shareholders, with much of its volume supported by JV partners. President Dash Robinson explained that affordability initiatives could be a tailwind for RTL if local hurdles for developers are eased, as there's pent-up demand for refurbished homes. CFO Brooke Carillo clarified that $10 million-$15 million in expense savings are concentrated across corporate and CoreVest segments. She noted that while total operating expenses increased by $30 million in 2025, this was tied to $12 billion of profitable volume growth in Sequoia and Aspire, resulting in a marginal cost per loan of about 25 basis points, which they aim to reduce further.

Eric Hagen asked about Redwood Trust's future strategy for jumbo volume, specifically the balance between securitization and third-party sales, and the confidence in the stabilization of credit performance within the Bridge Loan (BPL) portfolio.

Answer

CEO Chris Abate highlighted securitization as a strong option for jumbo loans due to Redwood's liquid shelf and low financing costs, enabling growth without substantial external capital. He also mentioned fundraising for Sequoia and bank partnerships as additional growth avenues. President Dash Robinson explained that BPL credit issues are largely confined to the first-half 2022 vintage. He noted that the securitized bridge portfolio (representing the last three years of production) has a 90+ day delinquency rate below 3%, with increasing prepay velocity and efficient resolution of delinquencies due to a shift towards smaller balance, single-family focused collateral. CFO Brooke Carillo added that $280 million in Q3 paydowns came from bridge loans, including REO and special assets.

Eric Hagen asked about Redwood Trust's future jumbo volume distribution, specifically the expected split between securitization and third-party sales over the next year, and the factors providing confidence in the stabilization of credit performance within the BPL (Bridge Loan) portfolio.

Answer

CEO Chris Abate stated that securitization remains a strong option due to Redwood Trust's liquid shelf and low financing costs, allowing for extended growth without significant outside capital needs. He also highlighted the potential for growth through partnerships with banks. President Dash Robinson explained that BPL credit performance stabilization is linked to vintage issues, with higher severities limited to the first half of 2022 vintage. He noted that the securitized bridge portfolio (last three years of production) is below 3% 90+ day delinquencies, with efficient resolution of delinquencies. CFO Brooke Carillo added that $280 million of paydowns in the quarter, including REO and special assets, contributed to moving the legacy book.

Eric Hagen of BTIG questioned the scenarios under which Jumbo channel margins could expand, the outlook for the Bridge portfolio given higher input costs, and whether a Fed rate cut could lead to mark-to-market upside.

Answer

CEO Christopher Abate explained that margins could expand by supplementing strong daily flow volume with opportunistic bulk pool acquisitions from banks. President Dashiell Robinson added that a Fed cut would be helpful for the Bridge portfolio by recompressing cap rates and increasing transaction velocity, but noted the company remains selective in certain markets due to input costs.

Eric Hagen asked about potential catalysts to lower high credit enhancement levels in securitizations and how GSE reform might impact this. He also questioned whether it's more effective for CoreVest to tighten underwriting or raise loan coupons.

Answer

CEO Christopher Abate advocated for regulatory reforms like changes to Reg AB II to make public securitization more viable, noting ample private credit capital is available. President Dashiell Robinson addressed the CoreVest question, stating they prioritize adjusting credit policy (i.e., lowering leverage) over simply increasing price (spreads) in markets with perceived risk.

Eric Hagen of BTIG questioned if there was room to expand the jumbo loan credit box, whether bulk loan purchases share a similar risk profile to new originations, and how reduced unsecured debt impacts capital allocation strategy.

Answer

President Dashiell Robinson identified the new Aspire platform, targeting the non-QM market, as the primary avenue for credit expansion, noting bulk pools often have pristine credit. He also explained that reducing unsecured debt provides flexibility to relever deleveraging secured assets, allowing capital to be efficiently redeployed into the operating businesses, including optimizing the bridge portfolio.

Eric Hagen of BTIG asked about potential opportunities from GSE loan limit increases and for an outlook on jumbo market supply, questioning if securitization volume could grow even if interest rates remain high.

Answer

CEO Christopher Abate stated that GSE limit increases are largely priced in and less impactful than in prior years, seeing bigger opportunities in non-QM products. On jumbo supply, he noted significant market capacity exists. He argued that higher rates could actually boost securitization volume by making it less attractive for banks to hold jumbo loans on their balance sheets, creating a major partnership opportunity for Redwood.

Eric Hagen asked about the potential for reduced credit enhancement levels in non-QM securitization trusts and how that might influence the company's leverage appetite for retained subordinate pieces. He also questioned if GSCs might sell more of their loan portfolios to create room for MBS purchases and if the market is deep enough for such sales.

Answer

Jack MacDowell (CIO, Chimera Investment Corporation) noted differentiation in AAA enhancement levels and rating agencies reviewing models, but did not expect a material decline in credit enhancement given creeping delinquencies in 2022/2023 cohorts. He expressed comfort with leverage on horizontal risk retention due to fixed-rate term financing. Regarding GSCs, he affirmed they could sell NPLs, having done so historically if economically viable.

Eric Hagen from BTIG asked about the potential for reduced credit enhancement levels in non-QM securitization trusts and how this might influence Chimera's leverage appetite for retained subordinate pieces. He also questioned if GSEs might sell more non-performing loan (NPL) portfolios to facilitate MBS purchases and the market's capacity for such sales.

Answer

Jack MacDowell, CIO of Chimera Investment Corporation, noted differentiation in AAA enhancement levels across deals and rating agencies reviewing models, but doesn't expect a material decline given some delinquency increases in 2022-2023 cohorts. He explained that retaining horizontal pieces in securitizations provides fixed-rate term financing, making them more comfortable with leverage than mark-to-market repo. Regarding GSE NPL sales, he expressed hope they would, noting it's a historical avenue they could use again if economically sensible.

Eric Hagen of BTIG asked about the impact of potential Fed rate cuts on the portfolio and callable debt, the potential for home equity products to affect the loan portfolio, and the planned allocation of Home Express's loan production.

Answer

CIO Jack Macdowell explained that Fed rate cuts would likely boost net interest margin and could make more securitizations economical to call. He noted that while home equity products exist, the seasoned borrower profile makes widespread adoption unlikely to significantly alter credit performance. He also emphasized that Chimera will continue to support Home Express's third-party sales channels while also retaining some production for its own balance sheet, without a specific target split at this time.

Eric Hagen of BTIG asked about the portfolio's sensitivity to higher delinquencies across RPL and non-QM loans and requested details on two newly refinanced loan facilities, including advance rates and margin call provisions.

Answer

CIO Jack Macdowell explained that while non-QM delinquencies are being monitored, the credit risk is manageable due to high borrower equity and active asset management. He noted RPL delinquencies are stable. Regarding the facilities, he confirmed they are structured repos with banking partners and feature non-mark-to-market or limited mark-to-market terms, which proved resilient during recent volatility. He declined to provide specific advance rates due to the complexity of the underlying collateral.

Eric Hagen of BTIG inquired about the impact of rising interest rates on margin calls during the quarter and the company's outlook on the securitization market amid changing Federal Reserve rate cut expectations.

Answer

President and CEO Phillip Kardis stated that any margin calls received were immaterial and not significant. An executive then elaborated on the securitization market, noting that tightening credit spreads create favorable conditions for exercising call rights and redeploying capital. They highlighted strong investor demand, evidenced by their first-ever sale of a BB tranche in a recent deal.

Eric Hagen asked about Invesco Mortgage Capital's book value sensitivity and the potential upside to further spread tightening, considering that spreads have already tightened significantly.

Answer

Brian Norris, CIO, confirmed that the magnitude of book value change to spread changes remains similar due to stable leverage. However, he emphasized that expectations for significant further spread tightening are reduced, as the $200 billion of GSE purchases are largely priced into the market. Mr. Norris indicated that substantial additional tightening would likely require increased bank participation or higher GSE caps.

Eric Hagen asked about the book value sensitivity to further spread tightening, specifically whether the magnitude of this sensitivity remains similar now that spreads are tighter compared to when they were wider.

Answer

CIO Brian Norris confirmed that the magnitude of book value change to spread changes remains consistent due to stable leverage. However, he emphasized that expectations for *significant* further spread tightening are reduced, as the market has largely priced in the $200 billion of GSE purchases. He anticipates that money managers might sell into current spread levels, preventing substantial further tightening unless there are major new catalysts like increased bank demand or higher GSE caps.

Eric Hagen from BTIG asked about the potential behavior of Agency CMBS spreads during Fed rate cuts and the stability of the CMBS repo market in a widening event.

Answer

Chief Investment Officer Brian Norris stated that the financing market for Agency CMBS has been robust and they have no concerns about its stability. He expects CMBS spreads to follow Agency RMBS spreads tighter, albeit with a lower beta, as the Fed begins to cut rates. He also confirmed the CMBS position is levered consistently with the rest of the portfolio.

Eric Hagen questioned whether the traditional relationship of mortgage spreads tightening after a Fed rate cut might differ in the current macro environment. He also asked about potential opportunities in commercial credit.

Answer

Brian Norris, CIO, agreed that a slowing economy and steeper curve generally benefit agency mortgage valuations. He also noted that a Fed on hold isn't necessarily negative as it reduces short-term volatility. Regarding credit, Norris stated that the company is hesitant to add credit exposure, has sold its remaining modest credit investments, and is now 100% agency with no plans to change that allocation in the near term.

Eric Hagen of BTIG asked if retiring preferred stock changes the approach to leverage, what the target leverage range is, whether spread widening risk is greater in a rally or sell-off, and the appetite to extend the duration gap.

Answer

CIO Brian Norris stated that retiring preferred stock doesn't change the view on debt-to-common leverage, which has a comfortable target around 9x, but total debt-to-equity will move higher. He also noted the intention is to keep the duration gap close to zero, as mortgages have been trading long versus rates, meaning they tend to outperform in a rally and underperform in a sell-off.

Eric Hagen from BTIG asked if PennyMac Mortgage Investment Trust would consider selling Mortgage Servicing Rights (MSRs) either opportunistically or for risk management and deleveraging purposes.

Answer

David Spector, PennyMac Mortgage Investment Trust's Chairman and Chief Executive Officer, confirmed that the company would consider selling MSRs. He highlighted the management team's increased agility in portfolio management and their proven ability to execute MSR sales and transfers, as evidenced by past trades with PFSI.

Eric Hagen asked if PennyMac Mortgage Investment Trust would consider selling MSRs opportunistically or for risk management purposes to delever the balance sheet.

Answer

David Spector, Chairman and CEO, confirmed that PMT would consider selling MSRs. He emphasized the company's increased agility in managing its portfolio in 2025 and its ability to execute MSR sales and transfers, as demonstrated by a prior trade with PFSI. He stated that if higher-returning assets are identified compared to MSRs, such a sale would be contemplated.

Eric Hagen of BTIG questioned whether potential reforms to title insurance, combined with strong home price appreciation, could motivate low-coupon borrowers to pursue cash-out refinances.

Answer

David Spector, CEO & Chairman, stated he does not expect title insurance reform to significantly accelerate prepayment speeds on low-interest-rate loans. He believes that while cost reductions are helpful for purchases, homeowners with low mortgage rates are more likely to extract equity via closed-end second liens rather than a full cash-out refinance.

Eric Hagen of BTIG asked whether potential reforms to title insurance, when combined with strong home price appreciation, could incentivize low-coupon borrowers to pursue cash-out refinances, thereby increasing prepayments.

Answer

CEO David Spector stated he does not expect title insurance reform to significantly accelerate prepayment speeds on low-coupon loans. He believes the cost savings are modest and the primary benefit will be for home purchases. Spector noted that PMT's affiliate, PFSI, is seeing an increase in closed-end second liens, suggesting homeowners prefer tapping equity without refinancing their primary low-rate mortgage.

Eric Hagen of BTIG asked whether the jumbo and investor property loans from securitizations are considered a substitute for the Agency MBS portfolio that is typically paired with MSRs.

Answer

EVP & CFO Daniel Perotti clarified that it depends on the specific tranche retained. The senior mezzanine portions of securitizations are viewed as substitutes for Agency MBS due to their similar interest rate sensitivity. However, he noted that the majority of recent retentions ($66 million last quarter) were in credit-sensitive subordinate bonds, which are not substitutes and are treated as credit investments similar to CRT, while a smaller portion ($29 million) was in the more senior, TBA-substitute bonds.

Eric Hagen from BTIG asked for the source of liquidity to retire debt due in the coming month and whether the company expects to carry lower leverage as a result. He also clarified if the transaction was reflected on the third-quarter balance sheet.

Answer

Executive Daniel Perotti clarified that the funds to repay the debt will come from drawings on secured lines, a transaction that occurred after the quarter ended on September 30. He stated that this action would keep overall leverage relatively unchanged, as it effectively swaps secured debt for the retiring convertible notes.

Eric Hagen asked about PennyMac Financial's balance sheet strategy regarding unsecured debt, particularly in the context of rising prepayment speeds, and inquired about the remaining buyback authorization.

Answer

CFO Dan Perotti explained that debt is managed via the non-funding debt-to-equity ratio (around 1.5x), and as equity and the MSR portfolio grow, there's potential for more unsecured debt, which is preferred for liquidity and flexibility. He expects further unsecured debt issuance in 2026 and beyond, maintaining prudent leverage. Chairman and CEO David Spector stated there's over $200 million in buyback authorization, which is regularly reviewed and has been historically utilized.

Eric Hagen questioned how community bank consolidation might alter their appetite for mortgage origination and PennyMac Financial's opportunity to gain market share. He also asked about opportunities to reduce servicing expenses meaningfully in the near term, including any target rates and their inclusion in ROE guidance.

Answer

David Spector, Chairman and CEO, stated that while consolidation is ongoing, PFSI's robust underwriting and risk management practices provide comfort. He believes consolidation will ultimately benefit PFSI due to its presence in all three channels. Dan Perotti, CFO, and David Spector, Chairman and CEO, confirmed expectations for continued decline in unit servicing costs through technology and AI, with potential for additional upside. The ROE guidance through 2026 does reflect these anticipated cost savings, with corporate expenses increasing due to technology investments.

Eric Hagen inquired about how renewed attention on community bank credit risk and potential consolidation might affect their mortgage origination appetite and PennyMac Financial's opportunities to gain market share. He also asked about the potential for meaningful reductions in servicing expenses, any target rate for these costs, and whether the ROE guidance incorporates such reductions.

Answer

Chairman and CEO David Spector stated that while consolidation has been ongoing, PennyMac's robust underwriting and risk management practices for correspondent counterparties provide comfort. He believes consolidation will benefit PennyMac in the long run due to its presence across all three channels (correspondent, broker, consumer direct). CFO Dan Perotti confirmed expectations for unit servicing costs to continue declining through technology and AI initiatives, with the 2026 ROE guidance reflecting these additional cost savings, and potential for further upside if technology initiatives move quickly. David Spector added that a slight uptick in corporate expenses was due to investments in AI-related technology to enhance the servicing system and reduce future expenses.

Eric Hagen from BTIG asked for a sensitivity analysis on custodial balance earnings and interest expense for a potential Fed rate cut. He also questioned the outlook for correspondent channel margins if mortgage rates remain high.

Answer

CFO Daniel Perotti confirmed that both floating-rate debt and custodial deposit earnings are closely tied to the Fed funds rate. CEO David Spector addressed the margin question, stating that in a 'higher for longer' environment, they are seeing correspondent sellers sell whole loans rather than retain servicing, a trend he expects to continue, supporting PennyMac's market share growth.

Eric Hagen of BTIG, LLC asked about the mix of loan recaptures (rate/term vs. purchase), the use of proceeds from the recent debt issuance, MSR financing flexibility, and how gross margins have trended in April.

Answer

Executive David Spector confirmed most recaptures are rate-and-term refinances, with the new brand partnership aimed at boosting purchase recapture. Executive Daniel Perotti explained the debt proceeds paid down MSR financing lines, increasing flexibility. He noted that while all lines are mark-to-market, PFSI has significant excess collateral, preventing margin calls. Perotti also stated that overall margins in Q2-to-date have been slightly tighter than in Q1.

Eric Hagen asked if PFSI's quarterly origination volume has a floor of around $30 billion and questioned the competitiveness of the GSE cash window as an alternative for correspondent sellers.

Answer

Executive David Spector did not commit to a specific volume floor but addressed the competitive landscape. He explained that the GSE cash window is a less attractive alternative for sellers in high-rate environments because they are reluctant to retain unhedged servicing. He emphasized PFSI's strength as a leading aggregator and the importance of its relationships with sellers, particularly when market conditions shift.

Eric Hagan asked for Annaly's perspective on potential G-fee cuts by the administration to lower mortgage rates, specifically how a broad G-fee cut might impact the prepayment environment. He also inquired about metrics for comparing hedging costs over time and the attractiveness of raising capital in different spread and volatility environments.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, stated that a G-fee cut on purchase loans is appropriate, but a broad cut impacting existing loans could damage the MBS market. He noted that spread volatility has been stable for the last six months, reducing hedging costs. Regarding capital raising, he preferred wider spreads with more uncertainty over tighter spreads, but acknowledged current strong technicals in the agency market. V.S. Srinivasan, Head of Agency, added that higher coupons haven't tightened much due to policy uncertainty, suggesting future opportunities.

Eric Hagen asked for Annaly's perspective on potential G-fee cuts by the administration and their impact on the prepayment environment. He also inquired about metrics for comparing hedging costs over time and the attractiveness of raising capital in different spread environments.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, stated that G-fee cuts on purchase loans are appropriate, but broad cuts impacting existing loans could damage the MBS market. He noted that spread volatility has been stable for the last six months, leading to low hedging costs. Finkelstein expressed a preference for raising capital in wider spread environments, despite current tighter spreads, due to the stability provided by strong technicals and the Fed's balance sheet actions. V.S. Srinivasan, Head of Agency, added that higher coupons haven't tightened much due to policy uncertainty, potentially creating future opportunities.

Eric Hagen questioned whether Annaly envisions returning to a duration gap strategy, weighing it against leverage, and asked about the impact of potential GSE re-entry into the Agency MBS market on spreads and MSR valuations.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, stated that Annaly currently maintains a near-zero duration gap due to market uncertainty, prioritizing spread basis and credit risk. He also noted that while some GSE re-entry is priced in, broad fixed income demand has been the primary driver, and GSEs could act as spread stabilizers if well-regulated.

Eric Hagen of BTIG, LLC asked about the strategy of pairing low-coupon MSRs with higher-coupon assets and questioned how much duration hedging the MSR portfolio currently provides.

Answer

Head of MSR Ken Adler stated that the company has built the capability to participate in any coupon through strategic partnerships. CEO David Finkelstein clarified that while the MSR position is a powerful cash flow generator, it provides minimal duration hedging, accounting for less than 2% of the overall hedge portfolio.

Eric Hagen from BTIG, LLC asked how Annaly thinks about pairing its seasoned, low-coupon MSRs with higher-coupon opportunities. He also questioned how much the MSR position contributes to the portfolio's overall duration hedge and return.

Answer

Head of MSR Ken Adler explained that Annaly has built capabilities and partnerships to participate in all coupon environments and is prepared to act as opportunities arise. CEO & Co-CIO David Finkelstein clarified that the MSR position provides a very small duration hedge, accounting for less than 2% of the overall hedge portfolio. He described it as a powerful carry generator with minimal structural leverage rather than a significant duration offset.

Eric Hagen of BTIG inquired about the risk of weaker housing prices becoming systemic and the potential implications of the GSEs being released from conservatorship.

Answer

Co-CIO Michael Fania described current housing price weakness as regional and a pullback from outsized gains, not systemic, citing strong long-term fundamentals like borrower equity. CEO David Finkelstein added that a potential release of the GSEs from conservatorship could create opportunities, as a smaller GSE footprint would benefit both Annaly's agency and residential credit businesses by opening up the market for non-core loans.

Eric Hagen from BTIG inquired about the housing market, asking if price weakness could become systemic, and also questioned the potential market impact if the GSEs were released from conservatorship.

Answer

Co-CIO Michael Fania characterized the housing price weakness as regional and not systemic, citing strong underlying fundamentals like high borrower equity and a long-term supply deficit. He also highlighted the resilience of the securitization market. CEO David Finkelstein added that a potential GSE exit from conservatorship would be a long-term net positive, creating opportunities for Annaly's residential credit and Agency businesses.

Eric Hagen of BTIG, LLC asked how Annaly is managing leverage and viewing mortgage spreads given the outlook for heavy Treasury issuance, and whether the company uses its stock valuation as a proxy for MBS demand.

Answer

CEO David Finkelstein stated that spreads are fair to inexpensive and that hedges remain positioned at the long end of the curve to protect against Treasury supply risk. He clarified that Annaly's stock valuation is a function of its own performance metrics—like economic return and EAD—rather than a proxy for the broader MBS market, where demand is currently widespread across many participants.

Eric Hagen from BTIG, LLC asked about managing leverage and mortgage spreads given the outlook for heavy Treasury issuance. He also questioned if Annaly uses its stock valuation as a proxy for MBS demand and how it views growth opportunities.

Answer

CEO David Finkelstein stated that spreads are fair with some tightening potential, and they are maintaining hedges at the long end of the curve due to Treasury supply. He clarified that Annaly's valuation is a function of its own performance (return, EAD, leverage), not a proxy for the broader MBS market, which is driven by collective demand from all participants.

Eric Hagen asked for AGNC's perspective on prepayment speeds, at what mortgage rate level the refi market might accelerate, and whether AGNC would modify its hedging strategy, specifically longer-dated hedges, if refis were to accelerate.

Answer

Peter Federico acknowledged increased prepayment risk, emphasizing that asset selection (coupon composition, pool characteristics like channel, credit, geography, loan balance) will be critical for mortgage performance. He noted that 87% of AGNC's 5.5s and above portfolio (48% of total) has attributes for more stable cash flows, citing their 6.5% population paying at less than half the CPR of the cheapest-to-deliver cohort. He also stated the importance of operating with a positive duration gap and using option-based hedges (like receiver swaptions) to provide protection in a rising prepayment environment.

Eric Hagen asked for AGNC's perspective on prepayment speeds, the mortgage rate level that would significantly accelerate the refi market, and whether hedging strategies, specifically longer-dated hedges, would be modified in such a scenario.

Answer

Peter Federico, President, CEO, and CIO, acknowledged increased prepayment risk and emphasized the critical role of asset selection, including coupon composition and specified pool characteristics, for future mortgage performance. He cited that 87% of AGNC's 5.5s and above portfolio has attributes for stable cash flows, noting their 6.5% coupon population pays at less than half the CPR of the cheapest-to-deliver cohort. He stated that AGNC would operate with a positive duration gap and utilize receiver swaptions for protection in a rising prepayment environment.

Eric Hagen of BTIG asked about the risk of the government deficit to the repo market, whether Fed support could justify higher leverage, and the potential impact of GSE credit scoring changes on prepayments.

Answer

Peter Federico, President, CEO & CIO, stated he does not see the deficit as a near-term risk to the repo market, citing Fed support and potential enhancements to its standing repo facility. This stability provides confidence in funding. On credit scoring, he views the changes as having minimal impact on prepayments from an investor's perspective, noting it's a manageable adjustment once data is available.

Eric Hagen asked for AGNC's view on the prepayment environment, the level of convexity risk in the market, and the potential for forced selling from other levered investors to impact spreads.

Answer

Peter Federico, President, CEO, and CIO, characterized significant prepayment risk as distant, noting that about 75% of AGNC's portfolio has favorable prepayment characteristics. He stated he has not seen any evidence of forced deleveraging from peers and believes recent selling pressure was driven by broader bond fund redemptions rather than distress within the mortgage REIT sector.

Eric Hagen sought details on the mortgage rate assumptions underlying the company's prepayment speed projections and asked for a comparison of current reinvestment risk versus historical periods with faster speeds. He also inquired about the impact of bank regulation on repo counterparty appetite.

Answer

Christopher Kuehl, EVP and CIO, explained that prepayment projections are based on the forward curve and that recent data shows a steep prepayment response to rate changes, though the risk is manageable via active management. Peter Federico, Director, President and CEO, addressed the repo market, stating that while there is some volatility at period ends, it is a manageable cost issue, not a capacity constraint, and is not expected to limit demand for Agency MBS.

Eric Hagen from BTIG questioned AGNC's capacity to increase leverage from its current level, how the company benchmarks its leverage targets, and where within the coupon stack it expects to deploy newly raised capital.

Answer

Peter Federico, President and CEO, responded that leverage decisions are primarily driven by market volatility; as spread volatility decreases, the company gains confidence to operate with higher leverage. Christopher Kuehl, CIO, added that from a deployment perspective, the best long-run risk-adjusted returns are currently in higher 'Production Coupons,' and that is where new capital would likely be allocated, despite their higher prepayment risk.

Eric Hagen asked about the impact of pressure on the Fed to cut rates, specifically whether it is supportive, effective, or might lead to more one-directional interest rate volatility. He also inquired about the 4% book value increase since year-end, leverage stability, and the immediate reaction to the 20-30 basis points of spread tightening following the GSE announcement.

Answer

Smriti L. Popenoe, Co-CEO and President, stated that the company has been prepared for increased government intervention in the market, expecting explicit efforts to influence monetary policy and mortgage rates due to global debt levels. She noted that while the exact 'how' is unpredictable, there's a high probability of front-end rates being influenced by non-fundamentals, and the company uses policy, fundamentals, technicals, and psychology as analytical lenses. T.J. Connelly, CIO, explained that when book value increases, leverage mathematically decreases, and the portfolio is expected to maintain leverage between 7x and 8x for the next several quarters, comfortable with earning target spreads and supporting the dividend at these levels.

Eric Hagen asked about the impact of pressure on the Fed to cut rates on market support, effectiveness, and potential for increased interest rate volatility. He also inquired about the 4% book value increase since year-end, leverage stability, and the immediate reaction to spread tightening post-GSE announcement.

Answer

Smriti L. Popenoe, Co-Chief Executive Officer and President, stated that government intervention to influence monetary policy and mortgage rates is anticipated and planned for, acknowledging that fundamentals and policy can diverge. She highlighted the strategy of earning OAS during calm periods and maintaining liquidity during volatility. T.J. Connelly, Chief Investment Officer, added that the team analyzes policy, fundamentals, technicals, and psychology for each yield curve component and mortgage coupon. Connelly also explained that the 4% book value increase since year-end, while positive, mathematically reduces leverage, which is expected to remain stable between 7x and 8x for the next several quarters, supporting dividend expectations.

Eric Hagen asked why the market has seemingly shrugged off factors that would typically drive higher volatility, especially in recent weeks, and if this changes Dynex Capital's holistic view on the range for MBS spreads. He also questioned if reinvesting faster prepayments offers opportunities for alpha within the coupon stack or if the company is primarily driven to the current coupon to support return on capital.

Answer

Smriti Popenoe, Co-CEO and President, suggested that the market's perception of narrowed outcomes, increased policy clarity, and massive liquidity, partly driven by AI, have contributed to lower volatility, but emphasized that underlying vulnerabilities and tail event probabilities remain. T.J. Connelly, Chief Investment Officer, added that Dynex Capital prepares for unexpected market reactions and sees value in buying cheap out-of-the-money protection. Regarding reinvestment, T.J. Connelly confirmed that Dynex Capital actively seeks alpha across the coupon stack, maintaining a nimble approach beyond just the current coupon, as demonstrated by their deliberate lower coupon bias in previous quarters.

Eric Hagen of BTIG asked about the potential response of rates and MBS spreads if the Fed cuts fewer than the two times priced in, and the current thinking behind the allocation between specified pools and TBAs.

Answer

CIO T.J. Connelly responded that with supply remaining low, he sees very little impact on spreads if the Fed cuts less than expected. He noted the team's base case is for 50 basis points of cuts. On portfolio allocation, he explained that repo financing for pools is currently more attractive than the implied financing on TBAs, favoring a larger position in specified pools.

Eric Hagen of BTIG asked about the yield pickup in current coupon TBAs and the potential for rotating out of lower coupons. He also requested specifics on how much of the recently raised capital has been deployed and the company's current liquidity position and philosophy.

Answer

Chief Investment Officer Terrence Connelly explained that lower coupons offer valuable duration certainty and have a place in the portfolio, while current coupons offer significant yield spreads. He confirmed about two-thirds of the raised capital was deployed. Co-CEO Smriti Popenoe detailed their liquidity philosophy, which involves targeting a higher cash level during volatile times and maintaining liquidity equivalent to 60-70% of equity.

Eric Hagen asked if a steeper yield curve might prompt the company to take on more portfolio risk, either through leverage or a duration gap. He also inquired about how Dynex prices in prepayment risk from potential rate shocks and aggressive originator targeting.

Answer

Co-CEO Smriti Popenoe explained that with current spreads offering strong double-digit returns, the impetus to take on more risk is low unless the trade-off is compelling. CIO Terrence Connelly addressed prepayment risk by emphasizing the importance of security selection, specifically using specified pools to avoid highly refinanceable market segments and mitigate the impact of 'mini refi waves'.

Eric Hagen asked how a significant pickup in prepayment speeds would affect the company's leverage and hedging strategy, and whether paydowns are reinvested opportunistically across the coupon stack. He also inquired about the firm's perspective on recent repo market volatility.

Answer

Co-CEO Smriti Popenoe and SVP Terrence Connelly explained that the wide variety of available mortgage coupons provides ample relative value opportunities, mitigating prepayment risk. They noted specified pool holdings have muted prepayment impacts and that they are opportunistic across the coupon stack and in Agency CMBS. Regarding repo markets, they distinguished between temporary quarter-end "traffic jams" causing price spikes and the structural decline in reserves from QT, noting financing availability remains healthy.

Eric Hagen asked for perspectives on the anticipated CLO supply for the next year, how sensitive the market might be to increased issuance, and the conditions expected to drive the spread environment. He also inquired about the presence and indirect sensitivity of AI-related credits in the CLO market, particularly in the middle market CLO space, and their connection to credit flow.

Answer

Larry Penn (CEO) expressed a lack of strong conviction on future CLO supply, noting it depends on new issue loan supply and that current market conditions favor resets and refinancings over true new issues due to tight loan ARB. He suggested that a widening of loan spreads while AAA tranches hold firm could create a window for new issuance. Regarding AI-related credits, Larry Penn acknowledged their potential impact on the loan market, creating both winners and losers, which contributes to credit dispersion. He highlighted concerns for CLO equity if winners prepay and losers face fundamental problems. He also noted that while AI could affect middle market private credit, slower mark adjustments in that less actively traded space lead them to be cautious.

Eric Hagen of BTIG inquired about the yield on newly acquired CLOs versus the existing portfolio, the current level of 'dry powder' for future investments, and the potential market impact of 401(k) plans gaining access to private assets.

Answer

Portfolio Manager Gregory Borenstein noted that yields on new CLOs varied and the portfolio mix shifted, making direct comparisons complex. CEO Laurence Penn confirmed the company retains significant dry powder, with deployment capacity linked to their dynamic risk management and hedging strategy. Executive Vice President Mark Tecotzky addressed the 401(k) topic, suggesting the initial impact would likely be on AAA ETFs, which could both compress yields and improve the securitization arbitrage for CLO equity.

Eric Hagen asked about the expected response of MSR valuations to further drops in interest rates, the sustainability of demand in a refinancing environment, and how the company would react to even higher MSR valuations. He also inquired about MSR repo financing maturities and opportunities for optimization.

Answer

Bill Greenberg (President and CEO) explained that their low WAC portfolio (3.60% gross WAC) is still significantly out of the money, so further rate drops would not largely impact its refinanceability. While MSR prices would decline with lower rates, this is modeled and hedged, and strong demand for low WAC MSR is expected to persist. Nick Letica (Chief Investment Officer) added that technological advancements have improved servicers' ability to recapture and retain MSR value. William Dellal (CFO) stated that MSR repo maturities are typically 1-2 years and roll, and they will seek optimization opportunities. Bill Greenberg noted increasing participation in MSR financing, keeping spreads stable.

Eric Hagen asked how MSR valuations would react to a further decline in interest rates, whether current demand sources would persist in a refinancing environment, and how Two Harbors would respond to potentially higher MSR valuations at lower rates. He also inquired about the maturities of MSR repo financing and revolving credit facilities, and opportunities for optimization.

Answer

Bill Greenberg, President and CEO, explained that with a gross WAC of 3.60%, their MSR portfolio is significantly out of the money, so even substantial rate drops would not largely impact its refinanceability. He noted that while MSR prices would decline with lower rates due to increased prepayment expectations, this is modeled and hedged, and strong demand for low-gross WAC MSR is expected to continue. Nick Letica, Chief Investment Officer, added that technological advancements have improved servicers' ability to recapture and retain MSR value. William Dellal, Chief Financial Officer, stated that MSR repo maturities are typically 1-2 years and roll, and they will seek opportunities to optimize financing. Bill Greenberg further mentioned continued interest from new participants in MSR financing, with stable and well-supported spreads.

Eric Hagen from BTIG, LLC questioned the company's reported book value sensitivity to a 25 basis point tightening in spreads, suggesting it seemed low, and asked for a breakdown between the MBS and MSR portfolios. He also asked if MBS spreads have reset wider due to tariffs and how they might react to a Fed rate cut.

Answer

President and CEO Bill Greenberg explained that with 65% of capital allocated to the hedged MSR strategy, the portfolio has inherently lower sensitivity to MBS spread movements. CIO Nick Letica added that a lower net mortgage exposure and a portfolio shift 'up-in-coupon' further reduced spread duration. Letica noted that while spreads are wider, a Fed rate cut would likely be positive for mortgages by steepening the yield curve and attracting investors.

Eric Hagen of BTIG, LLC sought clarification on whether the increased spread exposure in October was due to higher leverage or other factors, and asked how the company benchmarks its leverage. He also inquired about plans for the upcoming convertible debt.

Answer

Chief Investment Officer Nicholas Letica clarified that the increased spread exposure was not from higher leverage but from the natural change in the MSR hedge requirements as rates rise. President and CEO Bill Greenberg added that leverage is just one of many risk metrics they monitor, alongside spread exposure and liquidity. Regarding the convertible debt, Greenberg noted it is due in early 2026 and is on the company's radar to be addressed.

Eric Hagen asked about the potential return of dollar roll specialness to the market and its impact on trading volume and market dynamics. He also inquired about the supply and availability of longer-dated repo and its effectiveness as a hedge against fewer-than-anticipated Fed rate cuts.

Answer

Chairman and CEO Robert Cauley stated that he does not foresee a significant return of dollar roll specialness, as quantitative easing is unlikely, and it has not been a core strategy for Orchid Island Capital. CIO Hunter Haas added that specialness is currently depressed due to prepayment fears and poor TBA deliverables. Regarding longer-dated repo, Robert Cauley mentioned that while they explore it, spreads are generally too wide, leading them to use it opportunistically. Hunter Haas noted that futures have been a more effective hedging tool, and repo lenders are hesitant to price in rate cuts, especially given potential economic weakening.

Eric Hagen from BTIG asked about the potential return of dollar roll specialness to the market and its impact on trading volume and market dynamics. He also inquired about the supply and availability of longer-dated repo and its effectiveness as a hedge against fewer-than-anticipated Fed rate cuts.

Answer

Chairman and CEO Robert Cauley stated that significant dollar roll specialness is unlikely to return, as the Federal Reserve is not expected to resume quantitative easing and will reinvest mortgage paydowns into Treasuries. He also noted that Orchid Island Capital has not historically been a major player in this area. Chief Investment Officer, CFO and Director Hunter Haas added that dollar roll specialness remains depressed due to prepayment fears in upper coupons. Regarding longer-dated repo, Robert Cauley explained that while they seek to lock in funding opportunistically, spreads are often too wide. Hunter Haas mentioned that using futures has been more effective for hedging and that repo lenders are often slow to price in rate cuts, making longer-dated repo less attractive.

Eric Hagen from BTIG asked for confirmation that the book value update included the dividend accrual and questioned whether management expects MBS spreads to widen or tighten in an interest rate rally, especially for current coupons.

Answer

Robert Cauley, Chairman, President & CEO, confirmed the book value update was inclusive of the dividend accrual. He and Hunter Haas, CFO & CIO, discussed that while a credit-driven rally could cause spreads to widen, their house view is for a resilient economy. They believe mortgages are currently cheap and that various market scenarios would likely lead to more buyers, not fewer. Cauley used a metaphor of government deficits pushing the economy forward despite Fed braking to illustrate his view that the Fed will be challenged to cut rates, suggesting a steep curve could persist.

Eric Hagen asked if mortgage spreads have reset permanently wider due to recent market volatility and inquired about the cost and feasibility of using swaptions to hedge volatility risk.

Answer

Executive Robert Cauley and CIO/CFO George Haas addressed the questions. Cauley stated he sees no near-term catalyst for a material tightening of spreads. Haas added that ongoing volatility would likely keep spreads wider as investors demand a premium. Regarding hedging, both executives agreed that buying swaptions now would be very expensive. Haas explained their current risk management focuses on delta hedging and managing leverage, as it is difficult to put on a tail-risk hedge in the midst of a volatile period.

Eric Hagen asked about the level of yield curve steepness that would prompt an extension of the portfolio's duration gap, the widest historical duration gap deployed, and why management doesn't expect significant spread widening in higher coupons during a rally, given the refinance risk.

Answer

Executive Robert Cauley estimated the widest historical duration gap was around 1.5 years but expressed hesitation to extend duration now without a meaningful return of bank demand for MBS. CIO George Haas clarified that their barbell strategy is designed for a rally scenario; while higher-coupon assets would lag due to negative convexity, their portfolio of lower-coupon, longer-duration assets would be expected to perform well and offset potential book value erosion.

Eric Hagen inquired about the strategy behind the current size of the TBA short position and whether wider mortgage spreads would prompt an adjustment to leverage or the position itself. He also asked about the outlook for using IOs and other derivatives.

Answer

Executive Robert Cauley mentioned they are considering moving TBA shorts to higher coupons, which are more vulnerable in a bear steepener. Regarding derivatives, Cauley expressed hesitation with high-coupon IOs due to model uncertainty in a future refinancing wave but noted they are exploring opportunities. Executive George Haas added that they are always analyzing roll levels and implied funding to identify opportunities in the TBA market.

Eric Hagen from BTIG inquired if Velocity Financial would consider loan sales to private credit funds as an alternative financing source to fuel growth, and asked about the primary drivers of the recent increase in loan prepayment activity.

Answer

Christopher Farrar, Co-Founder, CEO & Director, acknowledged receiving reverse inquiries from private credit sources and sees potential opportunities for private financing structures to supplement growth, though he doesn't expect whole loan sales to be a major component. Regarding prepayments, he explained they are driven by borrowers' unique situations, with activity split roughly 50/50 between property sales and refinancing, and noted that prepayment penalties protect the company's yields.

Eric Hagen from BTIG, LLC inquired about the drivers of increased commercial loan demand, the full-year outlook for origination volume, the use of raised capital, and the methodology for calculating gains on REO sales.

Answer

President and CEO Christopher Farrar attributed the rise in commercial demand to the successful ramp-up of a new internal division focused on owner-occupied properties, rather than a broader market shift. He stated the current origination pace is sustainable for the year and that raised capital is deployed to fund new loans and grow the portfolio. CFO Mark Szczepaniak clarified that gains on REO sales are calculated after any previously accrued but uncollected interest has been reversed from earnings, making the gain relative to the cost basis.

Eric Hagen asked about the impact of broader market volatility on Velocity's securitizations, the predictability of NPL resolution gains, and the characteristics of the non-single-family asset portfolio and related REO.

Answer

President and CEO Chris Farrar responded that Velocity's securitizations are not experiencing the volatility seen in larger CMBS deals, as they are more comparable to non-QM RMBS. He characterized NPL resolution gains as lumpy and hard to predict quarterly, but noted they have historically averaged a 2-3% gain over time due to the significant equity in the underlying properties. Farrar also confirmed that the REO portfolio is mostly liquid 1-to-4 family assets and that the ongoing shift to fair value accounting will diminish the need for CECL reserves.

Eric Hagen asked about the typical foreclosure timeline for NPLs, the potential risks involved, the profile of the end-buyers for resolved properties, and the total return profile of the recent October securitization.

Answer

President and CEO Chris Farrar detailed that foreclosure timelines vary by state, with a weighted average of 9-10 months. He explained that for 1-to-4 unit properties, the end-buyer can be anyone from a family to an investor, while commercial properties are typically bought by other investors or owner-users. Regarding the October securitization, Farrar stated that strong executions can yield ROEs well north of 25%, though this level of return varies with market conditions for each deal.

Eric Hagen from BTIG asked if loan closing speeds could improve further without compressing margins and questioned if the strategy for selling Mortgage Servicing Rights (MSRs) had changed.

Answer

Chairman, CEO & President Mat Ishbia stated that AI investments would continue to improve closing speeds, creating a significant competitive advantage when rates fall and competitors slow down. On MSRs, he described the market as robust and confirmed UWM's approach remains opportunistic, selling when favorable but retaining the flexibility to hold.

Eric Hagen inquired about the timeline, one-time costs, and recapture improvements associated with bringing loan servicing in-house, and also asked about the potential for adjustable-rate mortgages (ARMs) to become a more compelling product.

Answer

Chairman and CEO Mathew Ishbia explained that UWM aims to begin boarding loans in-house by early 2026, with the full transition completed by the end of that year. He noted there would be no significant one-time costs and highlighted benefits like cost savings, enhanced customer experience, and improved recapture rates. Regarding ARMs, Ishbia stated they are not a major focus, as consumer preference remains strongly with fixed-rate loans, and he does not foresee ARMs becoming a meaningful part of the market.

Eric Hagen from BTIG inquired about how UWM measures the success of its various broker incentive programs and how that success is benchmarked at different interest rate levels. He also asked if the Q1 volume guidance drop was due to seasonality or a falloff in demand.

Answer

CEO Mathew Ishbia explained that incentive success is measured through a complex set of analytics focused on broker retention, share of wallet, and adoption of UWM's broader products and services. Regarding Q1 guidance, he framed the numbers as strong, noting they are above the prior year's actuals and that Q1 is always the seasonally slowest quarter for the industry.

Eric Hagen from BTIG asked if adjusted EBITDA is a good proxy for cash earnings and how MSR sales are reflected. He also questioned if the margin guidance incorporates recent rate moves and if there's room for margin expansion at current higher rates.

Answer

Chairman and CEO Mathew Ishbia and CFO Andrew Hubacker clarified that adjusted EBITDA does not fully reflect cash flow from MSRs, as capitalization is not excluded, but sales are. Ishbia confirmed the 85-110 bps margin guidance accounts for the recent rate backup and that margin expansion is possible when rates move favorably, as demonstrated by the Q3 outperformance.

Eric Hagen of BTIG inquired how the software adjusts for interest rate fluctuations and if the AI can preemptively react to capital markets conditions. He also asked for specifics on how the Tinman platform retains borrower attention to drive higher conversion rates.

Answer

Founder & CEO Vishal Garg explained that the AI makes pricing instant, moving beyond daily rate sheets to find the best execution across all investors and products in real-time, calling it a 'game changer.' On conversion, he noted that Betsy AI can now instantly engage customers at points of fatigue or confusion—a task too costly for human staffing—which has enabled volume growth even as the sales team has been reduced.

Questioned how the recent debt restructuring improves negotiating terms and competitiveness for partnerships, and how the software platform addresses a wide range of borrower profiles beyond simple 'down the fairway' loans.

Answer

Kevin Ryan stated the restructuring improves the balance sheet, making Better a stronger counterparty, which is helpful on the margin, but technology remains the primary draw for partners. Vishal Garg added that while the platform was initially for simple loans, onboarding retail partners forced them to build out functionality for complex scenarios (e.g., multiple borrowers, non-QM, construction loans). The AI underwriter now automatically matches consumers to this full product set, improving conversion across all channels.

Eric Hagen of BTIG inquired about how Better's AI technology adapts to the rising cost of property insurance and how the company's pursuit of profitability influences its risk appetite.

Answer

CEO Vishal Garg explained that the Tinman platform has a built-in insurance engine that provides instant quotes, accommodating cost variations. He emphasized that the path to profitability is based on efficiency gains from AI and cost-cutting, not on taking on more credit risk. CFO Kevin Ryan reiterated that nearly 100% of loans are pre-committed to investors, minimizing balance sheet risk, and highlighted the $11 million in core expense reductions from Q3 to Q4 2024.

Eric Hagen of BTIG inquired about NYMT's current preference between BPL bridge and rental products, its pricing strategy for lower-quality loans, and the potential impact of Federal Reserve rate cuts on its securitization financing costs and existing liabilities.

Answer

President Nicholas Mah stated a preference for growing the BPL rental portfolio due to competitive pressures in the bridge space and noted that NYMT prioritizes high credit quality over chasing marginal yield on riskier loans. Mah and CEO Jason Serrano explained that rate cuts would benefit new financing execution and could create accretive opportunities to call and refinance existing fixed-rate securitizations.

Eric Hagen of BTIG asked about Rithm's capital allocation flexibility across segments, the potential impact of Fed rate cuts on capital raising for Sculptor, and which strategies the recently raised capital at Sculptor were directed towards.

Answer

Chairman, President & CEO Michael Nierenberg described a centralized capital allocation model, where earnings are funneled to segments with the highest potential returns, such as supporting the Sculptor CLO business. He noted that while lower rates help financing, they could also compress asset yields. He confirmed recent capital inflows at Sculptor were broad-based, with continued strength in its real estate and credit businesses.

Eric Hagen from BTIG questioned Rithm's capital allocation strategy, including the flexibility to move capital between segments and whether higher leverage could increase valuations. He also asked how Fed rate cuts might impact capital raising at Sculptor and which strategies received the recent $1 billion in AUM.

Answer

Michael Nierenberg, Chairman, President & CEO, described a "funnel" approach where corporate earnings are allocated to the highest-return opportunities, noting they are fairly agnostic but see potential in areas like consumer lending. He explained that while lower rates help financing costs, they could also compress asset yields. He clarified the recent capital inflows at Sculptor were broad-based, directed toward real estate, credit, and CLO strategies, with Rithm's balance sheet supporting the CLO business by taking equity stakes.

Asked for details on Sculptor's performance and AUM growth drivers, the specifics of the upcoming MSR funds (fees, returns), and clarification on the first quarter's MSR valuation change and related hedges.

Answer

Sculptor's performance is strong across all strategies, with the real estate fund attracting $3.2 billion in long-dated capital. The upcoming MSR funds will target teens returns, with fees yet to be determined. The Q1 MSR valuation mark was significantly offset by hedges (long mortgages, treasuries, swaps), resulting in a net impact of about $185 million, and the company feels well-positioned against market volatility.

Eric Hagen from BTIG asked about the leverage in the investment portfolio when excluding MSR hedges and whether there's room to increase it. He also inquired about the subservicing business, its contribution to earnings, and its growth opportunities.

Answer

Michael Nierenberg, Chairman, CEO, and President, explained that the balance sheet is primarily concentrated in MSRs, their hedges, and Genesis loans, and that while they could increase leverage, they don't see a need to currently. Baron Silverstein, President of Newrez, added that the subservicing business continues to see growth opportunities by taking market share with banks and existing relationships, especially given market dislocations, and that the pipeline for 2025 looks strong.

Eric Hagen of BTIG, LLC inquired about the leverage level in the investment portfolio when excluding MSR hedges. He also asked for details on the subservicing business, its earnings contribution, and its growth prospects.

Answer

Michael Nierenberg, Chairman, CEO, and President, noted the balance sheet is concentrated in MSRs, hedges, and Genesis loans, and while leverage could be increased, it's not currently necessary. Baron Silverstein, President of Newrez, added that demand for subservicing remains strong, particularly for non-QM assets, and that Newrez is gaining market share with a strong pipeline for 2025.

Eric Hagen of BTIG, LLC questioned Rithm's flexibility to reallocate capital from Newrez if rising rates cause MSR write-ups, asked for perspective on mixed signals in consumer credit, and inquired about a specific excess MSR purchase during the quarter.

Answer

CEO Michael Nierenberg confirmed Rithm has full flexibility to redeploy capital across its businesses, a key advantage of its unified structure. He stated that while delinquencies may rise slightly, the consumer remains resilient, and the company is fully hedged to minimize book value volatility. He clarified the excess MSR purchase was from a liquidated fund and is held in the investment portfolio.

Eric Hagen of BTIG questioned Rithm's flexibility to reallocate capital from Newrez to other segments if MSRs are written up. He also asked for perspective on consumer credit health and for details on an excess MSR purchase during the quarter.

Answer

CEO Michael Nierenberg affirmed the company's flexibility to redeploy capital across the platform, noting its fully hedged position minimizes book value volatility. He stated that the consumer remains in reasonable shape and clarified the excess MSR purchase was from a liquidated fund Rithm previously managed.

Eric Hagen of BTIG inquired about the company's strategic response to market volatility and wider spreads, the behavior of non-QM originators, and the current market yield and economic spread of the securitized non-QM loan portfolio.

Answer

CEO T.J. Durkin explained that the company maintained its discipline during the recent macro-driven volatility, as there was little forced selling in their core assets. He clarified that the ROE presented for the non-QM portfolio reflects its current market return, not a historical cost basis, making it the best indicator of economic spread.

Jake Katsikas, on behalf of Eric Hagen from BTIG, LLC, questioned what would need to occur for the 5.7% yield on securitized non-agency loans to increase and asked if a further drop in warehouse financing costs would encourage more aggressive pipeline building.

Answer

CEO T.J. Durkin clarified that the 5.7% yield is a GAAP accounting figure reflecting older 2021-2022 originations with term financing and is unlikely to move significantly. He pointed to the ROE as a more relevant metric. Regarding financing, he noted that while warehouse terms are improving, the pricing in the securitization market is a more critical factor for overall investment activity than just the initial warehouse costs.

Eric Hagen asked about the drivers behind non-QM valuations, the potential risk to the capital structure if recession concerns intensify, and whether the company would consider raising capital below book value in a dislocated market.

Answer

CEO T.J. Durkin and CIO Nicholas Smith both expressed confidence in the credit quality of their non-QM book, citing significant home price appreciation, multiple loss remediation tactics, low delinquencies (1% 90+), and a sub-60% mark-to-market LTV. Regarding raising capital below book value, Durkin stated, "the short answer is probably, No," as the market is currently viewed as fairly orderly.

Eric Hagen of BTIG asked about Greenlight Re's capital allocation strategy, how it might change with upcoming renewals, and whether market volatility creates opportunities to deviate. He also questioned the target return for the MicroStrategy arbitrage trade and its comparison to other opportunities in the Solasglas fund.

Answer

CEO Greg Richardson stated that capital allocation changes would be incremental, with a potential shift from the Open Market segment to Innovations or buybacks if rate softening continues into 2026. CFO Faramarz Romer noted a Q4 quota share freed up capital for Innovations growth. Chairman David Einhorn explained the MicroStrategy arbitrage has no specific target return but profits from ETF structural dynamics like options decay and negative gamma, adding that its return has been 'exceedingly high,' annualizing to nearly triple digits.

Eric Hagen of BTIG asked for Essent's perspective on how the increasing efficiency of nonbank originators might influence prepayment behavior among high-LTV borrowers and how this dynamic is factored into the company's risk pricing models.

Answer

Chairman and CEO Mark Casale acknowledged that originator efficiency is 'brutally efficient' and is factored into their duration assumptions for pricing risk. However, he stressed that prepayment behavior remains highly rate-dependent. He noted that a drop in rates would likely accelerate refinancings but would also unlock significant new purchase activity, creating a new cycle of growth.

Eric Hagen of BTIG asked about the inputs for Mr. Cooper's MSR valuation, specifically if a recapture estimate is factored into the fair value and how to think about the sensitivity of the option-adjusted spread (OAS) in the current rate environment. He also inquired about the potential business impact from any dismantling of the CFPB.

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CFO Kurt Johnson confirmed that recapture is factored into their MSR value, noting it's an industry-standard practice. He explained that for low-coupon loans, the OAS is effectively a stable fixed yield. CEO Jay Bray addressed the CFPB question by stating the company's consistent view is to work collaboratively with regulators, as they share the goal of helping customers, and they do not see any imminent changes impacting the business.

Eric Hagen from BTIG asked about the key differences between the adjusted EBITDA and the sources and uses of cash flow figures presented in the earnings deck, and which metric better reflects how management runs the business. He also requested an estimate for cash flow amortization following the Flagstar onboarding and how to benchmark it against interest rate changes. Later, he asked about the market impact of the new Ginnie Mae capital rules.

Answer

Executive Vice President and CFO Kurt Johnson clarified that the 'sources and uses of cash flow' is the primary metric used to manage the acquisition strategy and share repurchases, representing true free cash flow. Regarding amortization, Johnson stated they don't provide specific guidance but suggested the impact from Flagstar's portfolio would be roughly proportional to its size relative to the existing portfolio. On the Ginnie Mae rules, Johnson noted Mr. Cooper is extremely well-capitalized and that the rules could potentially catalyze some MSR sales from a few undercapitalized servicers, leading to slightly more activity in the Ginnie Mae bulk space.

Eric Hagen from BTIG inquired about the significant $124 million fair value mark on MSRs, the specific inputs that changed, the extent of recovery since September, the response of gain-on-sale margins to recent rate changes, and the production contribution from the Academy acquisition.

Answer

CEO Terry Schmidt and CFO Amber Kramer addressed the MSR mark, attributing it to the Q3 interest rate decline and noting that the subsequent rate backup in October suggests a reversal of the impairment. Terry Schmidt stated that purchase-focused margins have remained steady, while Amber Kramer acknowledged potential Q4 volatility from long-term locks. Regarding the Academy acquisition, Amber Kramer stated they do not disclose specific contributions but noted it represented about 20% of their volume at the time of the deal.

Eric Hagen questioned the expected development of pull-through rates amid rate volatility and asked about the hedging strategy for the MSR portfolio, including the types of products used and target hedge ratios.

Answer

Desiree Elwell, Executive, stated that pull-through rates have remained stable within a tight range over the last 6-9 months, later clarifying the rate used is 88%. Terry Schmidt, Executive, explained that Guild relies on the 'natural hedge' of its retail production, which historically becomes more profitable in falling rate environments. He noted that 20% of the MSR portfolio has coupons over 6%, representing a significant recapture opportunity.