Trevor Cranston

Trevor Cranston asked about Ellington Financial's strategy in the agency-eligible market, considering potential government policy changes like LLPAs or g-fees, and how these might impact pricing, prepayment speeds, and convexity risk for these loan types.

Answer

Mark Tecotzky, Co-Chief Investment Officer, explained that current LLPAs and g-fees make private label execution more attractive, and significant changes would be needed to shift volume back to GSEs. He noted that Ellington Financial factors in prepayment risk by assuming higher speeds than calibrated models, acknowledging that market participants are already pricing in this policy uncertainty.

Trevor Cranston of JMP Securities LLC requested details on Longbridge's new HELOC for Seniors product and asked how the strong performance of Longbridge might change the outlook for its long-term earnings contribution and the company's dividend policy.

Answer

CEO Laurence Penn described the new HELOC for Seniors as a unique product without a fixed maturity date or negative amortization. He noted that Longbridge's ADE contribution has been exceeding the previously guided $0.09 per quarter, and he is cautiously optimistic this outperformance will continue, which supports the current dividend level. He refrained from giving specific projections for the new product.

Trevor Cranston asked how the high volatility in securitization spreads during the second quarter has impacted the company's appetite for new loan acquisitions and requested color on acquisition activity.

Answer

Co-CIO Mark Tecotzky explained that the firm dynamically shifts between buying securities and originating loans based on relative value. Initially in April, securities looked cheaper amid wide spreads, but as execution stabilized, loans became more attractive. CEO Laurence Penn added that EFC's increased frequency of securitizations and use of credit hedges helps mitigate the 'gestation risk' of acquiring and holding loans before securitizing them.

Trevor Cranston of Citizens JMP asked about the potential impact of the HMBS 2.0 rollout and HUD staffing changes on the HECM market and, consequently, on the Longbridge business.

Answer

CEO Laurence Penn acknowledged the uncertainty, stating it's a 'wait and see' situation regarding regulatory changes. He stressed that the proprietary reverse mortgage business has been the primary earnings driver for Longbridge, providing a buffer against potential HECM market disruptions. CFO JR Herlihy added that any interruption on the government-insured side could potentially increase demand for their proprietary products.

Trevor Cranston inquired about the relative value between agency and credit investments following significant interest rate and spread movements in the fourth quarter. He also asked for clarity on whether $0.09 per share is a reasonable baseline for quarterly earnings contribution from the Longbridge segment.

Answer

Co-Chief Investment Officer Mark Tecotzky explained that the reduction in the agency portfolio is a long-term strategic capital rotation into non-agency origination businesses, not a reaction to short-term relative value. CEO Laurence Penn addressed the Longbridge segment, confirming that $0.09 per share in Adjusted Distributable Earnings (ADE) is an achievable and stable target that would ensure dividend coverage, though results can be volatile with interest rates. He noted that the proprietary reverse mortgage securitizations provide a significant boost to these earnings.

Trevor Cranston asked about the incremental returns on new investments given recent spread tightening, comparing these returns to the current dividend. He also questioned the likelihood of further government actions to lower mortgage rates, such as increasing GSE portfolio limits or reducing G-fees.

Answer

Co-Chief Investment Officer Desmond Macauley stated that the levered yield on 30-year 5s (production coupon) is around 15%, with potential for additional returns from spread tightening and curve steepening, noting this is comparable to the 16% hurdle rate for marginal capital. Co-Chief Investment Officer Sergey Losyev commented that the 'lowest hanging fruit' for lowering mortgage rates might have been picked, and further government actions like G-fee cuts could have mixed effects, though more announcements are expected in the midterm.

Trevor Cranston asked about the incremental returns on new investments given current spread tightening and how these returns compare to ARMOUR's current dividend. He also questioned the likelihood of further government actions to lower mortgage rates, such as increasing GSE portfolio limits or reducing G-fees.

Answer

Co-Chief Investment Officer Desmond Macauley detailed that levered yields on 30-year MBS are around mid-teens (15%), with potential for additional returns from spread tightening (4%) and curve steepening (1%). He noted this is close to the 16% hurdle rate for marginal capital raises. Co-Chief Investment Officer Sergey Losyev commented that the 'lowest hanging fruit' for lowering mortgage rates has been picked, and while more announcements are expected, implementation has been slow, with some future steps potentially counteracting policy goals.

Trevor Cranston from Citizens JMP asked about the company's outlook on interest rate volatility following a significant Q3 drop and how current lower pricing influences the potential to add swaptions or options to the hedge portfolio.

Answer

Co-Chief Investment Officer Desmond Macauley explained that volatility hedging involves both swaptions (used in the past) and asset selection, with 40% of the portfolio in low-optionality assets like shorter duration, lower coupons, and DOS securities. He noted that while volatility has decreased, it remains higher than historical periods like 2019, and a continued Fed normalization could lead to further medium-term declines, making low-optionality assets a preferred approach for now.

Trevor Cranston inquired about the future evolution of interest rate volatility and the potential for incorporating swaptions or options into the hedge portfolio given current lower volatility pricing.

Answer

Co-Chief Investment Officer Desmond Macauley explained that volatility hedging can be achieved through swaptions or asset selection, noting that 40% of the portfolio is in low optionality assets like shorter duration, lower coupons, and DOS securities. He compared current volatility levels to 2019, a period of Fed normalization, suggesting that volatility could continue to decline in the medium term, making low optionality assets a preferred approach for now.

Trevor Cranston of JMP Securities LLC asked about the portfolio's reduced allocation to higher coupon MBS and where the company is deploying new capital. He also questioned the role of the new long treasury position.

Answer

Co-Chief Investment Officer Sergey Losyev clarified that the reduction in higher coupons was a tactical response to April's volatility and that the firm continues to favor 5.5% and 6% coupons for their high ROE. He explained the five-year treasury position is used to manage overall duration risk and serves as a tactical hedge for their Agency CMBS holdings.

Trevor Cranston inquired about the most attractive opportunities in the coupon stack, what assets were sold post-quarter end, and the company's capacity for further share buybacks while maintaining liquidity.

Answer

Desmond Macauley, an executive, stated that the firm's bias is toward production coupons, particularly 5% and 5.5% coupons, and 5-year Agency CMBS for their positive convexity. He confirmed that some assets were sold after the April 2nd risk event to manage risk, while still maintaining significant spread exposure. Scott Ulm, an executive, added that while there is capacity for more share repurchases, it is balanced against the attractive returns available in the portfolio and the overarching need for liquidity.

Trevor Cranston of JMP Securities asked where ARMOUR sees the best opportunities in the MBS coupon stack, why the portfolio size decreased post-quarter end, and about the company's capacity for further share repurchases.

Answer

Executive Desmond Macauley stated that ARMOUR is biased towards production coupons, specifically 5% and 5.5%, and also finds value in 5-year Agency CMBS for their positive convexity. He explained that some assets were sold after a significant risk event on April 2 to manage risk. Scott Ulm added that while there is capacity for more share buybacks, the company balances this against the attractive returns available in the portfolio and the need to maintain substantial liquidity.

Trevor Cranston asked for more details on the expected pace of exercising call rights throughout the year, specifically inquiring if any are anticipated in the first quarter. He also requested an explanation of the 'unlevered home equity loans' line item on page 12 of the slide deck.

Answer

Nick Smith, Chief Investment Officer, stated that TPG Mortgage Investment Trust is focused on two transactions expected to free up approximately $35 million of equity, with a significant portion anticipated in Q1 and the remainder in Q2 or Q3. He explained that 'unlevered home equity loans' are loans held without leverage, serving as a cash substitute against favorable, unutilized financing to mitigate cash drag.

Trevor Cranston (Citizens) asked for details on TPG Mortgage Investment Trust's expected pace for exercising call rights throughout 2026, including any anticipated Q1 activity. He also requested clarification on the 'unlevered home equity loans' line item presented in the earnings slide deck.

Answer

Nick Smith, Chief Investment Officer, indicated that approximately $35 million in equity from two focused call rights transactions is expected to be freed up, with a significant portion in Q1 2026 and the remainder in Q2 or Q3. He clarified that 'unlevered home equity loans' represent loans held without leverage, serving as a cash substitute to mitigate cash drag.

Trevor Cranston questioned how much of the loan portfolio was 'in the money' for prepayment at recent rate lows versus today and asked about the structure of home equity securitizations, specifically the expected equity investment.

Answer

CIO Nicholas Smith responded that the "vast majority" of the portfolio is currently out of the money for prepayment. On securitization structure, he explained that due to the up-in-credit nature of home equity loans, the financing can be more efficient than even non-QM, with leverage levels comparable to other asset classes.

Trevor Cranston of Citizens JMP inquired about the most attractive loan markets for securitization and asked for the company's net duration position at the end of the quarter.

Answer

Chief Investment Officer Nicholas Smith identified opportunities in agency-eligible positions and co-issue deals, noting that selling non-QM loans to real money buyers is currently more prudent. He also mentioned the home equity space is being monitored. CEO and President T.J. Durkin declined to comment on the specific net duration, stating the company does not publish that metric.

Trevor Cranston with Citizens JMP inquired about HomeXpress Mortgage's Q1 2026 volume and gain-on-sale trends, and Chimera's capital deployment strategy, specifically the relative value between adding Agency MBS and non-Agency securitizations given recent spread tightening.

Answer

Kyle Walker, President and CEO of HomeXpress Mortgage, noted typical seasonal volume reduction but expressed optimism for 2026, expecting good Q1 performance with strong gain-on-sale premiums. Jack MacDowell, CIO of Chimera Investment Corporation, emphasized portfolio construction objectives, including maintaining liquid Agency MBS and MSRs as hedges. He stated that while Agency MBS remains attractive, the company constantly evaluates selling non-QM loans in the secondary market versus securitizing and retaining parts of the capital structure.

Trevor Cranston inquired about HomeXpress's Q1 2026 production volume and gain-on-sale premiums, comparing them to Q4 2025, and asked for insights into the best relative value for capital deployment between Agency MBS and non-agency securitizations given recent spread tightening.

Answer

Kyle Walker (President and CEO, HomeXpress Mortgage) noted typical seasonal volume reduction but expressed optimism for Q1 2026, expecting good gain-on-sale premiums. Jack MacDowell (CIO, Chimera Investment Corporation) discussed portfolio construction objectives, including balancing liquid Agency MBS and MSRs, and the ongoing evaluation of selling HomeXpress loans versus securitizing and retaining capital structure pieces.

Trevor Cranston of JMP Securities LLC asked about the long-term vision for Chimera's capital allocation mix between its legacy credit portfolio and newer asset classes like Agency MBS and MSRs.

Answer

CIO Jack Macdowell explained that the future portfolio mix will be dynamic, aiming for a diversified and stable portfolio. He noted the legacy portfolio will naturally run off over time. He projected that MSRs could eventually represent 15-25% of capital allocation, while Agency MBS will maintain a permanent role for liquidity and relative value, with the company remaining opportunistic across all residential credit sectors.

Trevor Cranston of Citizens JMP questioned the growth outlook for the third-party advisory business and asked for the key drivers behind the flat book value performance early in the second quarter.

Answer

CEO Phillip Kardis stated that the company is bullish on the growth potential of its third-party business, driven by both new and existing clients. CIO Jack Macdowell explained that the stable book value performance was a result of wider credit spreads on loan assets being offset by favorable valuation changes in the company's securitized debt liabilities.

Trevor Cranston of Citizens JMP asked for details on Chimera's strategy for investing in mortgage servicing rights (MSRs), including potential capital allocation and target coupon types, and inquired about the potential opportunities from GSE reform.

Answer

An executive explained that while a specific capital allocation for MSRs is not yet defined, they are a key focus for portfolio construction and duration hedging. The company will evaluate MSRs across the coupon stack based on relative value and strategic objectives. Regarding GSE reform, the executive noted that while the path is uncertain, potential opportunities could emerge from market volatility in agency MBS and a potential shift of non-core products to the private market.

Trevor Cranston inquired about Chimera's perspective on the home equity lending market as a potential growth area and asked for an update on the portfolio's net duration and book value quarter-to-date.

Answer

President and CEO Phillip Kardis confirmed that Chimera is actively looking at the home equity space, an area where their acquisition target, Palisades, has experience, but they have not yet found a compelling opportunity. Chief Investment Officer Dan Thakkar addressed the book value, stating that as of that morning, the company's book value was roughly flat compared to the end of the second quarter, indicating that the gains from the third quarter had been offset by recent rate movements.

Trevor Cranston requested an update on the prospective return outlook following additional spread tightening in January and its implications for the near-term dividend level. He also asked about any material changes in coupon exposures in January and the strategy for the coupon stack given potential policy actions.

Answer

CIO Nick Letica stated that tighter spreads would marginally lower the return potential. CFO William Dellal mentioned that the dividend decision is made later in the quarter and it's too early to comment on trends. Nick Letica added that overall mortgage exposure was lowered, with GSE buying focusing on current coupons, leading to positive effects on lower coupons and some widening in higher coupons.

Trevor Cranston asked for insights into growth opportunities within the sub-servicing business, specifically whether future growth is expected to be tied to MSR sales or if other avenues are being explored. He also questioned why the securities portfolio's return estimate on slide 14 increased despite tighter spreads.

Answer

Bill Greenberg (President and CEO) highlighted the long-term nature of sub-servicing relationships and opportunities arising from industry consolidation, attracting dissatisfied clients, and leveraging their MSR investor expertise. He confirmed that MSR sales can seed new sub-servicing relationships, but they are also pursuing other growth opportunities. Nick Letica (Chief Investment Officer) clarified that the securities portfolio return estimate is based on the actual portfolio at quarter-end, not a stylized version. He explained that shifts in the portfolio, spread movements across the coupon stack, and the inclusion of other assets like DUS bonds and derivatives, along with varying assumptions for financing, leverage, and prepays, all contribute to the quarter-over-quarter changes in the return estimate.

Trevor Cranston asked about the growth opportunities within the sub-servicing business, specifically whether future growth is expected to be linked to MSR sales or if other avenues exist. He also questioned why the securities portfolio's return estimate on slide 14 increased despite tighter spreads.

Answer

Bill Greenberg, President and CEO, stated that sub-servicing growth is a long-term process involving relationship building and leveraging their expertise as MSR investors. He identified opportunities arising from industry consolidation and client dissatisfaction, confirming that MSR sales can 'seed' new sub-servicing relationships and serve as a tool for portfolio management. Nick Letica, Chief Investment Officer, clarified that the securities portfolio's return estimate reflects the actual portfolio at quarter-end, not a stylized version. He explained that shifts in portfolio composition, varying spreads across the coupon stack, and the inclusion of other assets like DUS bonds and derivatives, along with assumptions for financing, leverage, and prepays, all contribute to the estimated return range.

Trevor Cranston of JMP Securities LLC inquired about the company's strategy for its nascent second lien origination business, asking if the intent is to hold these assets or sell them. He also asked for more details on the increased exposure to mortgage derivatives that contributed to performance.

Answer

William Greenberg, President & CEO, responded that the decision to hold or sell second liens will depend on the risk-reward profile at the time, viewing it as another tool to use based on whether holding, selling in bulk, or securitizing offers the most value. Nicholas Letica, VP & CIO, elaborated on derivatives, stating the focus has been on growing inverse IO exposure, which now constitutes under 5% of securities capital, and is a sector where they can leverage their prepayment expertise.

Trevor Cranston from Citizens JMP asked for management's perspective on the competitive impact of the Rocket and Mr. Cooper merger on the servicing and bulk MSR markets. He also requested additional details regarding the previously announced CFO transition.

Answer

President and CEO Bill Greenberg stated that the merger's impact is likely more muted than headlines suggest, anticipating that combined MSR demand will remain similar, though potentially making bids slightly more competitive. On the CFO transition, Greenberg expressed that the company is 'thrilled' to have William Dellal appointed as the permanent Chief Financial Officer, highlighting his value to the firm, and did not provide further comment.

Trevor Cranston of Citizens JMP questioned the company's outlook on swap spreads relative to treasuries and how this view influences their choice of hedging instruments.

Answer

Chief Investment Officer Nicholas Letica stated that while there's no hard limit on how tight swap spreads can go, the company believes much of the treasury supply concern is already priced in. He noted that TWO uses a combination of swaps and treasury futures, currently favoring swaps as they offer better carry and could potentially widen if the Fed halts quantitative tightening. The decision is heavily influenced by future U.S. budgetary policy and supply dynamics.

Trevor Cranston asked about Invesco Mortgage Capital's approach to leverage levels following recent MBS tightening, and where the company is identifying value within the coupon stack for new investments after the GSE buying announcements. He also inquired about any unexpected prepayment behavior in the specified pool portfolio, particularly for higher coupons.

Answer

Brian Norris, CIO of Invesco Mortgage Capital, explained that leverage was modestly increased in Q4 due to the positive environment and is comfortable, potentially drifting lower as book value increases. He noted good value in the belly of the coupon stack (3.5% to 5.5%) due to attractive TBA dollar roll market. Regarding prepayments, Mr. Norris stated no major surprises, observing increased speeds in higher coupons (6% and 6.5%) but less impact on their protected pools, emphasizing the superior predictability of cash flows from lower loan balance pools.

Trevor Cranston asked about Invesco Mortgage Capital's approach to leverage levels and where they are finding value within the coupon stack for new investments, particularly after the GSE buying announcements. He also inquired about any unexpected prepayment behavior in the specified pool portfolio, especially for higher coupons.

Answer

CIO Brian Norris explained that leverage was modestly increased in Q4 due to a positive environment and might slightly decrease as book value rises. He noted value in the belly of the coupon stack (3.5-5.5) due to attractive TBA dollar roll market. Regarding prepayments, Mr. Norris stated no major surprises, acknowledging increased speeds in 6% and 6.5% coupons but less impact due to prepayment protection, and emphasized the superior predictability of cash flows from lower loan balances.

Trevor Cranston from JMP Securities LLC inquired about the outlook for swap spreads and how that impacts the company's comfort with its current hedge mix.

Answer

Chief Investment Officer Brian Norris responded that the firm is at its maximum comfortable allocation to interest rate swaps, which constitute about 80% of hedges on a notional basis. He noted that hedging with swaps is currently attractive from an ROE perspective and that they anticipate spreads will ultimately widen, which would be beneficial.

Trevor Cranston inquired about any changes made to the hedge portfolio in April and whether the smaller portfolio size impacts the company's dividend policy.

Answer

Chief Investment Officer Brian Norris responded that the hedge ratio was increased due to near-term policy uncertainty, but the mix between swaps and treasuries remained stable. CEO John M. Anzalone added that the dividend, which was recently reduced, is still being comfortably covered and that current portfolio ROEs are supportive, so there are no immediate concerns about the dividend level.

Trevor Cranston asked about the recent changes to the hedge book, the rationale for increasing the use of Treasury futures, and the company's forward-looking view on swap spreads.

Answer

Chief Investment Officer Brian Norris responded that the shift to Treasury futures, which now constitute 30% of the hedge notional, was to reduce exposure to swap spread volatility. He noted this is at the high end of their target 20-30% range and they are comfortable with the current mix, despite the trade-offs between the cheaper hedging cost of swaps and the volatility risk.

Trevor Cranston of Citizens JMP asked for the company's thoughts on using swaps versus treasury hedges, the reasons for negative swap spreads, and if there was a change in hedging strategy.

Answer

CIO Brian Norris explained that the company began using treasury futures more prominently in Q3. He noted that swap spreads, now driven more by treasury supply since the LIBOR-to-SOFR transition, could remain persistently tight. Therefore, the strategy is to increase the use of treasury futures to mitigate exposure to swap spread tightening.

Trevor Cranston inquired about spread behavior in the non-Agency market in January and its impact on securitization execution, as well as future opportunities to sell within the CRT book versus maintaining a stable run-off mode.

Answer

Daniel Perotti, CFO and Senior Managing Director, reported that non-Agency spreads in January were stable to tightening, in sympathy with Agency spreads, supporting robust demand for securitizations. He clarified that PMT sold third-party CRT acquired opportunistically when spreads were wider, as their returns fell below thresholds. However, PMT expects to retain all CRT based on its own lender credit risk share due to the high-quality nature of the underlying loans, significant home price appreciation, low LTVs, high FICOs, and low expected future credit losses.

Trevor Cranston from Citizens JMP asked about spread behavior in the non-agency market in January and its impact on securitization execution. He also inquired about future opportunities to sell within the Credit Risk Transfer (CRT) book versus maintaining a stable run-off mode.

Answer

Daniel Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer, reported stable to tightening non-agency spreads in January, supported by robust demand for securitizations. Regarding CRTs, Perotti clarified that previous sales were opportunistic third-party positions, and PMT intends to retain its direct production-based CRT due to its strong return profile and high-quality underlying loans.

Trevor Cranston of Citizens JMP asked about the current return expectations for new loan securitizations and whether they have changed with the recent credit spread widening.

Answer

Chairman & CEO David Spector confirmed that with recent credit spread widening, the return targets on retained subordinate bonds from new securitizations have increased to the mid-teens, or approximately 15%. He noted this attractive return profile is a key driver of their securitization strategy and that PMT's ability to organically create these securities is a unique competitive advantage in a market with limited secondary flows.

Trevor Cranston of Citizens JMP asked for clarification on the company's securitization pace and the specific product mix, including investor loans, prime jumbo, and other potential asset classes.

Answer

Executive David Spector confirmed the company is on pace for consistent investor loan securitizations and plans at least one jumbo loan securitization in the first half of 2025. He noted that while they have evaluated securitizing closed-end seconds, the returns do not currently meet their targets. Spector also mentioned that they are in the early stages of exploring the prime non-QM market.

Trevor Cranston inquired about PennyMac Financial's preparedness for an additional leg down in mortgage rates, including the effectiveness of production offsets, and the likelihood of policy changes like G-fee reductions or loan-level pricing adjustments.

Answer

Chairman and CEO David Spector emphasized his goal to build robust capacity, combining headcount and technology, to ensure recapture exceeds amortization, aiming to achieve this well before year-end. CFO Dan Perotti added that an increased hedge ratio provides greater protection if interest rates decline further. Spector expressed skepticism about significant G-fee reductions, expecting continued reliance on GSE portfolios, and noted that LLPAs would take time to change, affirming PennyMac's strategy to manage to a range of outcomes.

Trevor Cranston asked about PennyMac Financial's observations regarding borrower responsiveness to refinance opportunities during recent rate rallies, comparing it to historical trends and models, and also requested the specific recapture rate for the third quarter.

Answer

Chairman and CEO David Spector noted that recapture rates were up for the quarter, attributing this to technology enhancements, including a new loan origination system that reduced application completion time by 50%, and effective marketing initiatives. CFO Dan Perotti added that borrower responsiveness has been slightly higher than historically observed, with folks eager to refinance into lower rates, and that the full benefits of improved recapture focus would be more evident in Q4 payoffs.

Trevor Cranston asked about the responsiveness of borrowers within PennyMac Financial's servicing portfolio to refinance opportunities during rate rallies, comparing it to historical trends, and requested specific commentary on the third quarter's recapture rate performance.

Answer

David Spector, Chairman and CEO, and Dan Perotti, CFO, observed that borrowers are responding slightly quicker to refi opportunities than historically, especially those who purchased at higher rates. David Spector highlighted improved recapture rates in Q3 due to technology, including a new loan origination system that reduced application completion time by 50%, and effective marketing initiatives. Dan Perotti added that the full benefits of improved recapture focus would be more evident in Q4 payoffs.

Trevor Cranston from Citizens JMP followed up on the hedging strategy change, asking if the Q2 increase in production expenses was tied to building recapture capacity and if further increases should be expected in Q3.

Answer

CFO Daniel Perotti confirmed the Q2 expense increase was largely due to adding capacity in direct lending to support the new hedging approach. He noted a small incremental increase of $1-3 million might occur in Q3. CEO David Spector emphasized that this capacity cost is a fraction of previous hedge costs and should lead to more consistent ROEs.

Trevor Cranston asked about the future of servicing operating expenses, questioning whether the consistent improvements are leveling off or if there is still significant room for further efficiency gains.

Answer

Daniel Perotti (executive) confirmed that there is still significant room for further reductions in servicing operating expenses. He stated that while the pace of improvement may slow, the company believes it can achieve at least a one-third further reduction in the expense metric over time, driven by continued scale and technology enhancements.

Trevor Cranston asked about the likelihood of GSE portfolio caps being increased as they approach current limits and whether Annaly has observed or expects any impact from GSE portfolio buying on swap or funding markets.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, stated it's difficult to predict if GSE caps will be increased, noting the FHFA director's recent comments against it but also significant remaining capacity. Regarding swap and funding markets, he observed no meaningful widening of swap spreads despite Fed adjustments, suggesting potential GSE involvement. Finkelstein also discussed how GSE MBS purchases could offset a lack of liquidity in the repo market. V.S. Srinivasan, Head of Agency, added that the current scale of GSE buying is not large enough to immediately impact swap spreads.

Trevor Cranston asked about the likelihood of GSE portfolio caps being increased and whether Annaly has observed or anticipates any impact from GSE portfolio buying on swap or funding markets.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, stated it's hard to say if caps will increase, noting the FHFA director's recent post. He mentioned that the GSEs have significant capacity before hitting current caps. Regarding swap markets, he hadn't seen a meaningful impact, but expected GSEs to hedge purchases with swaps if past behavior is a prologue. He also noted that GSE MBS purchases should offset their reduced liquidity in the repo market. V.S. Srinivasan, Head of Agency, added that the size of GSE buying (e.g., $100 million DV01 for $200 billion) is not large enough to immediately impact swap spreads.

Trevor Cranston asked about the refi responsiveness within Annaly's OBX securitization portfolio as mortgage rates declined, and the return sensitivity of subordinate positions to faster prepayment speeds.

Answer

Mike Fania, Co-Chief Investment Officer and Head of Residential Credit, noted that 2023 vintage OBX deals were paying in the low 30s CBR, slower than anticipated, due to prepayment penalties on investor loans. He added that the actual return profile for retained transactions has been higher than forecasted due to slower speeds.

Trevor Cranston of JMP Securities LLC asked about the macro risk of higher-than-expected inflation from tariffs and how Agency MBS would perform if the market priced out expected Fed rate cuts.

Answer

CEO David Finkelstein stated that while tariff-related inflation will pass through, it should be offset by declining services inflation, allowing the Fed to proceed with its planned cuts. He added that if the cuts do not materialize, the portfolio is well-hedged for a flatter yield curve, and Agency MBS should perform adequately as long as volatility remains contained.

Trevor Cranston of JMP Securities LLC asked about the macro outlook, specifically the risk of tariff-driven inflation being higher than expected and how Agency MBS would perform if the market priced out anticipated Fed rate cuts.

Answer

CEO & Co-CIO David Finkelstein stated that Annaly's base case is that declining services inflation will offset rising goods inflation, allowing the Fed to deliver two rate cuts as projected. However, if inflation runs higher and the Fed does not cut, he explained that the portfolio is well-hedged for a flattening yield curve. As long as volatility is contained, he expects Agency MBS to perform fine in such a scenario.

Trevor Cranston of Citizens JMP asked about the supply-demand dynamics for Agency MBS, particularly from foreign investors, and whether recent volatility has affected the pace of new loan acquisitions.

Answer

V.S. Srinivasan, Head of Agency, noted that while demand from domestic funds and banks was solid, significant demand from Asian accounts has not yet materialized and likely awaits Fed rate cuts. Co-CIO Michael Fania confirmed that volatility has led to a more defensive posture in loan acquisitions, with the firm building in higher gross margins to buffer against execution risk, resulting in slightly lower lock volumes.

Trevor Cranston from Citizens JMP inquired about the near-term supply-demand dynamics for Agency MBS, particularly from foreign investors, and how recent volatility has affected the pace of non-agency loan acquisitions.

Answer

V.S. Srinivasan, Head of Agency, noted that while overall demand was strong pre-volatility, significant demand from Asian accounts has not yet materialized and likely awaits Fed rate cuts. Co-CIO Michael Fania explained that in response to volatility, they have become more defensive in loan acquisitions by increasing their gross margin, which has slightly slowed lock volume.

Trevor Cranston of Citizens JMP asked about the profile of bulk MSR packages currently available in the market, specifically regarding their note rates, and how that profile is expected to evolve.

Answer

Head of MSR Ken Adler explained that the vast majority of bulk packages consist of lower note rate MSR, as lenders sell these less refinance-sensitive assets to raise liquidity. Higher note rate MSR typically comes in smaller, 'mini-bulk' packages. CEO David Finkelstein added that the overall MSR universe still has a low average note rate, which will continue to dominate the bulk supply.

Trevor Cranston of Citizens JMP asked for details on the profile of bulk MSR packages currently in the market, specifically regarding note rates, and how this might evolve relative to Annaly's existing low-note-rate portfolio.

Answer

Ken Adler, Head of Mortgage Servicing Rights, explained that the vast majority of bulk packages feature lower note rates, as lenders prefer to sell MSR from customers unlikely to refinance. Higher note rate packages tend to be much smaller. CEO David Finkelstein added that the overall MSR universe still has a low average note rate, which is what is most likely to come to market.

Trevor Cranston inquired about AGNC's updated view on swap spreads, including the potential for further widening and where they might ultimately settle, as well as the outlook for interest rate volatility.

Answer

Peter Federico believes swap spreads will stay in the current range with potential for further widening throughout the year, driven by the Fed's shift from quantitative tightening to reserve management and eased regulatory requirements. He expects this to put widening pressure on mortgage spreads, making swap-based hedges more favorable than Treasury-based hedges, potentially adding 25-30 basis points of extra carry (1-2% ROE). Regarding volatility, he noted that the decline in interest rate volatility in 2025 was a key driver of MBS outperformance. He expects generally low yield volatility in 2026, partly due to the Treasury's focus on keeping longer-term rates stable, and believes the direction of interest rates is more likely lower than higher, which would be positive for agency MBS.

Trevor Cranston asked for an update on AGNC's view on swap spreads, including potential for further widening and their ultimate settlement. He also sought management's thoughts on future interest rate volatility and its impact on MBS performance.

Answer

Peter Federico, President, CEO, and CIO, believes swap spreads will remain in their current range with potential for further widening due to the Fed's shift to reserve management and eased regulatory requirements. He expects this to favor swap-based hedges. He noted that declining interest rate volatility was a key driver of 2025 MBS outperformance, attributing current low volatility to Treasury's focus on long-term rate stability. He anticipates generally low volatility in 2026, which is positive for Agency MBS.

Trevor Cranston of JMP Securities LLC questioned management on their view of the optimal size for the company, particularly given its ongoing ability to issue accretive capital.

Answer

Peter Federico, President, CEO & CIO, responded that growth is driven by the ability to raise accretive capital that supports the dividend, not for growth's sake. He highlighted the benefits of scale, such as low operating costs and high stock liquidity. However, he also acknowledged market capacity constraints as a limiting factor, stating that AGNC is focused on finding the 'perfect efficient frontier' between growth benefits and market limitations.

Trevor Cranston asked for AGNC's outlook on swap spreads and for an update on how the company is thinking about its at-the-market (ATM) equity offering program after the recent market selloff.

Answer

Peter Federico, President, CEO, and CIO, suggested swap spreads are narrow due to intermediary balance sheet constraints and negative sentiment on USD assets, but he expects eventual widening from regulatory relief on the supplemental leverage ratio (SLR). On the ATM program, he confirmed AGNC will continue to use it opportunistically to raise accretive capital when valuations are attractive for deployment.

Trevor Cranston asked about AGNC's current leverage target, considering the portfolio additions late in the quarter and into January. He also inquired about any shifts in the company's relative value assessment between TBA securities and specified pools.

Answer

Peter Federico, Director, President and CEO, noted that leverage has been very consistent and that any increase would depend on attractive and stable spreads and declining volatility. Christopher Kuehl, EVP and CIO, added that recent capital deployment has focused on higher coupon MBS, which offer the best risk-adjusted returns. He also mentioned that while some specified pools are attractive, they remain patient and are carrying their TBA position due to favorable roll financing.

Trevor Cranston of JMP Securities asked for more detail on the expectation that a steepening yield curve would boost demand for Agency MBS, questioning which types of investors would drive this demand and the degree of steepening required.

Answer

Peter Federico, President and CEO, explained that the increased demand is expected to come primarily from unlevered investors, such as bond funds, as capital rotates out of the $6+ trillion in money market funds seeking higher yields. He also cited potential future demand from banks, pending clarity on Basel III regulations, and foreign investors. He noted this would be a gradual process as the Federal Reserve continues its easing cycle.

Trevor Cranston asked about the probability of further politically motivated actions to improve housing affordability or lower mortgage rates, such as lowering G-fees, and how this influences investment decisions. He also inquired about the deployment of capital raised in January, specifically within the coupon stack and where the best value is found post-GSE buying announcement.

Answer

Smriti L. Popenoe, Co-CEO and President, explained that government intervention in housing, including using GSEs to influence policy, is not new, and actions like lowering G-fees or removing loan-level pricing adjustments are possible. She noted the company anticipates and prepares for such interventions, which could lead to more negative convexity and potentially favor prepayment-protected mortgages or ARMs. T.J. Connelly, CIO, added that the belly of the coupon stack, primarily fives and five and a halfs, has been most interesting for capital deployment, with opportunities also found across the coupon stack in specified pools offering durable call protection.

Trevor Cranston inquired about the probability of politically motivated actions to improve housing affordability (e.g., lowering G-fees, removing LLPA) and their potential impact on investments, as well as an update on capital deployment in January.

Answer

Smriti L. Popenoe, Co-Chief Executive Officer and President, confirmed that government intervention in housing policy, including potential G-fee reductions or LLPA removal, is anticipated and prepared for, noting its historical precedent. T.J. Connelly, Chief Investment Officer, added that such actions would likely increase negative convexity and impact prepayment-sensitive mortgages, reinforcing the value of prepayment protection. Connelly also stated that capital raised in January was primarily deployed in the belly of the coupon stack, specifically fives and five-and-a-half coupons, with opportunities found across the stack for durable call protection.

Trevor Cranston inquired about the demand side for Agency MBS, specifically the potential for GSEs to increase their balance sheets and retained portfolios, and how Dynex Capital views their role as a demand-side player going forward. He also asked about the impact of lower implied volatility on Dynex Capital's hedging strategy, particularly regarding its increased option position.

Answer

T.J. Connelly, Chief Investment Officer, acknowledged the GSEs as a potential source of marginal demand, noting their capacity to add up to $450 billion under current agreements, though he views full utilization as low probability. He also discussed other demand sources like bank deposit growth, domestic bond funds, and mortgage REITs. Regarding hedging, T.J. Connelly and Smriti Popenoe, Co-CEO and President, explained that lower volatility presents opportunities to repurchase inherently short options and buy out-of-the-money protection cheaply, stabilizing portfolio duration and preparing for potential tail events.

Trevor Cranston of JMP Securities LLC questioned where returns on Agency CMBS stand relative to RMBS and how the company thinks about the strategic fit and potential size of these assets in the portfolio.

Answer

Co-CEO Smriti Popenoe highlighted Agency CMBS as a stable, call-protected asset that offers a solid return profile, especially when hedged with negative-spread swaps. CIO T.J. Connelly added that they are focused on the five-year part of the curve, where returns are compelling, and noted a strong technical backdrop with growing interest from banks and insurance companies, making the total return profile competitive with RMBS.

Trevor Cranston from Citizens JMP requested more context on Dynex's scenario planning for potential GSE changes and foreign selling of MBS, including the potential impact these events could have on mortgage spreads.

Answer

Co-CEO and President Smriti Popenoe stated that while logic suggests cautious GSE policy changes, Dynex prepares for outlier scenarios and market shocks. She noted a large-scale, long-term reallocation away from dollar assets is difficult for foreign investors. Chief Investment Officer Terrence Connelly added that their forecasts do not assume significant foreign demand and that foreign holders can let securities mature rather than actively sell.

Trevor Cranston followed up on the hedge portfolio, asking if the shift into swaps would continue, and inquired about the company's rate sensitivity and near-term outlook on interest rates and volatility.

Answer

CIO Terrence Connelly responded that the hedge portfolio is positioned appropriately for the current environment. He provided an updated, more balanced rate sensitivity profile, clarifying they are not taking a directional view but are preparing for more volatility at the long end of the curve. Co-CEO Smriti Popenoe added that the steeper yield curve now provides a positive carry, which helps absorb volatility.

Trevor Cranston asked for Dynex's outlook on the interest rates market and potential volatility heading into the U.S. election, and how the portfolio is positioned for this risk.

Answer

Co-CEO Smriti Popenoe stated the portfolio is positioned for a less restrictive Fed and a terminal funds rate of 3-4%, with a focus on the shape of the yield curve rather than absolute rate levels. SVP Terrence Connelly added that the swaptions market is pricing in significant post-election volatility, and Dynex is prepared with ample liquidity and capacity to add leverage to capitalize on potential market dislocations.

Trevor Cranston from Citizens JMP questioned the company's philosophy on hedging its MSR asset, particularly why it doesn't use financial hedges given that the natural hedge from originations may not fully offset MSR value changes when rates rally.

Answer

CEO Terry Schmidt explained that Guild has traditionally relied on its retail purchase production as a natural hedge, noting that Q3 origination growth outpaced servicing runoff. CFO Amber Kramer added that financial hedges carry a direct cost, and the company believes reinvesting that capital into growing the origination business is a better use of cash and aligns with their long-term strategy.

Trevor Cranston of JMP Securities asked about Newrez's competitive positioning and growth opportunity within the wholesale mortgage channel, which is currently dominated by a few large players.

Answer

Newrez President Baron Silverstein acknowledged the competitive landscape but stated there is room for Newrez to grow. He outlined a strategy focused on leveraging their non-agency product expertise, making significant technology upgrades to support broker partners, and maintaining strict capital discipline. He emphasized that they will pursue market share where it is attractive but will not chase unprofitable volume.

Trevor Cranston of JMP Securities asked about Newrez's competitive positioning and growth opportunity within the wholesale lending channel, which is dominated by a few large players.

Answer

Newrez President Baron Silverstein stated that while the channel is concentrated, Newrez can compete effectively, especially in its traditional strength of non-agency products. He emphasized that growth will be driven by technology upgrades and a disciplined capital deployment strategy, focusing on taking market share when margins are attractive.

Trevor Cranston of JMP Securities inquired about the impact of spread widening on NonQM margins in Q1, the market's adjustment to higher rates, and the potential for gain-on-sale margins to return to Q3 levels. He also asked about competitive intensity in the NonQM space and performance adjustments within the GSE-focused call center.

Answer

Chief Investment Officer Obi Nwokorie confirmed continued margin compression into Q1, with AAA NonQM spreads widening by another 65-70 basis points, but expressed belief that margins could normalize near 3.5-4% eventually. Chief Administrative Officer Justin Moisio noted some fallout in the unlocked pipeline but expects volume to stabilize around $100 million per month. Moisio also stated that while major competitors will remain, some newer entrants might exit the volatile market. He confirmed the call center's GSE originations fell 23% in Q4 as the company pivoted marketing spend to NonQM, which doubled its volume in the channel.