Annaly Capital Management - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 EAD held at $0.72 per share while GAAP EPS was $0.15; economic return was 3.0%, book value per share was $19.02, and the quarterly common dividend was raised to $0.70.
• Versus consensus, EPS beat and revenue missed: Q1 2025 Primary EPS actual $0.72 vs $0.698 estimate; Revenue actual $244.54M vs $418.52M estimate. Primary EPS likely reflects EAD (non-GAAP) used by Street for mREITs; GAAP EPS was $0.15. Values retrieved from S&P Global.*
• Leverage and risk remained conservative: GAAP leverage fell to 6.8x (from 7.1x), economic leverage rose modestly to 5.7x (from 5.5x), and the hedge ratio was ~95% as management emphasized prudence amid post-quarter tariff-driven volatility and MBS spread widening.
• Portfolio positioning: Total portfolio $84.9B with $75.0B Agency; mix tilted toward intermediate coupon TBAs (4.0s/4.5s) and higher-coupon specified pools (5.5s); Residential Credit decreased to $6.6B; MSR stable at $3.3B (~21% of dedicated capital).
• Management expects to maintain the $0.70 quarterly dividend for 2025 “all else equal”; catalysts include potential regulatory reform (SLR/Basel “endgame”) that could support swap spreads and Agency MBS, and disciplined balance sheet/liquidity (~$7.5B assets available for financing) to navigate volatility.

What Went Well and What Went Wrong

• What Went Well

  • EAD durability and dividend increase: EAD of $0.72 per share matched Q4 and supported an increased $0.70 dividend; “we increased our common stock dividend… Given our outlook for 2025, we expect to maintain this level” (CFO).
  • Broad-based contribution: “each of our three investment strategies contributed positively” with Agency, Residential Credit (OBX platform), and MSR all positive to economic return; Agency allocation increased slightly and liquidity strengthened (~$7.5B assets available for financing).
  • Funding tailwinds: Lower average repo rates (4.56% vs 4.93% prior quarter) and extended repo tenor (50 days vs 32 days) supported earnings; warehouse capacity expanded to $5.8B post-quarter.

• What Went Wrong

  • GAAP earnings compression: GAAP diluted EPS fell to $0.15 from $0.78 in Q4; hedge losses ($2.14/share) modestly outpaced gains from Agency ($1.89), resi credit ($0.08) and MSR ($0.05) as volatility increased late in Q1.
  • Margin mix: NIM ex-PAA ticked down to 1.69% (from 1.71%) and average economic liability cost rose 9 bps to 3.88%, partly reflecting swap income dynamics and funding mix.
  • Market headwinds: Post-quarter tariff headlines drove rate volatility and MBS spread widening (more pronounced vs swaps); AAA non-QM spreads were ~20 bps wider QoQ with additional widening post quarter (since partially retraced).

Transcript

Operator (participant)

Please note this event is being recorded. I would now like to turn the conference over to Sean Kensil of Investor Relations. Please go ahead.

Sean Kensil (Head of Investor Relations)

Good morning and welcome to the first quarter 2025 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the risk factor section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release.

Content referenced in today's call can be found in our first quarter 2025 investor presentation and first quarter 2025 financial supplement, both found under the presentation section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency; and Ken Adler, Head of Mortgage Servicing Rights. With that, I'll turn the call over to David.

David Finkelstein (CEO)

Thank you, Sean. Good morning, everyone, and thank you for joining us. Today, I'll briefly review the first quarter and our performance before turning to the current environment, given the elevated volatility we've seen post-quarter end. I will provide an update on our outlook and positioning for each of our businesses. Serena will then discuss our financials before opening up the call to Q&A. Now, the first quarter looked relatively benign in hindsight, though 10-year Treasury yields did trade in the 65 basis point range over the quarter and ultimately foreshadowed some of the rate volatility we experienced in April. January and February were characterized by generally healthy fixed income demand and positive risk sentiment.

However, conditions began to deteriorate somewhat in March amidst discussion of the new administration's trade policy, which shifted the outlook and led to an underperformance in risk assets and a retracing of the tightening in spreads from the first two months of the quarter. Our portfolio performed well, delivering a 3% economic return during the quarter. In addition, we increased our common stock dividend to $0.70 per share, underscoring our earnings momentum. Our capital allocation to Agency increased slightly to 61% as we deployed accretive capital raised through our ATM into the sector. Economic leverage increased modestly to 5.7 turns at the end of the quarter, though remained at the low end of our historical range. Now, turning to the macro landscape in April, markets have been struggling to decipher competing narratives in recent weeks. The shift in U.S.

Trade policy has further weighed on consumer and business confidence and is likely to impact economic growth over the foreseeable future. While inflation slowed in the first quarter, tariffs should lead to higher goods prices over the medium term, which risks 2025 representing a second consecutive year of limited inflation progress for the Fed. Interest rates and financial assets broadly have exhibited meaningful volatility following the tariff announcements. In just the past few weeks, we've seen Treasury yields traverse a similar size trading range as they experienced during the entirety of the first quarter. This has led to a cheapening in balance sheet intensive assets and a widening of Agency MBS spreads in tandem with other spread products. As we have conveyed in recent quarters, we believe it pays to be prudent given that we have earned our dividend at lower relative levels of risk.

We entered the year with our lowest economic leverage in a decade and enhanced our liquidity throughout the first quarter to $7.5 billion in total assets available for financing. Combined with an actively managed and well-hedged portfolio, this prepared us well for the volatility that ensued in April. Now, to focus specifically on our businesses and beginning with Agency, $3.5 billion in notional portfolio growth in the first quarter was driven by purchases of largely intermediate coupon TBAs, which lagged relative to production coupons during the rate sell-off in the fourth quarter and early part of Q1. These securities also offered a more favorable convexity profile and attractive carry as rolls improved in the first quarter. Additionally, they should prove the most durable area to invest if the economy continues to slow.

On the hedging side, we maintained a disciplined approach with respect to our interest rate exposure given the macro uncertainty. The prospect of regulatory reform led to a widening in swap spreads early in the first quarter, which allowed us to better balance our hedge exposure by shifting some of our longer-dated swaps into Treasury futures. We also layered in a modest swaption position as implied volatility cheapened somewhat in the first quarter. Post-quarter end, the MBS widening, which began in March and accelerated in April, has been more pronounced versus swaps relative to Treasuries as swap spreads have narrowed to historically tight levels. Now, it is important to note that throughout this recent volatility episode, funding markets have demonstrated stability.

When macro stress further subsides, we do expect the focus around MBS to return to the fundamentals: inexpensive valuations, a muted prepayment environment, and durable financing markets for the Agency sector. Now, shifting to residential credit, our portfolio ended the quarter at $6.6 billion in market value with $2.4 billion in capital. The decrease in portfolio size of $340 million quarter over quarter is attributable to opportunistic sales of third-party securities as well as an increased pace of securitizations in the first quarter. Credit spreads began to widen in March as AAA non-QM spreads were approximately 20 basis points cheaper on the quarter, with subsequent widening post-quarter end. In an encouraging sign of the residential credit sector's resilience, the new issue market remained open throughout the significant volatility experienced in April, and spreads have since tightened from the peak experienced a couple of weeks ago.

Now, as it relates to the housing market and specifically home price appreciation, momentum continues to decrease as affordability is burdening potential borrowers. In addition, increases in available-for-sale inventory have weighed on shorter-term supply and demand dynamics. The housing market is exhibiting signs of increased regional disparity as several areas that experienced outsized HPA post-COVID are now displaying a modest reversal of those trends. Now, despite the negative momentum that a portion of the market is exhibiting, the national housing market appears to be on stable footing given record levels of borrower equity, low delinquencies, tight underwriting standards, and the longer-term deficit of single-family homes relative to the size of the population and current demographics. Onslow Bay's correspondent channel lock and acquisition volumes remained strong in Q1 as we finished the quarter with $5.3 billion in locks and $3.8 billion of fundings.

Our vigilance regarding the quality of our credit is best evidenced by our lock pipeline, which exhibited a 758 weighted average FICO and a 67% CLTV. The OBX securitization platform closed six transactions in Q1 totaling $3.1 billion, including our inaugural HELOC transaction as well as a non-QM private placement. Post-quarter end, we priced two additional securitizations totaling $1.1 billion, reflecting the programmatic nature of the platform. Since the beginning of the year, we've manufactured $540 million of proprietary credit assets at mid-teens expected ROEs for Annaly and our third-party funds. Moving to the MSR business, the portfolio ended the first quarter relatively unchanged at $3.3 billion in market value, comprising $2.7 billion of the firm's capital. During Q1, we settled $28 billion in principal balance of previously disclosed purchases while adding approximately $3 billion in UPB across our bulk and flow acquisition channels.

We were disciplined in growing the portfolio in the quarter as we expect supply to stay elevated throughout 2025, almost equal as the origination community should continue to monetize MSR given historically compressed gain-on-sale margins. As the mortgage origination and servicing industry consolidates, we've strategically aligned ourselves with industry-leading sub-servicing and recapture partners that should create clear competitive advantages for our platform. We believe that greater efficiency and technological investment in the mortgage industry provide the potential for enhanced portfolio yield through increased recapture capabilities and a superior borrower experience. Our MSR valuation increased very modestly, driven by a marginally steeper SOFR curve and tighter spreads on observable MSR consisting solely of deep out-of-the-money collateral. With a 3.23% aggregate borrower rate and less than 5% of the portfolio with a mortgage rate greater than 5%, our MSR holdings are differentiated relative to the broader servicing market.

Our exposure to higher note rate MSR, the segment of the market that depreciated over the quarter, is negligible, contributing to our relative outperformance. Lastly, related to MSR, fundamental performance of the portfolio continues to exceed our initial modeled expectations as serious delinquencies are approximately 50 basis points. The portfolio exhibited a 3.4% CPR over the quarter, and increased escrow balances and resulting float income have provided positive tailwinds. All told, while the outlook remains uncertain, our portfolio is diversified, liquid, and actively managed, which should allow us to perform across a variety of economic scenarios. We continue to believe this portfolio construct has significant synergies with the potential for superior risk-adjusted returns, as evidenced by delivering a positive economic return in each of the past six quarters.

While volatility presents its challenges, we're encouraged by the underlying dynamics in this environment, including highly attractive new money returns, a steeper yield curve, and declining financing costs. Now, with that, I'll turn it over to Serena to discuss the financials.

Serena Wolfe (CFO)

Thank you, David. Today, I will provide brief financial highlights for the quarter ended March 31, 2025. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Earnings available for distribution per share for the quarter was consistent with the prior quarter at $0.72 per share. Earnings were primarily driven by lower average repo rates of 4.56% compared to 4.93% in the prior quarter, along with higher coupon income on higher average investment balances. These increases were partially offset by lower swap income due to the unwinding of swaps, which were replaced with future positions that do not have an interest component in EAD.

Considering continued strong earnings, driven largely by reduced repo funding costs and higher average investment yields, we increased our dividend from $0.65 to $0.70 per share for the first quarter. Given our outlook for 2025, we expect to maintain this level for the remainder of the year, all else equal. As of March 31, 2025, our book value per share was $19.02, a modest decline of less than 1% quarter over quarter. After accounting for our aforementioned dividend, we achieved an economic return of 3% for Q1. Our individual businesses all contributed positively to our economic return despite the challenging macro environment in the latter part of Q1. For the quarter, we saw gains on Agency MBS, Resi Credit, and MSR portfolios of $1.89, $0.08, and $0.05 per share, respectively. However, declines in our hedge positions modestly outpaced these gains at $2.14 per share.

Over the last year, we have spent time on our earnings calls discussing the various additions and expansions of funding options available to our credit businesses. Our financing strategy is defined by our diversified structures, and given our size and scale, we have access to a wide range of funding options, including bilateral repo, our in-house broker-dealer, sponsored repo, securitizations, credit facilities, and warehouse financing. We took advantage of the robust funding markets during the quarter and added term to our repo book at attractive spreads. As a result, our Q1 reported weighted average repo days extended to 50 days compared to 32 days as of the fourth quarter of 2024. Since the end of 2022, we have added $2.1 billion of warehouse capacity, including supplements for new products and non-marked-to-market and committed facilities within the residential credit business.

This brings total capacity to $3.9 billion across 10 counterparties as of March 31, 2025, with a utilization rate of 43%. Additionally, we have added $1.6 billion in capacity over the same period within our MSR business. This is consistent with portfolio growth, bringing the total available committed warehouse for MSR to $1.8 billion across three counterparties as of March 31, 2025, with a utilization rate of 50%. After quarter end, we upsized an existing credit facility within the residential credit business, bringing our current total capacity across both businesses to $5.8 billion. Annaly's financial strength is further evident in our unencumbered assets, which ended the first quarter at $6.3 billion, including cash and unencumbered Agency MBS of $4.7 billion, which is approximately 60% of the dedicated capital of our Agency business.

In addition, we have approximately $1.2 billion in fair value of MSR that has been pledged to the committed warehouse facilities but remains undrawn and can be quickly converted to cash, subject to market advance rates. Together, we have approximately $7.5 billion in assets available for financing, up approximately $600 million compared to the fourth quarter and representing approximately 60% of our total capital base. Finally, touching on OpEx, our efficiency ratios increased moderately during Q1 due to the timing of certain expenses. However, we expect expenses to normalize and full-year OpEx to equity ratios to align with historical levels, all things being equal. Now, that concludes our prepared remarks, and we'll open the line for questions. Thank you, Operator.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Our first question will come from Bose George with KBW. Please go right ahead.

Bose George (Analyst)

Hey, everyone. Good morning. Can I get an update on your book value quarter to date?

David Finkelstein (CEO)

Sure, Bose. Good morning. As of Tuesday evening, our book value, inclusive of the dividend, so economic return was off roughly 3.5%. To give you context of how it has evolved coming out of the Easter holiday weekend, the economic return was roughly off 4.5%.

Bose George (Analyst)

Okay. Great. Thank you. Can you talk about your outlook for spreads and how does what's happening in the swap market play into that? Does it have more to do with swaps normalizing? Also, any thoughts on what regulators might end up doing with the bank SLR and what that could mean for the market?

David Finkelstein (CEO)

Sure. Let's first talk about swap spreads because obviously a lot of factors have driven mortgage widening, and swap spread tightening is one of them, but also volatility. As it relates to swaps, it's important to back up and talk about how the swaps market has evolved over really the past decade. Beginning with post-Dodd-Frank, swaps ultimately were all cleared and, as a consequence, margined and marked to market on a daily basis. Effectively, that eliminated credit risk. Another evolution, obviously, is the transition from LIBOR to SOFR. Overnight treasuries is the benchmark, which also reduces any risk associated with that instrument as a hedge. The last point to note is they're synthetic, and so there's no balance sheet risk associated with swaps. Effectively, what's occurred over the last decade, Bose, is that swaps have become the risk-free curve, yield curve in the U.S.

As a consequence, your best carry as a hedge is going to be that risk-free curve. It is a very attractive hedge from a carry standpoint. However, it does not have the highest correlation to mortgages. Treasuries actually do exhibit greater correlation, and that is largely because of balance sheet risks. The way we look at it is we are looking to balance carry and correlation and strike the best risk-adjusted return as a hedge. We think we have done that effectively. What has occurred over the very recent past is, as we got to April 2, beyond, a lot of volatility ensued. As a consequence, that flight to quality was more reflected in swap spread tightening as opposed to a Treasury rally, albeit Treasuries have now since rallied back. That is what has driven the underperformance of Agency relative to swaps.

Our view is that as we do get to hopefully a better outcome on these trade negotiations, you will see volatility decline, and you'll see swaps normalize and widen. That's our view, but it's going to be predicated on greater confidence on the outlook as it relates to trade and also market volatility subsiding. Now, your point about the regulatory environment, obviously coming into the year, there was a lot of anticipation about reg reform, and that did lead to swap spreads widening, largely because of the anticipation that it would free up balance sheet on the part of banks, and particularly broker-dealers at banks, so that they could intermediate balance sheet-intensive products with greater capabilities. That did get put on the sidelines a little bit, given the other priorities of the administration. Our anticipation is that we will have broad regulatory reform coming down the pike.

I think the Treasury Secretary said you can anticipate the third and fourth quarter to see the benefits of that when he was interviewed early this week. The Fed obviously has a new regulatory chair coming in, waiting confirmation and Bowman. Treasury is well focused on it, as are the other parts of the administration, FDIC, OCC, and we do expect that to be a focus. SLR is obviously on the table, and then likely a full re-proposal of Basel Endgame and other accommodations to make balance sheet more friendly and the intermediation of the Treasury market and other sectors in markets to be more fluid. We are hopeful, and we will wait to see. We do think it will be a tailwind to swap spread widening in the coming quarters. Does that help?

Bose George (Analyst)

Yes, that's great. Thanks for all the color.

David Finkelstein (CEO)

Sure.

Operator (participant)

Our next question will come from Doug Harter with UBS. Please go ahead.

Douglas Harter (Analyst)

Thanks. David, you mentioned that you came into the year with your lowest economic leverage. Just thinking now that spreads have widened and how you're thinking about leverage today, whether this is an opportunity to increase it or with volatility likely or potentially to remain high, you would kind of keep it as is.

David Finkelstein (CEO)

Sure, Doug. You bring up the two opposing forces in terms of how we look at leverage. Number one is that spreads are wider, which would suggest you would take more risk and add more leverage. On the other side of the equation, a lot of that is driven by higher volatility. As a consequence, it makes taking leverage up more risky. When we look at how we're positioned currently, we're trying to balance those two competing forces. Positioning-wise, leverage has ticked up modestly this quarter, but we're still inside of six turns. Until we see volatility come down, or at least we can forecast it, we're probably going to keep things close to home. We're optimistic that things will continue to subside in terms of market conditions, liquidity, and volatility. There's still a lot of uncertainty.

Our inclination is to keep things close to home. We'll let leverage drift a little bit, and we're not going to be overly defensive when we don't think we need to be, but we're going to keep it conservative for here, Doug.

Douglas Harter (Analyst)

I guess just a question on that, right? If you wait until you see volatility kind of decline, do not you risk kind of that that is the spread movement tighter since that is the bulk of why spreads are so wide, higher volatility, just kind of how you balance that offense and defense?

David Finkelstein (CEO)

Sure. Sure. First of all, I'd say if you look at our spread shocks, for a 25 basis point tightening in spreads, the portfolio makes nearly 10%. Right now, spread durations are a little bit longer, so that's a little bit over 10%. It's more than sufficient opportunity to generate return under that eventuality. Yeah, it is a difficult puzzle to assess given the fact that you'll miss some of that spread tightening. If you think about it, these two competing forces, you want to move quickly. If you think about the alternative, if all of a sudden we do have a reinvigoration of the extreme volatility that materialized between April 2nd and April 9th, that's going to be quite painful. That's what we're tasked with being responsible about.

The return will be certainly rewarding if spreads do tighten, but we want to make sure that the portfolio does not get unwieldy in terms of managing leverage and duration in the absence of that and a retracement of some of the calmness that has ensued the past week or thereabouts.

Douglas Harter (Analyst)

Great. I appreciate those answers, David. Thank you.

David Finkelstein (CEO)

Thank you, Doug.

Operator (participant)

Our next question will come from Richard Shane with JPMorgan. Please go ahead.

Richard Shane (Analyst)

Hey, guys. Thanks for taking my questions this morning. Look, obviously, large portfolio dealing with incredible uncertainty and high degree of volatility. You're also in an environment where I think you're investing in at least nine different coupons. It looks like during the quarter, you shifted incrementally towards a little bit more of the discount bonds. Is that sort of strategically where we think you should be going? Or not where we think you should, but where we should expect that you are trending over the next two or three quarters?

Vankeepuram Srinivasan (Head of Agency)

Hi, Shane. This is Srini. Thanks for the question. Overall, we feel like at this moment, particularly in the first quarter, roles were starting to look pretty attractive in the intermediate coupons, and the intermediate coupons had underperformed in the sell-off which we saw in the fourth quarter, and they were, on a relative coupon basis, pretty attractive. Over the last month or so, we still find the intermediate coupons quite attractive. We do have a general bias towards rates going lower rather than higher, which again suggests we should be in intermediate coupons. Payouts have come up a lot since the end of the fourth quarter, so pay-ups are looking much more attractive now. We do like specified pools up in coupons. When the opportunity presents itself, we will add some specified pools up in coupon, but our TBA positions will remain in intermediate coupons.

David Finkelstein (CEO)

Rich, I'll just add to Srini's point, we did add a lot of fours and four and a halves, and those are around the $93-$95 price bonds. If we do get a rally, those assets will trade long for quite some time, so we'll really benefit from that. Conversely, in higher coupons, if you think back to the fall when the 10-year rallied to $365 or thereabouts, speed's really accelerated on those premium coupons. We're certainly sensitive to the refinanceability of cuspy and higher coupons as well. We think that's the right sweet spot.

Richard Shane (Analyst)

Got it. Do you think that we have been in an environment all mortgage borrowers are rate bulls, all mortgage originators are rate bulls? We have been in an environment for the last 18 or 24 months where people have been financing homes with the expectation that they will be able to refinance them very quickly. In addition, the technology for refinance and the industry structure is evolving. Do you think that on a like-for-like basis, we will see speeds substantially higher than we would have expected historically based upon modest moves up in the stack based on more modest rate moves?

Vankeepuram Srinivasan (Head of Agency)

Short answer would be yes. We got a glimpse of this in fall of last year, as David mentioned, when rates rallied and mortgage rates got below 6%. Cheapest to deliver 6s, which were roughly 75 basis points of incentive.

Refinanced at a speed, one-month speed of 38 CPR, and six and a halves with 125 basis points of incentive paid at almost 52 CPR. These are faster speeds than what we saw experienced in 2019, but not as fast as what we saw in 2021. The reason is that in 2021, we were at historic low-end rates, so there was a lot of media effect. The combination of higher loan size and a shift in origination from bank originators to non-bank originators has definitely made the cheapest to deliver universe much more negatively convex today than it was pre-COVID.

Richard Shane (Analyst)

Got it. It's interesting to hear the phrase media effect, which we have not heard for a while in this space, but it's a good point as well. It's not a factor I was considering. Thank you, guys, very much.

David Finkelstein (CEO)

Thank you, Rick.

Operator (participant)

Our next question will come from Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Analyst)

Hey, thanks. Good morning, guys. I think you talked about housing prices and some moderation there in certain areas. I mean, do you see weaker housing prices becoming systemic under any scenarios, or do you think it's really more likely to be isolated? If it does stay relatively isolated, do you think that could have any impact in any way on Agency MBS spreads or conditions in the securitization market?

Mike Fania (Co-Chief Investment Officer and Head of Residential Credit)

Sure, Eric. This is Mike. I'll take the first part of the question regarding housing. I think when talking about housing, I think the first thing that you need to do is take a step back and assess what that market has done. Housing prices are up 47% since year-end of 2019. They've outperformed significantly. They've outperformed analyst expectations. Even over the last two and a half years, with the mortgage rate at six and three quarters, home price appreciation has still been very strong. What you are now seeing is inventory has increased. Inventory's up 18% year over year, but inventory's up close to 50% from February of 2022. Longer-term, inventory's still 25% below where we were pre-COVID, but shorter-term, it has increased. What you're seeing is this spring selling season is weaker than the past seasons.

Existing home sales, it's the lowest existing home sales that we've seen since March of 2009. You're hearing it on the builder calls that it's more than just incentives now. Now they actually need to decrease pricing. I think a lot of that is just you're seeing a little bit of pullback from outsized HPA. Where you're seeing it, it's more regional in nature. You're seeing a lot in the South, a lot in the Southeast. Florida is pretty weak, but Florida was also up 60% since 2019. A lot of it is just you're seeing it from short-term increases in inventory. Texas, Florida, Georgia, you're seeing it in the Carolinas, a little bit in Colorado and Arizona. On the other side of that, the Northeast is very strong. New York, New Jersey, up 6-7%. You're seeing the Midwest is also strong as well.

I think shorter-term, you may see some pullback here. HPA may be flattish and maybe negative throughout the year. I think, as Dave mentioned in the script, there's still a lot of longer-term reasons as to why we're constructive on housing. Delinquencies are still relatively low. Mortgage credit availability is still tight. You're seeing in terms of longer-term inventory, we think it's short 3-4 million units. When you think about borrower equity, housing market's $55 trillion, and there's only $13 trillion of first-line debt. I think longer-term, we feel constructive, but over the near term, just given the outsized HPA, you are going to see some pullback. In terms of what that means for the securitization market, we have seen delinquencies increase. We'll relate that to the non-QM market. I think in actual losses, it's been nominal.

It is because of the equity that you see within these securitizations and within the PLS market. Those borrowers have anywhere from 25-30 points of equity. I think that housing would really need to depreciate and decelerate for the PLS market to be impacted.

David Finkelstein (CEO)

Eric, your second part of the question was that related to if there's a widening in Resi Credit spreads, will Agency follow sympathy, or is that it?

Eric Hagen (Analyst)

Yeah. Yeah, essentially. Yeah, exactly.

David Finkelstein (CEO)

Yeah. Obviously, there are two different markets and typically two different buckets across buyers of mortgage-backed securities. Certainly, to the extent Resi Credit does cheapen and it's not really deemed a credit event, then it'll be more competitive with Agency. Generally, we think there's appetite certainly for the Resi Credit sector, and Agency buyers will look at Agency based on OAS, volatility, and all the metrics that you assess Agency MBS relative to.

Mike Fania (Co-Chief Investment Officer and Head of Residential Credit)

Yeah. Eric, I would just add in terms of if you want to think about the resiliency of the PLS market and what we have recently seen, we were out with our Non-QM 6 transaction. We went out with that market. We were out in the market on April 1. We ended up pricing that on April 7. During that time period, you saw the S&P 500 was down around 10%. We were still able to price a transaction in the middle of liquidation with equity markets effectively cratering and doing it at a level that we still thought was relatively accretive to our cost of funds to warehouse. We had over 20 investors in that transaction. I think the PLS market is different than where it was called four to five years ago.

If you asked us, "Would you be able to print a transaction in that type of volatility three, four, five years ago?" I think the answer would have been no. I think the growth of the market and the resiliency and the number of sponsors in terms of your investors, I think, has certainly increased.

Eric Hagen (Analyst)

Really helpful color from you guys, as always. One more, if I may, just because there's so much going on right now. I mean, lots of speculation around the GSEs getting released from conservatorship. We're not looking at, we're not overlooking any of the complexities with respect to a release. If it eventually results in the GSEs having a smaller or more nimble footprint in the mortgage market, I mean, first, what do you think that could mean for the level and the volatility of MBS spreads? What are the opportunities more broadly in the market that you think could be most attractive against that backdrop?

David Finkelstein (CEO)

It is certainly a topic of a lot of attention right now. As we see it, conservatorship should not last forever. What we have heard from policymakers is that to the extent the GSEs are privatized, it needs to be done thoughtfully and carefully. I think that the FHFA Director is aligned with the Treasury Secretary. I think Pulte said just the other day that first and foremost, the objective is to make sure that anything that is done does not affect the mortgage market in a negative way. We have been encouraged with what we have heard thus far. Given the other priorities on the administration's plate from trade to taxes to immigration, it is further out the horizon that we think it will come to the forefront.

Now, as it relates to the GSE's footprint under a scenario where they're no longer in conservatorship, yes, they could have a smaller footprint, which is generally good for both our Agency business and our residential credit business. I think we talked about on our last call that we would be more competitive from a Resi Credit standpoint with a lot of the products that the GSEs do currently guarantee. I think we noted that 20% of the existing wheelhouse for the GSEs is what's considered non-core, second homes, investor properties, and other types of loans. We would welcome the opportunity to compete to acquire and securitize those products. A smaller footprint in Agency only helps the supply and demand dynamics of the Agency market. Generally, we feel pretty good about that.

Eric Hagen (Analyst)

Thank you, guys. Appreciate you.

David Finkelstein (CEO)

Thank you, Eric.

Operator (participant)

Our next question will come from Jason Weaver with Jones Trading. Please go ahead.

Jason Weaver (Analyst)

Hey, good morning, guys. Thanks for taking my question. You mentioned the allocation shift towards Agency with the distribution of more Resi Credit in the quarter, but can you talk about today where you see relative attractiveness in capital deployment?

David Finkelstein (CEO)

Sure. Agency, as spreads have cheapened, some of that's driven by vol, but generally, OASes are wider, and that's where the marginal dollar is going given the returns in the Agency market. We'll still continue to focus on OBX loan acquisition to securitization because that's a very good return for us, and we expect to grow the OBX platform. However, it could come at the cost of our third-party portfolio, much like you saw in the first quarter where we grew OBX, but we reduced third-party securities, primarily CRT as well as NPL, RPL. We'll see how spreads evolve to determine that. Generally, Agency is where the marginal dollar is going. As it relates to MSR, we have grown the portfolio nicely. We didn't grow it much in the first quarter.

The MSR portfolio for us has just kind of quietly laid in the grass and generated really strong returns because of the low note rate and low delinquency attributes of that portfolio. It has just been very stable for us. We would like opportunities to continue to buy MSR, but those do tend to be episodic. We expect there to be a reasonable amount of supply coming, and growth will be dependent on pricing for the most part. Generally, right now, the marginal dollar is going to be allocated to Agency, but we will make sure we keep an overall level of diversification in the portfolio that has benefited the shareholder for the past couple of years. It has worked out quite well, and we will be focused on it.

Jason Weaver (Analyst)

That's helpful. Thank you. As a follow-up, I wonder if you could talk about the home equity securitization transaction, what you learned from that, and where you see investor demand evolving there.

Mike Fania (Co-Chief Investment Officer and Head of Residential Credit)

Sure. Thanks, Jason. Yeah. That transaction, I think, actually went very well for us. We tightened that transaction, I think, close to 15-20 basis points relative to our IPTs. We priced the AAA asset at SOFR plus 160. The blended cost of funds there was about 85% advance rate, SOFR plus 170. When we look at that relative to our cost of funds within warehouse, it's probably a 5% better advance rate and maybe call it 25-30 basis points better in terms of rate in terms of your cost of funds. Very accretive for us there. The type of HELOCs that we're focused on, they're full documentation, it's bank-quality credit. We're not participating in some of this alternative documentation that some of our peers and other competitors have been looking to do.

I think for us, it just shows that there is liquidity out there. I think what is unique about HELOCs and the ability to sell HELOCs through the securitization market is it is a floating-rate product. When you look at floating-rate assets within the PLS market, within the Resi PLS market, really, it's only CRT. Maybe there's a small creation of floaters off prime jumbo deals. There was a lot of demand from accounts that historically did not participate in our non-QM transactions with our fixed rate, but did participate in the HELOC transaction because of the floating-rate nature. I think we feel very good about the deal and about future purchases and our ability to access securitization for term funding there.

Jason Weaver (Analyst)

Appreciate that, Mike. Thanks for all the color, guys.

David Finkelstein (CEO)

Thank you, Jason.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question will come from Trevor Cranston with Citizens JMP. Please go ahead.

Trevor Cranston (Analyst)

Hey, thanks. On the Agency portfolio, can you guys talk a little bit about what you're seeing in terms of the supply-demand dynamic in the near term? In particular, if you can maybe talk about what you're seeing from foreign investors and what the outlook is for that segment of the market. Thanks.

Vankeepuram Srinivasan (Head of Agency)

Sure. Before this recent bout of volatility, there was pretty strong demand from fixed-income funds because fixed-income flows were very strong. There was very high CMO creation because demand for floaters, Agency floaters, was very strong and across a wide range of accounts. There was reasonable demand from banks. Banks added about $20 billion in the first quarter, and REITs also had reasonable demand. As far as foreign accounts, we've seen a lot of demand for foreign accounts, but they're usually from places like Canada and the U.K., which is mostly money-manager demand. I don't distinguish them any different from fixed-income flows that you see in the U.S. What we have not seen in any reasonable size is demand from Asian accounts. We think that we need another 25-50 basis points of cut in the front end, Fed cuts, before we see the Asian demand emerge.

Now, does all of this tariff trade war and tariff change that equation? It's not clear to me at this point. We have enough information to go to say one way or the other.

Trevor Cranston (Analyst)

Okay. Got it. That's helpful. On the non-Agency side of things, with all the rate and spread volatility we've seen in April, has that had any impact on sort of the pace of new loan acquisitions in that business? How should we think about that for the early part of the second quarter? Thanks.

David Finkelstein (CEO)

Yeah. Thanks, Trevor. Yeah, it's a really good question. I would say it has. Really, what we're doing is when you experience a time like this where you're seeing volatility, you're seeing increase in spreads, what we will do is we'll build in a higher margin, a higher gross margin relative to what we have been doing historically. I think in times like this, it's prudent for us. It's one of the reasons why the ROEs of the business increased in terms of on our investor deck because we need to make sure that we have enough buffer for our ability to execute these transactions. I think it's also a little bit in terms of building a little bit more margin just given our a little bit cautious on the consumer as well. I would say our lock volume is off, but it's not off significantly.

We're still a platform that has the ability where there's some inelasticity in terms of our pricing. I would say, yes, we have a little bit more of a defensive posture given securitization spreads and given the volatility that we're seeing. We do that through our margin, and that's a pretty reactive function.

Trevor Cranston (Analyst)

Okay. Makes sense. Thank you, guys.

David Finkelstein (CEO)

Thank you, Trevor.

Operator (participant)

With no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to David Finkelstein, Chief Executive Officer, for any closing remarks.

David Finkelstein (CEO)

Thank you, Wyatt. Thank you, everybody, for joining us today. Have a good rest of the spring, and we'll talk to you soon.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.