Two Harbors Investment Corp. (NYSE:TWO) Q2 2024 Earnings Call Transcript

Two Harbors Investment Corp. (NYSE:TWO) Q2 2024 Earnings Call Transcript July 31, 2024

Operator: Good morning. My name is Melissa, and I will be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors Second Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. After the speaker’s remarks, there will be a question-and-answer period. I would now like to turn the call over to Maggie Karr.

Maggie Karr: Good morning, everyone, and welcome to our call to discuss Two Harbors second quarter 2024 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer; Nick Letica, our Chief Investment Officer; and Mary Riskey, our Chief Financial Officer. The earnings press release and presentation associated with today’s call has been filed with the SEC and are available on the SEC’s website as well as the Investor Relations page of our website at twoharborsinvestment.com. In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today’s call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.

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

William Greenberg: Thank you, Maggie. Good morning, everyone, and welcome to our second quarter earnings call. Before getting into our financial results, I would like to take a moment to recognize the retirement of our CFO, Mary Riskey. As previously announced, Mary will retire in August after a long and distinguished career, the last 13 years of which were at Two Harbors. Mary was already at Two Harbors when I joined in 2012, and I remember having numerous conversations with her in those early years and being struck by her knowledge and command of very technical issues. In the 12 years I have known Mary, I’ve come to admire her for her honesty, character, commitments and loyalty. There is no doubt Mary has left an indelible mark on our company, and we are grateful to her for her leadership.

Mary, you’ll be missed, and all of us at Two Harbors wish you the very best in your next chapter. We are also very excited to announce that William Dellal will be joining us as interim CFO effective August 1. William and I worked together for 10 years from 1998 through 2008, that couldn’t be happier to join together again. Most recently, William worked at Caliber Mortgage, where he was CFO and then President, through the completion of the sale of Caliber. Prior to that, William was Head of Capital Markets at CitiMortgage. He has vast experience in the mortgage industry with deep knowledge of servicing, origination, markets and risk management. In this time of growth and change for our company, we are especially fortunate to be able to draw on Williams’s wisdom and expertise.

We will continue to search for a permanent CFO, who will be able to help us grow, not from where we are currently, but from where we expect to be in the near future. William Dellal’s presence allows us to be careful and thoughtful in that search. Now turning to our quarterly results. I’ll start by providing an overview of our performance, followed by a discussion on the markets and finish with an update on RoundPoint operations. Mary will cover our financial results in detail and Nick will discuss our investment portfolio and return outlook. Let’s begin with Slide 3. Our book value at June 30 decreased to $15.19 per share, representing a 0.0% total economic return for the quarter. For the first half of the year, we generated a total economic return of 5.8%.

Our second quarter results were primarily affected by a small widening in the RMBS spreads and higher realized volatility in the second quarter compared to the first quarter. MSR performed well with stable cash flows supported by slow prepayment speeds. Please turn to Slide 4 for a brief discussion on the markets. In the second quarter, there was no lack of conflicting economic data driving a pickup in volatility. Figure 1 on this slide shows CPI readings from the beginning of 2021 through the present. Both employment and CPI reports came in stronger than expected in April, followed by weaker-than-expected readings in May and then stronger and better-than-expected reports in June. Unexpected developments in the U.S. presidential race, plus surprising results in French and British elections also contributed to market volatility.

After rising 50 basis points and then following by 50 basis points, the 10-year treasury yield ultimately rose again and finished the quarter about 20 basis points higher at 4.40%. The 2-year treasury yield followed a similar path, rising 40 basis points and falling by 30 basis points, finishing up 13 basis points to 4.75%. In June, the Fed left rates unchanged as they continue to wait for more good data showing that inflation was steadily declining towards their 2% target. Market expectations for interest rate cuts in 2024 declined from about 3 cuts or 75 basis points to about 2 cuts by quarter end as seen in figure 2. The Fed’s own projections, the dot plots, moved the median expectation for Fed funds down from 3 cuts to 1, though a plurality of members had 2 cuts in their forecasts.

Inevitably, many forecasts shifted the first cut further out in time, reinforcing the higher for longer view. Post quarter end on the back of a weaker-than-expected inflation reading, Chairman Powell [ph] signaled that an interest rate cut is probable for September, and the market is now fully pricing in the September rate cut. We also expect that volatility will decrease as the Fed embarks on an easing cycle, which will benefit both RMBS and MSR valuations and further supports the idea that this is an excellent environment for our current allocation to MSR and Agency RMBS. Please turn to Slide 5 for a brief discussion on RoundPoint’s operations. Our goal in owning and operating mortgage company was to achieve economies of scale, improve MSR economics and to be able to leverage a more expansive set of opportunities in the mortgage finance space, thus creating new sources of profitability for the company.

In line with our previously articulated plan, we completed the transfer of all of our servicing to RoundPoint’s platform in June. RoundPoint’s now services over 900,000 loans or about $225 billion of UPB. We continue to be focused on implementing operational efficiencies to deliver low cost of service per loan and are pleased with our progress so far. In the second quarter, we also launched our direct-to-consumer originations platform, and we are actively taking loan applications from potential customers. In just the first few weeks of operations through July 25, we have taken locks on more than $25 million worth of loans. While this is still a very small number, we are pleased that we met the target that we set for ourselves, and we expect this number to grow over time even if interest rates remain unchanged.

As a reminder, this direct-to-consumer platform is designed to have small but steady and positive returns in a higher rate environment like this, which should be able to generate larger returns in the refinance environment and to act as a hedge to faster-than-expected prepayment speeds. We also intend to begin offering ancillary and home equity products to our customers, including second lien loans later this year. We added approximately 17,000 loans from one subservicing clients in the quarter. We believe that we are the ideal partner to service MSR for new and existing MSR holders, and we are actively working on the ability to support various structures. Our results this quarter again demonstrate the benefits of our portfolio construction of MSR paired with Agency RMBS.

In addition, through owning an operating entity, we are able to more closely affect our returns through our own actions by lowering operating costs, hedging our existing portfolio to recapture originations and expanding our opportunity set. Our investment strategy is designed to produce returns across different market environments. With the majority of our capital allocated to hedged MSR, our portfolio is less exposed to fluctuations in mortgage spreads and portfolios without MSR, while still preserving upside to falling volatility and spread tightening environments. With that, I’d like to hand the call over to Mary to discuss our financial results.

Mary Riskey: Thank you, Bill, for your kind words about my upcoming retirement. It has truly been an honor to service Two Harbors CFO, and I have been fortunate to work with amazing people. Now please turn to Slide 6. Our book value was $15.19 per share at June 30 compared to $15.64 at March 31, including the $0.45 common dividend results in a flat quarterly economic return. As a reminder, total economic return is the primary metric we consider as an indicator of our performance. Please turn to Slide 7. The company generated comprehensive income of $0.5 million or $0.00 per weighted average common share in the second quarter. Net interest expense of $38 million was favorable to the first quarter on lower average borrowing balances and rates, partially offset by lower RMBS interest income from net sales.

Net servicing income of $172 million included $139 million of service fee income and $37 million of float and ancillary income, offset by $4 million of third-party subservicing fees and other MSR-related servicing costs. Net servicing income was favorable to the first quarter by $12 million due to higher servicing fee collections and float income as well as lower third-party servicing costs as we transitioned our remaining servicing to the RoundPoint platform. Investment securities loss and change in OCI was favorable to Q1 by about $48 million due to a smaller selloff in rates and slight spread widening. Servicing asset losses were $23 million in the quarter, unfavorable to the first quarter due to amortization that more than offset the effect of higher rates driving an increase in the servicing asset.

Net swap and other derivative gains were lower in the second quarter by $125 million due to a smaller sell-off in rates. Please turn to Slide 8. RMBS funding markets remained stable and liquid throughout the quarter with ample balance sheet available. Spreads and repurchase agreements tightened slightly with financing for RMBS between sulfur [ph] plus 16 to 20 basis points. At quarter end, our weighted average days to maturity for our Agency RMBS repo was 85 days. We financed our MSR activities across 5 lenders with $1.9 billion of outstanding borrowings under bilateral facilities. Our 5-year MSR term notes matured in June, and we replaced them with increased capacity on the repo secured by the variable funding note. We ended the quarter with a total of $630 million unused MSR asset financing capacity and $91 million unused capacity for servicing advances.

I will now turn the call over to Nick.

Nicholas Letica: Thank you, Mary. Please turn to Slide 9. Our portfolio at June 30 was $16 billion, including $11.1 billion in settled positions and $4.9 billion in TBAs. Our leverage increased to 6.8 times as we migrated up in coupon in Agency RMBS shifted from specified pools to TBAs and increased our notional mortgage exposure. Despite a pickup this quarter, volatility has been trending down as the variability of Fed outcomes has diminished, which we believe warrants a slightly more aggressive stance. While our leverage increased, you will notice in the bottom right graph that our spread exposure increased only slightly. Generally, higher coupon RMBS have lower spread durations and lower coupons. So as we went up in coupon, we also increased leverage to maintain the spread exposure of the portfolio.

Lastly, we continue to manage our exposure to interest rates very closely. And similar to the first quarter, our rate exposure was low in the second quarter. Please turn to Slide 10. In the second quarter, interest rates rose modestly and volatility picked up primarily owing to erratic economic data. Bigger one, which we have shown over the past several quarters show spreads versus volatility from 2019 to present. Our preferred implied volatility gauge, 2-year options on 10-year rates increased from 97 to 103 basis points on an annualized basis, slightly above its year-to-date mean. With rates and volatility higher, the nominal spread of current coupon RMBS predictably finished 8 basis points wider at 127 basis points to the treasury curve, while the option-adjusted spread finished 3 basis points tighter at 24 basis points, reflecting the increase in implied volatility.

On a month-to-month basis, RMBS spreads generally followed the pattern of higher rates driving weaker performance and lower rates driving stronger performance. As you can see in Figure 2, the nominal spread curve steepened across the coupon stack over the quarter, increasing the attractiveness of higher coupon mortgages. Please turn to Slide 11 to review our Agency RMBS portfolio. Figure 1 shows the composition of our specified pool holdings by coupon and story. And on Figure 2, you can see the performance of TBAs compared to the specified pools we own throughout this quarter. Hedge mortgage performance was negatively impacted across the coupon stack by the considerable choppiness of rates. We actively moved our positions around between specified pools and TBAs across the coupon stack.

We added approximately $1.6 billion notional of 5.5% to 6% TBAs to better position our RMBS portfolio for potential spread tightening into a lower volatility environment. We also rotated approximately $665 million notional of lower coupon securities into 6% to 6.5% on TBAs to capture wider spreads and higher coupons. We subsequently replaced $450 million, 6.5% TBAs with specified pools to improve performance should rates rally and prepayments pick up. Figure 3 on the bottom right shows our specified pool prepayment speeds increased to 7.2 CPR from 5.1 CPR in the first quarter as expected due to seasonality. As the majority of our RMBS holdings are currently priced at a discount to par, faster speeds are beneficial to our portfolio. Please turn to Slide 12 as we discuss the environment for investments in MSR.

MSR performed well in the second quarter with valuations being bolstered by a few large nonbank originators competing on lower amounts of supply. Given the strong bids in the market, certain large buyers turned into sellers, including ourselves. Figure 1 shows servicing transfers since the beginning of 2014. As expected, transfer volumes for the first two quarters of 2023 show a decline from the record levels of the past 2 years. As you can see in Figure 2, primary mortgage rates hovered again near 7% in the second quarter. Overall, prepayment rates for 30-year Fannie Mae RMBS increased to 6% CPR in the July report from 5.3% at the beginning of the quarter as turnover hit its spring peak. The end-of-money share of 30-year mortgages remained below 5%, although the share continues to slowly grow due to new originations.

Prepayments follow the central themes of the last 2 years, turnover seasonality, early curtailments and muted refinancing. Please turn to Slide 13 to review our MSR portfolio. The portfolio was $211 billion UPB at June 30. We settled $328 million UPB of MSR through flow sale acquisitions and committed to purchase approximately $1.6 billion UPB through a bulk acquisition, which settled early in the third quarter. Post quarter end, we converted to purchase $1 billion UPB through another bulk purchase. We also opportunistically committed to sell $6.4 billion UPB of higher coupon MSR. Although our goal is to grow our MSR portfolio over time, we will continue to actively manage our assets, including MSR and allocate capital based on where we see opportunity.

This was a targeted part of our MSR population, which we selected based on where we felt there was an extraordinary bid in the market. The price multiple of our MSR increased slightly to 5.8 times from 5.7 times. Prepayment rates for our MSR holdings increased to 5.3 CPR, also following turnover seasonality, slightly slower than the same period in 2023. While our MSR with a gross WACC of 3.5% continues to enjoy slow prepayments and strong float income because of higher rates. When rates inevitably drop or prepayments increase, we are prepared for that, too. As Bill mentioned, we now have a retention recapture business up and running, which will protect our investment in MSR, particularly if rates were to materially fall. Though we have intentionally designed an MSR portfolio that has lower refinance characteristics with over 800,000 loans, there will always be some borrowers seeking to refinance their mortgage.

Finally, please turn to Slide 14, our return potential and outlook slide. The top half of this table is meant to show what returns we believe are available on the assets in our portfolio. We estimate that about 61% of our capital is allocated to servicing with a static return potential of 13% to 16%. The remaining capital is allocated to securities with a static return estimate of 15% to 17%. With our portfolio allocation shown in the top half of the table, and after expenses, the static return estimate for our portfolio is between 10.8% to 13.4% before applying any capital structure leverage to the portfolio. After giving effect to our outstanding convertible notes and preferred stock, we believe that the potential static return on common equity falls in the range of 12.5% to 16.5% or a prospective quarterly static return per share of $0.47 to $0.63.

Looking ahead, we remain optimistic about the return potential of our investments. Nominal spreads for Agency RMBS are still wide on a historical basis and possess tightening potential in a lower interest rate volatility environment. In fact, the relationship with spreads to rates has become less dramatic as evidenced by a decline in the volatility of mortgage spreads. Mortgage demand is on much more solid footing than it has been over the last several years, exhibited by the tightening of mortgage OAS in a selloff with rising volatility. This was a large reason why we have turned more constructive in the near term and are comfortable operating with slightly higher leverage. With about 60% of our capital invested in hedged low coupon MSR that has low duration and low spread volatility, the portfolio has and should continue to perform well in bouts of heightened interest rate volatility while still preserving upside to spread tightening environments.

Our MSR portfolio remains deeply out of the money. Less than 1% of the mortgage loans that back our MSR are likely to refinance at current mortgage rate levels, keeping prepayment risk low and leading to stable attractive returns. Though the MSR market is presently in a dynamic of lower supply and higher demand, there will continue to be opportunities to add MSR at attractive levels, given our unique combination of investment management experience, coupled with our own servicing and recapture operations. Thank you very much for joining us today. And now we will be happy to take any questions you might have.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question will come from Doug Harter with UBS.

Doug Harter: Thanks and good morning. In the past, you had kind of described your leverage position as kind of neutral. How would you describe your leverage position today?

Nicholas Letica: Hey, Doug. Good morning. This is Nick. Thank you for that question. If you look — we’ve described our leverage range as being somewhere between 5 to 8 times from a high to a low. If you look at where we are now at 6.75, we are just slightly above the middle of that range. We did increase our leverage, as we noted in our call in our prepared remarks, by about three quarters of a turn. But I would still say we’re not — we’re also as described on the call, slightly more aggressive. But if you look at our overall risk metrics and leverage is but one metric at the way we look at risk, there are many other metrics. And as we pointed out, our spread sensitivity of the portfolio is a big one. And if from quarter-to-quarter, our spread sensitivity hasn’t changed very much.

I would say that the interpretation or the feeling about which part of the coupon stack we feel has better opportunity right now has been to move up in coupon for a variety of reasons. And by doing so, that does lower the per unit of mortgage, it does lower the amount of technically spread duration, but it does other things, for example, we do think we capture more volatility sensitivity in being in higher coupons, and we just generally like that part of the stack better than the lower coupons. But I would still say we’re slightly more aggressive, but certainly not full bore on mortgage spread tightening. We do — I think like many market participants, we have more confidence that the Fed will cut rates this year, and we do expect that, that will happen.

But as we have a Fed that is still stated to be data dependent. And as we’ve seen over the last few years, you never know. Our construction of our portfolio, which, again, is quite intentional with 60% of our capital in MSR provides a lot of return stability but still preserves upside should the Fed, in fact, cut, and we do see a steepening of the yield curve and a decline in volatility.

Doug Harter: Great. I appreciate that answer, Nick. Thank you.

Operator: Thank you. Our next question comes from Trevor Cranston with Citizens JMP.

Trevor Cranston: Hey, thanks. Good morning. You talked some about the potential spreads to tighten if and when volatility declines. I guess as you look forward over the remainder of the year, with the Fed potentially starting to lower rates and also the election upcoming, can you talk a little bit about sort of the time frame you guys see for when we could actually see a meaningful decline in volatility? Thanks.

William Greenberg: Thank you, Trevor. Thanks for that question. I’ll elaborate a little bit, I guess, on the prior response. It’s very hard to time things exactly right. And I think it’s a little bit foolhardy to try to put a stake in the ground about exactly when things like that will happen as I think, as we all know from being in the market for a long time. But the reality is that the probability of a Fed cutting cycle and a lower volatility environment is better now than it’s been in the last 2 years as most notably inflation seems to be finally trending down towards the level which the Fed can start cutting rates again. So it’s a very difficult thing to say. In a market, I think if you look at the forward curve, particularly in terms of the Fed for this year, the market is now pricing at about two and three quarter cuts, which is up about one cut since the beginning of the quarter, and we’ve had this better data.

That seems to be pretty fully baked into what we think could happen right now. It certainly could happen, but it feels like it’s pretty rational. So I wouldn’t expect to see an immediate drop in volatility. And if we felt like there was an immediate drop in volatility, we would probably position ourselves with more — even a little more leverage than we have. But — and as you mentioned, we have an election coming up. We’ve had a lot of gyrations around that. There’s a lot of geopolitical instability around the world right now. So it’s not something that we think is going to happen immediately, but it’s more likely to be a gradual thing that happens for the balance of the year and into 2025.

Trevor Cranston: Got it. Okay. That’s helpful. And then in terms of the construction of the hedge portfolio, can you maybe comment a little bit on how you guys are thinking about using treasuries as opposed to swaps kind of given where swaps spreads are trading recently? Thanks.

William Greenberg: Sure. We have — at the end of the quarter, we did have a little bit more — if you look at our swap in terms of PD-L1 [ph] composition, we have a little bit more swaps than Treasury futures on as hedges. That’s been quite intentional again, because we do — if you look at the carry on using swaps versus Treasury futures, it is better. And certainly, there is — you do introduce some amount of swap spread volatility to the mix, but we think where swap spreads are right now, they’re meaningfully better carry than having treasury hedges. And so we have shifted a little bit more to that side. We think it’s a good time to be having — being along that risk on the hedge side versus Treasury futures. But as usual, we use a mix of them, and it varies depending upon where swap spreads are and – and a little bit about our growth outlook in the market in terms of what treasury supply is.

Most recently, just we had a refunding announcement this week that was pretty good for the market and swap spreads do seem to be a little bit better bid than they had been in the — throughout the second quarter at least.

Trevor Cranston: Yes. Okay. Appreciate the comments. Thank you.

Operator: Thank you. Our next question comes from Bose George with KBW.

Bose George: Hey, everyone. Good morning and congrats, Mary, on your upcoming retirement. If you first — I didn’t know if you guys gave this already, but if not, can we get an update on book value quarter-to-date?

William Greenberg: Sure. Good morning, Bose. Thanks for that question. Through last Friday, we’re up approximately 1% on book value.

Bose George: Okay. Great. And then I wanted to — the Slide 14, where you have the expected return and your return on the RMBS is 15 to 17, I guess, up from 12 to 13 Can you just sort of break out the drivers? I guess the leverage is a little higher, you went up in coupon, just how much, or if there’s anything else that contributed to that as well.

Nicholas Letica: Hey, Bose. It’s Nick. Thanks again for the question. You hit it right on the head. Leverage is up a little bit, and we did migrate up in coupon, which is driving more return potential out of the security section of the portfolio.

Bose George: Okay, perfect. Thank you.

William Greenberg: You bet, Bose.

Operator: Thank you. Our next question comes from Jason Weaver with Jones Trading.

Jason Weaver: Hey, good morning. I see that you enlarge the ATM program. Is there any change to the target asset allocation for the new capital raise there? Or was this in response to a change you’ve noticed in the marketplace, anything like that?

William Greenberg: Yes. Thanks for the question. I would characterize this as really more of a housekeeping item. We had depleted our ATM authority really in the fourth quarter of last year, but in the first quarter and in the second quarter, we didn’t utilize our ATM at all. And so this was really just resetting the thing back to a level where we could take advantage of any market opportunities should they arise in the near term, but we have no plans imminently to do that. This was really just to reset to a more normal level from where it had gotten.

Jason Weaver: Okay. Thank you. And then I noticed you touched on this during the prepared remarks, but can you talk a bit more about RoundPoint’s ability to recapture given what we may be moving into as a lower rate environment?

William Greenberg: Sure. Well, as we’ve said publicly, we made the decision to start up our own platform last year. We began that effort in December. And at the time, we set for ourselves a target of being able to make our first loans by June, which we did. We continue to make locks, and we funded some loans. As Nick said in our prepared remarks, though, only 1% of our portfolio is in the money and something like only, I want to say like 5% or thereabouts of our portfolio has mortgage rates above 6% or something like that. And so it’s still a long way away from being able to be in a refinance environment. My own view is that even if the Fed cuts rates, right, that doesn’t necessarily mean that long-term rates are going to go down very much at all.

The natural state of things is typically a positively slow yield curve, right? And we’ve been in this flat to negatively shaped yield curve for a long time. So I think there’s lots of room for the Fed to cut mortgage rates to stay where they are. But nevertheless, if mortgage rates go down, we are building up capacity and the ability to be able to recapture more of our loans should they come in the refinance window and we’re gearing that up as we speak.

Jason Weaver: All right, thank you very much for the color.

William Greenberg: Thank you.

Operator: And our next question comes from Eric Hagen with BTIG.

Eric Hagen: Hey, good morning. I hope you guys are well. How do you think that the yield or the total return outlook looks for TBAs versus pools right now? Do you feel like you’re getting a pickup in yield? And what does that you’ll pick up kind of look like? Or how would you kind of describe the value proposition for being overweigh TBAs right now?

Nicholas Letica: Hey, Eric, it’s Nick. Thanks for that question. We don’t — there isn’t — don’t see a tremendous variation honestly, between TBAs and pools. And the increase in our pools is, to some degree, driven by the movement of our — of how MSR moves through time and how it needs to be hedged with current coupon. We did – pools do generally have wider spreads than specified pools because you pay up for the specified pools for some better convexity characteristics, which is in the form — usually in the form of a tighter yield or tighter spread in exchange for better qualities in terms of hedging and return in other return scenarios. But if you look at the pickup in our pool — or in TBAs versus pools it was primarily really in those production coupons, which we migrated up into.

And certainly, I would say in 5.5, we don’t really see any great — we don’t see any great pool opportunities right now. I’d say the only place where we — as we noted in our prepared remarks that where we did some migration from TBAs to specified pools was in 6.5 where we did buy some generally lower pay-up pools to provide for better convexity in those kind of — for that kind of coupon. But there isn’t — it’s a combination as we always look at things of liquidity, where it is on the stack and our ability to efficiently and quickly move around should we need to as the market moves.

Eric Hagen: Okay. That’s helpful. Thank you. How do you guys expect conditions in the bulk MSR market to potentially respond to prepayments pick up more materially? Like do you expect the typical list of sellers to show up if rates are lower? And do you feel like the concentration risk and the market share concentration among originators is it like as a risk for buyers of servicing?

William Greenberg: Thanks, Eric. That’s a good question. The supply dynamics in the MSR market have been unique and interesting as in this market period where rates have risen so far so fast and we’ve had the large banks taking both sides of buying and selling. I think a lot of the — and your question about forward supply and what that looks like compared to what it’s looked like in the recent past, it’s certainly going to look different. I think that, to a large degree, most of the low WACC servicing has probably changed hands already. There doesn’t seem to be — while we continue to see packages of that stuff out there in the world. Certainly, I think we’re in the later innings on seeing that stuff trade. So your question is if rates fall and there’s a lot more origination of at-the-money servicing, there are many market participants originators who are not equipped to hold MSR as it’s being produced.

It depends on the kind of rally in a gentle grinding rally mortgage spreads and primary secondary will probably stay constant rather than gapping out. And so originators who don’t have a lot of capital will be forced to sell that as they go. Also in a rally as in a trending market, MSR mulch [ph] will be declining, and so many people who don’t have the ability to hedge are going to want to get rid of that stuff as soon as they can, right, else they risk a lower mark-to-market on the stuff, right? And so I think you will see a pickup in supply of at-the-money stuff to some degree, it won’t be 1 for 1 with the origination pipelines in the market as a whole, right? But you will see some of that stuff come out. There’s often a lag between when rates start to fall and mortgages are made that in itself is a 60-day to 90-day time period as well.

And then there’s usually a little bit of lag further for the MSR stuff to come to market as well. So I do think you would see that. But the MSR market is often laggy and slow moving and that sort of thing. But I think you would expect to see some increase in that and at the money stuff [ph]

Eric Hagen: That’s really helpful. Thanks, Bill. Appreciate you guys.

William Greenberg: Thank you. Good to see you.

Operator: Thank you. This concludes today’s question-and-answer session. At this time, I will turn the conference back to Mr. Greenberg for any additional or closing remarks.

William Greenberg: Well thank you, everyone, for joining us today, and thank you as always for your interest in Two Harbors.

Operator: This concludes today’s call. Thank you for your participation. You may now disconnect.