Two Harbors Investment's (TWO) CEO Thomas Siering on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Two Harbors (TWO)

Two Harbors Investment Corporation (NYSE:TWO)

Q2 2014 Earnings Conference Call

August 7, 2014 9:00 AM ET

Executives

July Hugen – Director, IR

Thomas Siering – CEO and President

Brad Farrell – CFO and Treasurer

William Roth – Chief Investment Officer

Analysts

Douglas Harter – Credit Suisse Securities (NYSE:USA) LLC

Mark DeVries – Barclays Capital

Chas Tyson – Keefe, Bruyette, & Woods

Trevor Cranston – JMP Securities

Joel J. Houck – Wells Fargo Securities LLC

Merrill Ross – Wunderlich Securities

Operator

Good day, ladies and gentlemen, and welcome to the Two Harbors Second Quarter 2014 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Ms. July Hugen, ma’am you may begin.

July Hugen

Thank you, Vincent, and good morning. Welcome to our second quarter 2014 financial results conference call. With me this morning are Tom Siering, President and Chief Executive Officer; Brad Farrell, Chief Financial Officer and Bill Roth, Chief Investment Officer.

After my introductory comments, Tom will provide a recap of our second quarter 2014 results, Brad will highlight some key highlights from our financials and Bill will review our portfolio performance. The press release and financial tables associated with today’s conference call were filed yesterday with the SEC. If you do not have a copy, you may find them on our website and the SEC’s website.

This call is being broadcast live over the Internet and may be accessed on our website in the Investor Relations section under the Events and Presentations link. We encourage you to reference the accompanying presentation to this call, which can also be found on our website. Reconciliation of non-GAAP financial measures to GAAP can also be found in the presentation.

We wish to remind you that remarks made by management during this conference call and the supporting slide presentation may include forward-looking statements. Forward-looking statements reflect our views regarding future events and are typically associated with the use of words such as anticipate, target, expect, estimate, believe, assume, project, and should, or other similar words. We caution investors not to rely unduly on forward-looking statements. They imply risks and uncertainties and actual results may differ materially from expectations.

We urge you to carefully consider the risks described in our filings with the SEC, which may be obtained on the SEC’s website at www.sec.gov. We do not undertake any obligation to update or correct any future looking statements, if later events prove them to be inaccurate.

I will now turn the call over to Tom.

Thomas Siering

Thank you, July. Good morning to everyone and thank you for joining our earnings conference call. Let me start with a summary of our financial results.

Please turn to slide three. We are off to a great start to the year, delivering a total return on book value of 6% in the second quarter and 9.9% through the first six months of the year. For the quarter, we delivered comprehensive income of $238.8 million or $0.63 per weighted average diluted share, representing a return on average equity of 23%.

Additionally, we reported core earnings of $0.24 per share, and GAAP earnings of $0.11 per share. As you know we believe GAAP earnings are less instructive as to our performance. Next, I’d like to provide a brief update on our mortgage loan conduit and the MSR progress. Our conduit continues to gain momentum and I’m pleased to announce that we had over $1 billion of prime jumbo holdings and pipeline locks on a combined basis at quarter end. Obviously we’ve done a lot to advance our originator relationships.

Subsequent to quarter end, we also completed another securitization and we intend to complete others as market conditions allow. From a financing perspective, we expect to utilize the Fed Home Loan banks to support our conduit activities more in the future which allows us to provide consistent pricing to our originator partners and is an important way for us to optimize our overall funding mix.

With regard to MSR we are exploring opportunities to expand our investment in this asset class with the variety of partners including those associated with our mortgage loan conduit. During the quarter, we acquired MSR through bulk and flow transactions.

MSR continues to be an excellent asset for our portfolio on a yield basis and respective mitigation of interest rate and spread risk. Our agency securities benefited from tighter agency spreads in the quarter, our non-agency securities also continue to appreciate. Last night, we released a case study on our non-agency portfolio located at www.twoharborsinvestment.com under the Investors and Webinar links. This webinar focuses on home price appreciation or HPA as one of the primary drivers on non-agency performance overtime.

It profiles a particulars prime bond that we’ve held in our portfolio for several years. Those of you who have followed us closely will recognize that is an example we’ve highlighted in past presentations. We’ve recently sold this bond at a price close to par does having a little additional upside. That said, as you will see in the webinar home prices remain well off peak levels also for home affordability is quite high and because of this I am considering the effective low mortgage rates.

Unemployment improved through the quarter dropping to 6.1% in June. Furthermore according to core logic home prices were up 7.5% on a rolling 12 month basis as of June 30th. These are also positives for credit performance and the potential for further non-agency price appreciation, we hope you find this webinar to be instructive.

As we turn to page four let’s take a look at some of the other aspects at the macroeconomic environment. Interest rates continue to fall in the second quarter with 5 and 10 year yields dropping approximately 10 basis points and 20 basis points respectively quarter-over-quarter. Over the last 12 months our total return on book value was 16% which is considerably better than the 10 year treasury which returned only 3.7% over the same period. This illustrates our investment teams and key ability to manage our portfolio across the various interest rate and mortgage environments and to hedge effectively.

While it has been speculated for some time the Fed announced in the June meeting minutes that the final reduction and its asset purchases will occur following its October 2014 meeting assuming the economy progresses as expected. The Fed also noted that it would likely maintain its current Fed fund’s target range of 0 basis points to 25 basis points for considerable time after the asset purchase program ends especially if inflation remains below its target of 2%. We believe the end to the Fed purchases will impact the mortgage market over the coming months.

We continue to monitor a variety of issues that would impact the housing and mortgage market over the longer-term. The most important of those is the future overall of the GSEs. As many of you are aware a number of proposals have been presented over the past several months regarding GSE reform. We maintain our belief that is unlikely that meaningful strides toward this reform will be accomplished in 2014. That being said it is promising that there has been a wide spread recognition of the need for private capital to support the U.S housing market.

We believe mortgage rates like Two Harbors as a source of permanent capital dedicated to the mortgage market will play an integral part in reducing the government footprint in the mortgage market over the long-term. To that end we have maintained a dialogue with many in Washington to help create solutions to the challenges faced in the mortgage market.

Now I will turn the call over to Brad for a discussion of our financial results.

Brad Farrell

Thank you, Tom and good morning to those on the call. Let’s turn to slide five to go through our book value roll forward. Our book value increased to $11.09 per share. Our comprehensive income or economic return equivalent was $230.8 million or $0.63 per weighted share offsetting our dividend declaration of $0.26 per share or $95.2 million. As we have said before book value growth and comprehensive income are two important metrics in reflecting our ability to generate cash returns and distribute dividends over the long-term.

Please turn to slide six, for an overview of our financial results. Core earnings of $0.24 per weighted share represented an 8.9% annualized return on average equity. This result is in line with our expectations when we set the dividend. In the second quarter we continue to recognize favorable yields on our agency RMBS and MSR due to slower CPR. Our implied debt-to-equity ratio, including our TBA position was 3.0 times which is an increase from 2.7 times in March 31st, as we increase our FHLB borrowings as-well-as decreased our short TBA position.

Our expense ratio was 1.5% of average equity in line with the first quarter. As a reminder this metric will be dependent upon the transactional activities of our conduit and MSR businesses. So we expect variation quarter-over-quarter.

On the bottom right-hand side of this slide, we have noticed some accounting topics of importance. We released, approximately, $25 million of credit reserves on our non-agency RMBS, we released reserves as a result of specific holdings that are surpassing our performance assumptions and we review this on an ongoing basis. It is important to note that our general view of fundamentals remains unchanged.

The acceleration of our prime jumbo pipeline drives two noteworthy accounting topics. In accordance with ASC 815, we recognized interest rate lock commitments on mortgage loans held for sale as derivatives and account for them at fair value on the balance sheet. At June 30th, fair value on the derivative was $3.4 million but the financial impact may become more relevant at some point in time.

The expansion of our prime jumbo pipeline also impacts the presentation of core earnings given where we have incremental risk to hedge. In the near-term this may negatively impact core earnings results due to the timing difference between the swap expense and the income associated with the loan. For example swaps have an immediate cost whereas unsettled loans do not provide immediate income but rather income once they are settled.

Our MSR assets increased from a fair market value of approximately $477 million as of March 31st to $501 million at June 30th largely due to the acquisition of a bulk pool in April. During the quarter we recognized $33.9 million of servicing income, $6.2 million of servicing expense and a $29.6 million decrease in the fair value of our MSR which includes implied amortization of $13.9 million.

Please turn to slide seven. I would, next, like to spend some time discussing our financing profile, including the Federal Home Loan Bank of Des Moines, and an update on the repo markets. As of June 30th, we have secured advances of approximately $1.5 billion with a weighted average maturity of approximately 47 months. While today our advances are primarily collateralized by agency securities, as we fund our mortgage pipeline intend to shift the collateral mix further to A rated or better non-agency RMBS and prime jumbo hold-ons. Overtime we expect the flexible nature of FHLB facility to help us to diversify and optimize our funding mix especially as it relates to our conduit initiative.

Moving to the repo markets. Despite drawing some media attention they are functioning in a normal manner for us and we have not experienced any meaningful shifts and financing haircuts or rates. Historical events in the repo market highlight the importance of having a diversified counterparty mix which has always been our practice. In addition to having 24 active counter parties we maintain a lengthy maturity profile with an average of 68 days to maturity at June 30. This is a decrease from the 84 days at March 31 which is due to our increased use of the FHLB advances as-well-as some July maturity repo that was renewed subsequent to quarter end. On an aggregate basis we have 238 average days of maturity across our repo and FHLB advances.

Now let me turn the call over to Bill.

William Roth

Thanks, Brad, and good morning everyone. This was an excellent quarter with respect to our total return on book value of 6% as-well-as the significant progress on our mortgage loan conduit which I’ll cover later.

Please turn to Slide 8 which details the specifics of our second quarter results. Our rate strategy performance well. With yields increasing 10 basis points quarter-over-quarter to 3.8% driven by higher realized yields on certain of our Agency assets including I/O and inverse I/O.

Tighter spreads on higher coupon agency MBS and ARMs contributed to overall book value performance. Our MSR yield was 10.6% consistent with the first quarter. We’re pleased with the stable performance of our MSR asset given the backdrop of lower interest rate and strong mortgage prices. As usual I’d note that agency and MSR yield will be driven by prepayment activity.

Our credit strategy had another strong quarter with legacy non-agency bond prices moving higher thus contributing nicely to our increase in book value. Turning to the right hand side of the page you can see that this quarter we’ve provided additional details on our credit portfolio which is becoming important as our credit holdings are beginning to move towards new issued security especially from our conduit activity.

Yields on legacy non-agencies which include bonds issued prior to 2009 and primarily reflect our subprime bond holding were generally consistent with the first quarter. These remain about 90% of our non-agency exposure though that is down from around 95% last quarter. The yield on our net economic interest and securitization trust decreased quarter-over-quarter as we sold a rich I/O that had generated a very high yield in the first quarter. After this sale our retained interest which now also includes over a $180 million in AAA bond still generated a yield of over 5%. Finally we purchased some other recently issued AAA non-agencies yielding in the 3% to 4% range.

Our aggregate portfolio generated an annualized net interest spread of 3.38% roughly in line with the first quarter. Our cost of funds was slightly higher due primarily to a modestly higher overall swap expense. This was largely driven by an increased amount of swaps needed to hedge the substantially higher loan locks commitments during the quarter. As Brad mentioned these locks do not generate income until the loans have come on to our balance sheet.

Please turn to slide nine. Our portfolio as of June 30th was 14.5 billion, including 10.8 billion in rates, and 3.7 billion in credit. Consistent with the first quarter, approximately 57% of capital is allocated to rates, which is comprised of 44% agency and 13% MSR. Opportunities in the Agency RMBS base remain generally unappealing as yields and spreads tightened during the quarter. As such we have kept leverage on our Agency RMBS portfolio below our targeted levels. We maintained our position in higher coupon bonds and other shorter duration assets. As this keeps our basis risk exposure fairly low and aims to minimize any book value impact from wider spreads that could be a consequent ending in asset purchases later this year. The increased MSR holdings are also helpful in this regard as they are a natural basis risk hedge.

One item I would like to highlight from the quarter is that we sold about half of the ARMs that we had acquired in the middle of 2013. These ARMs were purchased in a time of distress in the market when they wind about 50 basis points in spread. Today, they are back to the tight levels we saw before the widening so we have cut back on these holdings to manage these potential downside risk. Within our credit portfolio, we still have a substantial emphasis on legacy non-agency particularly sub front. We believe the deeply discounted bonds can benefit as the economy and healthy markets continue to improve overtime. There remains upside optionality to lower delinquencies, higher recoveries and faster prepay. I would also like to point out that the other category increased by over 350 million this quarter as we added prime jumbo holdings by mortgage loan conduit. This category includes our net economic interest in securitizations. Overtime increased conduit activity will drive higher credit holdings from new issuance.

Turning to slide 10, you will see that our overall portfolio metrics are similar to last quarter. Leverage remains low with our implied debt-to-equity ratio for RMBS, Agency derivatives, and mortgage loans held for sale, net of TBA, at 3 times. This was up a bit with our use of FHLB financing and a smaller short TBA position. Agency prepays kicked up a bit as spring is a seasonally strong time for housing turnover and rates moved lower during the quarter. Non-Agency prepays were also up slightly which is great for our overall performance metrics given the deep discount on the bond.

Moving to the right hand side of the slide, in keeping with our typical positioning, we are carrying low interest rate exposure. In addition due to our holdings in shorter duration Agency assets and MSR, our basis risk exposure was also still relatively long. As to our increased swap position, as noted earlier, this relates to the dramatic increase in prime jumbo loans and locks which increased our overall duration risk. As we have discussed before, MSR is a good hedge for fixed rate mortgage assets but the timing of MSR purchases does not always match up with asset purchases. As we continue to acquire more MSR, it will help to drive overall swap hedges down relative to our total hedging needs. From more in a raising holdings, please refer to the appendix slide 18 through 22 and see slides 24 and 25 for more information on our hedging.

Turning to slide 11, let’s about our mortgage loan conduit which was certainly a highlight of our second quarter. We saw an increase in our prime jumbo loan holdings in our pipeline to approximately 377 million and 650 million respectively bringing the combined total to north of a billion at quarter end. This is substantially from the first quarter, due to having more originators on board as well as being able to provide consistently attractive rates to our originators. Our ability to provide consistently strong pricing is a benefit we get from having longer-term FHLB financing available to fund loans in the event that pricing in the securitization market is not attractive when we might be looking to issue a deal. This allows us to more effectively help homeowners and purchase of their home. We highly value our relationship with the FHLB and believe it enables both parties to effectively and efficiently meet our respective goals of providing permanent capital to the rest mortgage market.

To-date, our conduit efforts have been focused on sourcing prime jumbo loans from our originator partners, which allow us to create mortgage credit investments for our portfolio. As we mentioned last quarter, we are considering the possibility of offering a non-QM product or potentially other products, if it make economic sense for borrowers as well as our stockholders. Subsequent to quarter end, we closed Agate Bay Mortgage Trust 2014-1, a 268 million securitization, it was backed by 334 million of prime jumbo mortgage loan and will allow us to create attractive assets of our portfolio.

I am also pleased to report that after completing this deal our positive momentum has continued with prime jumbo loan holdings and pipeline totaling approximately 1 billion as of August 6. With this type of volume we anticipate completing additional securitizations later this year should market conditions permit. We are very excited about the growth of the conduit and becoming a more frequent issuer as this goes well for our credit strategy going forward.

Please turn to Slide 12. We added 5.3 UPB of bulk and flow MSR during the quarter investing about $53 million. We closed on a bulk portfolio of approximately 4.8 billion of UPB of MSR from FlagStar early in the quarter and added 545 million UPB from our flow arrangement with PHH. The market value of our MSR at quarter end was approximately 500 million or about 13% of capital. Looking forward, we continue to see opportunities in the MSR sector for both bulk transaction and flow sale arrangements through our originator relationships. As we have said before, we are focused primarily on new production MSR given its attractive yield and hedging benefits to our portfolio. In closing, this was a great quarter with strong return on both values and excellent progress on developing our originator phasing platform. We believe this will serve as a growing source of product for our rates and credit strategies overtime and look forward to keep you apprised of our progress on the next call. Thank you for joining us this morning,

I will now turn the call back to our operator.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Douglas Harter of Credit Suisse. Sir, your line is open.

Douglas Harter – Credit Suisse Securities (USA) LLC

Thanks. I was wondering Bill if you could talk about how, what the securitization markets look like right now for funding and the attractiveness of the deal that you just completed.

William Roth

Yeah sure. Absolutely. Well the markets for mortgage assets there is still good demand the way that we looked at this transaction is that we originate loans and securitize and sell the AAAs, the credit bonds run ROEs in the low to mid-teens, you know we’ve actually retained some AAAs on past field as well as some on those field and those are we are sort of in the 10% plus or minus area. So both of those are more dominant than other alternatives that we are seeing to invest. Overtime as that market opens up and there is better liquidity in more investors because currently as you know that market is still seeing small volumes. We think that pricing will be even better and that returns will be attractive for us. Historically the securitization market offers returns in the sort of 10% to 15% range overtime and so we’re confident that we’ll see that I mean we’re sort of that in that range already but I think that we’ll sustain. And the other thing that we’re excited about is our pipeline is obviously quite healthy so we intend to as I said on the call we anticipate a number of more securitization in the near future.

Douglas Harter – Credit Suisse Securities (USA) LLC

And on those returns, are those returns are they are available because of the attractive FHLB or that be available through kind of market funding?

William Roth

Well on the subordinate and obviously the IOs those are securities that we you know either you know don’t use leverage on or if we do we can get attractive terms of the street. On the AAA you know the returns are certainly better if we put those on the FHLB which we are happy to do but there is street funding available there as well. I mean the primary benefit as we have mentioned before to the FHLB we can provide consistent rates to our originator so, that the AAA market cheap at some point and we don’t want to sell bonds and we can hold those you know – time to –

Douglas Harter – Credit Suisse Securities (USA) LLC

And is there another bigger factor as to why you became much more active in that market this quarter versus prior quarters?

William Roth

Well the biggest thing is you know frankly we have been originators as we move through the year we have said before that we are targeting 35 to 4 originators and we are making very by the end of the year we are making very good progress so, the biggest thing is just in you know if you look back at the beginning of the year housing activity was really low primarily because of the weather. We added a bunch of originators housing activity in the Spring and Summer is better and you know our ranges have been more consistent you don’t just really have to pay off it’s just you know you have to been there day and day out with the rate that is competitive. So, it’s actually a combination of factors.

Douglas Harter – Credit Suisse Securities (USA) LLC

Great, thank you.

William Roth

Thanks Doug.

Operator

Thank you. Our next question comes from Mark DeVries of Barclays. Your line is open.

Mark DeVries – Barclays Capital

Yeah, thanks. Bill just curious about your comment about seeing additional upside on your legacy non-agencies partially given how much credit assets have already rally. Could you just give a sense of how much upside you know there can be if you see a conversions between what is the market is pricing and where you may think you know the fall frequencies the savories were headed?

William Roth

Yeah, sure, I mean it’s hard I mean it certainly can’t put a number on it you know our average mark is you know the bond that we retail for the not including the new issuer stuff it’s right around 70 bucks so, it’s still a big 30% discount apart. So, you know prepays increase and credit percentage improves obviously we have a big credit reserve against that position you know you could see at the end of that and gain more than we might expect so, I can’t necessarily predict an amount but I can tell you that if things goes awful in the housing market it’s not going to happen if things away they are being going we would expect to see more upside as you probably saw we can release a little bit more reserves this quarter and that’s consistent with you know what we have seen in the performance of our holdings.

Mark DeVries – Barclays Capital

Okay, that’s helpful. And Brad I am sorry if you cover this but, is there much expenses leverage that we should expect is you ramp-up your securitization function or most of the expenses related to that variable and kind of go up if volume increased?

Brad Farrell

Yeah, we had absorbed most of our you know core platform expenses so, I to get our point where we have you know platform that can support the MSR and can’t do but then what I know and that kind of noted the past couple of quarters anytime we have large transaction of volume weather that be due diligence of other types of cost associated with a large purchase or a large transactions that’s where the variable is going to float and potentially cause either you know a little bit of volatility in that expenses ratio.

Mark DeVries – Barclays Capital

Okay. Is there an opportunity as you get bigger to bring some of that more than variable expense in house?

Brad Farrell

Yeah. definitely there is always an opportunity to kind of right size you know when you do it legal and certain professional services there is – -to scale to use outside vendors there is specialty skill set that you might now be able to bring in house but we always are looking to kind of balance between you know the external expertise that we need as well as building our own capabilities in house.

Mark DeVries – Barclays Capital

Okay, great. Thanks.

Brad Farrell

Thanks Mark.

Operator

Thank you. Our next question comes from Bose George of KBW. Your line is open.

Chas Tyson – Keefe, Bruyette, & Woods

Hey, good morning guys this is actually Chas Tyson on for Bose. Just another quick on the securitization. Did you guys – how much of that you retained on the balance sheet? And then I know you talked about the ROEs for the AAA and the credit lines but you guys have a blended ROE on that as well?

Thomas Siering

No, we actually didn’t we just close this deal when it comes down to the accounting and like that we probably have more to talk about that next quarter. We obviously always sold AAA we did retain some and we have as we said you know there been times going back as I said and the call that you know AAA spread got attractive to us in terms of adding position to the portfolio so, you know we are happy to buy other bonds that we see and the market as well. We didn’t actually put out updated numbers on this particular deal yet.

In terms of the ROE you know I think the best way of thin that is from a longer-term prospective if the ROE to the you know activity are consist with what we are seeing and consistent what they have been over a long-term period of i.e. in that you know low to mid-teens about 5% of the given transaction is what you would expect roughly to be put to work at that kind of number. So, for every $100 say $5 of that you know we would be looking at that kind of ROE.

Chas Tyson – Keefe, Bruyette, & Woods

Okay, that’s really helpful, thanks. And then just a question for you on kind of you’re positioning versus rates just looking at 5-1. I mean I know you guys are fairly neutral to rates but the flip around you know from last quarter just wanted to get your thoughts on that if there anything behind that or that’s just you know not intentional?

Thomas Siering

Well, yeah, that’s a good question I mean I don’t want to say a little this of noise but you know given that we can’t do it many of loans coming in every day and then we know that we are going to sell out a number of that. We obviously head on a daily basis but we don’t necessarily hedge this scenario which is up a 100 immediately. So, I think you can expect over time the number to cover around zero unless we obviously take a view like we have in the past at certain time but I wouldn’t put too much reading into the fact that it went from you know 1% one way to 2% the other.

Chas Tyson – Keefe, Bruyette, & Woods

Got it, that makes sense. And then on the MSR I know you guys had another flags or deal through and some flow from PHH as well. You know you guys obviously think the opportunity is fully tract of what’s good sizing for you guys in terms of beyond that where is there target looking to get to?

Thomas Siering

Yeah, what we have said in the past and we haven’t really set anything differently to counter this is that given the size of our balance sheet and our duration needs that we could easily see the holding of MSRB around a 1 billion before we really get too much spot you know having you know allocating capital from either credit strategy or more from rates et cetera so, we have plenty of liquidity and that’s a big number especially in that space because the challenge isn’t to go from 500 billion the challenge is to get the right product at the right price and these deals as you know take a decent amount of time to pull together. But we are still we still have in our mind that as the number that worth us shooting for.

Chas Tyson – Keefe, Bruyette, & Woods

Got it, thanks guys. I appreciate the time

Thomas Siering

Thanks Chas.

Operator

Thank you. And our next question comes from Trevor Cranston of JMP Securities. Your line is open.

Trevor Cranston – JMP Securities

Hi, thanks. one more on the increased conduit activity this quarter obviously you guys did a good job growing that and it seems like there has been increased issuance overall and some of the new issuers have come to market. I was just curious you guys have talked before about you know some factors that have kind of constrain the market in terms of bank demand for balance sheet jumbo loans. Have you guys seen any change in those factors or do you think the increased issuance recently is mostly just related to kind of AAA levels?

William Roth

Hey, Trevor good morning this is Bill.

Trevor Cranston – JMP Securities

Okay.

William Roth

- I think I think the you know the banks are obviously still you know looking for high quality asset that have yield I don’t think has you know we don’t track that weekly or monthly but certainly they are competitive with their rates. There’s also been stability in the triple A space which has helped, when spreads and prices are flopping around people are less certain to invest, so we have seen much better stability and as you said we’ve seen a little bit of pickup in activity it’s also worth noting that as I said before during the winter production overall I mean everybody saw the GDP was awful so I think coming out from where in the spring and summer we saw pickup in originations in general overall activity which has also been a factor.

Trevor Cranston – JMP Securities

Okay that’s helpful and on the rich portfolio just a detailed question would you guys give us the CPR for the overall portfolio is everything notable to pay attention to in terms of divergence between the prepaid speeds on the agency MBS versus the MSR portfolio?

William Roth

I’m not sure I totally understand your question I mean I think that, yeah maybe you could elaborate a little bit.

Trevor Cranston – JMP Securities

So I mean basically you guys are giving in overall number for the entire portfolio which went up about through CPR this quarter I was just wondering the number for the agency MBS is meaningfully different from what the MSR portfolio is prepaying at?

Brad Farrell

Yeah this is Brad, I’ll just maybe clarify so on slide 18 and in other places we referenced CPR speeds of 8.5% it’s important to understand that, that is just our MBS portfolio that does not include MSR. So that is a metric that’s consistent in prior periods. And I think that answers your question. We have not disclosed the speed of our MSR I mean from the point of CPR.

Trevor Cranston – JMP Securities

Okay fair enough. Thank you.

Brad Farrell

Yeah thanks Trevor.

Operator

Thank you. Our next question comes from Joel Houck of Wells Fargo. Your line is open.

Joel J. Houck – Wells Fargo Securities LLC

Thanks Good morning the question on the FHLB obviously it’s a as you pointed out most of the agency placed as you move into rated securities non-agency can you help us in terms of – purpose I understand what the buying cars would look like average – probably go up but some sense on the pricing on those facilities?

Brad Farrell

Yeah this is Brad, looking at from a big picture perspective one of positive which will be advances is it’s really a term debt for a period of say three to five years if you look at kind of our average maturity and really it’s a placement of collateral benefit, so really the cost are fixed as we’ve already taken those positions. And so really that’s not going to change as we shift the collateral. Now obviously different characterizes are applied depending on the collateral type but the actual cost of borrowing remains constant based on the term we’ve taken on that debt.

Joel J. Houck – Wells Fargo Securities LLC

So you just have to put more collateral against as you shift in the non-agency?

Brad Farrell

Exactly the cost of the debt itself remains disclosed its around 40 basis points floating out LIBOR.

Joel J. Houck – Wells Fargo Securities LLC

Okay so that’s correct, maybe just – in three or five years?

Brad Farrell

Yeah exactly.

Joel J. Houck – Wells Fargo Securities LLC

Okay thank you very much.

Brad Farrell

Thanks Joel.

Operator

Thank you and our next question comes from David Waldref of Landsberg. Your line is open.

Unidentified Analyst

Hi good morning I just had a question on the FHLB given the moratorium that was enclosed do you see that impacting your ability to borrow for them or expand your line and I just wanted to get your thoughts on general on the moratorium.

Thomas Siering

Sure David, this is Tom. In the respect of that we really obviously don’t want to speak for the home owner for the FHFA and so we don’t know what the result of the moratorium will be. We consider ourselves to be in a very good standing with the Home Loan Bank of Des Moines, we’ve very good relationship with them, there are tremendous people and we feel importantly that what we’re doing is very faithful to the mission of the home loan which is to provide liquidity a funding source for the prime jumbo loans which we think is helpful to the mortgage on the house in market. So open them out, come on the moratorium as that’s going to be really couldn’t say but I do want to say that we consider our relationship with home loan to be very healthy at this point.

Unidentified Analyst

Would you look to expand about the 1.5 billion if you were able to down the road?

Thomas Siering

Well perhaps we’re very happy with the facility as it expands today, perhaps we might expand it but obviously I really couldn’t comment further on it, but we’re very happy with the relationship and the funding amount as it stands to that.

Unidentified Analyst

Okay appreciate it. Thanks a lot.

Thomas Siering

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Merrill Ross of Wunderlich Securities. Your line is open.

Merrill Ross – Wunderlich Securities

Thank you good morning. On slide 10, you indicated that you increased by 2 billion that hedged primarily the jumbo pipeline which I think you sized at about a 1 billion right now in the conduit. Is there maybe can you give us some insight as for the gearing in the tenant of the swapping that you’ll do to hedge your pipeline risk?

William Roth

Hey Merrill this is Bill that’s a great question. And so one of the things that we have to do is hedge all points, we try to hedge all points across the curve or at least manage our exposures there and so our overall need was obviously if you look at a 1 billion and you figure out the duration of those loans you could say well you can do more swaps for shorter tenure or fewer swaps in much longer core blend so we also move our TBA positions around to hedge so I don’t think it’s necessarily read into the fact that we had 2 billion versus a 1 billion of that – that also could have been just a backdrop as hedging overall.

Merrill Ross – Wunderlich Securities

I’m sorry, I think I have missed what your TBA position was at quarter end?

William Roth

Yeah I mean Brad is going to look that up for you in a second, but like I said our TBA is long and short.

Thomas Siering

Merrill, I’m sorry one second.

Merrill Ross – Wunderlich Securities

.I am getting lot of interference. I think I have to disconnect and speak with you later. I apologize.

Thomas Siering

Thank you Merrill.

Operator

And at this time I see no further questions in queue I’d like to turn the call back over to you Mr. Siering.

Thomas Siering

I’d like to apologize for our technical difficulties today. But thank you, and thanks everyone for joining our call today. On September 8th we will be participating in the Barclays Global Financial Conference, New York and we would welcome the opportunity to speak with you at this event. As you wish, as always we appreciate greatly your interest in Two Harbors. Have a terrific day. Thank you.

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