Two Harbors Investment Corp (TWO) Presents at Barclays Global Financial Services 2019 Broker Conference Call (Transcript)

Two Harbors Investment Corp (NYSE:TWO) Barclays Global Financial Services Conference Call September 10, 2019 11:15 AM ET

Company Participants

Thomas Siering - CEO, President & Director

Matthew Koeppen - MD & Co-Deputy CIO

William Greenberg - MD & Co-Deputy CIO

Conference Call Participants

Mark DeVries - Barclays Bank

Mark DeVries

Okay. We're going to get started. Thank you for joining us. I'm very pleased to be joined from -- by the team from Two Harbors. Up on the stage, we've got in the middle CEO, Tom Siering; and then surrounding him his two new co-CIOs, Bill Greenberg, who I guess was previously the co-CIO, but now we've got Matt Koeppen who's new to that role. So, we're going to do a fireside chat format. I've got a number of questions and then towards the end, we'll open it up to the audience to see if they have any.

Question-and-Answer Session

Q - Mark DeVries

Starting off, just kind of given the rate outlook, can you talk about the impact to book value and net income, if we see any rate cuts?

Thomas Siering

Firstly, I'd like to [Technical Difficulty] Matt's point about book value.

Matthew Koeppen

Sure thanks, Mark. While there's certainly a lot of rate cuts pricing into the market stand, we find ourselves in a lower rate environment. We're in a period where we see expectations for Fed cuts along the magnitude of about 3x going through January. In general, we position ourselves from an overall risk standpoint and portfolio hedging standpoint to perform well in any interest rate environment that we find ourselves in, whether it's lower rates or higher rates, we tried to keep the -- keep our exposures to things like interest rate, duration, and curve durations low in general.

Thomas Siering

Yes. I'd just make an additional comment. So, as Matt said, there's quite a few rate cuts priced in. And so, when you ask, how does our book value perform with the federal cut rates, I think we've seen some of that already in the second quarter given the performance that we disclosed. In terms of net income, right, there is no question that as rates falls, as prepayments go up, that has an impact on the income part of things, but we manage our portfolio of our total earnings perspective and as we've seen, that holds up quite well in those environments.

Mark DeVries

Okay. Is there any update that you can provide us on, kind of, where you stand intra-quarter on your book value?

Thomas Siering

Sure. That's right. So, through the end of August, net of accruing for the dividend, we are up between 3% and 4%.

Matthew Koeppen

Going back to the prior question, this is a good example of a period where you might expect to see book values under pressure, but we really think that our portfolio has performed well given what had happened.

Thomas Siering

Yes. To be clear, both our common and our preferred dividends.

Mark DeVries

Okay. So that's an interesting disclosure because we've had two competitors, a little bit more agency-focused to disclose in last couple of days negative 2% and I think 3% move, kind of -- what do you attribute the strength in your book value, the actual positive move over the last couple of months?

Thomas Siering

Yes. I think it's really a very similar story in August, before what we saw in the second quarter, which was rates continue to fall sharply. Mortgages, particularly, current coupon mortgages widened a lot, right? So that the existence of mortgage servicing rights in our portfolio, which has the effect of being net short of that exposure actually benefited, higher coupons underperformed less. I think one difference is we have specified pool pay-ups not doing as well in August as we saw in the second quarter. So that was a little bit of difference. But the net driver of the performance was the existence of servicing the portfolio.

Mark DeVries

Okay. And just a little bit more on, kind of like, what's your outlook is for the rest of the year? And how you're, kind of, positioning your hedge for that outlook?

Matthew Koeppen

Well, I guess, that really is -- there is an awful lot priced in , I would say, to the interest rate market, and we've managed to navigate it pretty well. Again, we are keeping the kind of exposures, curve and duration low like we always do. So, I think we could expect to continue more of the same, but we're really not changing anything in particular with respect to how we manage the portfolio given where we are in this particular rate environment.

Thomas Siering

I would just like to say that we are mortgage investors and not macro rate traders. And so, we're pretty agnostic about the direction of rates, although I will say that we're probably just as concerned about a quick snap back in rates higher as we are to lower rates so we're pretty close to home here.

William Greenberg

Yes, I'd add just a couple of things, firstly we really convinced the pairing of them, so I would -- with Agency RMBS as just a better mousetrap. The second thing I would say is that we're of size where things like MSR does move the needle for us, and also that we're able to select securities in a way that benefit in environments like this. And so, our proposition has always been, when you buy Two Harbors, you're not buying beta, you're buying alpha.

Mark DeVries

Okay. I think, in recent calls you've indicated you don't expect GSE reform until after the 2020 elections. Can you just talk us through your thoughts on the potential scenarios for reform, and what it could mean for the Agency market?

Thomas Siering

Sure. So, as you know, the Treasury and HUD released their papers on Thursday and Secretary Mnuchin and Director Calabria are speaking today. I haven't seen those comments, but I assume they will mostly reflect what's in the paper. Though there are certain legislative recommendations in that paper and there are certain administrative recommendations in the paper, I think the likelihood of seeing meaningful legislative reform is low as we've discussed in the past certainly before the election and probably immediately even after, I think it's still low to get lots of people on board with that. I think that said, it was meaningful I think to see the recommendation out of treasury to be endorsing an explicit government guarantee, and I think that helps to shape the debate a little bit in a constructive way going forward.

The most obvious part of administrative reform, I think we can speak and we're likely to see is the shrinking of the footprint, obviously, in the products that they have outlined in the paper in terms of vacation homes and investor properties, LTV, high DTI, things like that and in the base case that shrinks the amount of available securities available for agencies. So, potentially it helps the supply issues there, makes TBA potentially better if we talk about removing some of the high balance things and some of the faster-prepaying things. It could, absent some redefinition of what QM means, increase the volume into some of the private-label securities markets or non-QM sectors. And that could create investable opportunities there too. I think that's probably the biggest one. Matt, do you have anything to add?

Matthew Koeppen

Well, unfortunately, a large amount of the important changes, which we think are sensible require action from the political process these days, which I don't think anyone else would want to pin our hopes on an effective and, right, normal process there so.

William Greenberg

I would add though that we thought the paper was very thoughtful, well-written, and middle of the fairway.

Mark DeVries

Okay. What risk do you see to Agencies from a scenario where the FHFA just pushes them out in a recap and a release without legislation. I mean, there's a lot of thinking out there it's not going to happen regardless, right? And this is a way for them to force Congress' hand to act at some level and they certainly have the power to take them out of conservatorship. They don't have the power, obviously, to create an explicit guarantee where it does not exist but they do have the power to renegotiate the PSPA and create some, kind of, at least continued support relationships. In a scenario like that, do you see any kind of risk to have mortgages, Agency mortgages trade with a less explicit government support mechanism than they've enjoyed since conservatorship?

Thomas Siering

I think there's an incredibly low probability of that.

William Greenberg

That's, right. I mean to follow up on Tom's earlier point. But if you thought that paper was well-considered and was a rick on the middle of the fairway and in that paper they were very clear about the constraints surroundings being able to do such a thing that is in cognitive disruptions to the RMBS market and so -- that the people you're talking about doing this are fully aware of what the ramifications might be. So, I just view that as a very, very low probability.

Mark DeVries

Okay. Fair enough. And then, I think, you also alluded to the potential -- for potentially, I mean, assumingly they want to create greater opportunity for private capital, people would like to see a more robust private-label securitization market. Tom, could you ever imagine a scenario in which you get back into the conduit business so that opportunity gets big enough that you would, kind of, revisit that?

William Greenberg

Well, I'd never say never but this is probably close enough to never. To -- but we're always going to do what make sense for our shareholders if that scenario were to represent itself in a really robust way, maybe, but I have to say there's not been a day that I've regretted that we close for conduit.

Mark DeVries

Great. And then just in the current environment, even where returns are -- or first of all, could you just talk about where given some of the spread widening we've seen in the last month or so, where you see levered returns on the Agency business right now?

Thomas Siering

Sure. So, sort of, maybe, obviously, right, there is not a single number that you can point to that speaks to all mortgages, right? We have often said that levered returns on the Agency mortgages are in the low-double digits and I think we would still say that despite the widening because as I said most of the widening that we've seen has been in the lower coupons, which is typically not where we have been positioned in the past. I think today with that recent widening, those coupons, those are starting to look interesting and attractive, and returns in those coupons are probably also in that sector as well.

Mark DeVries

Okay. So, no material change from what you've been investing in recently?

Thomas Siering

No, no. I'd say, it is material in the sense that the valuation proposition has shifted or at least is more evenly distributed between the coupons than it has been in the past. I'd say, six months ago or something like that we found very little value in the current coupons and low coupons. And so, when we said the lever of trends would be double digits that was not referring to the current coupons that was much lower, as now I think we can say that those sorts of returns also apply a little.

Matthew Koeppen

And in terms of your absolute return expectations, we find ourselves although it’s -- the construction is different, we find ourselves still in the low-double digits expectations.

Mark DeVries

Okay. And in a way that, Tom, kind of, thoughts around the dividend here, is it still feel like kind of the right place to be? You see potential to grow that going forward?

William Greenberg

Well, we've been reluctant to give guidance in that respect, but I will just say that our history has been that when we reset the dividend, we do it for more than one quarter and so we look at it with the best vision possible looking forward into the balance of the year.

Mark DeVries

Okay. Got it. Okay. Can you just talk, how you are currently thinking about the Agency rate strategy and the longer-term allocation of capital between that and the credit strategy here?

Thomas Siering

Sure. So we're under no illusions that the credit capital allocation is going to trend lower over time. That market is simply shrinking, although we are still able to find pockets of opportunity today, and we've been able to invest between $350 million and $400 million in the last quarter, right, in those kind of securities. But over some intermediate period of time that's going to go lower and that capital is going to have to redeployed into something. Now currently we don't find opportunities in what we call new credit spaces but that could change, as I said, it really is just a question of prices and not a question of philosophy or religion or anything like that. So we stay and ready to invest, that should things change. On the Agency side, we still think that the most interesting and scalable opportunities is Agencies paired with MSR.

Mark DeVries

Okay. And then you're still finding albeit maybe in sort of smaller numbers attractive opportunities in the legacy non-Agency?

Matthew Koeppen

There's still enough volumes that traffic despite the fact that the market has shrunk dramatically from 15 years ago from a $2.5 trillion market down to something near $300 billion there's still enough volume that turns over during any period, during the year that we can still find securities about like Bill said, we are under no illusions that that will continue as the market continues to shrink that will also diminish.

William Greenberg

Our credit allocation may be the same to be clear, but it would had to replenished with something else.

Mark DeVries

Yes. Okay. So what coupons do you currently find attractive for your Agencies? And are you looking at particular types of specialized pools to help the prepays here?

Matthew Koeppen

Well, it's interesting, Bill alluded to this a little bit earlier, the landscape has shifted quite a bit, this is a dramatic widening in the current coupons stack, which we really found very little value in, say, last year or several quarters ago. We're really have been focused largely in the higher coupons that we thought had much better relative value with the cheapening and the changes in the market, there's actually been a shift to some extent so some of the lower coupons are really looking attractive and in fact by some measures, we see current coupons across the stack really near five year wides in terms of valuations though changed a lot.

And of course, we are always looking at specified pools, our specified holdings are to a large extent call-protected. There's been quite a shift there as well in this lower rate environment. So markets been very desirous of call protection. So those stores are performing very well particularly in higher coupons and in fact, we've even seen a grab in some of the current coupons for similar call protection. So those have actually moved fairly quickly and we, sort of, assess all the time whether or not those offer value but those have really moved to a level that we think might even be aggressive. So things have changed quite a bit.

Thomas Siering

On our earnings call, we said that we were move out of high coupon high pay-up stories into lower coupon low pay-up stories and that's still generally true. We like that where we can but that obviously just, sort of, implies everything those high coupon high pay-up stories are fully values and to the extent that they are, we're making that rotation. But some of those stories even though they are high they'll look pretty good.

Mark DeVries

Okay. Great. Are you still seeing some type of residual effects from the mismatch between LIBOR and repo rates impacting your returns?

William Greenberg

We are. We reported earlier that it had a nominal effect on us through Q2 and it really -- that's really when it began was near the end of the second quarter and it diminished somewhat for some period during the summer, but it's been persistent we're seeing it now. We do expect it to have an effect at least through the end of this year. The magnitude of that is probably somewhere given where rates are today, probably in the magnitude of about $0.03 to $0.05 running impact. We're hopeful and expect that that will diminish once we get through year-end and normalize our interest rate curve to some extent, maybe once we get into the next year that will dissipate somewhat, but we do expect it to have an impact for at least through the end of this year.

Mark DeVries

Okay. Can you talk about what you think it's driving that and what might cause it to reverse?

William Greenberg

Some of the things that people talk about are heavily increase treasury supply and very bloated dealer balance sheets. Those things are pretending to drive repo rates in general higher and it's spilling over into the mortgage market funding rate as well.

Mark DeVries

Okay. And do you have any sense for whether that might get reversed in the near and the medium term?

William Greenberg

Like I said at this time given that we are in the year and that it's been persistent I wouldn't expect it to clean up until sometime into the next calendar year.

Mark DeVries

Given the sharp moving rates we had this year, can you talk more about how you view, kind of, MSR currently in the fundamentals in that space?

Thomas Siering

Sure. So obviously with lower rates prepayments are increasing to the extent that are servicing holdings now the servicing strategy is really predicated on the duration and especially, characteristics of the assets. We don't mind that at all. As I said before servicing is a hedge to current coupon mortgages spreads, right? And so as rates have fallen as prepayments have increased, the amount of mortgages that the servicing hedges increases somewhat. And so that's something that we can manage to and that we don't mind it all and so it affects somewhat our distribution of -- the coupon distribution that we invested on the asset side as we look at that. But overall servicing is behaving exactly the way it's supposed to and we like that.

Mark DeVries

Yes, that's an interesting point. It seems like it makes you somewhat unique investor in the MSR space, right? Where you actually don't necessarily mind...

Thomas Siering

Correct.

Mark DeVries

If values go down because there's a hedging purpose too. Does this actually make you -- in an environment like this where rate volatility is higher and people more worry about prepays and more, kind of, competitive bid for the asset then you are in an environment where rate alloc is more benign and investors are less concerned about prepay risk on acquiring MSR?

Thomas Siering

Yes and no. We are unique in many ways. I think it correlates to what you are suggesting is if you had a mortgage pool -- servicing pool that had a very low coupon and very stable prepayments. We don't like that very much because it doesn't hedge anything, right? And so we like the servicing that is the most sensitive that it can be relative to rates. Now one of the things that happened as rates have fallen very quickly here is that we adjust our prices immediately and to reflect the new prepayment environment. Whereas many sellers of servicing don't hedge and so when they want to sell to raise cash or for whatever reason they see prices being lower, right? Obviously, that being careful to distinguish the difference between the nominal price and the value of the thing, right? So when prices are lower if they didn't hedge they lost money and we came so far so fast. On August 1, rates were 2% already and here we sit at 1.60% that maybe if we just wait a little bit longer we can get back to those prices and I can get yesterday's price. But sellers are often in environments like this reluctant to sell the bid offers spreads widened our bid is sometimes lower than sellers would like to have, even though we're fully adjusting at these prices. So it depends what environment you are in, what kind of pool it is, whether we're better or worse than what people thinks.

William Greenberg

Mark, you touched on one of the most misunderstood things about MSR, when rates fall and MSR goes down in value or in price, people then go, well, that's a bad thing. That's not the right way to look at it. The question is, how did that perform relative to RMBS versus what we would have been in swaps. Obviously, if we would have hedged that with swaps, we would have lost money just in a different form on that hedge. But it's how those relationships work of one another that matters and one of the reasons that we've been able to generate alpha relative to cohort to the last while is that relationship between MSR and RMBS has been better behaved than that between RMBS and swaps.

Mark DeVries

Understood. So how is the supply of MSR? Is it still strong? And there's enough MSR out there to, kind of, keep growing your books so you can hedge agencies with them?

Thomas Siering

It is. I'd say in years passed, right? We've seen a gross supply of bulk packages. The MSR market being $150 billion to $200 billion. I think we've seen that already this year, we saw $75 billion out for the bid in the first quarter, $50 billion in the second and another $75 billion so far in the third. Not all of those packages are transacting for the wider bit of spread that I mentioned before, but I think as we either settle in here on rates or as people come to terms with the new levels, I expect those transaction volumes to be maintain steady or actually pick up. And of course, let's not forget that lower rates in entire prepayments, which means more servicing is being created and so at some point that stuff's going to need to come to market also generally, right? And so there will be future-forward supply also.

Mark DeVries

I believe on the call you -- for that reason you indicated, you expect growing supply and in the second half of the year as refi picks up, I assume is very much the case here.

Thomas Siering

Yes, yes.

Mark DeVries

Okay.

William Greenberg

Yes. If we can just stabilize where we get some price discovery, some more packages will be in the transaction then we would expect to see some actual volumes increase.

Mark DeVries

Okay. You completed your first MSR securitization last quarter. How do you view that as a funding option versus kind of the current bilateral facilities?

Thomas Siering

Good question. I think we view it as a tool that's available in the entire funding landscape. The securitization only takes when you make lateral, right, that's one constraint on it. But we liked very much the term of the funding its five year term with two one year extension. So that matches the average life of the asset very well. Some of the good things about are the fact that the securitizations and the lenders are out there in the market makes things sometimes easier to work with and sometimes harder to work with. We need to upsize the facility. The thing is already set up for that. It's very easy for us to grow that facility and issue more notes now that we have more collateral and buy more pools, obviously, that's easy. But [indiscernible], in some ways it's less flexible than having one counterparty to call up to modify something or change something the way we want. So we think it's a great addition to our funding mix and it has lots of great benefits but it's only one tool.

Mark DeVries

Okay. How do the cost to that compared…

Thomas Siering

It's very similar to the bilateral of structures. What were -- one of the interesting things, interesting to me anyway, is that the securitized structures have certainly driven the pricing lower of funding MSR over the last two years or how long it's been but the bilateral market has had to file a suite in order for that to even maintain a viable thing and banks like that. Because today banks are looking for things to invest in, they like to lend at that -- those kinds of spreads for what it is, it's very safe and provide lots of margin for banks and so if they want to have that business, they need to file a suite in there. And so that's driven all spreads including the bilateral ones and so they're about the same.

Mark DeVries

Okay. Great. Turning to the credit strategy. Last quarter you added $370 million in discounted legacy non-Agencies. I think we talked on this little bit, but just talk about -- more about what you're seeing there in terms of the opportunity set.

Matthew Koeppen

Sure. Yes. I think we discussed this early. But we're continuing to look every day, and we're hopeful that volumes continue to come through and securities that we think are attractive, of course, something that's happening at the same time is some securities in the existing portfolio have -- as performance has gone through, it gravitated up over time. So you can expect us as those securities run out of upside, we'll rotate out of those and that capital will need to find a home, hopefully, we're able to continue to access opportunity. If there's nothing available at the time as we said earlier, we are opportunistic and that capital may find itself rolling into the agency rate strategy.

William Greenberg

I'll feed a little bit more color to what Matt just said, so the securities that we sold recently had average dollar prices of like $95 and of the $370 million that we bought, they referenced the average purchase price was around $62. That rate isn't going to necessarily go to $95 but there's a chance that it appreciates significantly.

Thomas Siering

A lot from that.

Mark DeVries

So what were the lifetime IRRs on -- so you probably were buying those at even lower levels, right, the ones that ran up to $95.

William Greenberg

Oh, decided but yes.

Mark DeVries

And how long would you've held those, only to take the value up to...

William Greenberg

Some of those would've gone way back -- some of those would've gone back to the beginning certainly, that would have been -- I would have to look particularly to see that some of those would have been purchases that were just post-crisis come in into the 2010, '11, '12 period. We aggregated a lot of securities and had a lot of capital committed to that strategy back then which has diminished over time. But I'm sure if we looked, we'd find a lot of those -- or going back to beginning.

Mark DeVries

Do you have a sense at all, Tom, for how the returns -- the realized returns are since you started doing legacy non-Agencies if compared to expected returns?

Thomas Siering

Not much higher than our expectation of the time of purchase but performance has been outstanding.

Mark DeVries

Okay. So turning to book value. I think, in your investor deck you have slide where you've shown and you've protected or you've even grown book value over the years in contrast to a lot of peers, what's really helped Two Harbors accomplish that over the years?

Thomas Siering

Well, for one thing, not overpaying the dividend. That's a big part.

William Greenberg

Yes, I was going to say that the overarching being there is what I'd like to call a ruthless focus on preserving book value. There can be no dividend without book value, right? So that's paramount number one. Within that, I think we've had to be flexible and nimble in different environments. But I think over the life of the company, we've had to do different things in order to maintain that. And so...

Thomas Siering

And one thing, excuse me, Matt. One thing that just drives us crazy, by the way, is that competitor will release earnings and they outperformed the quarter by a $0.01 or $0.02 but they've lost a significant amount of book value and someone gets them and like, hey, great quarter guys. That's not how we see the world. We see the world from a total return perspective and we manage the book according to that. Preservation of book value we feel is job number one, you can't make money if you don't have money. Matt, I interrupted you.

Matthew Koeppen

No problem. I was going to say that we've had -- talking about book value, we had several you can break it into different periods over the cost of our lifetime. There's obviously an early period and so the postrecovery period where book value was largely driven by recovery in the credit space and then also...

William Greenberg

Agency.

Matthew Koeppen

And then than the agency space and on top of -- in the agency space one thing that was a big driver too as we went through some QE, several QE programs that was a big driver in the agency space and spreads and the opportunities that were very attractive to start within that. And then as time has gone on, like Bill said, we've ruthlessly focused on book value and one of the great additions to our portfolio and our portfolio construction in the last five years, call it really, has been servicing and the effect that it has on the overall mortgage spread risk, while still delivering a very attractive ongoing running return.

Mark DeVries

Okay. How would you expect your book value to hold up if the business cycle turns, and we go into a moderate recession? I think the -- from my perspective, the real risk is to your credit book and that as opposed to the agency but interested in hearing your perspective?

Thomas Siering

I'll let Bill handle it but I -- from my point of view, there's a lot of recession already, in pricing and the rates.

William Greenberg

That's exactly what I was going to say, I say, we are already doing that, right? That's what the market is telling us and that's where the level of rates are right now. I think if we were to actually turn a recession we really think rates are going to go even lower then where they are, like, I think, we're here. In terms of the credit sensitivity to the legacy non-Agencies, let's not forget these are 15-year old securities that are currently -- these are people who've been still in their houses, they're still paying their mortgages after all this time they've been through lots of cycle and so forth. So, I mean, whatever credit sensitivity these things have, it's unambiguous that it is an order of magnitude lower than what it was 10 years ago or 15 years ago, right? What I'd say is this scenario volatility, right, is really much, much smaller than it ever was. So yes, there is not none, but I think it's pretty small.

Thomas Siering

Yes, you have to realize too, about over the last 5, 8 years, the LTV metrics have been -- some of them changed dramatically and obviously, the super metric of whether someone defaults in their home is do they have equity in it. And so that landscape is changed dramatically.

Mark DeVries

Yes. Fair enough. Although, it feels like the rates market is definitely pricing in a different world than general credit markets are, in general. I mean credit spreads for the most part of it continues to tightens. So I guess, what I'm trying to get -- and I certainly understand that, particularly, with these legacy bonds, the fundamentals probably hold up well. But kind of, what are your thoughts on what happens just to spreads in general from a price perspective in an environment where risk assets are selling off?

William Greenberg

Well, I mean my view would be, I mean if we're in a general risk of environment all spreads everywhere are going to widened sort of in sympathy even if it's not warranted under wider non-Agencies, too, in an environment like that if that's what you are talking about. And the legacy non-Agencies, I actually don't -- I mean, I view it as the same way as we've just said. If the fundamentals don't warrant it, then the only spread widening that can occur will be risk premium widening, which, I think, I guess, that can happen if you're talking about an environment like that. But...

Matthew Koeppen

Again they're 15-year old securities, a lot has happened to them. They're very mature. So if you see investment grade or high yield credits spread in the world widening you're not going to see a similar magnitude of widening in these legacy credit assets. They may widened a little bit in sympathy, particularly, as time continues to pass and they mature in the durations and then shortened, it's absence of major crisis that affects everything, it's hard to imagine a sustained widening there.

Mark DeVries

Okay. Great. And then just one last question on leverage. Can you talk on the -- touch on how you're thinking about a steady-state leverage in this environment, is this something we could see tick up. If the investment opportunities improve?

Matthew Koeppen

Go ahead.

William Greenberg

So I would say is we have to ask ourselves what is the real question, right? And the real question is how much money can we lose? That's I think, behind your question. So while we're aware of in kind of what I call the nominal leverage numbers, right? We manage our portfolio really to, what I call the real question, which is how much money do you think we can lose? And we think that pairing Agency RMBS with servicing allows a certain leverage metric, right? To be exposed to actually less risk, right, and less drawdown risk, less chance to lose real money than as a portfolio with a phenomenal leverage number that doesn't have MSR. So that's how we manage the portfolio. Now that said, as rates have rallied and all durations, federations, industry durations have compressed, we in second quarter, as we said, we added some mortgages, which took our leverage up a little bit, right? But still, actually our overall risk went down during that period. And so we're comfortable with that. Now all else equal, we expect -- we're comfortable with that level. We expect that to be roughly constant going forward. I think it's fair to say that as -- that if we were to see a back up in rates, you might see some of the opposite behavior, right? But generally we're comfortable with the level and we expect it to be roughly stable.

Mark DeVries

Yes. That does it for me. We've got time for 1 or 2 questions from the audience if there are any? All right, if not, please join me in thanking them for their time.

Matthew Koeppen

Thanks very much, Mark.

Thomas Siering

Thank you.