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spk10: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage Rate 2022 First Quarter Financial Results Conference Call. Today's call is being recorded. At this time, all participants have been placed on the listen-only mode, and the floor will be open for your questions following the presentation. If you'd like to ask a question at that time, please press star 1 on your telephone keypad. At any time, if your question has been answered, you may remove yourself from the queue by pressing the pound key. Lastly, if you should require operator assistance, please press star 1. It is now my pleasure to turn the floor over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.
spk05: Thank you, and welcome to Ellington Residential's first quarter 2022 earnings conference call. Before we begin, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as projections of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements. whether as a result of new information, future events, or otherwise. Joining me on the call today are Larry Penn, Chief Executive Officer of Ellington Residential, Mark Ducati, our Co-Chief Investment Officer, and Chris Mernoff, our Chief Financial Officer. As described in our earnings press release, our first quarter earnings conference call presentation is available on our website, EarnVeet.com. Our comments this morning will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentations. With that, I will now turn the call over to Larry.
spk09: Thanks, Jay, and good morning, everyone. We appreciate your time and interest in Ellington Residential. To begin, please turn to slide three. The challenging operating environment of late last year intensified during the first quarter of 2022 as it became increasingly evident that the hiking cycle and quantitative tightening will be faster and more severe than previously expected as the Federal Reserve combats surging inflation. During the first quarter, the Fed made the first of what are expected to be many interest rate hikes, concluded its final month of net purchases of agency MBS, and signaled that balance sheet runoff would likely commence soon. Geopolitical instability and recessionary concerns further contributed to a risk-off sentiment in the market, and yield spreads in virtually every fixed-income sector, including agency RMBS.
spk00: You can't read my list?
spk09: And yield spreads in virtually every fixed income sector, including agency RMBS, widened relative to U.S. Treasury securities and interest rate swaps. Here on slide three, you can see the meteoric rise of intermediate-term interest rates in particular. The two-year note yield rose a remarkable 160 basis points during the first quarter, and as of March 31st, was up a full two percentage points since September 30th, and was at equal yield with the benchmark 10-year note. The 160 basis point move for the two-year was its largest quarterly increase since 1984. Mortgage rates have similarly soared. The 30-year fixed survey rate has risen by more than two percentage points since November, and today sits at 5.1%, which is the highest it's been in more than a decade. This sharp increase has suddenly eliminated the refinancing incentive for most borrowers, and so prepayment speeds are plummeting. The full ramifications of the new mortgage regime are just starting to play out, whether in terms of deteriorating housing affordability, the impact on the mortgage industry and other housing-sensitive industries, or the longer-term impact on the economy in general. The bond markets were extremely volatile in the first quarter and continue to be. The move index which measures short-term volatility of interest rates, as implied by the Treasury options market, reached its highest level since the 2020 COVID liquidity crisis. Against this backdrop of surging interest rates and heightened volatility, agency RMBS experienced both significant duration extension and significant yield spread widening, which in combination caused extremely sharp price declines. You can see on slide three that the price of Fannie Mae two-and-a-halves, which at year end were a production coupon but are now way off the run, finished the quarter at a $95.4 price, down 6.7 points for the quarter. You can also see toward the bottom of this slide the significant yield spread widening in agency MBS, particularly in higher coupons, whether measured on an option-adjusted basis or on a nominal basis. For the first quarter, earned generated a net loss of $1.33 per share on a fully mark-to-market basis, as you can see on slide four. And while our net loss, and therefore our book value decline, was significant, we aggressively rebalanced the duration of our hedges throughout the quarter so as to prevent even deeper book value declines. Our delta hedging costs associated with all this rebalancing were high, but again, they were absolutely essential in preventing even deeper book value declines. Finally, our meaningful short TBA position also helped offset some of the impact of the duration extension and yield spread widening during the first quarter. When interest rates spike, TBA short positions tend to extend more than specified pool assets. and this dynamically and automatically hedges a correspondingly larger portion of our specified pool portfolio. We expect to continue to rely on TBA shorts to reduce the overall volatility of our earnings and book value. In his remarks, Mark will elaborate further on how we navigated the first quarter's volatility and how we are positioned going forward. But first, I'll pass it over to Chris to review our financial results for the first quarter in more detail. Chris?
spk03: Thank you, Larry, and good morning, everyone. Please turn to slide five where you can see a summary of EARN's first quarter financial results. For the quarter ended March 31st, 2022, we reported a net loss of $17.5 million, or $1.33 per share, and core earnings of $3.9 million, or $0.30 per share. These results compare to a net loss of $2.8 million, or $0.21 per share, and core earnings of $3.7 million, or $0.28 per share in the fourth quarter. Core earnings exclude the catch-up premium amortization adjustment, which was a negative $488,000 in the first quarter, as compared to a positive $169,000 in the prior quarter. During the first quarter, as Larry noted, agency RMBS significantly underperformed U.S. Treasury securities and interest rate swaps. For EARN, net losses on the agency RMBS exceeded net interest income and net gains on our interest rate hedges, non-agency RMBS, and interest-only securities, which resulted in a significant net loss for the quarter on a March market basis. Core earnings increased sequentially by $0.02 per share to $0.30, which was in line with our dividend for the quarter. This increase was driven by higher average holdings in the first quarter. Our net interest margin did decrease marginally quarter over quarter to 1.76% from 1.81% as higher cost of funds more than offset higher asset yields. Since our specified pools are relatively seasoned overall, they offer both prepayment protection and extension protection relative to their TBA counterparts, which now include newer issue, more prepayment-sensitive pools. While the surge in mortgage rates during the quarter caused the value of prepayment protection to fall substantially, it also enhanced the value of extension protection. After taking into account these partially offsetting factors, pay-ups for our existing specified pool portfolio declined over the course of the quarter. However, we net sold pools during the quarter and these net sales generated generally consisted of pools with much lower pay-ups. Overall, average pay-ups for our specified pool portfolio declined only slightly quarter over quarter to 0.94 percent as of March 31st as compared to 1.07 percent as of December 31st. Please turn next to our balance sheet on slide six. Book value per share was $10.14 at March 31, as compared to $11.76 at December 31. Including the $0.30 of first quarter dividends, our economic return was negative 11.2% for the quarter. We finished the quarter with cash, cash equivalents, and other liquidity of $29.9 million, in addition to other unencumbered assets of $11.3 million. Other liquidity represented $13.7 million of unencumbered U.S. Treasury securities. Next, please turn to slide seven for a summary of our portfolio holdings. Our agency RMBS holdings measured on a trade date basis per GAAP decreased by 70% to $1.068 billion as of March 31st, as compared to $1.289 billion as of December 31st. The decrease was driven by a combination of net sale, paydowns, and mark-to-market losses. However, measured on a settlement date basis, our agency RMBS holdings increased sequentially by 13 percent to $1.169 billion from $1.034 billion. Over the same period, our interest rate, sorry, our interest-only holdings increased to $17.9 million from $13.1 million, while our non-agency holdings decreased slightly to $8.7 million from $9.1 million. We traded very actively during the first quarter with agency RMBS portfolio turnover of 77%. On slide eight, you can see the details of our interest rate hedging portfolio.
spk02: During the quarter, we continued to head
spk03: hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities, and futures. We ended the quarter with a net short TBA position both on a notional basis and as measured by 10-year equivalents. Slide 9 illustrates our net mortgage assets to equity ratio, which is measured on a trade date basis. This ratio decreased to 6.9 times from 7.1 times during the quarter. and was due to lower agency RMBS holdings, particularly offset by a smaller net short TBA position on a fair value basis and lower shareholders' equity. Our debt-to-equity ratio adjusted for unsettled purchases and sales increased to 8.3 times as of March 31st as compared to 6.9 times as of December 31st. This increase in our debt-to-equity ratio was primarily due to the increase in borrowings on our agency RMBS portfolio where we had larger settled holdings at quarter end, along with lower shareholders' equity. I will now turn the presentation over to Mark.
spk06: Thanks, Chris. The rate and spread volatility in the first quarter was absolutely historic. The yield on the two-year Treasury jumped 160 basis points, Fannie Two's dropped seven points, and Fannie Four's dropped over five points. In terms of volatile quarters for the bond market, This one is going to stand out for a very long time. The massive change in the Fed's messaging led to a huge repricing of yield spreads across all of fixed income. When the dust settles, and it has not all settled yet, the opportunity set after these historic moves should make for a phenomenal backdrop for an agency mortgage REIT. What you have now is agency MBS, an asset with good liquidity and no credit risk, priced at very wide spreads, and with most of the market no longer exposed to the risk of fast prepayment. so you can see a clear path to low-teens levered returns on pools and PBA where you more or less know what you're getting on prepayments, which should now be limited to cash-out refis and turnover. This is a completely different opportunity set than what we had in the second half of 2020 and all of 2021. Those were periods where current coupon rules were strong because of Fed buying and spread volatility was manageable because of the Fed backdrop. But once you ventured into coupons that the Fed wasn't buying, you either had premium TBA-like pools paying blazing fast because of the efficiency of the non-bank mortgage companies, or you had specified pools at nosebleed pay-ups. You could make returns, but a lot of it was really drafting off the Fed. Now we have a market that has a much richer opportunity set and much wider spreads. You don't have to take prepayment risk if you don't want to. At the end of the quarter, our 30-year portfolio ranged in price from $88 to 103. We also have had lots of seasoned cohorts, so expected returns are both much higher and much better quality today than they were before. But, and there's always a but, this repricing was driven by the abrupt exit of the Fed, which also means we should expect more volatility, both volatility in spreads and volatility in rates, meaning more mark-to-market volatility. But for much of the market that's below $98 price, there's not substantial cash flow uncertainty. To get to the low price points today, we first had to endure the price declines and manage through the enormous rate moves in the resulting delta hedging costs, which have been substantial. For EARN, our economic return was negative 11%. Much of that loss was from the massive underperformance of agency MBS versus treasuries and swaps, but not all of it. There were delta hedging costs, there were widespread offer spreads, and there was yield curve repositioning. Nobody has a crystal ball on rates, but it's unlikely that the volatility of the first quarter is repeated because it was an adjustment to a 180-degree turn by the Fed. The Fed rarely revises their economic outlook so radically. So now you have wide mortgage spreads, predictable speeds, and discounts. And with discounts, you have room to run up in price before you have to worry about prepayment risk and substantial negative convexity should the market start pricing in recession fears. Spreads are wide, but unlike 2020, we have not seen funding pressures, even though liquidity is way down. As a result, the cost of repositioning the portfolio is higher than normal, but the financing side of the equation is stable. As a manager, you have to be patient and access liquidity as it presents itself. So how did our portfolio adjust during the quarter? You can see on slide 7 that we shrunk our portfolio. That is a prudent thing to do in volatile markets when you experience book value decline. That is what you need to do to keep leverage relatively constant. It's not a comment on the going forward opportunity. It's just conservative portfolio management in the face of high volatility and heightened uncertainty. The volatility has subsided the last two weeks, but April was still a very volatile month, and our preliminary estimates show that our book value as of April 30th was in the 940 to 960 range. You can also see on slide 8 that we increased the 10-year equivalence of our hedges, and that's despite having a smaller portfolio. We did this because the duration of both spec pools and their TVAs increased during the quarter as higher rates implied slower prepayment speeds and consequently longer duration. On slide 9, you can see that we essentially shrunk our mortgage exposure portfolio pro rata with the size of our portfolio. So our net mortgage exposure only declined slightly from 7.1 to 6.9. This is not a commentary on mortgage value. It's more a commentary on market volatility. Mortgages are much cheaper now than they have been in years, and a lot of bad news is already baked into their pricing. Eurodollar futures already imply that three-month LIBOR will reach 3.6% by June 2023. Fannie Twos, which were a current coupon for much of last year and had an average price during 2021 of almost 101, are now trading with an 87 handle. And Fannie Ford's, which averaged a price of about 107 in 2021, and whose prepayment protected pools used to trade at multiple point payups, now trade at 99 and a quarter. The market is assuming a very fast taper and correspondingly, a lot of net supply for private capital to digest. Things can obviously move more and spreads can continue to widen. but a lot of the mortgage market is now fully extended. We don't plan to increase leverage materially from here until we see signs of interest rate and spread stability. NIMs are very wide right now, and they're what we consider high-quality NIMs that don't require big premium dollar prices or big spec pool pay-ups. But we respect the fact that we are in uncharted waters with elevated inflation and balance sheet runoff around the corner. So I think we're going to wait for more stability before increasing leverage from here. Discount coupons performed much better than higher coupons during the first quarter, so that positioning helped us. And meanwhile, the underperformance of higher coupons created a great entry point. We can see on slide 14 that we have gone up in coupon on our holdings. The weighted average coupon of our 30-year pools increased by 19 basis points sequentially during the first quarter, and we have done more of that since quarter end. How will our process deliver strong returns going forward? Given how wide spreads are now, we don't need more leverage to generate a high dividend. We rely on prepayment models, we monitor our duration and yield curve exposure closely, and we hedge across the curve. All that's important, as we want to capture and leverage the wide spreads we see. And with the Fed stepping away, we believe that more dislocations could emerge, which would provide relative value opportunities to exploit for those who have maintained excess liquidity. As the Fed shrinks, MBS have wide yield spreads, but they're also hedgeable. So it's a real opportunity to get double-digit returns without taking credit risk and now with a lot less prepayment or volatility risk because Convexia, the mortgage market, is much better. We have a range of coupons to buy, and we don't have to be so role-dependent. In the short run, there's mark-to-market volatility, but in the long run, you can buy government-guaranteed assets at widespread through a discount to par and have a lot of extension risk already priced in. but we will be patient with adding leverage as the Fed hasn't even stopped buying yet, and more technical headwinds are set to come as they start to reduce the size of their balance sheet. In addition, we can manage our portfolio with a diversified mix of discounts and premiums, so we don't have a disproportionate focus on call risk as in years past. And most importantly, we don't have to compete with an enormous pool of capital, the Fed, that isn't seeking returns. Yields are much higher and spreads are much wider, so private capital can demand and should get a portfolio with substantially higher levered return. I think agency MBS can perform well from here regardless of the direction of rates. If we see a weak economy that leads to a dip in interest rates, that can still be a scenario for strong returns as we may get faster prepayments from cash-out refis than what we are assuming. Whereas for credit-sensitive bond portfolios, A recessionary scenario would likely be a challenge, and higher rates and lower supply can reduce the supply of agency MBS, improving the fundamental picture. Now back to Larry.
spk09: Thanks, Mark. Despite the Fed's initial intentions for a smooth and well-telegraphed tightening cycle, surging inflation has forced their hand to move faster, and at times the market's reaction has been reminiscent of the taper tantrum in 2013. The reduced Fed support was obviously a headwind for agency RMBS in recent months, and the extreme interest rate volatility has widened yield spreads and made it a lot more expensive to hedge. In April, interest rates continued to increase, yield spreads widened further, and volatility remained elevated. As Mark mentioned, our preliminary estimate is that our book value at April 30th was in the $9.40 to $9.60 range. In light of our recent book value declines, last night we adjusted our annualized dividend back to the way it had been sized previously, namely to an approximately 10% yield on book value per share. We believe that this adjustment was prudent in light of recent circumstances, but we are also optimistic that we can start rebuilding that dividend given that much richer opportunity set that Mark spoke about. As we've seen in the past, big pricing dislocations tend to be the source of opportunity. With significantly wider yield spreads and lower pay-ups, agency-specified pools are more attractive than they've been in a long time. Repo financing terms continue to be very favorable. And putting it all together, higher reinvestment yields are outpacing rising borrowing costs. So core earnings in the coming quarters is actually looking very strong. And from a price performance perspective, which has been by far the biggest component of recent underperformance, New agency RMBS supply is declining significantly given the much higher mortgage rates, and this should help mitigate the negative effects of Fed balance sheet reduction. In fact, back in 2013, this is exactly what happened. After severely underperforming during the taper tantrum, agency MBS actually rallied significantly during the second half of that year. With that, we'll now open the call to questions. Operator, please go ahead.
spk10: As at this time, if you'd like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question. And we'll take our first question from Crispin Love from Piper Sandler. Your line is open.
spk08: Thanks, and good morning. So, first off, thank you for the book value update here, but just based on the the recent volatility and your outlook. Do you believe that we've started to see some stabilization mortgages in April? And then just also, what are your expectations for near-term volatility continuing and then coupled with the investment opportunities you're seeing?
spk06: Hey, Crispin, it's Mark. So I would say that the second half of April, there was more spread stability than there was the first half. So while the entire month was of all the months, you certainly saw some stability the second part of April.
spk08: Great. Thanks, Mark. And then one on the dividend, and I know it's a board decision here, and Larry, I know you had some comments on it, but just thinking about the dividend, would you view that as the new $0.08 monthly run rate? just a resetting of the dividend here on recent book value? And then just also, how are you thinking about the dividend relative to core earnings going forward? Because recent commentary and then commentary you just had seems that the 30 cent run rate in core isn't in question, but perhaps with a slightly lower portfolio that we saw, you might fall a little bit below there. So just kind of thoughts on the dividend and also compared to core earnings.
spk09: Sure. Thanks, Crispin. Yeah, so as I said, we resized the dividend basically to a 10% yield on our new book value per share. As I mentioned, core is outstripping that and, in fact, is expected to expand further in the coming quarters. So, but, you know, because of the particular tax situation that we're in, we're not required, if you will, to distribute all of our core, you know, in our dividend. So even with core exceeding the dividend as we project for the next few quarters, you know, we would not be required to do that. And we just thought, as I said, given the circumstances, we thought it was prudent to resize that to the 10% yield where it had been you know, probably the last time that we resized it, frankly.
spk08: Okay, great. And then just so I'm clear, sir, are you saying that you think over the next few quarters a core should be at least 30 cents? Yes. Great. Thank you. That's helpful. Thanks for taking my questions. Sure. Thank you.
spk10: Our next question comes from Doug Harder from Credit Suites. Your line is open. Doug, your line is open.
spk07: Sorry about that. Can you hear me now?
spk05: Yes. Sorry, Doug. Thanks.
spk07: You mentioned that the latter part of the month you started to see volatility slow down. You know, I guess as you think about kind of the risks, you know, how do you kind of size the risk to future spread widenings versus kind of the potential for spread tightening kind of in the market now?
spk06: Yeah, so that's a good question, Doug. So one thing is we kind of contextualize mortgage spreads versus other competing fixed income spread products. So investment-grade corporates, high-yield bonds, those sectors have widened a lot too. So while we see very clearly widespreads on agency MBS versus the hedging instruments, We use the term high-quality NIM, so it's a NIM where you don't have a lot of prepayment uncertainty to it, and it's a NIM where we think rates up, rates down, the NIM will hold up. It won't degrade a lot, and it won't require a lot of delta hedging. So we see very wide net interest margins on agency MBS, but we also see competing products have also underperformed materially this year. So What happens with competing products doesn't really change the fact that we can capture a high net interest margin now. But I think what happens with competing products does have something to say about entry point and price volatility. So we want to see, and you're starting to see it a little bit now, stability in rates, stability in mortgage spreads, but also stability, say, in investment grade Investment grade spreads for other asset classes. And you have a lot of bad news got priced into the market in Q1. It led to the book value decline. But the book value decline has created a much better opportunity set than we've had in the last few years. But there's still a few hurdles left for the market, right? The Fed's got a meeting this week. Expectations for a 50-base point hike. they announced the tapering. So I think we also want to see a little bit how the market absorbs with daily mortgage supply without the Fed being a buyer, right? They're buying a lot less now than they did last year, but they're still buying, right? So it's a little bit of an adjustment. So I think that the net interest margin right now is very wide, but we want to be thoughtful about... entry points. And thoughtful about entry points has something to do with other asset classes and sort of overall market tone.
spk02: Great. Appreciate that answer. Thank you.
spk10: Our next question comes from Eric Hagan from BTIG.
spk04: Hey, thanks. Good morning. How would you say a long-short MBS portfolio is in a better position to outperform a portfolio hedged exclusively with interest rates? Like when the Fed is about to start tightening more aggressively, what are investors getting by being long-short versus some other approach, levered approach?
spk06: You're saying a long-short MBS portfolio is versus say like high yield portfolio or an investment grade bond portfolio? Or a short MBS portfolio versus just long MBS portfolio.
spk04: Right, the second thing you said, or a long MBS portfolio hedged with swaps and treasuries.
spk06: Right, so I think what you get is less volatility sensitivity. So a lot of the mortgage market now, say kind of Fannie 3 and F's and lower, are sort of fully extended and the prepayment speeds versus, you know, if you believe the forward curve gets played out, the prepayment speeds are going to be largely determined by turnover and cash out refis, right? And then when you get above that, then you start getting into things that, you know, can get in the money and have refinance, you know, have an increase in prepayments if mortgage rates drop, right? So I think that You have, and it depends what coupons you're long, but what coupons you're short. But one thing, and you saw it in the first quarter, is that being short some mortgages reduced how much increase in volatility hurts you. Now, I think that given how much TBAs and spec pools underperformed, it's a weaker case now than it was at the start of the quarter for sure.
spk04: Okay, that's helpful, Colorado. Thanks. You know, how does loan price depreciate?
spk06: I just wanted to add one other thing, is that to the extent you have a research effort and modeling efforts that can do a good job of identifying discount pools that are going to have elevated prepayments, you know, so you kind of predict levels of cash-out activity and levels of turnover, then long short in some of these coupons can add a fair bit of excess return. There's parts of the mortgage market now that are 13 points below par. So picking the pools with faster prepayment speeds, if you can pick pools that have faster prepayment speeds and buy those versus TBA, and if TBA's price is the same prepayment speeds, that adds a lot of excess return.
spk04: Yeah, that's helpful. I think that actually leads into maybe my next question, which is, you know, how does home price appreciation and inflation factor into the outlook for prepays? I mean, do you feel like there's the potential for faster speeds to develop and the lower coupons simply as a matter of faster turnover and cash out refi demand against the current backdrop?
spk06: Yeah, it's a great question and something we have been doing a lot of data analysis on, right? So What you have now is a whole bunch of borrowers with, you know, three and a half, three and a quarter, three percent mortgage rates. So they're, you know, anywhere between 150 to 200 base points below the current mortgage rate. But they're also sitting on a mountain of home equity, right? So what we've seen in the past is that how likely you are to do a cash out is a function of how much cash you can actually take out, i.e., how much equity do you have in your property. but also what's the rate differential between your mortgage rate and the current mortgage rate. So the strong HPA we think is supportive of cash out activity. And it's interesting because while there's a borrower component to it, there's also an originator and a servicer component to it. And some of the non-banks have been very aggressive in making borrowers aware about cash out refi opportunities. So a strong HPA is definitely something that we think is supportive of higher turnover speeds. You're just now, you know, it's really only been, you maybe have two months of data to really look and see what's going on. But, you know, because there's the amount of equity you have in your home and There's a little bit of a geographic component, right? So you've had, you know, on aggregate 20% HPA, but it hasn't been, you know, it's not like every area went up 20%. So there's certainly some high flyer areas. So there's, that's supportive of turnover speed, and it's also something that it's hard for models to capture, right? You're at a moment in time now where the amount of HPA borrowers have is a lot higher than what they've historically had in the data set. So you can't, it's hard to go back and sort of regress and data mine and find other moments in the historical mortgage prepayment record that look a lot like this moment. So you really need to be watching like a hawk each and every prepayment report and then really slice and dice the data into as many different dimensions as you think are relevant. So it's also interesting, too, if someone did a cash out last year, are they more or less likely to do a cash out versus someone did a purchase last year, right? So there's a whole bunch of stuff which is sort of fertile ground for research, and I think if you get it right, there's a lot of excess return that is built into the price of somebody's discounted MBS that isn't 100% captured to the model, and you're dealing with a market that has caused so much red ink out there that it's not fully priced in. It's not a kind of market where people are sort of listening to stories and really feel like they have to reach for incremental return. So you can focus on this stuff, and I think it adds a lot of excess return. and it'll eventually get priced in. But I think now you can almost sort of pick it up almost for free.
spk09: Yeah, if I could add. Yeah, if I could add. Yeah, it's a really fascinating place where we are right now in the mortgage market where there are so many securities now. Mark mentioned that, I think it was Fannie Two's trading with an 87 handle, where the difference in value, A, at current rates, if they prepay, say, at 6 CPR versus 10 CPR. It's massive. And in terms of how they'll respond in an upgrade environment, again, 6 CPR versus 10 CPR, you're going to have a lot more modest price drop if the market sees consistent speeds at 10 CPR instead of 6 CPR. So the value of a lot of the mortgage market right now is going to be, I think, highly dependent, but as Mark said, really probably mostly just on the upside. In other words, I think the market is pricing in pretty slow speeds, but there's tremendous upside if speeds end up being faster, which as, you know, Eric, you implied, could be very dependent on home price appreciation, you know, the economy, mobility, all sorts of things. So it's fascinating, and it will... unfold over the coming months and quarters. But, of course, the longer-term trend is going to be really important, too, because you're talking about these are very long mortgages right now.
spk04: I appreciate you guys. Thank you. Thanks, Eric.
spk10: Our next question comes from Mikhail Goberman from JMP Securities.
spk00: Hi. Good morning, gentlemen. Most of my questions have already been touched on. If I may just ask you, what kind of opportunities are you seeing in the reverse mortgage market? It seems to be a space that is attracting more interest these days.
spk09: I'll just say, Mikhail, that there was widening in sympathy in that market. And so just not surprisingly, it looks like a good entry point there. It's not a big focus anymore. You know, as you can tell looking at our portfolio of the company, you know, we're focusing on the more liquid sectors. But, you know, just we do think that it's an excellent entry point right now for, you know, for Hekampools as an investor.
spk01: They have widened. Yeah, the portfolio is roughly flat to, you know, last quarter versus this quarter. In terms of size? Yeah. Okay.
spk00: All right. Thanks a lot.
spk10: That was our final question for today. We thank you for participating in the Ellington Residential Mortgage REIT 2022 First Quarter Financial Results Conference Call. You may disconnect your line at this time and have a wonderful day.
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