Operator: And we have our next question from Trevor Cranston with JMP Securities.
Trevor Cranston: A question about the agency MSR asset class, as you look beyond sort of the initial acquisition of the Arlington portfolio. Can you talk about how you sort of envision being involved there, whether it’s opportunistic bulk purchases or if you potentially look to have some sort of flow agreements on new production MSR?
Larry Penn: I think it could be both of those. So the agency servicing portfolio that we’re acquiring given where rates are we think is going to be steady high return asset for us, and it gives us the capabilities. And we’ve always had sort of the capabilities on the modeling side, because modeling prepayments is so much a part of sort of our DNA. But now we’re going to have more capabilities on all the necessary infrastructure. So it could be bulk purchases, it could be flow. If I had to guess, I’d guess in the beginning probably more of our focus would be on bulk purchases, but that can be either way, we mentioned in the prepared remarks that we’ve been buying non-QM servicing for years and it’s flowed into the portfolio and it’s been a nice offset for some of the interest rate risk on non-QM loans.
And so I think this acquisition gives us a lot of flexibility and a lot of capability on the agency servicing. And with banks potentially being less interested in having significant capital outlay there, I think it’s a natural time for us to be able to acquire more portfolios.
Trevor Cranston: And then on Longbridge, the portfolio there’s been growing this year. I was curious if you could talk about specifically I guess with the proprietary loan bucket, how you think about sort of capital allocation there over time? And if the different cash flow characteristics of reverse loans sort of limit how much capital overall you’d be willing to allocate there?
Larry Penn: Sorry, what would limit — can you say that again, what would limit the amount of capital?
Trevor Cranston: Just the different cash flow characteristics of reverse loans, not getting like the regular monthly payments, like if you want a forward mortgage, if that has any…
Larry Penn: So I don’t think that’s really so much of an issue for us. Given — I mean one of the things we talked about on the call is how much principal payments we got on the rest of the portfolio. So again, it’s a good complement to have something that’s accreting but with a very high yield, right, versus something that is very short and amortizing principle all the time. So that’s actually a good combination of both are high yielding and doesn’t really create any cash flow issues for us. But it is a long term product and we’re not — if you look at the way that we’ve run other loan businesses like non-QM, for example, it’s not really our strategy to hold long term loans and finance them with short term financing sort of indefinitely.
So I think that sort of looking to where that strategy is going, I think, it’s probably better to think of accumulating critical — similar to non-QM, right, because those are long term loans too. Accumulating critical mass for securitizations or — and then doing those securitizations and retaining junior pieces, or just home loan sales, right? So — and it’s different buyers potentially for non-QM versus in the whole loan market versus reverse proprietary reverse mortgages. But maybe not that different. I mean, insurance companies have — I think we’ve spoken about this before, have really increased their appetite substantially in the last year for non-QM. And we sort of see that given the long duration, which is something that insurance companies tend to like and the high yielding aspect of these proprietary reverse mortgages, we think that’s a natural home there as well.
So I think, I would think of it more in terms of those accumulating critical mass than either doing home loan sales or securitization.
Operator: And we have our next question from Eric Hagen with BTIG.
Eric Hagen: I wanted to check in on conditions for non-agency repo, other term financing for retained securities that you guys retain office securitization. How stable the availability of that capital is and maybe even how rate sensitive you think that financing is going forward?
Larry Penn: I mean, we — go ahead, Mark…
Mark Tecotzky: No, I was going to say in a word, it’s been stable, right? Even with — there was a lot of price volatility and spread volatility in some of the credit products in 2022, there hasn’t been a lot of price volatility in spread products in 2023. But even in 2022 and now continuing this year, spreads have been stable. So that financing to us is basically a spread to SOFR. So the actual rate we’re paying is going up and down with SOFR goes up and down. But what’s been stable is that spread between SOFR and our ultimate borrowing costs. And the pools of capital interested in doing that financing has actually grown. In the last couple years, we’ve expanded our range of counterparties, so on the really short duration or the floating rate loans.
Then what you’re really locking in as sort of, ADE or net interest margin is if we’ve got a loan that’s SOFR plus six, we’re financing, it’s SOFR plus one and three quarters. Then every turn of leverage you’re locking in that difference. So 425 beats just for kind of like ballpark numbers. And then on — when you have the fixed rate bonds there, say non-QM, then you’re doing generally a — we’ve had two kind of hedges for non-QM this year. It’s been paying fixed on SOFR swaps or it’s been short TBA, now it’s more paying fixed on SOFR swaps. So you’re paying a fixed rate, you’re getting a fixed rate from the loan, so you’re getting that spread. And then the SOFR we receive on the floating leg of the swap that we’re getting paid that essentially pays to repo counterparties the floating leg, we owe them on the financing.
So they were also still kind of locking in the spread there. It’s just the difference between the fixed rate on the loan and the rate we’re paying on the SOFR swap. But the pool of capital and the spreads to SOFR has been stable. And if anything, it’s actually been coming down a little bit. And I think the reason for that is, is just repo now, given the shape of the curve, is a really high yielding asset. If you can — if you have a repo book at SOFR plus [175], you’re sort of earning 7%, so that — it’s a low LTV loan, it’s daily mark-to-market. There’s a lot of protections repo lenders get that make that a very desirable asset for a lot of pools of capital. And I think that’s why the financing has been stable. If you go back to sort of days when SOFR was close to zero, then it was LIBOR, then the all in yield on the financing just wasn’t that attractive.
And then I felt like the financing markets were not as deep as they are right now.
Eric Hagen: I wanted to go back to your comments around the consumer conditions. I think you gave some cautious commentary around the consumer loan portfolio. Like how does that outlook tie into other areas of the portfolio where there’s maybe some more asset level risk, like obviously, the resi portfolio or some aspects of that portfolio?
Mark Tecotzky: So it’s interesting. We were looking at just some charts today that were tracking delinquencies in different loan categories as a function of — whether borrowers had student loans or not and you definitely see the impact of student loans turn on. So I guess what I would say is where we have seen weakness has been lower credit score borrowers. So the difference in performance between lower FICO and high FICO, that’s always been there, but the magnitude of the difference has gone up. And I think the reason why we think that’s the case is just pretty high gas prices and in some parts of the country, very high gas prices, like you look in California. So higher gas prices, higher rent. And now what’s sort of squeezing people a little bit is a little bit slower wage gains.
