Annaly Capital Management Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2025

Key Takeaways

  • Positive Sentiment: Annaly generated a 0.7% economic return in Q2 and $0.73 earnings per share, outpacing its $0.70 dividend for the seventh consecutive quarter of positive returns.
  • Positive Sentiment: The Agency MBS portfolio grew to $80 billion with spreads 5–10 bps wider, and management expects potential Fed rate cuts and GSE reform to tighten technicals and boost demand.
  • Positive Sentiment: In residential credit, Onslow Bay closed a record $3.6 billion of securitizations in Q2 with a high-quality pipeline (764 WA FICO, 68% LTV), positioning the firm well for housing market headwinds.
  • Positive Sentiment: The MSR business maintained a $3.3 billion portfolio, added $30 million in market value, and reported stable fundamentals (4.6% CPR, 0.5% delinquencies), while expanding flow servicing and subservicing partnerships.
  • Positive Sentiment: Annaly ended Q2 with approximately $6 billion of unencumbered assets (including $4.7 billion agency MBS) and diverse funding lines, providing ample liquidity and operational flexibility.
AI Generated. May Contain Errors.
Earnings Conference Call
Annaly Capital Management Q2 2025
00:00 / 00:00

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Sean Kensil
Sean Kensil
Director - IR at Annaly Capital Management

Good morning, and welcome to the second quarter twenty twenty five earnings call for Annaly Capital Management. Any forward looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date hereof.

Sean Kensil
Sean Kensil
Director - IR at Annaly Capital Management

We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our earnings release. Content referenced in today's call can be found in our second quarter twenty twenty five investor presentation and second quarter twenty twenty five financial supplement, both found under the Presentations section of our website. Please also note this event is being recorded.

Sean Kensil
Sean Kensil
Director - IR at Annaly Capital Management

Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co Chief Investment Officer Serena Wolfe, Chief Financial Officer Mike Fania, Co Chief Investment Officer and Head of Residential Credit Vyas Srinivasan, Head of Agency and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Thank you, Sean. Good morning, everyone, and thank you all for joining us for our second quarter earnings call. Today, as usual, I'll briefly review the macro and market environment as well as our performance for the quarter. Then I'll provide an update on each of our three businesses ending with our outlook. Serena will then discuss our financials before opening up the call to Q and A.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Now starting with the macro landscape, U. S. Economy has persevered through considerable trade related uncertainty and resulting market volatility in recent months. Growth is likely to run around 1% annualized for the first half of the year, well below the pace of recent years, but is arguably outperforming post Liberation Day expectations. Employers hired nearly 450,000 workers in the second quarter, which has lowered the unemployment rate marginally to 4.1%.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

And overall hiring has slowed compared to recent years, but the labor market is relatively balanced and layoffs have been somewhat muted. Inflation meanwhile likely ran at the slowest level in the past three quarters as the continued decline in service sector inflation offset firming in goods prices, some of which likely tariff related. The economy and the labor market's resilience has affirmed the Fed's current wait and see stance with the majority of policymakers indicating a preference for more data to assess the impact of tariffs on inflation. We do expect the Fed to ultimately deliver on the two interest rate cuts projected for 2025 at the last FOMC meeting, given the consensus view among policymakers that current interest rate levels remain somewhat restrictive. As it relates to markets, the positive reversal in sentiment as the second quarter progressed helped risk assets recover from their sharp underperformance in early April and financial conditions have reached some of the most accommodative levels since the onset of the hiking cycle in 2022.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Despite improvement in markets, longer term treasury yields remain elevated as the market will need to continue to fund large deficits, particularly with the passage of the recent tax and spending bill. Swap spreads have also been unable to reverse the majority of their April tightening, which left agency MBS spreads five to 10 basis points wider on the quarter. Now against this backdrop, we delivered an economic return of 0.7% for the second quarter, while generating earnings available for distribution of $0.73 once again out earning our dividend. And Q2 marked the seventh consecutive quarter of generating a positive economic return for our shareholders, demonstrating the diversification benefit of our three fully scaled housing finance strategies. Year to date, we've delivered a 3.7% economic return with a total shareholder return of over 10% through quarter end.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

And further to note, we raised just over $750,000,000 of accretive capital in the second quarter through our ATM program, which was predominantly deployed in the agency sector and leverage increased modestly to 5.8 turns in light of the increased allocation to Agency. Now turning to our investment strategies and beginning with Agency, our portfolio ended the quarter at nearly $80,000,000,000 in market value, up 6% quarter over quarter. After the early April volatility, market conditions for Agency MBS improved. Rates were range bound, the yield curve remained relatively steep, implied volatility declined and comparable fixed income assets tightened given the favorable risk sentiment in markets. Agency MBS did lag in the recovery as demand from overseas and the bank community has remained muted, but we do think that these participants could become more active should the Fed resume cutting or as expected regulatory reform materializes.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

With respect to our activity, early in the quarter, we managed our duration through the tariff driven volatility with little adjustment to our agency portfolio. And as markets normalized, we steadily added agency MBS at attractive spreads in line with our capital raising, growing our agency portfolio by roughly $4,500,000,000 in notional terms. Purchases were fairly evenly split across 4.5s, 5.5s and 6s and we marginally preferred pools over TBAs as repo financing was slightly more attractive than dollar roll carry. We continue to operate within a narrow interest rate risk band given the volatility we've experienced thus far this year. And in Q2, all asset purchases were hedged and duration extension was prudently managed due to the rise in long end rates.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Within our hedge portfolio, we remain in favor of holding swaps against shorter term risk due to deposit carry profile, while maintaining a more balanced mix of treasury and swap exposure in the intermediate and long end. Swap spreads tightened significantly during the quarter and forward markets are signaling further tightening in the months ahead. If that changes however, we can nimbly adjust our hedges between swaps and treasury risk, But for now, a roughly sixty-forty hedge allocation between swaps and treasuries is more favorable in our view. Overall, we remain optimistic on the agency sector as fundamentals are sound and there are several potential catalysts out the rise to improve Agency MBS technicals. Additionally, we're encouraged by the administration's recent statements regarding GSE reform, noting that any privatization efforts will preserve the implicit guarantee and aim to tighten MBS spreads removing a significant market concern.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Shifting to residential credit. Our portfolio was relatively unchanged at $6,600,000,000 in market value and $2,400,000,000 of capital. The resi credit sector broadly tracked corporate credit over the quarter widening in sympathy with other risk assets in early April only to finish the quarter with spreads roughly unchanged. Now despite the turbulence in the first half of the quarter, the non agency market demonstrated its durability with over $43,000,000,000 of gross issuance on the quarter. Our Onslow Bay platform had its highest quarterly securitization activity to date closing $3,600,000,000 across seven transactions and we priced an additional two securitizations in July bringing cumulative twenty twenty five activity to $7,600,000,000 across 15 transactions, generating $913,000,000 of high yielding proprietary assets for Annaly and our joint venture.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Onslow Bay's expanded credit correspondent channel also remained the industry leader, generating $5,300,000,000 of locks and funding $3,700,000,000 of loans over the quarter. And this is despite tightening our credit standards once again given some of the headwinds we are seeing in housing. Our current locked pipeline is a seven sixty four weighted average FICO, a 68% LTV and is over ninety five percent first lien. Regarding the housing market, available for sale inventory continues to increase as affordability remains challenged given elevated mortgage rates, high home prices and increased property taxes and insurance premiums. While housing affordability has been an issue for the past three years, we've entered a buyer's market as sellers now materially outweigh prospective homeowners.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Higher supply has led to four consecutive months of negative according to Zillow and we expect the majority of the housing market to turn modestly negative year over year in the near term. Now balancing the deceleration of the housing market is a stable labor market, low consumer delinquencies, expansionary fiscal policy and elevated asset pricing including equity markets. We remain well positioned in this environment as we control all aspects of our loan manufacturing strategy and the resulting assets have minimal leverage. Notably, over 70% of our residential credit exposure is represented by retained OBX securities and residential whole loans collateralized with high quality borrowers. Moving to our MSR business.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

The portfolio ended the second quarter unchanged at $3,300,000,000 in market value, comprising $2,600,000,000 of the firm's capital. While both trading activity was healthy in the second quarter, we were measured with respect to new purchases as MSR valuations remained firm acquiring approximately $30,000,000 in market value. Our MSR valuation improved very modestly quarter over quarter driven by the steepening in the yield curve, lower implied volatility and strong observed bulk execution. Solid fundamental performance of the portfolio persisted this past quarter with a three month CPR of 4.6%, serious delinquencies unchanged at 50 basis points and escrow balances up 6% year over year, which helped to drive increased float income. And the portfolio continued to generate well defined durable cash flows given the 3.24% note rate with the average borrower at three fifty basis points out of the money.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

As we move forward, we remain focused on furthering the build out of our flow servicing relationships and capabilities and expanding our subservicing and recapture partnerships, which should allow us to capitalize on MSR opportunities across both the bulk and flow channels as relative value dictates. Now to conclude with our outlook, we maintain conviction that our portfolio will continue to generate strong risk adjusted returns in the current environment. We've been encouraged by declining macro volatility as of late and we see further benefits to our portfolio in the mortgage sector should expected Fed cuts materialize. In the near term, we expect to be overweight agency given historically attractive spread levels. But over the long term, we'll strategically grow our residential credit and MSR portfolios as we look to expand Onslow Bay's presence across And as always, we remain flexible in the current investing climate with our historically low leverage and ample liquidity.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

We're well positioned as we enter the second half of the year. And with that, I'll turn it over to Serena to discuss the financials.

Serena Wolfe
Serena Wolfe
CFO at Annaly Capital Management

Thank you, David. Today, I will provide a brief overview of the financial highlights for the quarter ended 06/30/2025. Consistent with prior quarters, our earnings release will disclose both GAAP and non GAAP earnings metrics. However, my comments will focus on our non GAAP EAD and related key performance metrics, which exclude PAA. As of 06/30/2025, our book value per share decreased 3% from the prior quarter to 18.45 After accounting for our dividend of $0.70 we achieved a positive economic return of 0.7% for the second quarter.

Serena Wolfe
Serena Wolfe
CFO at Annaly Capital Management

This brings our economic return to 3.7% for the first half of the year. Earnings available for distribution per share increased by $01 to $0.73 and once again exceeded our dividend for the quarter. Results were primarily driven by higher yields on our investment portfolio of 5.41% compared to 5.23% in the prior quarter. Additionally, we saw lower average repo rates of 4.53% during the quarter, a modest decline of three basis points in comparison to the prior quarter. These increases were partially offset by lower swap income due to very modest swap runoff in the first half of the year.

Serena Wolfe
Serena Wolfe
CFO at Annaly Capital Management

Our rotation up in coupon in Agency over the last several quarters is evident in our interest metrics due to our increase in yields. The resi credit business generated additional income due to the growth of accretive OBX securitizations on balance as Enzo Bay experienced another quarter of record issuance. Net interest spread ex PAA has increased again, reaching 1.47% in the second quarter compared to 1.24% a year ago, and net interest margin ex PAA is 1.71% in Q2 compared to 1.58% in Q2 twenty twenty four. Turning to our financing strategy. Over the past several years, we have made deliberate and disciplined efforts to expand and diversify our funding sources.

Serena Wolfe
Serena Wolfe
CFO at Annaly Capital Management

Today, our financing platform encompasses a diverse range of traditional and nontraditional financing arrangements, which enhance both our liquidity profile and operational flexibility. We have added substantial capacity through non mark to market arrangements, second lien and HELOC lines, structured repurchase agreements and committed lines. For example, across our residential loan facilities, our non mark to market capacity has grown from $150,000,000 or 6% of total available capacity at the 2023 to $1,900,000,000 in the second quarter, now representing 45% of total capacity. These additions complement our more traditional financing sources, including bilateral repo, our internal broker dealer, sponsored repo, securitizations, participation interests and warehouse financing facilities. This breadth of funding structures allows us to navigate a range of market environments more effectively, enhancing stability during periods of volatility and positioning us to capitalize on opportunities as they arise.

Serena Wolfe
Serena Wolfe
CFO at Annaly Capital Management

During the quarter, we added approximately $5,000,000,000 of repo principal including term at attractive spreads. This increase was primarily due to the growth of the agency portfolio. As a result, our Q2 reported weighted average repo days maintained a healthy position of forty nine days. During the quarter, we upsized several resi credit warehouse facilities and added a new MSR line, increasing our capacity by 500,000,000 As of 06/30/2025, our total facility capacity for the residential credit business was $4,200,000,000 across 10 counterparties with a utilization rate of 40%. Our MSR business has total available committed warehouse capacity of $2,100,000,000 across four counterparties as of 06/30/2025, with a utilization rate of 50%.

Serena Wolfe
Serena Wolfe
CFO at Annaly Capital Management

Inclusive of our committed facilities, our weighted average days to maturity is fifty six days. Annaly's financial strength is further evident in our unencumbered assets, which ended the second quarter at approximately 6,000,000,000 including cash and unencumbered agency MBS of 4,700,000,000.0 In addition, we have roughly $1,500,000,000 in fair value of MSR that has been pledged to committed warehouse facilities, but remains undrawn and can be quickly converted to cash, subject to market advance rates. Together, we have approximately $7,400,000,000 in assets available for financing, a decrease of roughly $70,000,000 compared to the first quarter. Now that concludes our prepared remarks, and we will open the line for questions. Thank you, operator.

Operator

Thank you. We will now begin the question and answer session. The first question is from Bose George, KBW. Please go ahead.

Bose George
Managing Director at Keefe, Bruyette & Woods (KBW)

Hey, everyone. Good morning. Actually, first, can I just get an update on book value quarter to date?

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Sure, Bose. Good morning. As of last night, pre dividend accrual book was up about zero five percent, so call it 1.5% economic return.

Bose George
Managing Director at Keefe, Bruyette & Woods (KBW)

Okay, great. And then can you just discuss your comfort level with the dividend? How that ties in with your the economic return that you guys are seeing from the portfolio?

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Sure. So obviously, we raised a dividend earlier this year and we make those decisions very deliberately and we did have confidence that it was certainly earnable. And that's been the case. We've out earned the dividend and we expect to certainly cover and potentially out earn the dividend for the remainder of the year all else equal. As it relates to economic return, the way we look at it is the portfolio should generate an economic return approximating or in upwards of the dividend.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

There are hedging costs which could erode that economic return somewhat. But nevertheless, the goal is to get as close to the dividend as is achievable managing for hedging costs and other costs and we feel pretty good about where our economic return is year to date certainly. And as I mentioned, we have had positive economic return for the past seven quarters and we think the environment is certainly conducive to achieving close to that dividend yield given volatility has come down and asset spreads are relatively cheap.

Bose George
Managing Director at Keefe, Bruyette & Woods (KBW)

Okay, great. Thanks.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Thank you, Bose.

Operator

The next question from Doug Harter, UBS. Please go ahead.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Thanks and good morning. David, hoping you could just talk through kind of how you thought about managing the portfolio through the second quarter, your comfort in letting kind of leverage rise during kind of the extreme bouts of volatility versus kind of feeling compelled to kind of risk manage the portfolio and just help us with that thought process?

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Sure. Good question, Doug. So look, we came into the quarter with a very good liquidity position consistent with where we're at this quarter. So we were comfortable in light of the volatility. And Liberation Day was announced well in advance.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

And so we wanted to be prepared for it. Our leverage was low and we had ample capacity. So as April did get underway, our biggest focus was managing exposure. Given our low leverage, we could allow leverage to drift higher, which we certainly did, but rate exposure was something we were more focused on. And I think when it comes to the rates market in the current environment, navigating uncertainty is now the base case.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

And we need to be prepared for a range of outcomes. And so we're keeping our rate risk very close to home as I mentioned in my prepared remarks. And we let duration drift, but we're very disciplined when it comes to bans. And now we feel we're in a much better place certainly than we were in April and throughout the second quarter. We have a little bit more clarity on where tariffs are heading, the tax bills complete.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

We came into this quarter with virtually no duration. We drifted a little bit and so far rates have gone up, which is fine. But we feel good about the rates view, but that's the key focus in terms of managing that type of volatility given the fact that we have flexibility in light of relatively low leverage. Does that help?

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Very helpful. And then I guess in that context, if you're I guess, how do you think about balancing kind of continuing to invest into a market you see as attractive, whether that's through increasing leverage or continuing to access fresh capital? Kind of how are you weighing those decisions as kind of there is slightly more certainty than there was say three months ago?

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Yes. So look, as it related to the second quarter and raising capital, we were very deliberate with how we invested it. Our view when it comes to raising capital, as we've said before, it's got to be accretive to book value and accretive to earnings. And as we raise capital, we deploy it accordingly. We look at new capital the same as we look at existing capital and we study our leverage position on a daily basis.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

And if we feel like we're under levered, we'll put money to work. And to your point about in an environment that it was as uncertain as it was early in the second quarter, It can be difficult at times to deploy capital, but at the end of the day, we had confidence that capital raise would accretive and so we're comfortable putting it to work. Now related to increasing leverage versus raising capital, it was more advantageous for us we felt to raise capital and put that money to work as opposed to increasing leverage given the uncertainty. Now we're in a place where all has come down, we could raise leverage, but we don't need to. If you look at the returns we're generating and the yield we're generating with spreads where they're at, you can earn quite a handsome return with relatively low leverage and it gives us a lot of flexibility to manage other parts of the portfolio and it gives smoother returns.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

The point I wanted to stress about consistently positive returns is that we have run at meaningfully lower leverage over the past couple of years than we had in the past and it's worked out quite well. There's always an episode of volatility here and there, but we're able to sit on our hands with low leverage and not be forced sellers in a lot of circumstances and that's led to smoother returns because we haven't been in positions to sell cheap assets. And as we've raised capital, we've been able to deploy it profitably. So we feel really good with the leverage where it's at. And we haven't raised capital thus far this quarter, but if the opportunity materializes, we may do so.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Great. Appreciate the answers, David.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Thank you, Doug.

Operator

The next question from Rick Shane, JPMorgan. Please go ahead.

Richard Shane
Richard Shane
Analyst at JP Morgan

Thanks for taking my questions this morning. Look, one of the things you mentioned or actually two of the things you mentioned, an expectation that rates will be headed lower later in the year and commentary about negative HPA. As we think about the credit portfolio, can you help us start to think about some of the dynamics there? How are you insulated on the credit side? What are the puts and takes potentially of higher speeds on a portfolio that has different discount characteristics than the historic agency portfolio.

Richard Shane
Richard Shane
Analyst at JP Morgan

This is going to be sort of the first cycle with a credit portfolio of this size and I think it's helpful for investors to sort of understand the dynamics that you sort of the pros and cons as we enter a new part of the housing cycle.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Yes. So I'll start and then Mike can take it from there. I'll just say, Doug, Mike has been very forward thinking about making sure that the quality of credit portfolio was as high as it could be. We were very early in tightening credit standards in 2022. As I talked about, we tightened them more recently.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

And I think when you look at the underlying credit, it's as high quality as it gets in that sector. Our mark to market LTV in the portfolio I think is around 62%. We look at stress scenarios with HPA shocks. And if you look at our portfolio, we experienced say a 20% decline in home prices, roughly 4% of that portfolio would be underwater, is a very high quality credit portfolio in our view. I think Mike has done a nice job and feel free to take it from here and talk about how you

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

Yes. Thanks, Rick. I think that I would just add that in terms of the proactive changes that we've made since 2022, they are very significant. And I would say that we are an outlier in the market in terms of making those changes. So if you go back to the middle of twenty twenty two, the weighted average FICO in our lot pipeline was seven thirty five, about 20% of our originations were greater than ADLTV, about 20% were less than 700 FICO.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

So if you fast forward to our lot pipeline right now, it's seven sixty four weighted average FICO, only about 1% of loans are greater than ADLTV and I'll say only about 4% to 5% are less than 700 FICO. So, it has not impacted our volume in a meaningful way. But we've been very proactive in seeing the housing market decelerate, and trying to be on front foot so to speak. And Dave did mention that the quality of the portfolio, it's a $30,000,000,000 plus GAAP whole loan portfolio. It's a $7.59 original FICO, it's a 62 mark to market LTV.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

There's $300,000 of borrower equity in those underlying properties and the D60 plus as of the end of the recent quarter was under 2% was 185 basis points and that's actually down call it seven basis eight basis points quarter over quarter. In terms of the second part of your question in terms of speeds, so the portfolio is a $6.55 gross WACC that's the GAAP consolidated portfolio. The one month CPR is 13. But I think when you look at the part of the portfolio that right now non QM rates will say are 7.5%. If you look at our non QM portfolio rates that are 8.5% to 9%, so you're saying 100 basis to 150 basis points in the money.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

They're only paying 25 to 35 CPR. So the S curves within this market are flatter than the agency market. They're certainly much flatter than the jumbo market. You do have forms of prepayment protection like penalties. So I think that we are well insulated if there is a significant rally given the current gross lack of the portfolio and the prepayment protection that we have.

Richard Shane
Richard Shane
Analyst at JP Morgan

Got it. Okay, that's helpful. And look, this is all triggering thinking about this on a deeper basis. I don't see anywhere in the disclosures, but I may just be missing something. Is there a breakout by vintage so we can think about cohort exposure and HPA underlying HPA by year?

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

Yes, Rick, that's not something that we have disclosed, but that's something that we can follow-up with you offline in a discussion about potentially disclosing that in the future.

Richard Shane
Richard Shane
Analyst at JP Morgan

Terrific. Hey, appreciate the answers and thank you for the time this morning.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Thank you, Rick.

Operator

The next question from Jason Stewart, Janney Montgomery Scott. Please go ahead.

Jason Stewart
Director - Mortgage Finance at Janney Montgomery Scott

Hi, good morning. Thanks. And congrats on seven consecutive quarters of positive economic returns, quite an achievement there. So, I wanted to continue on Rick's question on the private the credit markets. What's your expectation at this point for GSE reform?

Jason Stewart
Director - Mortgage Finance at Janney Montgomery Scott

And how does that impact opportunities and developments in terms of products and where you can grow that business?

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Sure. And we've talked a lot about this in the past, Jason. Our expectation is now that the tax bill is done and we're working our way through tariff negotiations, we do expect it to be on the front burner over the near term. The GSEs do still need to raise capital and there's a lot of work to do before privatization can occur. But as we've said in the past, a lot of the loans that the GSEs originate are what are considered non core.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Think roughly 20% or thereabouts. And ultimately, we'll be able to compete for that origination is our view. So we're optimistic both in terms of lower supply in the agency sector, which can help the technicals and also the ability to broaden the approach on the resi side. Does that help?

Jason Stewart
Director - Mortgage Finance at Janney Montgomery Scott

Yes. I guess I'm hearing no change to your view there, which is fine.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

Jason, one thing that sorry Jason, one thing I could add to for David, in terms of the correspondent channel, I'll say, call it 10% to 11% of the actual correspondent lock volume is agency collateral. So that is agency investor, agency second homes. You are not seeing us come to the market to do standalone deals. However, that collateral is oftentimes included in our non QM transaction. So we are capitalizing on some of the pricing that the GSEs have and some of the efficiencies within the POS market relative to GSE execution. So we are doing that right now.

Jason Stewart
Director - Mortgage Finance at Janney Montgomery Scott

Okay. Okay. That's helpful. Thanks. And then on the MSR portfolio, I mean I understand that the $3.24 gross WACC is so far the money that any sort of it would take such a meaningful moving rates to have a prepayment effect there.

Jason Stewart
Director - Mortgage Finance at Janney Montgomery Scott

But how do you think about external factors impacting the multiple, whether it's M and A activity in the space, lower rates impacting transaction multiples elsewhere. How do you think about that in terms of valuation on the MSR portfolio?

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Look, one of the driving factors of MSR valuations as of late has been the cost of servicing has come down because of technological enhancements which are only I would say right now escalating and accelerating and consolidation in the servicing There's about four to five players that are investing combined hundreds of millions of dollars in technology and what you're going to see in terms of the pace of advancements servicing is going to be very meaningful over the next few years in terms of lowering the cost and that all passes through to us because it leads to cheaper sub servicing expenses. So we're happy with what we've seen. We think there's going be a lot of differentiation in servicing and we're partnered with the ones who are making these investments and they provide great service and what we provide them is we help them with their scale obviously, but also we're a capital and liquidity provider when there's a need to move MSR off balance sheet. So we like where we sit.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

We like the evolution of the sector. We think it's only going to become more efficient and it flows through into the valuations. And when you look at our multiple, we're relatively conservatively priced, we feel. And the performance of our MSR has been very good, well exceeded our expectations. Yes.

Ken Adler
Ken Adler
Head - Mortgage Servicing Rights & Portfolio Analytics at Annaly Capital Management

I mean another exogenous factor that's really helped us, Dave mentioned in the prepared remarks, is just the growth in the float accounts, T and I accounts up 6% year over year. That's not the first year it's been up that much and it's certainly below what the industry and we've modeled. Another exogenous factor is servicers have never been able to keep customers for so long. So developing that customer relationship opportunities and other revenue streams off the MSR, derived from the MSR asset. I mean those initiatives are in the infancy, but sure have a lot of promise given all the technology investments.

Jason Stewart
Director - Mortgage Finance at Janney Montgomery Scott

Great. Thank you.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Thanks, Jason.

Operator

The next question from Eric Hagen, BTIG. Please go ahead.

Eric Hagen
Managing Director at BTIG

Thanks. Good morning, guys. I have one on the MSR as well. As these low coupon MSRs continue to season and pay down slowly, I mean, should shareholders think about the value in pairing that opportunity with these higher coupons, right? Even versus a couple of years ago when the complexion of the mortgage market was a little different, the level of prepayment risk looked a little different, volatility.

Eric Hagen
Managing Director at BTIG

I mean how should we think about like the pairing of that opportunity there?

Ken Adler
Ken Adler
Head - Mortgage Servicing Rights & Portfolio Analytics at Annaly Capital Management

Yes. I mean we built out the capability to really participate actively in any coupon. And the way we've done that again as Dave alluded to is through building out these partnerships with the largest, the best and most technology enabled servicers and we capture partners. Given the portfolio of partners we have and given we already have exposure to all the coupons, well not a lot in the higher coupons, we have enough to be statistically significant. We're really able to see how they're performing and what's really going on and we do isolate the hedge strategies between the different note rates.

Ken Adler
Ken Adler
Head - Mortgage Servicing Rights & Portfolio Analytics at Annaly Capital Management

So we're ready, we're there, we're showing bids on all coupons and are prepared. On the low coupon side, I mean there is still a lot out there that does change hands because there's still there is a need for much of the mortgage industry to recycle out of the lower yielding loan rate MSR and kind of reallocate that capital to originating new loans which will be the higher coupon MSR. So we're still facilitating that trade as well as building out the infrastructure.

Eric Hagen
Managing Director at BTIG

Okay. That's helpful color. I mean, much hedging or like dollar duration is covered by the MSR position at this point? Like if you didn't have the MSR how much bigger would your hedge portfolio or your swap portfolio be? In other words like how much is the return of the portfolio being supported by this pairing of MSR and Agency MBS?

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Maybe I would call in less than 2% of the overall hedge portfolio. There's very little structural leverage in the MSR position. So we don't get meaningful duration change, but it's just a very powerful carry generator with a little bit of negative duration there.

Eric Hagen
Managing Director at BTIG

Right. Right on. All right. Thank you guys. Thank you, Eric.

Operator

The next question from Christian Love, Piper Sandler. Please go ahead.

Crispin Love
Crispin Love
Director at Piper Sandler Companies

Thank you. Good morning, everyone. Can you dig into the demand picture for Agency MBS in the current environment? Where is the bulk of demand coming from? You seem pretty positive on the space.

Crispin Love
Crispin Love
Director at Piper Sandler Companies

Just curious on your expectations in demand. Have you seen more involvement from banks? Is it too early there? Just curious on the picture overall and then just how that could impact your spread expectations?

Jason Stewart
Director - Mortgage Finance at Janney Montgomery Scott

Sure. On

V.S. Srinivasan
V.S. Srinivasan
Head of Agency at Annaly Capital Management

fundamentals on demand, fixed income funds saw about $50,000,000,000 in redemptions in April. But since then, they have seen about $50,000,000,000 per month in inflows. So demand from fixed income funds has been pretty strong. CMO issuance continues to be very strong. We're seeing about 25,000,000,000 to $30,000,000,000 in CMO issuance.

V.S. Srinivasan
V.S. Srinivasan
Head of Agency at Annaly Capital Management

So that's taking away about 30% of the gross supply to the market. What we have not seen is demand from banks and overseas accounts. And even without that demand, I think fundamentals are quite supportive for Agency MBS. Implied volatility is currently at three year lows. Asset carry is attractive for unhedged accounts.

V.S. Srinivasan
V.S. Srinivasan
Head of Agency at Annaly Capital Management

So, we do think MBS spreads can tighten three to five basis points to treasuries even without additional demand from banks and foreign accounts. But the real bull case for MBS is that a combination of regulatory reform and further easing in monetary policy will materially increase demand from banks and Asian accounts and we think the odds of that happening in the second half of the year are quite good.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Yes. Chris, if you think about the bank model, they've benefited quite a bit from high short rates and the generation of NIM specifically as a consequence of that. As the Fed does reduce rates that need for NIM to replace that NIM will materialize and we do expect it to come into Agency MBS.

Crispin Love
Crispin Love
Director at Piper Sandler Companies

Great. Thank you. Appreciate taking my questions.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Thanks, Kristin.

Operator

The next question from Matthew Erdner, John's Trading. Please go ahead.

Matthew Erdner
Research Associate at Jones Trading

Hey, good morning, guys. Thanks for taking the question. I'd like to turn back to resi credit. In the second half what you guys have seen kind of quarter to date I know that there's close to about $1,000,000,000 in securitizations out there already. But do you think 3Q is tracking to kind of be in line with 2Q?

Matthew Erdner
Research Associate at Jones Trading

And then just what are your margin expectations going forward as well given that the Fed is pricing or there's two rate cuts priced in?

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

Sure. Thanks Matt. This is Mike. In terms of issuance, I'll say year to date gross issuance has been $92,000,000,000 that's outperformed analyst expectations. I think we're tracking probably to be the highest issuance year since 2021 where we were north of $200,000,000,000 So the capital markets remain robust.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

Are healthy. In terms of securitization and levels, we actually have the tightest print in terms of AAAs where we've printed post Liberation Day. Our latest transaction was non Q1 twenty thirteen. It was a $662,000,000 transaction, 500,000,000 of AAA bonds and we sold the AAA at $138,000,000 All other issuers and sponsors are kind of in call it the 140,000,000 to 150,000,000 range. So I think what Q2 showed us and early Q2 and the volatility that we saw in April, I think that showed us that there's a resiliency and maturation of the non agency market that again if that occurred three, four, five years ago, we don't think that you'd see the same outcomes.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

So I think it's very healthy and we continue to build up the investor base. In terms of the second part of your question in terms of margins, we've talked about this in past calls. We don't actually publish what our margins are on our correspondent channel. But what you can assume is that we're retaining call it 11% to 12% of our transactions using maybe what a turn, turn and a half of recourse leverage. So call it 5% to 7% of capital deployment per each $100 and you're talking mid teens returns on that capital deployed.

Matthew Erdner
Research Associate at Jones Trading

Got it. That's very helpful. And then just as a follow-up to that you guys talked about the credit box there but you don't expect that to have any effect on the volumes that you guys do the remainder of the year?

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

Yes. It's hard to say. So we did $5,300,000,000 of locks, 3,700,000,000.0 of fundings on the quarter which was virtually identical to Q1. It was down a little bit from Q4. When you look at some of the origination volumes that we've seen from the banks and some of the non banks so far, origination volumes are up call it 20%.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

So it's hard for us to say that if we did not make some of these changes to our guidelines and to our pricing that we would not have done more volume. But I do think that we feel very good with the type of volume that we're doing. We've done 7,500,000,000.0 closed funded loans through the correspondent for the first half of the year. That's a $15,000,000,000 run rate. We think the non QM DSCR market is about 5% of total originations.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

So call it $2,000,000,000,000 of total originations, 100,000,000,000 of non QM DSCR. We think we're about a 15% market share and we think that that's a comfortable level for us at this point in time. So I think we feel good with the volumes and the targeted credit box that we have.

Matthew Erdner
Research Associate at Jones Trading

Awesome. That's great. Thank you, Mike.

Mike Fania
Mike Fania
Co-Chief Investment Officer & Head - Residential Credit at Annaly Capital Management

Thanks, Matt.

Operator

Next question from Trevor Cranston, Citizens JMP. Please go ahead.

Eric Hagen
Managing Director at BTIG

Hey, thanks.

Trevor Cranston
MD - Mortgage Finance Equity Research at JMP Securities LLC

Just a question on the macro outlook. It seems like there's a pretty strong consensus around steepening of the yield curve going forward. But as the impact of tariffs start to come in, guess, how much risk do you guys see of the impact of that on inflation being kind of greater than anticipated? And if some of the pricing in the Fed cuts were to come out of the market at some point, how do you think agencies in particular would perform in that type of scenario? Thanks.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Sure. So just looking at the macro outlook as it relates to tariffs, there will be inflation that will pass through. We're just starting to see it with the last CPI print and it will come through the summer. And our view is overall, you are going to have a continuation of services inflation and shelter coming down and goods inflation will be increasing. And as the Fed forecast, you got a 3.1% core PCE at the end of the year and that equates to roughly 25 basis points per month core PCE.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

And we feel like that's a reasonable assessment with services inflation coming down and goods inflation coming up. So we do anticipate that they'll deliver on the two cuts. They have an unemployment rate of around 4.5%, so four times higher. The labor market is slowing that will likely materialize. And as it relates to growth, I think they have 1.4% GDP.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

To achieve that, we need to grow close to 2% for the second half of the year. And so overall, the forecast and the dots seem to paint what we believe will be a pretty accurate picture of how it plays out and we'll get those two cuts. Now should that not occur, let's assume that inflation runs higher and the Fed is not in a position to cut. You'll see a flattening of the yield curve which were hedged for and agency MBS so long as volatility is contained should perform just fine. If on the other hand, you get a bigger deterioration in the economy and the Fed is more aggressive, then that's obviously going to be good for Agency because you will get more cuts, you'll get more involvement and that would be encouraging for us.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

But overall, if they don't deliver on the cuts, we're reasonably well hedged for that and that's not our base case. We actually think they'll get delivered upon.

Trevor Cranston
MD - Mortgage Finance Equity Research at JMP Securities LLC

Got it. Okay. Very helpful. Thank you.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Thanks, Trevor.

Operator

This concludes our Q and A session. I would like to turn the conference back over to Mr. Finkelstein for any closing remarks. Thank you.

David Finkelstein
David Finkelstein
CEO, Co-Chief Investment Officer & Director at Annaly Capital Management

Thank you, Vicki. Everybody have a good rest of the summer and we'll talk to you soon.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.

Executives
    • Sean Kensil
      Sean Kensil
      Director - IR
    • David Finkelstein
      David Finkelstein
      CEO, Co-Chief Investment Officer & Director
    • Serena Wolfe
      Serena Wolfe
      CFO
    • Mike Fania
      Mike Fania
      Co-Chief Investment Officer & Head - Residential Credit
    • Ken Adler
      Ken Adler
      Head - Mortgage Servicing Rights & Portfolio Analytics
    • V.S. Srinivasan
      V.S. Srinivasan
      Head of Agency
Analysts
    • Bose George
      Managing Director at Keefe, Bruyette & Woods (KBW)
    • Douglas Harter
      Equity Research Analyst at UBS Group
    • Richard Shane
      Analyst at JP Morgan
    • Jason Stewart
      Director - Mortgage Finance at Janney Montgomery Scott
    • Eric Hagen
      Managing Director at BTIG
    • Crispin Love
      Director at Piper Sandler Companies
    • Matthew Erdner
      Research Associate at Jones Trading
    • Trevor Cranston
      MD - Mortgage Finance Equity Research at JMP Securities LLC
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