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Welcome to Innovators and Ideas brought to you by RBC Capital Markets. Today, we are at our Global Financial Institutions Conference here in New York, and we're lucky enough to be joined by Bill Greenberg, president and CEO of Two Harbors. Bill, thanks for joining us. Thanks for having me today. So we'll start off with an easy one. Can you talk a little bit more about your company and maybe share some of your vision mission sort of purpose?
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Yeah, I'd love to. So Two Harbors was formed in 2009 in the wake of the great financial crisis, in order to extract value from the distressed markets, particular the mortgage markets existing at the time. Over the years, we have been, you know, innovators in different asset classes throughout the structured finance space and through the housing space. We really in 2020, we focused our efforts to to really concentrate our efforts on agency mortgage servicing rights and agency mortgage backed securities.
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And since then, we've grown that position quite substantially. We're now one of the top ten largest conventional servicers in the country. And most excitingly, for me is in September of 2023, we completed the acquisition of Round Point Mortgage Servicing, which means that we are taking all the servicing of our assets that we own in-house, which will allow us to achieve other economies of scale and also allow us to participate in other aspects of the housing market and the structured finance market that were heretofore unavailable to us.
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And so we're really excited about that.
You've steered two harbors to high performance maybe through one of the trickiest macro environments we've seen in a while.
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Can you talk us through the changes that you've kind of seen in recent years in the space that you're in the sector and what ideas or moves you've made beyond some that you've mentioned to sort of manage through some of that disruption and continue to grow? Yeah, well, the mortgage market is always in evading and evolving.
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I've been doing this for 30 years now, and one thing I can tell you is that the mortgage market, there's always something new to learn and to do and to add two participate in. And we've seen that certainly in the post-COVID era. We've seen things that we didn't think would be true. I mean, I remember thinking when COVID first occurred, how the heck are people going to refinance their mortgages when they can't even be in the same room as one another?
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But like they say in the movies, like the mortgage market finds a way. Right. And so it has been volatile. And, you know, we've changed regimes, you know, from a, you know, more than a decade of a government interventionist, low interest rate policy to one with more normal real interest rates in the world. And that's caused a lot of dislocation and a lot of realignment of who the participants are in the market.
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And what a discussion certainly around what the natural resting level of value of spreads is in this market. I like to think that we've been able to succeed by really focusing on the things that we know how to do well. I like to think that we're experts in managing interest rate risk and prepayment risk. And as I said, by focusing our efforts on agency mortgage backed securities, anti-choicers mortgage servicing rights, we are sticking to our knitting and and staying with the things that we know and that the key thing that will allow us to succeed in the future.
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What is made to harbor harbors paired construction of MSR with agency RBD so unique and so resilient in delivering returns across the sort of changing market environment. Yeah, that's a fascinating question because actually the benefits of the construction have changed over time. Right. In a lower rate environment where most of our servicing was produced, the mortgage servicing acts as a spread hedge and an interest rate hedge to our agency.
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Mortgage backed securities position, so that if the spreads the risk premium on mortgage backed securities happens to widen or tighten, the servicing will offset most of that. And so we ended up having much lower risk to mortgage spreads than portfolios without MSR. Now, what's happened as interest rates have risen so substantially is that our portfolios have largely decoupled because our portfolio of servicing mostly has a note rate of less than three and a half.
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That means there's very little prepayment risk in that asset class anymore. And so the hedge amounts that the servicing provides to a mortgage backed securities portfolio is lower than it was in the past. Maybe by 80% less than it was. But we still like the servicing part of the portfolio. It's got very little prepayment risk, very little convexity risk.
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It's a very high cash flowing asset because prepayment speeds are so slow. And so that's really good. And on the other side, the mortgage backed securities portfolio, we're sitting here at wider than average spreads and historically attractive levels. And so while there's less of a hedge there, two very good complementary portfolios, although not in the same way as they were complementary before, that's great.
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So I'm going to ask you to predict the future a little bit here. First of all, to talk about the outlook in this space as you look at the next 12 to 18 months. How are you guys about it? What do you see lying ahead? Yes, So we've said publicly on our last earnings call and so forth that we think assets here are pretty fairly valued.
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We think that spreads are equally likely to widen as they are to tighten. And so our posture here right now is reasonably neutral as far as risk goes. You know, again, I think the key thing about our portfolio construction is that with roughly two thirds of our capital allocated to mortgage servicing REITs, our portfolio just has less exposure to mortgage spreads than portfolios without.
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And so sometimes I'd like to say if you know that mortgage spreads will tighten over the next intermediate period. Then there are other better vehicles in order for you to take advantage of that. But if you're like me and maybe you don't know which way mortgage spreads are going to go and you can't tell the future, then maybe a portfolio that has kind of earnings potential as portfolios without MSR but less risk to the mortgage spreads, that's a good portfolio to be in and that's what I think.
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So if we look a little bit more forward, how else are you guys leaning into the future? What are two harbors doing to sort of continue to evolve and devise other new ways to create sustainable stockholder value sort of over the longer term? Well, the acquisition of round Point is really a key component of that. That said, number one, it allows us to extract more value from the servicing asset that we already own.
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We weren't able to receive all of the cash flows from that asset, which now we can. Similarly, we announced recently that we hired a guy to start a loan origination component of our business, a recapture or portfolio defense part of our business in order to protect our borrowers and to give more service to our borrowers should interest rates fall again and to be able to help them either refinance or get second lines and so forth.
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So that's a really important part of our business going forward. The round point operation in general will allow us to be involved in other sorts of things. You know, we've talked about potentially increasing our third party sub servicing business, right, or offering other ancillary products to our borrowers and those kinds of things. And so owning and operating company really allows us to impact our results and our returns by our own actions rather than, as I like to say, some time, you know, just watching the spreads fluctuate on the screens.
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Are there any challenges you faced as sort of CEO that were unexpected and how did you handle them? How did you sort of manage through them? So I've been CEO since mid 2020. And of course, you know, I've learned a tremendous amount. And most of the things that I've learned have been in areas that I was not experts in prior to write the stuff that I knew how to do.
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The investment part of the thing, the risk management part of the job that part is is squarely in my comfort zone. And so the challenges have been working with people who are experts in other thing, overseeing areas that I'm not expert in and learning how to spot the right questions, to ask and to ask the right questions for things where I might not be the subject matter expert and of course all the people components of the thing.
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You know, anytime you get, you know, more than a few people together, people are going to behave the way that they behave and managing that and getting people to all pull in the same direction and to see the benefits of of where we're trying to go. I think that's one thing that I've tried very hard to do, is to create a vision of where two halves is going, especially with the round point acquisition and what that means going forward.
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Getting buy in from my senior team, right, adjusting and modifying as they make suggestions and so forth. And then going forward and then everyone is is aligned and pulling together and we've done that. And I think that's going to be the reason why we're going to be successful as well. Final question, as you look out across the space in the sector that you guys are in, what are the qualities you think for the companies that are going to separate those that ultimately succeed over the long term versus those that maybe don't?
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I think it's going to be discipline. Markets are always volatile. There's always something new happening. And the people that know what they're good at and stick to what they're good at and are disciplined about keeping along that path will be successful. And those that think that they can expand into things that they're not expert in because, I see an opportunity here and that looks good without necessarily being expert.
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I think those are always difficult chances and maybe people might succeed for a little while, but I think that's hard to do over time unless you're really expert at it and really know the markets that you're in. And so that's the main thing that I would expect to see. Sage Advice. Bill, really appreciate your time. Thanks for joining us and good luck in your meetings today.
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Thanks for having me. I really enjoyed it.