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Two Harbors Investment (NYSE:TWO)
Q1 2021 Earnings Call
May 06, 2021, 9:02 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day and welcome to the Two Harbors Investment Corp. first-quarter 2021 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Paulina Sims, senior director of investor relations.

Please go ahead.

Paulina Sims -- Senior Director of Investor Relations

Good morning everyone and welcome to our call to discuss Two Harbors' first-quarter 2021 financial results. With me on the call this morning are Bill Greenberg, our president and CEO; Mary Riskey, our chief financial officer; and Matt Koeppen, our chief investment officer. The press release and financial tables associated with today's call were filed yesterday with the SEC. If you do not have a copy, you may find them on our website or on the SEC's website at SEC.gov.

In our earnings release and slides, we have provided a reconciliation of GAAP to non-GAAP financial measures. We urge you to review this information in conjunction with today's call. I would also like to mention that this call is being webcast and may be accessed in the investor relations section of our website. I would also like to remind you that remarks made by management during this conference call and the supporting slides may include forward-looking statements.

These statements are based on the current beliefs and expectations of management and actual results may be materially different because of a variety of risks and other factors. We caution investors not to rely unduly on forward-looking statements. Except as may be required by law, Two Harbors does not update forward-looking statements and expressly disclaims any obligation to do so. I will now turn the call over to Bill.

Bill Greenberg -- President and Chief Executive Officer

Thank you Paulina. Good morning, everyone and welcome to our first quarter earnings call. Today, I will go over our quarterly results at a high level and share some thoughts on the market environments, including the meaningful shifts in interest rates during the quarter. Mary will give more details on our financial results as well as our capital structure and financing activities.

And finally, Matt will discuss our portfolio composition, activity and risk profile as well as our outlook. Please turn to Slide 3. At quarter-end, book value was $7.29 per share, representing a negative 2.2% total economic quarterly return. First quarter performance was largely driven by roughly flat portfolio returns with a significant increase in MSR values hedging the decrease in RMBS prices.

Lower coupons underperformed higher coupons. Specified pool performance was mixed as our high coupon securities, where we are mostly positioned, outperformed their hedges. This quarterly performance also includes the impact of the actions we took to optimize our liability and capital structure as execute on our long term strategy. During the quarter, with spreads tightening beyond historic levels and volatility increasing, we reduced our RMBS position somewhat primarily in 2% and 2.5% coupons, given the unattractive risk-reward proposition.

Given these conditions, we expect to maintain a low exposure to mortgage spread risk. Ultimately, we believe the rapid pace of economic recovery will lead to a moderation of fed supports and spread normalization at which time we expect to increase leverage and deploy excess cash into investments at more attractive levels that what are available today. As we mentioned last quarter, the MSR market is healthy with pricing and activity at pre-crisis levels. We continue to benefit from the strong relationships with our originator partners, settling on $21.3 billion UPB in our flow-sale program and adding another $1.1 billion UPB through bulk purchases.

I will reemphasize our view that MSR provides strategic value, both as a hedge to mortgage spread risk and as asset that on its own delivers a low double digit levered return and this is where we expect to continue to deploy capital while keeping spread risk low. In this environment where the short term direction of mortgage spreads remain highly uncertain, we are confident that the agency plus MSR strategy can continue to deliver attractive risk-adjusted returns over time. So with more than a single one quarter in mind, we declared of common stock dividend this quarter of $0.17 per share. As always, we will continue to evaluate the dividend within the context of market conditions and return expectations.

On Slide 4, we highlight some of the noteworthy market dynamics and rate movements during the quarter. A substantially market outlook for the U.S. economy drove interest rates sharply higher with 10-year swap rates rising from 93 basis points to 178 basis points and five-year forward tenure rates climbing all the way to 2.5%. During this period, the mortgage current coupon rose 66 basis points from 1.38% to 2.04%.

Looking at the bottom left chart, the spread between primary and secondary mortgage rates continued to compress to more historical levels, especially over the last two quarters, meaning that the gain on sale process for originators has also come down to more normalized levels and any further increase in interest rates will likely be passed on to borrowers as higher mortgage rates. The chart on the top right shows the distribution by mortgage rate of standing mortgages in the blue bars, which we believe is a good proxy for the agency universe as a whole. At the end of December, roughly 85% of all mortgages had at least 25 basis points of the refinance incentive as shown by the gray circle. With the rise in interest rates and mortgage rates now hovering around 3.17%, the percentage of mortgages that are refinanceable with at least 25 basis points of incentive has declined to about 64% is shown by the green circle in the chart.

Additionally, those 64% of borrowers have, for some reason, not taken advantage of refinancing when rates have been lower so their sensitivity to refinancing is not precisely known. Nevertheless, higher interest rates, higher mortgage rates, tighter primary-secondary spreads and lower numbers of mortgages being refinanceable will inevitably lead to slower prepayment speeds which should be beneficial to our agency plus MSR strategy. Although rates have shifted higher and prepayment expectations have moderated, RMBS valuations continue to be very rich. We acknowledge that there are powerful technical factors at play such as continued roll specialness in the 2.5% coupon and not unrelatedly large-scale purchase demand from the Federal Reserve as well as large banks as those entities added $380 billion and $180 billion of RMBS, respectively in the first quarter alone.

Looking at the chart on the bottom right of Slide 4, the option adjusted spread on an index of agency RMBS currently sits at six basis points as of the end of the quarter. Although you cannot see from the chart, current spread levels are the types they have been since 2006. However, we do not expect these favorable technical forces to last forever. With the virus receding and the economy gaining strength, the federal reserve will one day begin to moderate their asset purchases.

Most market participants expect that the fed taper will occur sometime in early 2022. And Chairman Powell has said that he will be careful to telegraph those intentions to the market well in advance. And so that communication could come this year. Given the pace of economic rebound, it is our view that the risk to that conventional forecast is a shorter time line, not longer.

Furthermore, although fed has been clear that they will wait until they see the results of quickening economic growth, the large banks with all likelihood act sooner to divert capital from investment to making loans. And so a bank taper could occur even sooner. As we discussed on our fourth quarter earnings call, data analysis of historical spreads is just that spreads are typically mean reverting once they reach extreme level. As a result, we view the risk of spread widening to be significantly higher than the likelihood of spread tightening.

With a long term mean of 35 basis points over the last 10 years, spreads have room to materially widen. Without the benefit roll specialness, the fundamentals of owning RMBS are not very attractive today. The spreads being where they are, the hedge adjusted to carry on the asset only leads to mid to high single digit gross returns. Given these rich valuations and higher price volatility that we have seen recently, the investment thesis of buying a rich asset and expecting that the fed and the banks will keep buying at higher prices does not seem sustainable to us.

Indeed, as Matt will discuss later, the total quarterly performance on the TBA coupons that the fed and banks have been buying was essentially zero, meaning that we did not give up any economic performance by being underweighted to those coupons. We intend to be patient and deliberate in executing our strategy. We are continuing to add MSR at attractive levels, which compared with RMBS, keeps our exposure to mortgage spreads low. One benefit of the agency plus MSR strategy is that it allows us to keep exposure to spreads low when spreads are tight and to increase exposure when spreads are attractive.

This is what we intend to do over time. I will now turn the call over to Mary to discuss the details of our financial results.

Mary Riskey -- Chief Financial Officer

Thank you Bill and good morning everyone. Please turn to Slide 5 to review our financial results for the first quarter. Comprehensive income was negative $48.5 million, representing an annualized return on average common equity of negative 9.3% and our book value was $7.29 per share compared to $7.63 at December 31, resulting in a total economic return of negative 2.2%. Book value decline was mainly a function of flat portfolio performance, net of core operating expenses with an increase in MSR valuation offset by the impact of lower RMBS prices.

A higher tax provision and the premium related to the convertible debt repurchase contributed to the overall decline. We recognized a higher tax provision driven by the dramatic increase in the mark-to-market of our MSR assets. As a reminder, a portion of our MSR asset is required to be held in a taxable REIT subsidiary. Although we record tax provisions or tax benefits every quarter, the amount this quarter was more impactful on our results.

Although we focused on limiting our ultimate tax obligations, which have been historically low, GAAP to tax differences can result in current period impact to earnings and book value. Moving on to Slide 6. Core earnings was $0.17 per share compared to $0.30 in Q4. Interest income decreased from $72.5 million to $56.1 million in conjunction with lower asset balances resulting from prepayment and asset sales.

Interest expense rose modestly, due in part to a higher convertible debt balance, reflecting the portion of debt maturing in January 2022, which was not redeemed and also due to increased usage of revolving credit facilities to fund MSR. Gain on other derivative declined from $43.5 million to $18.9 million, driven by lower TBA dollar roll income as we reduced our positions. We also saw a smaller benefit from roll specialness which contribute $0.02 to core earnings, compared to $0.06 in Q4. As we discussed last quarter, we are taking actions to optimize our capital and liability structure.

And as part of that, are adding funding capacity in the form of revolvers for MSR. As we utilize the capacity in these facilities, we expect interest expense to increase once again in the second quarter. While it may not be intuitive to draw up MSR facilities, while we are in a strong cash position, it's important to note that these revolving structures take a significant amount of time to set up compared to standard repo facilities. They are multiyear funding and they typically have minimum use requirements.

It is essential to our MSR strategy that we consider our long term funding needs and long term expectations for portfolio assets and construction and plan ahead accordingly. As a reminder, the liability and capital actions taken this quarter, inclusive of the convertible debt issuance, optimization of MSR financing and redemption of preferred stock, is expected to deliver an annual net benefit of $0.04 per share, beginning in 2022. Turning to the table on the lower right, our portfolio yield in the quarter was relatively flat at 2.25% and our net spread decreased by 11 basis points to 1.65% due to higher cost of funds related to increased convertible debt and MSR financing. Net spread as of March 31, which is what to estimate for the near term, is expected to increase driven primarily by a higher yield due to the lower prepayment expectation and a higher proportion of MSR in the portfolio.

Turning to Slide 7. We continue to maintain a strong liquidity and capital position. Our unrestricted cash balance totaled $1.2 billion at quarter-end. The weighted average maturity of our agency repo positions increased to 100 days as of March 31, reflecting the flat term structure market and the attractiveness of a longer dated repo.

We increased the unused capacity in our MSR asset financing facilities to $392 million with the closing of an additional revolver in the quarter. We also have $180 million in committed capacity for servicing advances, should forbearances or defaults rise as the forbearance programs and foreclosure moratoriums wind down in the future. Finally turning to leverage. Our economic debt-to-equity at quarter-end declined to 6.4 times from 6.8 times at December 31 and our quarterly average economic debt-to-equity was 6.5 times in Q1, compared to $7.5 times in the fourth quarter.

I will now turn the call over to Matt for our markets overview and portfolio update.

Matt Koeppen -- Chief Investment Officer

Thank you Mary and thank you all for joining today. Turning to Slide 8. Let's discuss our quarterly portfolio activity and composition. As Bill noted, volatility picked up in both the rate and mortgage markets, with rates moving sharply higher and mortgages experiencing several bouts of spread widening during the quarter.

If you only looked at the quarter-over-quarter performance of current coupon RMBS, you might assume that it was a quiet period. However that was for from true and I will spend some time discussing the volatility during the quarter shortly. Ultimately, RMBS performance was driven by very strong and continued demand from both the Federal Reserve and the banking industry. As Mary discussed, we continued to decrease balances during the quarter, reflected by lower economic debt-to-equity of 6.4 times.

This was in part from sales and paydowns in our specified pool portfolio where valuations in some stories and coupons had become less attractive. We also reduced our overall TBA exposure from $5.5 billion to $5 billion. Part our TBA activity was rotating into higher coupons and reducing exposure to the 2% coupon, due to both an unattractive valuations and a significant decrease in roll specialness. We continue to source substantial volumes of new MSR assets through our flow program at attractive levels and have largely maintained the size of our portfolio in this fast prepay environment.

Additionally, we opportunistically added around $130 million market value of interest-only securities or IO during the quarter. As we highlighted last quarter, IO positions provide portfolio benefits that are similar to MSR when paired with RMBS in reducing mortgage spread exposure. Moving to Slide 9. I would like to take a moment to provide some color on the positioning in current coupon TBA mortgages in today's environment where, in our view, duration hedged carry no longer provides adequate compensation for elevated risk.

Starting with the upper graph, we show the duration hedged carry in ticks for TBA 2s and 2.5s. Notably, carry on the two coupon has decreased significantly from over six ticks per month to around 2.5 ticks at the end of March, caused mostly by the decreasing roll specialness. The graph on the lower left shows the monthly price volatility of the same instruments, also measured in ticks per month. During the quarter, we witnessed significantly higher spread volatility than observed in the prior two quarters.

Monthly volatility in the two coupon nearly tripled from around 10 ticks to around 28 ticks. Putting these ideas together, investors can risk 28 ticks per month in a one standard deviation move for the opportunity to earn 2.5 ticks per month. The final graph shows this in terms of how many months of carry are at risk. And you can see that for 2s, 11 months of carry are at risk each month assuming they observe first quarter volatility.

This is significantly longer than we typically observe in the mortgage market by a factor of two. With current coupon mortgages at or near all-time tight spreads, we believe the value proposition is quite challenging in the near term. Please turn to Slide 10 as we discuss our specified pool positioning and prepayments. In the lower left hand chart, you can see that performance was a mixed bag with lower coupon specified generally underperforming TBA and higher coupons outperforming somewhat.

In general, the performance across the stack wasn't particularly notable quarter-over-quarter, but as discussed, that doesn't speak to the intra-quarter volatility. Today, with regard to specified pools, we remain positioned largely in loan balance and geography stories. In the lower right-hand chart, we show a comparison by coupon of observed prepayment speeds from pools delivered into TBA contracts to observe prepayment speeds in our specified portfolio. The slower prepayment speeds as compared to deliver TBA pools highlights the reason they command a significant price premium over TBA.

Moving to Slide 11, you can see that our MSR portfolio was valued at $2.1 billion as of March 31, based on $187 billion UPB and with a gross coupon of 3.6%. That translates into a price of about $1.10 or right around a 4.2 multiple. The balances from the end of 2020 are also shown here and I would highlight the significant increase in value during the quarter. As the yield curve steepened with the rise in long term rates, the value of the servicing portfolio increased by over 30% and the multiple increased from 3.2 to 4.2.

Multiple expansion is a natural consequence of rising rate environments as forward interest rates and mortgage rates increase and prepayment expectations slow increasing future cash flow to the servicing strip. We settled $21.3 billion UPB of new MSR through our flow program during the quarter, which was enough to offset runoff in the period. Activity in the bulk market continued the pace and we continue to find valuations to be situational with some packages trading at pre-crisis yields while some are clearing at wider spreads. Around 50 billion UPB in bulk transactions came to market during the quarter, which is a fairly average volume and we committed to purchasing $13 billion UPB year-to-date.

In the lower right-hand chart, we compare our servicing prepayment speeds in blue versus TBA collateral in gray. Currently a majority of the underlying loans in our servicing portfolio have some form of seasoning or prepayment protection which is why our speeds are somewhat slower than the through the box speeds. Over the next two slides, we display our effective coupon positioning and risk profile. In the chart on the top of Slide 12, we show the combined exposures of agency P&I bonds, MSR and IO as of March 31, as compared to our positioning at the end of 2020, as indicated by the diamond bullets.

There are two main differences. One is the significant reduction in exposure to the 2% coupon, as discussed earlier, while increasing exposure to the 2.5% and 3% coupon in TBA. The second item of interest is that the current coupon equivalents displayed on the middle chart shifted up from the 1.5% and 2% coupons to become mostly concentrated in the 2.5% coupon. On net, you can see that we are slightly short the current coupons, while maintaining long positions in the 3% coupons and up.

The lower left hand chart shows our common book value exposure to 25 basis point spread widening or tightening and it indicates that book value would decreased by 4.2% in an instantaneous 25 basis point spread widening.4.2% represents an increase in exposure from the prior quarter despite our reduction in specified pools and TBA. It is due to the extension in mortgage durations that comes along with higher rates and steeper curves. We still believe that this is a low and manageable risk and it's certainly lower than the book value risk that would accompany an RMBS portfolio without the presence of MSR. Moving to Slide 13, here we see our interest rate and curve exposure.

Both are low and in line with our historical positioning. I would call out again that the agency plus MSR strategy provides significant interest rate offsets, which you can see by comparing the gray bars to the blue bars in both charts. Finally, I would like to take a look at our outlook for Two Harbors and our return expectations for new investments on Slide 14. Working from the bottom up, we believe gross returns for specified RMBS paired with swaps are less attractive than they were and expect returns to be in the range of mid to high single digits, depending on coupon and story.

TBA returns in the 2.5% coupon are enhanced by roll specialness which is likely to continue for the near future, albeit at less attractive levels. New investments in flow MSR paired with RMBS today can also drive returns in the high single digits or low teens. And if you assume role specialness on the RMBS component, it can be even higher. As Bill mentioned, we are focusing our efforts on adding new servicing paired with RMBS.

We continue to focus on our strong partnerships with MSR sellers and internal platform, which gives us the ability to source significant volumes. RMBS valuations are rich and the near term technical of fed and bank demand are formidable. Nevertheless, it is our expectation that we are near to the end of QV4 than the beginning and our portfolio as well constructed for eventual future mortgage spread widening. Our cash position is strong and we look forward to the normalization of the mortgage spreads and the opportunity to deploy that cash into more attractive spreads.

Despite this quarter's challenges, we continue to believe that longer term returns are attractive for our agency plus MSR portfolio construction. And now I will turn it back to Bill.

Bill Greenberg -- President and Chief Executive Officer

Thanks for that discussion, Matt. We continue to be excited about our unique portfolio construction and the benefits that MSR brings to the paired agency plus MSR strategy. In particular, with agency mortgages having reached decade low tight spreads, we think that our portfolio with low exposure to widening mortgage spreads is especially attractive. Thank you very much for joining us today and we will now be happy to take any questions you might have.

Questions & Answers:


Operator

[Operator instructions]. Our first question today comes from Doug Harter.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Just to probably get some clarity, Matt, on what you were just talking about, continuing to look to pair to pool agency with MSR. Does that mean that as you continue to grow servicing, you would look to kind of add that to the agency portfolio? Or are you kind of waiting for other opportunities there, just given the growth in servicing portfolio as well?

Matt Koeppen -- Chief Investment Officer

Yes. Good morning Doug. Thanks for that question and thanks for joining today. I think the answer is largely yes actually.

So we are very focused, like you said, on adding to the servicing assets. I think there's reasons to believe that that will see increased flows here in the coming months, given the shift higher in rates. So I would think there would be more for sale and we would see increased bulk sale. And with respect to how we would hedge it, I think at the moment, we would likely hedge it with TBAs, probably TBAs, 2.5% in particular, given the attractive roll specialness that still exists there.

And that would, as you know, that paired construction will continue to keep our mortgage spread duration low in aggregate, but with interesting income into the portfolio.

Doug Harter -- Credit Suisse -- Analyst

OK. And then just on the margin, as you talked about that, the margin today is higher than the core average. Can you just talk about what are the assumptions that go into the prepaids for that quarter-end margin versus what you are currently experiencing on prepaids?

Bill Greenberg -- President and Chief Executive Officer

I am sorry, Doug, I am not following. Which margin are you referring to exactly?

Doug Harter -- Credit Suisse -- Analyst

The net interest margin the ticks? Or the net interest spread, sorry, where you show the 1.94% spread as of March 31 versus 1.65 realized?

Bill Greenberg -- President and Chief Executive Officer

Yes. Mary, do you want to maybe take that one?

Mary Riskey -- Chief Financial Officer

Sure. I mean the asset yields as of March 31, which of course is based on a static portfolio, we do expect yields to go up and that is primarily due to lower prepayment assumptions and a greater proportion of MSR in the portfolio. Are you asking specifically what the prepayment assumptions are?

Doug Harter -- Credit Suisse -- Analyst

I guess just curious if that's using prepay speeds that you are currently seeing? Or if that is based prepay speeds declining further from here like using lifetime assumption? I am just trying to understand, if that higher yield is going to come through in 2Q or if it's going to take longer to achieve?

Mary Riskey -- Chief Financial Officer

Yes. I misheard this. Go ahead, Matt.

Matt Koeppen -- Chief Investment Officer

I was going to say that that does include that, that deal does include expected future prepayment speeds and we expect that, right. So the increase in rates hasn't quite made its way through into prepayment speed but it will in Q2. We expect to see, from April coming through this month to be down 20%, say 15% from the months following. And that's all from the rate effect.

And that is what it is embedded into the yield assumptions that you see in that calculation.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you.

Operator

The next question comes from Rick Shane.

Charlie Arestia -- JPMorgan Chase & Co. -- Analyst

Hi. Good morning guys. This is Charlie, on for Rick today. Thanks for taking the questions.

First, I was wondering if we could just get an update on where book value has trended through I guess the end of April? And then kind of more broadly had a question on sourcing MSRs going forward? As you mentioned, you have continued to grow that portfolio even in a pretty fast prepayment environment. As we look ahead and consider the possibility of rising rates and slower prepayments, I am wondering if the way that you source MSRs is going to change in any way? Or I guess, said, differently, how should we think about the mix between flow arrangements which I assume is a big part of kind of replacing that runoff and also the bulk purchases as prepayments begin to slow down and that environment changes? It seems like you have kind of already laid the foundation here with the additional capacity. But just curious to think about how that rate of change might evolve over time and if growth can really accelerate from here?

Matt Koeppen -- Chief Investment Officer

Sure. I will start with that one, Charlie. Thanks for the question and I will hand it off to Bill for the second part. But in terms of April, we haven't quite closed the books altogether on April.

But at the moment, we are estimating a total return through the end of the month, of about down 1%. And I will let Bill comment on MSR sourcing.

Bill Greenberg -- President and Chief Executive Officer

Yes. Thanks Matt and thanks for the question, Charlie. Good to have you on the call today. You are 100% right that a lot of our MSR acquisitions in recent months have come from our flow channels and relationships as a result the fast prepaids and fast current production.

As rates rise, we do expect that to decline. But we do also expect the number of and volume of bulk packages available in the market to increase to offset that. This is something that you often see when rates rise and origination profit declines that many small and midsize originators need to or want to sell servicing in order to generate cash to fund their businesses. And so that's a dynamic that we think is in play and we think our platform is really well suited to switch opportunistically between an acquisition channel of flow and bulk as market conditions change.

And so we feel pretty good about our ability to be able to continue to source the amount of servicing that we like.

Charlie Arestia -- JPMorgan Chase & Co. -- Analyst

Makes sense. Thanks so much guys. I appreciate the color.

Bill Greenberg -- President and Chief Executive Officer

Thank you.

Operator

We can now move on to Bose George.

Bose George -- KBW -- Analyst

Hi. Good morning. Actually, just to follow-up on the last question. Did you just give the book value update as being down 1% quarter-to-date? And then just when you think about it, OK, thanks.

And then just the positioning on the book, I guess it's safe to say, spreads don't tighten from here. Your book values probably has limited downside and the positioning is, if spreads widened, then that's where you kind of sense you outperform?

Bill Greenberg -- President and Chief Executive Officer

Yes. I would say, in general, at the moment as Matt discussed in his in his prepared remarks, we are currently keeping our mortgage spread low in general, right. And so I would expect that that no matter what spreads do here at the moment, we would have low book value volatility as a result of mortgage spreads. One of the nice things about and I think we said this in the prepared remarks also, one of the nice things about the strategy is the presence of MSR in the portfolio allows us to flex the amount of mortgage spread risk that we have so that when spreads are tight, like they are today, we can keep our mortgage spreads very low.

And when spreads become more attractive, which we believe they will in the future one day, we can increase that somewhat and still have a low mortgage rate compared to a portfolio without MSR but greater than we do today in order to take advantage of those more attractive mortgage spreads.

Bose George -- KBW -- Analyst

OK. Great. Thanks. And then actually can you just remind us why some of the MSR needs to be held in a TRS? And does that change the return profile?

Bill Greenberg -- President and Chief Executive Officer

I will let Mary take that one.

Mary Riskey -- Chief Financial Officer

Sure. Good morning Bose.

Bose George -- KBW -- Analyst

Good morning.

Bill Greenberg -- President and Chief Executive Officer

So we purchased our MSR into our servicing entity which is a taxable REIT subsidiary. That's the name serviced there with the GSCs. And then they kind of dictate how much they allow the excess servicing to be sold into the REIT. So both Freddie and Fannie have required amounts that need to be held in the actual servicing entity which is the taxable REIT subsidiary.

Bose George -- KBW -- Analyst

OK. Great. That makes sense. Thanks.

Operator

We can go to Eric Hagen.

Eric Hagen -- BTIG -- Analyst

Hi. Thanks. Good morning. How are you guys? So you got the MSR which note is essentially equivalent to being short lower coup TBAs which I think seems to make sense.

And you are also long some lower coupon TBAs at quarter-end which I think you noted aren't really as attractive from a carry standpoint anymore. Can you may just discuss what your footprint looks like there now? And if you are still long with these coupons, why you are picking up by being long when you basically short the MSR? Go long the MSR, short the TBA.

Matt Koeppen -- Chief Investment Officer

Thanks for the question, Eric. So when we were talking about the position rotation, we are mostly talking about their 2% coupon. That was the one that really in particular had much less attractive hedges up to carry. And so we will [indiscernible] quite a bit during the quarter.

The 2.5% coupon actually still is rolling pretty special. I think that dynamic could last with that coupon for some time. Recently, it's rolls have cleared in the 40 basis points, negative 40 basis points range or so, so that's 50 to 55 through repo finding which is still pretty attractive. And so like we said earlier, I can see us adding to that position against new servicing purchases as we go forward here.

Eric Hagen -- BTIG -- Analyst

Got it. Thank you for clarifying that. And then the swap portfolio looks like it has pretty short duration. I think that also makes sense.

Pay downs are still elevated for specified pools. And the MSR duration, I think, is at the longer end of the curve. But how do you think about beating up the swap portfolio if rates pick up a little further? Do you think about just delivering a little bit more?

Matt Koeppen -- Chief Investment Officer

Well, I think I mean our swap portfolio pretty small in general, I would say. Some direction heading on the short side in the front-end and we need to be a longer duration in the longer end. You can see that on Slide 13 actually of the presentations that most of the rate exposure is handled by the servicing asset. And the swap book is quite small.

As you know, we intend to keep a very tight leash on duration and curve. So I think we would expect to see that going forward as well.

Bill Greenberg -- President and Chief Executive Officer

I can add a little bit more color to that, Eric, if I can. As Matt said, on Page 13, the parallel shift duration, as you see them in the lower left chart, is largely offset between MSR and RMBS. But if you look at what the curve exposure is, when you pair those two, it's generally a curve steepener. And Matt said this that most of swap book is receiving in the long end in order to offset that.

But the natural position of the paired construction is to have a curve steepener on. And so our hedges are mostly mean to offset that.

Eric Hagen -- BTIG -- Analyst

Got it. Thank you very much. Thank you.

Operator

[Operator instructions]. Our next question comes from at Trevor Cranston.

Trevor Cranston -- JMP Securities -- Analyst

Hi. Thanks. A question on prepays. They are related to the slide you guys showed with the percentage of the market that's refinanceable.

And I think you made the point that it's still something like 60% but there's a lot of borrowers who, for whatever reason, haven't refinanced so far. So I was curious to get your thoughts on the program the FHFA announced last week to try and help lower income borrowers have more access to refinancing. How impactful do you think that could be to prepay speeds in the spec pool market? And if you think there's a risk that more programs like that come out over the course of the year? Thanks.

Matt Koeppen -- Chief Investment Officer

Sure. That's a good question, Trevor. Thanks for that one. I will take a stab at it.

I think that's just really a new announcement came out last week. So I think we know our process all the impact from it. But as we mentioned, the idea of course is that low income borrowers haven't been able to take advantage of low mortgage rates here. So a couple things I could say is that I think early estimates are that it could affect, say, I don't know, 10% to 20% of GSC borrowers.

I think we would expect that impact to be fairly small for lower coupon RMBS, right. Maybe some impact of an additional CPR for some period of time. Could be more impactful for higher coupons, right, like we could maybe estimate it as being as much as five CPR increase for some time period. But that would require a very high implementation and a very high pull-through rate.

Still, it remains to be seen how aggressively it's sort of pushed through the originator community and also how it's received by borrowers.

Trevor Cranston -- JMP Securities -- Analyst

OK. Got it. That makes sense. Thanks for the comments.

Operator

Thank you. As there are no further questions, I would like to hand the call over to Bill for any additional or closing remarks.

Bill Greenberg -- President and Chief Executive Officer

I want to thank everyone for joining us today and thank you as always for your support of Two Harbors.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Paulina Sims -- Senior Director of Investor Relations

Bill Greenberg -- President and Chief Executive Officer

Mary Riskey -- Chief Financial Officer

Matt Koeppen -- Chief Investment Officer

Doug Harter -- Credit Suisse -- Analyst

Charlie Arestia -- JPMorgan Chase & Co. -- Analyst

Bose George -- KBW -- Analyst

Eric Hagen -- BTIG -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

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