- 1 day ago
In this episode of Powerhouse, Diego Sanchez interviews David Finkelstein, CEO of Annaly Capital Management. They discuss the company's position as a leading mortgage real estate investment trust (REIT), its growth strategy, and the importance of subservicing partnerships. David shares insights on the current mortgage rate environment, the challenges faced by the Federal Reserve, and the future outlook for the housing market.
Here’s a glimpse of what you’ll learn:
Annaly Capital Management is the largest mortgage REIT.
The company has $15 billion in permanent capital allocated to housing.
Annaly's portfolio consists of $100 billion in assets.
The focus is on managing interest rate and prepayment risk.
Partnerships with subservicers create operational efficiencies.
The company is targeting a 20% leverage for its MSR portfolio.
Mortgage rates are expected to remain in a stable range.
The Federal Reserve faces challenges with inflation and employment.
Annaly aims to grow its Rezzi and MSR portfolios significantly.
Technology and data analytics are crucial for future growth.
Related to this episode:
David Finkelstein LinkedIn
https://www.linkedin.com/in/davidlfinkelstein/
Annaly
https://www.annaly.com/
HousingWire Youtube
https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q
The Power House podcast brings the biggest names in housing to answer hard-hitting questions about industry trends, operational and growth strategy, and leadership. Join HousingWire president Diego Sanchez every Thursday morning for candid conversations with industry leaders to learn how they’re differentiating themselves from the competition. Hosted and produced by the HousingWire Content Studio.
Here’s a glimpse of what you’ll learn:
Annaly Capital Management is the largest mortgage REIT.
The company has $15 billion in permanent capital allocated to housing.
Annaly's portfolio consists of $100 billion in assets.
The focus is on managing interest rate and prepayment risk.
Partnerships with subservicers create operational efficiencies.
The company is targeting a 20% leverage for its MSR portfolio.
Mortgage rates are expected to remain in a stable range.
The Federal Reserve faces challenges with inflation and employment.
Annaly aims to grow its Rezzi and MSR portfolios significantly.
Technology and data analytics are crucial for future growth.
Related to this episode:
David Finkelstein LinkedIn
https://www.linkedin.com/in/davidlfinkelstein/
Annaly
https://www.annaly.com/
HousingWire Youtube
https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q
The Power House podcast brings the biggest names in housing to answer hard-hitting questions about industry trends, operational and growth strategy, and leadership. Join HousingWire president Diego Sanchez every Thursday morning for candid conversations with industry leaders to learn how they’re differentiating themselves from the competition. Hosted and produced by the HousingWire Content Studio.
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NewsTranscript
00:00Welcome to Powerhouse, where we interview the biggest names in housing and ask them
00:12about their strategy for growth. I'm Diego Sanchez, president of Housing Wire, and my
00:17guest today is a special one. It's David Finkelstein, CEO of Analy Capital Management. David, it's
00:24so great to have you on the show.
00:25Well, thank you, Diego. It's a pleasure to be here today on Powerhouse.
00:30David, the first question is a simple one. What is Analy Capital Management?
00:35So Analy is a mortgage real estate investment trust. We're the largest of the mortgage REITs.
00:40We have $15 billion in permanent capital allocated exclusively to housing finance. Our portfolio
00:47is roughly $100 billion in assets, which consists of $87 billion in agency MBS, $7 billion in
00:54resi credit, and $3.5 billion in mortgage servicing rights. Now, agency MBS has historically
00:59been the mothership of the platform. And our evolution into resi credit and MSR actually
01:06began in 2016, primarily through the acquisition of a firm called Hatteras Financial, which is
01:13another mortgage REIT. And with that acquisition came our Onslow Bay platform, which a lot of
01:19folks in the market know the OBX shelf. And also Pingora Loan Servicing and the MSR portfolio
01:26accumulated by Pingora. Now, more specifically with respect to MSR, at that time, we very much
01:35liked the MSR asset and even launched a joint venture with Sovereign Wealth Fund to grow our
01:40MSR holdings. But we ultimately decided to sell the service or entity to Bayview, but continued
01:46to acquire MSR through our JV. Now, in 2020, coincident with my elevation to CEO, we wanted to expand
01:56our footprint in MSR, but do it on our balance sheet directly. And thus, we initiated the operational
02:04build out of our MSR platform with purchases beginning in 2021. And this really accelerated in 2022 as rates
02:13began to increase. And the originator community sought the liquidity of a large capital partner
02:20like Annaly. And where we sit today is that all three housing finance businesses are fully scaled
02:28and have been for the past few years. And returns have been strong. We've generated an average annual
02:35return of approximately 13% over the past three years as of the end of the third quarter. So we're
02:44very happy with our progress, Diego. And what are your continued ambitions with respect to MSRs? Are you
02:54going to keep building a book or how does that look for you? Well, look, Diego, from a big picture
03:00standpoint, Annaly is an industry leader with respect to managing interest rate and prepayment risk.
03:07And we're the only scaled MSR investor who began as an agency MBS investor with a focus on specified
03:15pools. And the time-tested analytics we utilize to evaluate loan-level characteristics in MBS are the
03:23same tools used in MSR. So there's considerable synergies with the agency portfolio, not to mention
03:31the natural hedge of just interest rate risk management. And all of our rate and convexity risk
03:39is managed by one team, which is a powerful differentiator. And MSR enables us to further
03:45deploy our market risk management infrastructure. Now, there's many scaled industry participants
03:53who have created competitive advantages through efficient management of origination and servicing
03:59operations. And we've found that partnerships with these entities create alpha for both parties.
04:07And as technology and the use of big data evolves, we're highly encouraged by the value servicing
04:14customers can have for a servicer. So beyond cross-sell and second liens, this can include insurance,
04:22other forms of borrowing, and even wealth management. Now, as far as portfolio size,
04:29we've been very public about targeting 20% of capital with one full term of leverage for MSR holdings.
04:37Currently, we hold roughly $230 billion in unpaid principal balance in MSR, or about $3.5 billion in
04:44market value, as I said. So at 20% with the term of leverage, we can grow to roughly $400 billion
04:51in UPB or about $6 billion in market value. Now, a key to our scale, however, is that we can own a very large
05:01portfolio of MSR without the MSR owning us, given the fact that it's 20% of capital and it doesn't dominate
05:09the overall portfolio activity. So we feel like that's about the appropriate scale for us.
05:15So room to grow. But also, MSR valuations are pretty high right now. Do you continue to acquire
05:24with MSRs as high in terms of valuation as they've been this year?
05:30Look, MSR multiples have expanded, to your point, but we don't see MSR valuations as being materially
05:38higher than they were at the start of the year. So fundamentally, prepayment speeds are relatively low.
05:45The yield curve is steeper and volatility has declined. Also, low delinquency rates in conventional
05:52loans lower the servicing burden associated with owning MSR. And servicing costs are declining as
06:00AI and new technologies are rapidly adopted. And increased comfort in relying on recapture and
06:09cross-sell revenues also enables us to justify additional purchases of MSR. And so I understand
06:17that multiples have expanded, but the fundamentals of MSR still look very reasonable to us on a
06:23prospective basis.
06:24All right. You mentioned partnerships as your way to service these MSRs that you're acquiring
06:34and the book that you're building. And about a year ago, you entered a subservicing partnership
06:40with Rocket. How is that partnership going?
06:44Precisely as planned, both with respect to our borrowers in the management of our MSR asset. Now,
06:52as it relates to borrowers, they're getting the best customer service experience possible,
06:57as we've observed. And as it relates to the asset, we're able to obtain industry-leading recapture
07:04on our MSR. And also to note, we're quite enthusiastic about the Rocket-Cooper combination,
07:12as Mr. Cooper was an existing subservice of ours. And we can now have the best of both companies
07:21applied to our portfolios, which are serviced there.
07:25Now, interesting combination with Rocket and Cooper, consolidating some of your subservicing
07:33into one partnership. But just last month, you entered a similar subservicing partnership
07:39with PennyMac. Is this a little bit of you spreading your eggs across several baskets?
07:44Well, diversification was certainly a motivator and a benefit, but not the driving force
07:52behind the initiative. So PennyMac is a very experienced and successful operation
07:57with differentiated servicing and recaptured technology that we're candidly quite excited
08:04to have access to. And that was the motivation.
08:07And do you think you'll enter more subservicing partnerships as you grow this MSR portfolio?
08:14It sounds like you have some dry powder to keep growing your book.
08:18Well, we do have additional subservicing partners beyond what we just discussed.
08:23And an important point to note is that the recapture partner doesn't have to be the subservicing
08:30partner. For example, we have subservicing relationships where we plug an independent
08:36recapture partner into that relationship and kind of get the best recapture with high-quality
08:43servicing as well. So we're pretty adaptable to what the market offers in terms of the ability to acquire
08:52subservicing and recapture. And we're going to be very nimble about it. And we do dedicate substantial time
08:58and resources to exploring partnerships and business development, which will continue as pricing
09:05competition persists. And a broad subservicing network gives us a great lens into the latest technologies
09:15and strategies. And also, the process is useful for evaluating existing partners and assessing the
09:25benefits and trade-offs of potentially bringing various operational capabilities in-house.
09:31So most of the big servicers, we've talked about Rocket, combining with Cooper, there's several other
09:40servicers that are building very sizable books of MSRs. Almost all of them are investing in technology and
09:51deploying technology to originate from their book. How do you think about recapture with respect to your
09:59subservicing partnership strategy? Sure. Well, recapture and expectations for cross-sell in the future
10:05have become a material component of MSR valuations. And it's critical that if we're going to participate
10:14in the MSR market at current valuations, that we extract these cash flows. And through partnerships
10:19with industry leaders, we're able to accomplish this without incurring execution risk, fixed costs,
10:27or significant operating leverage. So it's critical, Diego.
10:32Yeah, that makes sense. So let's talk about mortgage rates and housing market data. Mortgage rates have been
10:40really locked in a range of 6.2% to 7.2% this year. Do you see rates breaking out of this range anytime soon?
10:52Well, there's considerable uncertainty around the rates landscape, which is why we are currently hedging
10:59the vast majority of our rate exposure in this environment, Diego. Now, specifically with respect
11:04to your question, we are at the lower end of that range in mortgage rates you cited. And as far as
11:12breaking out, it's not our view at all that we'll retrace back through 7% in this cycle at all.
11:20But I would characterize the range to be somewhat symmetrical around the low sixes in mortgage rate.
11:27Obviously, the Fed is cutting, but expectations are well priced into the forward curve. And intermediate
11:35to longer term rates are not priced to decline much further from here, if at all. And thus,
11:43the probability of the mortgage rate going materially lower from here is somewhat low in the absence of
11:51a negative shock to employment and economic growth. But it's also difficult to see a strong catalyst for
11:58back to north of 7% mortgage rates. And so I think we're in a new range here, and we probably will break
12:05through 6% at some point. But there is some probability of climbing modestly higher. And we're
12:12in the unfortunate circumstance of a shutdown where we don't have a lot of data. But nonetheless, there is
12:18enough information out there to give us some level or some sense of the rates market. And we use every
12:24tool we can find.
12:26Yeah, I mean, it sounds like you're saying sort of five and a half to 5.75 up to 6.5 is kind of the
12:35range that you're betting on.
12:37That's about where I would characterize the range to be.
12:40In light of this, in light of your view on this, this range of mortgage rates, and the overall picture
12:46for the for the housing market, will Annalie's investment strategy change in 2026?
12:51Well, it's market dependent, obviously, but we have said publicly that our intention is to grow
12:59our resi and MSR portfolios to a combined 50% of capital, 30% resi and the 20% levered MSR I
13:08referenced earlier. So that is a longer term objective, but we'll be very patient in that
13:14pursuit. And if the market doesn't offer it over the near term, our current strategy of modestly
13:20overweight agency MBS is perfectly sufficient for this investment climate, which has been
13:27characterized by declining volatility and robust demand for fixed income, driven partially by the
13:33Fed's cutting cycle.
13:35You have a really interesting background that includes time at the Federal Reserve Bank of
13:40New York. How do you think the Fed is doing navigating their dual mandate in this really tricky
13:49economy? Sure. So the Fed has a very difficult task, given that we're on the wrong side of both of their
13:55mandates, inflation and employment. We've seen inflation forecasts accelerate largely in light of tariffs and
14:02somewhat stubborn services inflation as shelter. And also the labor market is clearly weakening. Oh, and by the
14:09way, the shutdown complicates the picture further for obvious reasons. You have some FOMC members that are more
14:16concerned about inflation and others more worried about the employment picture. It's almost evenly split, in fact.
14:25Now, policy rates remain restrictive, and so the desirable direction is lower rates. But like Chair Powell said in the
14:33last press conference, when there's fog on the road, you have to proceed slower and with more caution. And that's what we
14:41expect going forward, which is perfectly appropriate. So to answer your question, Diego, monetary policy is a very
14:49tough business right now. I know many of these policymakers, and they're very quick to acknowledge the challenges
14:56in this environment. And overall, I think they're doing an admirable job, particularly in light of the politics of the
15:04day. David, I really enjoyed learning more about NLE Capital Management today. Thank you so much for joining me on
15:13Powerhouse. Well, thank you, Diego. It's been a pleasure to be here with you on Powerhouse, and I'll look forward to seeing you soon.
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