Redwood Trust Inc (RWT) Q3 2021 Earnings Call Transcript

Good afternoon and welcome to the Redwood Trust, Inc. Third Quarter 2021 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Lisa Hartman, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone and thank you for joining us. With me on today's call are Chris Abate, Redwood's Chief Executive Officer; Dash Robinson, Redwood's President; and Brooke Carillo, Redwood's Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentation with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and could cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is provided in our third quarter Redwood review available on our website at redwoodtrust.com. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today. The company does not intend and undertakes no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on the company's website later today. I will now turn the call over to Chris Abate, Redwood's Chief Executive Officer, for opening remarks.

Thank you, Lisa, and good afternoon everyone. After a strong first half of the year, our team continued on our path towards transformative growth. After having communicated an ambitious second half of 2021 forecast, our third quarter results still managed to exceed our expectations. The entire organization has been energized to see the durability of our business model as we produce strong financial results and risk-adjusted portfolio returns. Our GAAP earnings were $0.65 per diluted share for the third quarter, and our GAAP book value increased 4.7% in the quarter to $12 per share at September 30. This contributes to an overall year-to-date increase in our GAAP book value of 21%, despite having raised our dividend each quarter of the year thus far. When combined, our GAAP book value growth and dividends paid have resulted in a 27% economic return to shareholders year-to-date. Operationally speaking, you'll hear more from Dash and Brooke on our third quarter results. But suffice to say it was a very strong quarter, with several in-house records broken. I'm particularly proud of a series of strategic and innovative transactions across our firm that were both accretive to earnings and foundational for future operating progress. This included the first private label RMBS securitization to leverage blockchain technology, completed in collaboration with Liquid Mortgage, an early Horizons investment partner. We also completed our first ever bridge loan securitization through our BPL platform, which provides a meaningful new distribution alternative to us. Next, our investment portfolio team co-sponsored the first ever securitization backed entirely by residential home equity investments. And finally, these deals were rounded out by six new venture investments by RWT Horizons in the third quarter. I'm also pleased that after following strict health and safety protocols, we were able to successfully host our third investor day in September, the first since the onset of the pandemic. During the event, we affirmed our commitment to our corporate mission to make quality housing, whether rented or owned, accessible to all American households. We also unveiled a much bolder strategic vision to become the leading operator and strategic capital provider driving sustainable innovation in housing finance. As we showed in New York, opportunities for transformative scale are clear and now attainable based on the strategic progress we've made in recent years. Our vision is built upon an immense multi-trillion-dollar addressable market that transcends the traditional mortgage lending space. Thanks to innovations in technology, there are now multiple ways for us to leverage our long-developed and highly regarded expertise in housing credit. We're already attacking antiquated processes in our markets with technology-enabled solutions, and over time we plan to completely reimagine other non-agency housing finance market workflows. Across the Redwood enterprise, we've cultivated a talented and engaged workforce that, as you might expect, believes in our mission and is inspired to innovate and help us realize our strategic vision and goals. Thanks to a lot of hard work over the past year, our platform is now beginning to command the attention of an industry where the status quo has not only been accepted, but also embraced by most. Our role is not a typical one for a REIT, much less one of the longest-tenured publicly traded REITs in the country. But that should not come as a surprise as we've never defined our business by way of a federal tax election. Those who do risk missing the growth potential of our platform, particularly as we continue to analyze our optimal long-term corporate structure. Rounding the bend toward the end of the year, we remain very optimistic about our business. But we are proceeding cautiously. We see several macro market risks ahead: COVID-19 variants, rising inflation, central bank tapering and the federal debt ceiling debate, to name a few. More fundamentally, recent trends in unemployment claims suggest that we're still in a recovery phase and the current economic situation is far from stable, notwithstanding the consistent upward pressure on home prices and rents that we've all observed in recent quarters. Our interest rate, capital and broader risk management posture reflects this view. While we've generated strong earnings thus far this year, we've done so with record amounts of cash on hand, putting $557 million at September 30. Going forward, our stakeholders should expect that we will continue to work to fulfill our broadly conceived mission, focused on the significant addressable market in front of us and run a business grounded in fundamentals and sound analysis. All while nurturing a diverse and talented team who are engaged and aligned with our values. Thank you again for joining us today. And I'll turn the call over to Dash Robinson, Redwood's President, to discuss our operating results.

Thank you, Chris. And good afternoon, everyone. As Chris described, the third quarter was another prolific one across our platform with increases in purchase and origination volumes complemented by innovative work across technology and capital markets. Our teams are operating at a highly productive and sustainable level as the foundation we have laid drives efficiency gains, and demand for our products remains robust. Notwithstanding the recent uptick in benchmark rates, excess capital in the markets is still in search of yield. We remain the partner of choice for whole loan and securities investors alike and continue to expand our distribution channels, accretive to our capital efficiency and bottom line. Our third quarter results reflect continued execution of the strategic goals we laid out at the beginning of the year. As Chris referenced, we are seeing meaningful progress in a number of the initiatives that we presented at our recent investor day, both organically and through new investments and partnerships already bearing fruit. In this vein, we strive to innovate daily in addressing the issues facing the housing market, but also look to take advantage of our strategic positioning in the markets we serve to continue to grow profitably and sustainably. Our progress also underscores important realities about housing affordability and accessibility themes we focused on at investor day. Housing finance needs more creative solutions driven by technology, a common-sense approach to underwriting and, most importantly, leadership in bringing market constituents together in pursuit of common goals. During the third quarter, we took important steps in this direction. Our results reinforced this broader backdrop and the opportunity across our platforms to continue serving growing areas in housing. And the recent path of home prices, coupled with the evolution in consumer demand and important trends in industry regulation, has created ample room for other creative solutions to help consumers monetize equity in their homes. Our third quarter results represent another step in the path towards transformative growth that we laid out at investor day, with our core operating businesses leading the way and notable strategic progress across the enterprise. The durability and diversification of our business model, coupled with our crisp execution and technological innovation, puts us in a unique position to drive change that benefits all stakeholders. With this in mind, it's important to unpack the key drivers of profitability across our platforms. Our residential business continued executing in the third quarter and we believe is well positioned heading into year end. Facing several market headwinds, including renewed inflation fears and meaningful rate volatility, the team drove margins and volumes higher and once again broke new ground in our Sequoia securitization program. We generated a record $4.7 billion of lock volume during the quarter, making quick work of our prior record of $4.6 billion two quarters earlier. Overall locks were up 22% versus the second quarter, 59% of which were on purchase-money loans. An important statement about the quality of our pipeline and our sellers, given benchmark rates during the quarter hit lows not seen since February. The volume of Choice locks remained steady versus the second quarter, and though current mortgage rates are approximately 30 basis points higher versus the lows of Q3, it is a helpful reminder that we have locked Choice loans with over 100 different sellers thus far this year—important groundwork that we believe will bear fruit as we head into next year. The depth of our distribution channels was another highlight during the quarter as we sold $2.4 billion of loans alongside our securitization activities. RMBS issuance remained elevated in the third quarter with September a particularly crowded month. As expected during any substantial uptick in supply, we witnessed more noticeable price tearing from investors across transactions—differentiation that we once again benefited from during the quarter. Our third quarter Sequoia 2021-6 issuance was $449 million in size and executed well inside competing transactions marketed during a similar period. At the time of securitization, the loans underpinning the deal were on average just one month old, compared to three to four months for our competitors, a testament to our efficiency in turning inventory. A key hallmark of the transaction was the first-of-its-kind use of blockchain-based technology within private label RMBS for enhanced remittance reporting for bond investors. Liquid Mortgage, an early partner through Redwood Horizons, is acting as distributed ledger agent, or DLA, on the transaction providing an added and more real-time remittance reporting option for investors who choose to leverage it. Liquid Mortgage has integrated with Redwood's sub-servicer to receive payment information that will be published on the blockchain daily. This is a significant first step towards applying technological advancements and transparency to an area of the mortgage industry that has historically been less advanced. We are excited to be leading the market in this effort and expect to implement this enhanced functionality going forward. In fact, Liquid Mortgage is also acting as DLA on our most recent Sequoia securitization, which closed in October and is backed by $407 million of jumbo residential loans. Leveraging technology remains a major organizational focus and we continue to achieve milestones on our organic technology roadmap. Rapid Funding, through which we provide accelerated settlement timelines for sellers, recently eclipsed $1 billion in purchases since program inception one year ago. Our Redwood Live app has also gained significant traction recently, and we expect seller adoption to increase and allow us to continue growing wallet share with our seller base. The third quarter was also another high point for our CoreVest business, our purpose lending platform. The third quarter's $639 million in fundings were the highest since late 2019 and reflected a consistent balance between single-family rental and bridge. SFR fundings totaled $394 million, up 26% from the second quarter—production that positioned us to price in an SFR securitization in early October, backed by approximately $304 million in loans and CoreVest's 19th securitization overall. CoreVest continues to deepen its operational moat, and during the third quarter, we achieved a key capital markets milestone as well when completing our inaugural transaction backed by bridge loans. CoreVest has long been an industry-leading bridge lender and we expect structures like this to further drive our competitive advantage. The transaction creates $300 million of financing capacity off of which we sold liabilities representing 90% of the capital structure, securing additional leverage on a non-recourse non-marketable basis at a cost of funds of less than 2.5% on the issued bonds. Importantly, the transaction was structured with a 30-month reinvestment period for loan payoffs, the longest of its kind to date for this type of transaction, making it another important liquidity management tool for the business as we expand originations. Operating momentum in the bridge business means we will likely use these types of structures and others going forward as third quarter fundings totaled $245 million, an increase of 14% from the second quarter. As competition ramps up across the BPL market, product development remains a key priority. We continue to expand our channels in BPL through a combination of direct lending and sourcing loans from third-party originators. To that end, during the third quarter, we made key progress in our correspondent loan business and further capitalized on our strategic investment in Churchill. Our technology initiatives also continued to advance in the quarter, furthering this expansion. We launched an initial release of our refreshed client portal with strong initial feedback and remain focused on creating more efficiencies at the front end of the underwriting process. The fourth quarter has traditionally been our most prolific for BPL originations and we feel confident about our capacity to manage higher volumes entering 2022. Our investment portfolio remained in step with our operating progress and continued to generate strong returns with our securities book appreciating in value by approximately 2% during the third quarter, and our bridge portfolio helping to drive net interest income higher. As Brooke will discuss in more detail, we believe there remains significant value to be unlocked from our investments based on the remaining discount in the book, coupled with continued execution of our call-right strategy. As Chris noted, our portfolio team delivered its own first-of-its-kind transaction during the third quarter, co-sponsoring a securitization backed entirely by residential home equity investments completed in partnership with Point Digital, a fintech originator. The hallmark transaction is backed by a product that enables consumers to monetize equity in their homes without having to sell or incur additional debt. Of the $34 trillion in total estimated U.S. home value that we mapped out at investor day, approximately $23 trillion is home equity, either backing existing debt or held for cash by a growing cohort of zero LTV borrowers. While Point and others have made progress in unlocking a small portion of this value, the opportunity demands additional product creativity and flexible capital. In parallel with the securitization, we've re-upped our flow purchase arrangement with Point providing us with a continued acquisition source and the opportunity to explore adjacent products. Point and Liquid Mortgage were two early Redwood Horizons investments and are now part of a growing suite of portfolio companies that we believe will be a driver of long-term value creation for Redwood. Horizons continued its strong investment pace during the third quarter, completing six investments in total. The go-forward pipeline is highlighted by an array of technology solutions, including several opportunities in climate analytics—an especially busy area where firms attempt to evolve traditional methods of predicting how climate change impacts property valuation, insurability and overall credit performance. With a direct nexus to our firmwide ESG work we expect to continue dedicating focus to this area. With that, I'll turn the call over to Brooke Carillo, Redwood's CFO.

Thank you, Dash. Our efforts to drive scale in our current businesses while executing on initiatives to innovate and reimagine the industry drove another strong quarter of financial results. We reported GAAP earnings of $0.65 per diluted share, representing a 27% annualized return on equity for the quarter, which significantly outpaced our dividend. As a result, book value increased $0.54, or 4.7%, to $12 per share in the quarter. We have had an outstanding 2021 year-to-date and are pleased to have built on the momentum from the first half of the year. We delivered our third consecutive dividend increase of 17% to $0.21 per share ahead of market expectations. We have consistently generated annualized economic returns in excess of 20% over the last five quarters. Our economic return spotlights not only the evolution of our dividend, but more importantly the expansion in our book value. Our results reflect the operating leverage of the platform. In the first nine months of the year, transaction volumes in our mortgage banking businesses have already surpassed the average annual volumes of the past several years. On a combined basis, our operating businesses generated an annualized after-tax operating return of 31% in Q3; they utilized roughly $450 million of average capital, or 30% of our total allocated capital, that produced two-thirds of our adjusted revenue for the quarter. As a reminder, these earnings can be retained in the business, driving the differential between the nearly 5% increase in book value and the 2% increase contributed from the investment portfolio. This underscores our ability to create organic capital, which we've been continuing to convey to the market. The residential mortgage banking team generated a 26% after-tax operating return on capital during the quarter. Income from mortgage banking activities, net, was $12 million higher than the second quarter as loan purchase commitments of $3.3 billion increased 20% from the second quarter, and our gross margins improved approximately 25 basis points, which is above the high end of our historical range. Margin expansion was attributable to improved execution on securitization during the quarter and hedge outperformance into a rising rate environment. We saw continued strength from our business-purpose mortgage banking operations, which delivered a 43% after-tax operating return on capital. Spreads continued to tighten in Q3, but the pace moderated, resulting in a lower increase in the price of loans and inventory at the beginning of the quarter relative to the second quarter's change. Aside from this, BPL mortgage banking results benefited from a 22% increase in funding volume, as well as strong execution on the securitizations completed in the quarter. Next, I'll turn to the investment portfolio which has been a consistent source of value creation in 2021. Following the $95 million of investment fair value changes we booked through the second quarter, we had another $26 million in Q3 from further improvement in credit performance and spread tightening, particularly in our third-party re-performing loan and retained CoreVest securities. Additional positive fair value changes were realized through the first-ever securitization of home equity investments. Separately during the quarter, we settled call rights on two Sequoia securitizations, acquiring $66 million of seasoned jumbo loans at par, which had a small benefit to book value. Portfolio net interest income increased by roughly $9 million driven by lower interest expense on bridge loan financing, and increased discount accretion income on our available-for-sale securities. The increase in accretion was driven by expectations for certain of our retained Sequoia securities to be called over the next several quarters, benefiting our cash flow forecasts and effective yields for those investments. But it is important to note that there is no impact to book value from these changes. Looking ahead, net of our third quarter gains, there remains potential upside of roughly $3 per share in our portfolio through a combination of inherent market discounts and call rights that we control. We estimate $1.2 billion of loans to become callable across Capital and Sequoia through the end of 2022. Should current market conditions persist, these callable loans can generally be sold or re-securitized well above their par value. Retaxable income increased to $0.14 per share from $0.11 in the second quarter due to higher net interest income. Our taxable rate subsidiaries earned $0.32 per share in Q3, up from $0.27 in Q2. We recognized a lower income tax provision compared to the second quarter from the release of valuation allowance on a portion of our deferred tax assets, partially offset by an increase in state taxes. Our balance sheet and funding profile remain in excellent shape with unrestricted cash of $557 million, which equates to over 75% of our outstanding marginable debt. We also had investable capital of $350 million to deploy into new investments. During the quarter, we added $350 million of financing capacity to support growth of our operating platform. We also completed the bridge securitization and a new $100 million non-marginable term financing collateralized by retained capital securities in our investment portfolio, each of which contributed to a roughly 20 basis point reduction in the cost of funds of our business-purpose lending segment. Our recourse leverage was unchanged at 2.2 times as we incurred additional warehouse borrowings to finance higher loan inventories, while rotating certain financings into non-recourse debt and experiencing appreciation of our equity base. One central tenet of our strategic plan is to continue enhancing our capital and operating efficiencies. During the third quarter, we maintained cost per loan for our residential mortgage banking operations at 28 basis points, compared with our historical average of 35 basis points during 2013 to 2019. Our business-purpose mortgage banking operations also delivered improved efficiencies, with a lower net cost to originate relative to the second quarter, even with higher general and administrative expenses in the quarter due to increased variable compensation tied to our strong year-to-date financial performance. Various efficiency ratios, such as pretax margin or operating expense as a percentage of GAAP net income, demonstrate very positive trend lines and our efficiency gains. And finally, we are embedding sustainability across our operations and investment strategy. We are committed to transparency and further integrating ESG into our financial reporting going forward. We recently provided a comprehensive ESG review at our investor day event in September, including new disclosure of human capital metrics and programs, and an overview of our key priorities and top commitments over the near to intermediate term. As Dash mentioned, we are analyzing opportunities within Horizons, which will aid our evaluation of various environmental and social impacts and risks within the portfolio. This has the potential to further evolve our risk management policies and build our operational resilience. And with that, I'd like to turn it back to the operator to open the call for Q&A.

Our first question comes from the line of Bose George with KBW.

Hey, everyone, this is Mike Smith on for Bose. Just a couple of policy questions around the mortgage bank. First, is there anything in either of the two bills that could negatively impact the housing market or the demand for BPL—maybe changes to operating profits, real estate capital gains, depreciation, things like that?

We're obviously looking at that, Mike. Thanks for the question. I think our preliminary sense is that it probably will not have a huge impact on those things. We'll have to see how those evolve, but at the moment, we're not anticipating any material impacts.

Yes, there is a contemplated corporate tax change, which would impact our tax rate effective for our TRS, which would be expected to be a small impact. We do have deferred tax assets there that could have a small benefit, but it's something that we're still monitoring at this time.

Great, that's helpful. And then a lot of non-bank lenders have raised their conforming loan limits ahead of the FHFA announcement later in November. Has this had any impact on 4Q volumes? And as a follow-up, could a larger-than-expected increase in the conforming loan limits have any impact on your jumbo guide for 2022?

Thanks for the question. At this point, we're not giving any specific forward guidance on volumes for 2022. But we do expect a very significant increase in conforming loan limits—anywhere between 15% and 20% for many metros, possibly higher. For us, those are very much statistically driven, and we've worked with loan limits for many, many years. We don't expect it to significantly impact our business; it's really a reflection of growth in the housing market. It's something the entire market has been grappling with in terms of affordability and accessibility for homes. So overall, we're certainly expecting a very large increase and planning for that. But at this point, we haven't had or experienced any meaningful effect on volumes.

Our next question comes from the line of Stephen Laws with Raymond James.

Good afternoon. Dash, I want to start with Choice. One of the slides from the investor day a month ago that I thought was interesting was how underserved the 660 to 720 FICO bracket is versus the amount of volume that was done in that FICO range even just five years ago. Can you talk about what you're looking at to get more uptake there and the opportunity that's ahead with that product?

Sure. Thanks, Stephen. We like that slide a lot too because we think it tells a pretty powerful story about the opportunity. Choice was about 10% of our locks this quarter. I would say that our flow volume in Choice was up about 25% quarter-on-quarter from Q2, which I think is a helpful thing to know because it reflects the fact that from our perspective, adoption is beginning to pick up. As I said in my prepared remarks, we have Choice loans with over 100 sellers at this point. There is still, from a residual perspective, certainly some things that loan officers have been focused on; non-owner-occupied loans have been a big story as well in terms of changes in caps. We think adoption is going well; it will take some time. Clearly rates have ticked up here and we expect Choice adoption and demand to continue to go up. We're ready for it, which is the most important part given how many sellers we've locked loans with at this point. We're optimistic about the prospects. The increase in flow purchases for Choice quarter-on-quarter is something that we are pretty pleased with.

Great. And then Brooke, I wanted to touch on financing costs. You guys have really done a great job growing interest income almost 20% year over year, and your interest expense is roughly flat—you've been able to lower that. I think you talked at the investor day about finding ways to turn loans faster. How much more room is there to increase the efficiency of financing and really expand that NIM from a net interest income standpoint?

Yes, it's a good question—thank you for noticing. We had guided last quarter that specifically we thought there was some room, particularly in the bridge asset class within our BPL business. We did execute our first securitization of that asset class this quarter, which definitely improved our terms—basically cost and advance-rate basis. In addition to that, we are focused on our warehouse lines and our other facilities, and that, in aggregate, lowered our cost of funds, particularly for BPL by about 20 basis points, which we mentioned had about a $2.5 million improvement in our overall NIM in the quarter. We continue to find and explore innovative financing structures across our business, but in general, looking across our recourse debt, with a paydown at roughly 3% cost of funds, we feel pretty good about where our financing stands relative to the health of the capital markets more broadly.

I'd just add that the benefit of the bridge securitization that Brooke articulated closed late in the third quarter, so there will be some incremental benefit there as well. We do expect to use structures like that more and more going forward. That deal has a unique feature that allows us over a 30-month period to replenish, so it's efficient in and of itself. As the business evolves, we expect to use more of that going forward, and for the fourth quarter that particular structure will have more of an impact, because the closing was late in Q3.

Great. And Chris, I'll save the hard question for you. A lot of things going on and a lot of ways you guys have been able to move the needle, whether it's the call gains or lowering financing costs, you've now got the AGIs that were talked about. If you were to take a one-year timeframe, which is how we look at the stock, what are the things you're most excited about that you think can be accomplished in the next 12 months?

Well, across the platforms we've got great momentum. We spoke about a plan in September at our investor day and we're very focused on executing that plan. When you look at residential, Dash mentioned Choice; when we think about our operating margins and how much more efficient we are now than we were even a year ago, we plan to carry that momentum into the next year, which should hopefully continue to result in durable margins. I think AGIs is a very exciting evolution of our business—it's a purely non-agency space where we can lend a lot of expertise from a structuring standpoint and from a scaling standpoint to these originators, particularly Point. And we layer in BPL, which continues to be a significant area of growth for us—a best-in-class platform. Both bridge and SFR volumes have been very strong and closings have been strong. Unlike the residential business where the fourth quarter you typically see some seasonally slow volumes across the industry, BPL is a big quarter for us. So we plan to carry that momentum into next year and really execute on the plan we laid out. We'll continue to innovate and be first movers in our markets. Horizons will continue to grow and be a bigger part of what we do. There's a lot in store for 2022.

Our next question comes from the line of Eric Hagen with BTIG.

Hey, good afternoon. The increase in net interest income from investments, I think the residential investments of almost $9 million quarter-over-quarter—can you tease that apart? What drove the increase? You may have said it in your opening remarks, Brooke, but what was one-time and what's a good depiction of the yield in the portfolio at this point?

Sure. So the various components of NIM that drove that $12 million increase, of which the $9 million you're talking about was a key part, approximately $5 million of that was related to revenue from higher discount accretion income on our available-for-sale securities. Those were all Sequoia-related because those constitute our AFS securities. Going forward, we expect that to be of similar magnitude; as I mentioned in the prepared remarks, we are running those securities to call rather than maturity for near- and medium-term calls for which we have high visibility, which will really bring our GAAP yields more in line with our expected economic yield over the anticipated life of those securities. You will see that at least in terms of a run rate in NIM. Also, the lower cost of funds commentary—part of that is related to more on the BPL side and some in residential. The rest was really related to higher loan inventory we carried into the quarter, reflective of volume. Given our projections heading into 2022, it's fair to include that as run rate as well. The other thing that impacted residential specifically in terms of NIM this quarter was hedge outperformance, and that will vary with market.

Got it, that's helpful. Can you share how the profile of loans that you're sourcing from Churchill are different from those sourced organically?

Sure. Like we've talked about before, that particular channel has been focused on some of the smaller-balance types of loans within bridge or single-family rental. Our core products that we originate directly through CoreVest on the single-family rental side tend to be larger in nature—cross-collateralized, five- to ten-year maturities. Our bridge suite of products is differentiated and includes built-to-rent, cross-collateralized lines of credit for larger sponsors. That particular acquisition channel may evolve, but for now we're focused there on generally smaller-balance bridge loans backed by one to two homes, and then single-family rental loans which tend to be 30-year maturity. So it's a bit of a different structure than what we typically produce directly through CoreVest. There's great capital markets demand for those and they complement our core direct production, allowing us to acquire those loans more efficiently by outsourcing some fulfillment while still doing all the underwriting. It's been a good complementary channel so far.

Our next question comes from the line of Steve Delaney with JMP Securities.

Hi, everyone—congrats on a strong third quarter and also a great investor day back in September. Dash, when you look at your two primary platforms and the loan products that you now have available in the non-agency world, are there any other specialty loan products you guys have not tackled yet that could be attractive using your existing platform but just different products?

It's a great question. I think it's more variations on what the teams are focused on. Multifamily has been an increasing focus of CoreVest's footprint, both shorter-term and more stabilized loans. We expect to be able to do more of that going forward, potentially larger loans—much of that is driven by increased client penetration and our improved financing capabilities. On residential consumer side, continuing to drive opportunities in expanded-prime in Choice and figuring out what products are out there remains important. I'd also touch on the home equity investment piece—it's much earlier stage for us, but the partnership with Point and the ability to securitize those as efficiently as we did, plus the massive addressable market, means variations on that theme will likely be part of the picture. But again, that's earlier days.

Reverse mortgages have been controversial over the years, but if you can come up with a better structure, you would have something meaningful. And switching gears to the resi platform, thinking about your seller base—could some of these newly public residential agency originators, who are struggling with revised-down margins, be a source of loans as they look to originate more non-agency business?

Steve, we mentioned in our materials we're purchase-heavy on the resi side, which is a good place to be given market conditions—we're not overly reliant on refi business. Our seller base is actually a bit smaller; we've culled it to focus on quality and relationships. I do think as things transition, more agency originators will try to move to non-agency—it's a logical evolution. We're talking to the right people and we're a good outlet for them. The non-owner-occupied business continues to evolve; while volume may shift, opportunities remain because many of these larger agency originators have established issuance platforms on the PLS side which present opportunities for us. There's a lot happening in the mortgage space; the fourth quarter is a good time to take stock. We'll have greater clarity on the FHFA direction, loan limit increases in November, and we'll start planning for 2022.

Our next question comes from the line of Ryan Carr with Jefferies.

Hi, good afternoon, guys. Congratulations on another great quarter. Thanks again for the excellent investor day last month. In terms of what you're seeing on the rate side, curious to hear your perspective or potential outlook on 4Q volumes and how that might be impacting a potential burnout scenario going into the fourth quarter?

Well, rates have been volatile—today was a very volatile day in the markets. When rates are volatile our hedging costs typically go up, particularly on the resi business which is more sensitive than BPL. We're actively managing our pipeline and exposure. Overall, seasonally on the resi side, it's typically a slower-volume quarter for the industry, and I think that will be the case this year again as it was in Q4 last year. We're as well positioned as we can be. Our book is turning over faster than many in the industry; our average loan age is well inside many competitors. From a current coupon perspective, we're well positioned—we can reprice every day. I think we'll be in a good spot to finish the year strong. On the BPL side, it's a very busy quarter and we've had a strong start there. Seasonally, historically we've gotten a lot done as we close out the year. We're mostly focused on finishing the year strong and then setting our sights on 2022.

Thanks for that color. And then quickly on the Horizons portfolio, any material updates in terms of fair value changes at this point?

No material updates—given the seasoning of our deals they're still pretty early in their life, so no material change to report at this time.

Our next question comes from the line of Kevin Barker with Piper Sandler.

Good afternoon. Thanks for taking my questions. I just want to follow up on your available capital—investable capital jumped, I believe it's $350 million and really doubled quarter-over-quarter. Is there anything in particular you see in the near term to redeploy that capital, or what are your expectations for putting that capital to use?

Thanks, Kevin. That was partly a result of some of the accretive financing transactions we did during the quarter, which we were pleased with. Consistent with prior quarters, a lot of it is making sure the operating businesses have the right depth of operating capital to continue to grow—ensuring we're running those businesses with the right margin of error in terms of risk capital and acquiring capital to fund more loans through the pipeline. That's job one. Brooke referenced increased volumes recently in bridge, which represent chunkier opportunities to put money to work and are highly strategic given CoreVest's footprint. Historically, it's been valuable for us to keep excess capital on hand to react when spreads create an opportunity to deploy more capital. We're pleased with the position heading into the end of the year; if there are things to do, we'll be ready to capitalize on them. As always, we're looking at some customized partnership-based investments which we hope to be in a position to discuss early next year.

Regarding your securities portfolio, it seems compelling that you have about $270 million of discount to par value potential recapture. Can you give specific examples of the largest portfolios that are sitting at a discount and what your cost basis may be on specific portfolios?

Sure. About $174 million of our accretable discounts are in our re-performing loan portfolio, which was about $517 million in fair value on our balance sheet at the end of the quarter. About 90% of our retained securities, where we own the entire sub-stack with about $2 billion of underlying collateral, are on the call schedule. That is where the vast majority of that discount line lives, which gives us more visibility around when we can potentially call those deals. That is not included in the $0.68 a share of potential upside from calls that we discussed previously—that would be in addition. I don't have the exact number offhand for the securities dollar value classifications, but I believe it's in the high 70s. Yes—$77 was the point referenced earlier.

Got it. So assuming higher home prices you'd be able to recapture that discount quickly. Do you have an estimate, and is there anything in particular that would accelerate the recapture of that discount?

Yes. Speed of prepayments has picked up on that cohort—from running around five to seven CPRs to now mid-teens. Steady prepayments will help accelerate recoveries, which is driven by home price appreciation combined with solid fundamental performance. We saw another improvement of about 1% to 2% in our 90-day delinquencies on that cohort of our portfolio as well. Delinquencies spiked into the mid-teens during COVID and are back down to the high single digits—around 10%. So as the economy continues to recover, we expect to continue to recover that value.

The other thing to add is the call rights come in two flavors: some relate to pool factors and how quickly the pools amortize away—which have been coming into the money much more quickly with housing price appreciation and higher speeds—and others are more time-based like in the re-performing loan securities. The first of the two larger investments we have actually becomes callable toward the end of next year; there's a slight call premium associated, but it may still be accretive to call. As Brooke said, those RPL numbers are not included in the $0.68, but they're more time-based and we'll assess at the time whether it makes sense to execute on calls versus other alternatives.

Okay. Do you anticipate the expiration of various forbearance and foreclosure moratoriums to potentially impact the recoverability of that discount? And do you anticipate those terms expiring to impact potential opportunities as we go into the new year?

It's possible, but I think more of the impact would probably be in the re-performing loan book. Our forbearance numbers and Sequoia exposures are de minimis at this point. We're in a very different situation than 10 or 12 years ago from a supply perspective and execution challenges. The expirations may speed up some resolutions, but those re-performing loan investments are on conforming loans and are subject to servicer guidelines for loss mitigation; many were subject to CARES Act policies. We're not pricing in any major negative impact from the expirations. The fundamentals of those portfolios have continued to improve, and prepay speeds are higher than we modeled. That's where we're focused—assessing future cash flows and resolutions.

Our next question comes from the line of Doug Harter with Credit Suisse.

Thanks. Just thinking about the amount of capital you need for the BPL mortgage banking business—since you did a securitization with the reinvestment period, does that ultimately reduce the amount of capital you need for that business and therefore improve the returns?

The short answer is yes. Apples-to-apples, we expect an ROE pickup and additional capital freed up. The 90% of liabilities we sold are on average about 10% to 15% higher on advance-rate perspective than the non-marginable bilateral warehouse lines we've usually used to finance bridge loans. The securitization is essentially match-funded, non-recourse and non-marketable, so it's very attractive on multiple fronts. At the margin there is an ROE pickup and additional capital becomes available for deployment.

Got it. And as you think about turning over originations quicker to minimize capital needs, where would you say you are in that process and is there more room for improvement?

We've made great progress. A couple of data points: our most recent securitization, the one that used blockchain, had an average loan age at time of securitization of one month compared to three to four months for the rest of the industry. From a funding turnaround perspective, even outside Rapid Funding, we're probably around two weeks to fund our sellers, which compares very favorably to the competition. So even with record volumes and record locks, we've continued to improve timelines. That's a testament to the team and our relationships. Speed and the ability to fund quickly and then securitize or sell is a huge hedge in this rate environment.

I'll just add that the plan is to continue growing these businesses and allocating more capital—but doing it profitably. The efficiencies and operating margins reflect great progress, especially this year. If we're allocating more capital, it's because the ROEs are extremely strong and it's the best marginal use of our capital.

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Okay, thank you, everybody, for participating in our call and we look forward to talking to you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.