Earnings Call Transcript - TWO Q3 2020

Operator, Operator

Good day, and welcome to the Two Harbors Investment Corp. Third Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Corey Stolhammer. Please go ahead, sir.

Corey Stolhammer, Managing Director

Good morning, everyone. Thank you for joining our call to Two Harbors Third Quarter 2020 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 like to remind you that remarks made by management during this conference call and the supporting slides may include forward-looking statements. Forward-looking 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.

William Greenberg, President and CEO

Thank you, Corey, and good morning, everyone. I'd like to welcome you all to our third quarter 2020 earnings call. The call will be as follows. I will go over quarterly results at a high level; and Mary Riskey, our Chief Finance Officer, will give more details on our financial results; and then Matt Koeppen, our Chief Investment Officer, will discuss our portfolio composition, activity and risk profile. And then I will make some comments about our forward outlook. Finally, we will be happy to take any questions. Summary of our results is shown on Page 3. Our book value at September 30 was $7.37 compared to $6.70 per share on June 30. This represents a 12.1% return on book value for the quarter. Included in these results, reversal of the previously accrued termination fee of $0.51 per share attributable to the nonrenewal of the management agreement, which reflects the fact that there is no longer any payment due as a result of the for cause termination. On a purely economic basis, excluding that reversal, our total return on book value would have been 4.5%. The favorable return is generally due to strong performance in lower coupon RMBS, tempered somewhat by the volatility reducing presence of MSR in the portfolio. This result validates our agency plus MSR strategy in which MSR is intended to meet the effects of mortgage spread widening and tightening in RMBS and produce more stable risk-adjusted results over the long term in a variety of economic cycles. Our core income for the quarter was $0.28 per share, which is far in excess of the declared dividend for the quarter of $0.14 per share. As we have discussed many times past, we believe that core earnings is not necessarily the best measure of the expected economic returns in the portfolio. Although the dividend represents roughly an 8% return on book value for the quarter, we expect to modestly increase the dividend next quarter, which will be more in line with what the portfolio is expected to economically earn netted expenses. The core number of $0.28 depends, as it is designed to do, on historic yields and costs and, in this environment, is higher than what we think current market returns are. Our ability to source MSR at attractive levels has been very encouraging. Low mortgage rates have resulted in record amounts of originations in the market, and we have been able to procure significant amounts of MSR from our flow-seller relationships. During the quarter, we settled on approximately $14.5 billion UPB of MSR, which was our biggest quarter ever. So the fourth quarter is already shaping up to be even better. Post quarter end, we settled on an additional $14.5 billion UPB in three separate bulk transactions. Current flow volumes with recent bulk settlements exceed our projected runoff, and our MSR portfolio has begun to grow again. I am also pleased to tell you that we closed on a $200 million servicing advanced facility with a large bank counterparty. Since the level of current forbearance in the portfolio has come in lower than we initially anticipated, we reduced the size of this facility in order to be more in line with our expected needs. Indeed, as of September 30, only 5.0% of our portfolio by loan count was in forbearance, of which 28% of borrowers had made their September payments so that the delinquent forbearance loans were only 0.6% of our MSR portfolio. Despite the fact these forbearances have been manageable, we feel that this facility expands our risk management toolkit and is a prudent addition to our funding mix. It also offers protection should forbearance numbers increase in the future. On August 15, we completed our transition to self-management after the termination of the management agreement on August 14. This transition occurred without interruption and was virtually seamless. This is not to say that there was not a lot of work involved because there certainly was. The Board hired 100% of the employees who had previously supported Two Harbors, and all of our business operations had continued without interruption. We are excited about this new beginning for Two Harbors, and we are looking forward to the positive impact it will have on the company and its stockholders. The litigation with Pine River continues, and we expect it to continue for the foreseeable future. Unfortunately, I can't say much more than that at this time. Please turn to Slide 4. Looking ahead, we are very optimistic about our strategy as an agency plus MSR REIT. Our business model of pairing MSR with the Agency RMBS with the size and scale of MSR that we have is unique in the market. We continue to believe that this paired construction will deliver high adjusted returns with lower mortgage spread risk than other portfolios without MSR. In the current environment, we expect to be able to grow our position in mortgage servicing rights, which will lower our mortgage spread risk further. Today, spreads have tightened; the presence of MSR has tempered returns. But in general, when the direction of MBS brands are uncertain, our portfolio construction should provide a less volatile profile over time.

Mary Riskey, Chief Financial Officer

Thank you, Bill. Turning to Slide 5. Let's review our financial results for the third quarter. As Bill mentioned, our book value at September 30 was $7.37 compared to $6.70 per share on June 30, representing a 12.1% increase. Excluding the result of the previously accrued management agreement termination fee, the quarterly return on book value would have been 4.5%. Book value growth was driven by positive performance from our RMBS portfolio and was offset by lower MSR pricing from fast speeds and mortgage spread compression. As you can see in the middle of the page, the reversal of the management agreement termination fee was $139.8 million or $0.51 per share. When the Board of Directors announced its plan to not renew the management contract with Pine River on April 13, the nonrenewal payment as well as the associated legal and advisory costs were to be recorded in Q2. As announced on July '21, the Board of Directors subsequently terminated the management agreement for cause, which carries with it no associated termination payment. Following GAAP principles, we reversed the termination fee in the third quarter. Moving to Slide 6, let's discuss our core earnings results. Core earnings were $0.28 per share in the third quarter compared to $0.05 in Q2. Our favorable core earnings were primarily driven by three factors. First, net interest income was higher, moving from $45.2 million to $60.5 million due to favorable repo rolls on lower LIBOR offset by rotation into coupon agencies and fast speeds. Second, restriking our entire swap portfolio at current rates at the end of Q2 resulted in favorable swap interest spread changing from $56.3 million to an income of $0.8 million. Finally, expenses were lower in the quarter, declining from $46.8 million to $43.5 million due to termination of the management agreement on August 14 and our transition to self-management. Turning to Slide 7. Our portfolio yield in the quarter was 2.42%, and our net yield increased by 155 basis points to 1.78% from 0.23%. Portfolio yield decreased by 42 basis points from 2.84% to 2.42% due to sales of higher-yielding RMBS in June, higher agency amortization due to prepayments and higher servicing expenses and lower servicing income due to MSR portfolio runoff and forbearances. However, our cost of funds has more than offset the yield decrease, declining 197 basis points from 2.61% to 0.64%, driven primarily by favorable repo rolls and the restriking of our swap book in June. I'd like to reiterate something Bill mentioned and we discussed last quarter. In our portfolio construction, the presence of MSR provides most of the interest rate hedging needed to offset the duration of our RMBS portfolio. Our position in interest rate swaps is now very small, and the contribution to net yield is negligible. However, since our RMBS position still reflects the accounting yields from the higher rate environment in which they were purchased, both core earnings and portfolio yields are anticipated to exceed our expected returns in the coming quarters. As we continue to rotate our asset portfolio, reducing some of our older holdings and moving into newer investments, we expect our asset yields to decline over time to market rates and the net portfolio yield should start to converge to market levels that are more consistent with our return expectations. On Slide 8, we have summarized our financing profile as of September 30. Our economic debt-to-equity at quarter end was 7.7x compared to 7.4x at June 30, and our quarterly average economic debt-to-equity was 7.6x in Q3, up from 6.8x in the second quarter. I would note here that had we not reversed the management fee termination payment in Q3, we would have ended the quarter with economic debt-to-equity of 8.1x. Our liquidity position remains strong with unrestricted cash of $1.6 billion at September 30. At the end of the third quarter, we had 20 active agency repo counterparties with a weighted average maturity of 83 days. Across our MSR facilities, we had $274.8 million outstanding in bilateral structures and $400 million outstanding in term notes. As of September 30, our total committed capacity across our MSR asset financing alternatives was $850 million, of which $175.2 million was unused. During the quarter, we closed two MSR-related facilities: a $100 million MSR financing facility and a $200 million servicing advance-only facility. These facilities provide us with additional liquidity in the event of increased forbearances or defaults and support future MSR portfolio growth. For more information on our financing profile, please see appendix Slide 27.

Matthew Koeppen, Chief Investment Officer

Thank you, Mary, and good morning, everyone. Turning to Slide 9. Let's review quarterly portfolio activity and composition. As previously noted, the third quarter economic return on book value was 4.5%, excluding the reversal of the termination fee associated with the nonrenewal of the management agreement. This performance was driven by a general spread tightening in MBS across most TBA and specified pool coupons as the Federal Reserve continued its balance sheet expansion by purchasing more than $300 billion mortgages this quarter. Mortgages will also benefit in the backdrop of relatively low implied and realized volatility during the quarter, which minimized delta hedging costs and muted embedded option costs within the assets. With interest rates stable, the market prices servicing was steady and behaved largely as expected. I would point out that third quarter returns are lower in our portfolio construction than in a mortgage portfolio without MSR. At Agency plus MSR REIT, this is by design. We've discussed in the past that MSR acts as a short positioning in the current coupon, which outperformed this quarter, and results in overall lower mortgage spread exposure. We estimate that the presence of MSR reduced returns relative to a portfolio with MSR by around 3% to 4%. On the other hand, we anticipate that our portfolio returns will likely outperform in periods of mortgage spread widening for the same reason. We did increase our RMBS portfolio, mostly through adding exposure to current coupon TBA as we find them relatively attractive. The continuation of the Fed's large-scale purchase activity should cause roll specialness to persist in the near future. Our net TBA balance increased by about $3 billion, and our specified pool position is lower by approximately $1 billion due largely to runoff. Additionally, as Bill mentioned, we've been able to source substantial volumes of new servicing through both flow and bulk channels and expect to be able to grow our MSR portfolio in coming quarters. One of the most interesting dynamics in today's market is the impact of roll specialness in the TBA market.

William Greenberg, President and CEO

Thank you for that discussion, Matt. Finally, I'd like to take a look at our outlook for Two Harbors and our return expectations. After the significant spread tightening we have seen in the last two quarters, we see gross returns for specified RMBS paired with swaps as less attractive than they were, and we see them to be in the range of mid- to high single digits depending on coupon and story. Current coupon TBA returns are enhanced by roll specialness, which is likely to continue for the near future. This could increase near-term returns to the mid-teens area depending on assumptions about how long specialness lasts. New investments in flow MSR paired with RMBS today can also drive returns in the low mid-teens. If you assume rural specialists on the RMBS component, it can be even higher. Investments in the flow channel are generally more attractive than bulk. We can still at times be 200 to 400 basis points tighter. However, it is very deal-specific, and some recent bulk transactions have occurred at attractive levels, too. As Mary discussed, our liquidity profile remained not only stable but strong. As we look forward, our expectations are to increase the size of the servicing portfolio and manage the RMBS portfolio accordingly, which would likely include the use of TBAs to enhance portfolio returns with attractive implied funding. New investments in specified pools are less compelling today with spreads nearer to the tight end of recent ranges. From a risk perspective, we are comfortable increasing our leverage to the 8 to 9 area. In today's environment, with current spread levels, we would broadly expect to maintain overall risk and leverage that is consistent with current levels. Thank you very much for joining us today, and we will now be happy to take any questions.

Operator, Operator

And your first question is from Doug Harter.

Douglas Harter, Analyst

Just one, just wanted to clarify kind of the last comment you made about leverage. Since you said you're comfortable with higher leverage, I guess, do you expect kind of an increase to those levels in the near term, assuming kind of returns kind of stay with where you just kind of highlighted?

Matthew Koeppen, Chief Investment Officer

Doug, thanks for joining. I'll start with that one. I could see us increasing slightly. I think we're perfectly comfortable, as we've guided before, with nominal leverage numbers in the 8 to 9x. I would note Mary pointed out that had we not had the change due to the management fee, our nominal leverage numbers would have been about 8.3x. So I think we're operating sort of in a comfortable zone and we can see ourselves continuing here. The last thing I would say is I would point out that nominal leverage isn't the whole story with our portfolio construction. As we've said before, the paired construction gives you lower mortgage spread risk despite what could potentially be higher nominal leverage numbers.

William Greenberg, President and CEO

Yes. I would just add a couple of things. Doug, thanks for the question. As we mentioned previously, there has been significant tightening in mortgage spreads; the attractiveness of specified pools is not what it was even a quarter ago. As we moved past spring, we indicated we would gradually and carefully increase risk and leverage over time. We anticipated some volatility, which might be linked to the election, but so far, it is proceeding in an orderly manner. I would say that if market conditions allow, we would be comfortable increasing our leverage further. However, given the current market conditions, we expect things to remain as they are now.

Douglas Harter, Analyst

Could you explain why there isn't an advantage to pairing TBAs with MSRs compared to swaps, especially since they seem to offer a similar return outlook?

William Greenberg, President and CEO

Yes. Well, one way to think about it is purely from a mathematical standpoint. But if you have two things, and one is yielding, right, or if you look at TBAs versus swaps as being, call it, low mid-teens, in order for the combination of something else to be higher than that, the other thing has to be higher than that also, right? And so what this is saying is that because the MSR by itself is sort of in that zone, it doesn't add anything that's already starting from a pretty high number. So when you're averaging numbers, so to speak, right, the average ends up being a combination of two things. And so in order for it to be higher, the other thing would have to be higher itself.

Operator, Operator

The next question is from Bose George.

Bose George, Analyst

Actually, can I get an update on book value quarter-to-date?

Matthew Koeppen, Chief Investment Officer

Bose, thanks for joining. So far, we are relatively unchanged in the fourth quarter. Interest rates have remained stable during October, while performance across coupons and MBS has been somewhat mixed. Current coupons are slightly tighter, but some, like the 2.5% and 3%, are a bit wider. Prices in the servicing market have also been steady, resulting in an overall situation that has not changed much through October.

Bose George, Analyst

That's helpful. You mentioned earlier about the economic return being somewhat higher than the current dividend. However, it remains notably lower compared to the returns from MSR paired with Agency MBS or what is being generated now with the portfolio's TBA specialness. When considering the longer-term return, are you excluding the unusual income from the TBAs? I would appreciate your insights on what is influencing that longer-term return.

William Greenberg, President and CEO

Yes, I'll start with that, and thanks for joining. As the charts on Page 15 indicate, the wide ranges shown are primarily due to how long we believe the specialness on TBAs will last. We think it will persist in the near to intermediate term, but it does depend somewhat on Fed buying. The numbers will also reflect our views on the MSR side, as new purchases are more appealing than existing holdings, particularly in the flow markets where we can acquire things at a significantly lower cost than bulk or our current portfolio pricing. Putting all of this together, we anticipate that the prospective returns in the portfolio going forward will be in the low to mid-teens. We indicated that we expect to modestly increase our dividend next quarter. While we usually do not provide dividend guidance, the unusual circumstances of 2020 prompted us to offer a bit more visibility. This should align the dividend more closely with what we expect the portfolio to earn economically.

Bose George, Analyst

Okay. So thinking about the economic return, it is kind of more of a double-digit number in that range. Is that a fair statement?

William Greenberg, President and CEO

Yes. Yes. I say once you put all that stuff together, it's probably low doubles, yes.

Operator, Operator

And your next question is from Stephen Laws.

Stephen Laws, Analyst

I guess, first, want to start with the question about the adverse market fee that goes into effect with refinances on December 1. Can you talk about, I guess, bigger picture, how you think that's going to be handled by the market? And how much of that fee is passed on to borrowers through higher refinance mortgage rates? And along from there, the impact on your portfolio, if it dramatically slows refinance this income statement benefit from lower amortization expenses and a positive mark on servicing valuations? Does it impact the balance sheet from book value or pace of MSR growth? Can you maybe take a couple of minutes and talk about how you expect that change on December 1 to impact the market in your portfolio?

William Greenberg, President and CEO

Sure. Thanks for the question. It's a good one. I have a couple of thoughts about it. So first, obviously, an upfront fee amortized over the average life of the asset really only translates into maybe a 10 to 12 basis point elbow shift, if you will, in the refinancing curve. And so if you felt that that was entirely going to be passed through by the consumers, that's what would be in it. It would nominally reduce refinancing speeds by some amount. Now it's true the primary secondary spread is very wide. Originators could absorb all of that themselves if they wanted to and only have their profitability go down a little bit. I guess different participants will do different things. If you ask me, I'd probably say it's going to be split 50-50, and so it will be something smaller than the 10 to 12 basis points or maybe 5% to 6% or 7%. Look, speeds have been really fast here. The adverse market delivery fee was meant to go into effect earlier. It's been postponed until the end of the year. That certainly had the effect of pulling through some refinancings sooner in the market rather than later. Maybe that's one reason why speeds have been more elevated than maybe some people thought here. Looking forward, I think it certainly has the effect directionally of slowing speeds in some way; whether it's a small effect or a medium effect, it remains to be seen. I think that should generally help our servicing portfolio more than a specified pool position. Our specified pool position is very well protected, very high quality, mostly loan balance and geography. It will have a marginal impact there. It will have a bigger effect on servicing should improve valuations there. When we've been bidding on servicing, we've not included that particularly in our valuations in our flow grids or in our book prices. So potentially, there's some tailwind there.

Stephen Laws, Analyst

Great. Can you touch base on outlook for the operating expense line or noninterest expense now that you're internally managed, maybe next year, I think you guys have provided a little bit of color previously, but now that you've moved to an internal structure, can you update us on kind of your outlook for G&A and comp and benefits for, say, full year '21?

Mary Riskey, Chief Financial Officer

Sure. Steve, it's Mary. So we would expect our operating expense ratio, excluding out of amortization and nonrecurring expenses, to be in the low 2% range. I would note that included in our operating expenses are certain transaction expenses associated with MSR. So the expense ratio will move around a bit depending on our acquisition activity and the size of our MSR portfolio, but we generally believe it will be in the low 2%.

Stephen Laws, Analyst

Great. Lastly, Bill, can you discuss your perspective on potential stock repurchases, especially considering that we are currently about 25% below the new book value and the low to mid-teens return on equity you mentioned regarding new investments? Do you think it would be beneficial to pursue both options? Does one option outweigh the other? Please share your thoughts on balancing capital reinvestment in new investments versus possibly repurchasing your own stock.

William Greenberg, President and CEO

Sure. I appreciate the question. I think we talked about this last quarter, perhaps. The lens through which we look at this question is really about obviously uses of capital, right? And if I think about just trading 25% below book here compared to, again, just statistics round numbers, 12% returns on investable assets, that's a two-year breakeven, right, that the investors would earn the same amount of money in two years as they would by realizing that benefit today, and is two years a short time or a long time is that worth it or not worth it? It obviously depends on the relative spreads in the market and the investment opportunities and the relative discount to book. At those prices, it seems to me, two years is a pretty low number. Obviously, we haven't made any decisions yet about those things. We did not buy any stock back in the third quarter, mostly for that reason that we felt that two was a low number. So we'll continue to monitor that as the world unfolds and develops, but that's the lens through which we're looking at this.

Operator, Operator

And we'll take the next question from Trevor Cranston.

Trevor Cranston, Analyst

Most of my questions have been addressed. I was interested in your mention of being able to start expanding the MSR portfolio again in the fourth quarter. As you evaluate your portfolio today, could you discuss how much you aim to grow the MSR book over time, assuming you can find suitable products to purchase in relation to the current size and composition of the agency book?

Matthew Koeppen, Chief Investment Officer

Yes, Trevor. I'll begin with that. We don't have a specific target in mind, but we certainly see potential for growth in our servicing asset, which we find quite appealing. It's among the most attractive opportunities we have at the moment. I believe there's ample room to grow before reaching a point where we might consider it excessive. We've been noticing an increase in volumes, which is quite exciting. The bulk markets have become much more active, and overall volumes have risen. We've observed even further volume increases in the fourth quarter so far. Although there might be a brief period of reduced activity in the bulk market as we approach year-end, we are still in a fast refinancing environment where new loans and servicing transactions are occurring. I believe this will eventually translate into broader market activity. Therefore, I feel confident that we can expand our portfolio in the upcoming quarters.

William Greenberg, President and CEO

I would just like to add a couple of points to that, Matt, if I may. When I look at the combination of stories on Page 15 and Page 13 of the presentation, pairing agencies with MSR is one of the most attractive strategies we can pursue. We believe that our portfolio's strength lies in reducing mortgage spread risk, and increasing our MSR certainly helps mitigate that risk, as highlighted on Slide 13. The numbers show that we are contributing 2.5% in reduced mortgage spread risk due to MSR, and this could possibly increase, making the total net smaller, which we consider to be a key advantage of our portfolio. Therefore, we aim to expand the MSR portfolio, and we see the market providing us with that opportunity in the near term.

Trevor Cranston, Analyst

Right. Okay. That's helpful. And then just one question on the cost of funds side. Do you guys have any meaningful amount of repo outstanding that hasn't yet rolled down to current market rates? And if so, could you maybe share when you expect that to roll?

Mary Riskey, Chief Financial Officer

This is Mary. I can start with that. The bulk of the repo had rolled to market rates in Q3. I think we had a little bit left to do in the fourth quarter, but for the most part, the repo balances are at current market rates.

Operator, Operator

We'll take the next question from Rick Shane.

Richard Shane, Analyst

I wanted to discuss Slide 6 briefly, which indicates a gain on other derivatives of $32.9 million for the third quarter on a core basis. When we examine the P&L, the gain on a GAAP basis was reported at $65.6 million, and then adjustments are made in the core to arrive at that net figure. I'm interested in understanding what is driving those marks and how we determine what should be included in core and what should be excluded.

Mary Riskey, Chief Financial Officer

Sure. The gain and other derivatives line for core earnings is exclusively TBA dollar roll income.

Richard Shane, Analyst

Got it. What are the other derivatives that are being reported on a GAAP basis?

Mary Riskey, Chief Financial Officer

Any realized and unrealized amounts on the TBAs would be reflected in the GAAP income statement rather than in core earnings. It mainly involves TBA and possibly a few options. The key difference between what is shown in core and what appears on the GAAP income statement is the realized and unrealized figures.

Richard Shane, Analyst

Got it. So we should think of what shows up as core on a net basis is actually the roll income and everything else is just marks on both sides?

Mary Riskey, Chief Financial Officer

That's correct.

Operator, Operator

And your next question is from Kenneth Lee.

Kenneth Lee, Analyst

You mentioned that when you look at some of the MSR valuations, a few were relatively situational. I guess just stepping back more broadly, wondering if you could just share with us your thoughts on how would you characterize the overall MSR markets in terms of just activity and trading and whether things have truly recovered at this point?

William Greenberg, President and CEO

Yes, I'll start with that. Thanks for the question. I would say the situation is continuing to improve from its earlier challenges. We have noticed a significant amount of bulk packages available. As Matt mentioned, there is some price discovery occurring. As we indicated, we are acquiring more flow volume. Prices seem to be returning to more normal levels. However, there is still a dynamic where the gain on sale is quite high, so many servicers are hesitant to sell servicing in this market. They might believe that rates will increase in the future due to more stimulus or think that certain rates will rise, or for various reasons, they feel they do not need to sell. I would say the volumes of expected MSR sales are still lower than what I would consider the natural level. Pricing is coming back to normal, and there is increasing clarity in the market; I think people have a better understanding of market prices. Bid-offer spreads are narrower than they were a few months ago. I would reiterate that I believe it's beginning to recover. Additionally, if I hadn't mentioned it before, I will now. In the flow market, although the previous dynamics still hold and many participants are still holding on, we are seeing more sellers interested in selling flow MSR to us going forward. This might be due to emerging hedging concerns or a need for cash. Overall, the market is beginning to improve and heal, and it is in a favorable position right now.

Kenneth Lee, Analyst

Got you. Very helpful color there. And one follow-up, if I may. When you just combine together all the dynamics of the agency markets, the roll specialness as well as the funding costs, wondering whether if you could just give us a sense of where net interest spreads could potentially trend over the near term?

Mary Riskey, Chief Financial Officer

Sure. I can take that question. So if you look on Page 7, we have shown you our as of yield as of September 30, which is a near-term outlook. I think over time, we would expect those yields to decline as we rotate our asset portfolio into lower coupons. We would expect that to be in the 1% to 1.25% range for a net yield, that's going to occur over time.

Kenneth Lee, Analyst

Got you. Got you. Very helpful.

Mary Riskey, Chief Financial Officer

And I should add that our yield on Page 7 does not include TBA dollar roll income.

Operator, Operator

The next question is from Mark DeVries.

Mark DeVries, Analyst

Yes. Just wanted to clarify some of the comments around the dividend. I think you indicated, Bill, that I think at least interim return expectations are kind of, let's call it, mid-teens, which presumably is benefiting from the higher returns on TBAs. But it looks like just on pools, it's kind of the low double digits. Should we expect the dividend to kind of move more towards those immediate returns or more towards the kind of the long-term sustainable if the specialness disappears?

William Greenberg, President and CEO

That's a great question. Thank you for being here. I would say the answer likely lies somewhere in between. If we look at the graph on Page 15, the returns linked to the pools indicate that some of the lower coupon pools are likely towards the tighter end of that spectrum. In contrast, the higher coupon specified pools tend to be at the higher end. As I mentioned, new MSR purchases, along with TBA, are generally in the low to mid-teens. Overall, we believe it's in the low double digits. We anticipate a modest increase in our dividend next quarter. Our dividend policy is set with a long-term view in mind, considering sustainability, taxable income, and other related factors. We need to observe how things evolve and will take all these aspects into account. We expect modest increases while remaining mindful of those considerations, and we'll see how things progress from there.

Mark DeVries, Analyst

Okay. That's helpful. And just wanted to get your view of how long you think specialness persists? Is it as long as the Fed is an active buyer? And if so, how long do you think that will be?

William Greenberg, President and CEO

I think that's exactly right. The graphs on page 10 indicate our expectations. In my opinion, low rates and current refinancing volumes suggest that fast speeds will continue, assuming rates don't increase for another year. The Federal Reserve's actions will likely depend on their economic outlook. The outcome of the presidential election is uncertain, but if we end up with a divided government that limits stimulus measures, the Fed might need to maintain their support longer than they otherwise would. I believe this situation will persist for some time.

Operator, Operator

And it appears there are no further questions at this time. Bill Greenberg, I'd like to turn the conference back to you for any additional or closing remarks.

William Greenberg, President and CEO

Well, I'd like to thank everyone for joining us today for our third quarter earnings call. Thank you very much for your interest in Two Harbors. Right, we'll see you next time.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.