Redwood Trust Inc (RWT) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the Redwood Trust Inc. Second 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 second quarter Redwood review and investor presentation, both 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. So we are closely monitoring the latest delta variant of the Coronavirus. The entire organization has been energized to see the reopening of the economy, continued strength in the housing market and exceptional performance and growth in our business. Strong operating income and rising portfolio valuations drove exceptional financial results for the second quarter, including GAAP earnings of $0.66 per diluted share, well in excess of our $0.18 per share dividend for the second quarter. This contributed to a 6.5% increase in our GAAP book value to $11.46 per share at June 30. The results we generated thus far in 2021 are reflective of a business that can expand profitably while successfully serving its mission of making quality housing accessible to all American households.

As you know, this mission emphasizes borrowers whose needs are not well served by government loan programs or potentially not at all. Our residential and business purpose lending teams together target the non-agency mortgage market, the segment of the market that many recently ignored, in large part due to the absence of federal reserve stimulus. The non-agency market represents the residential mortgage universe outside of government-backed mortgage programs. By targeting this market, rather than a specific borrower profile as we had in the past, our business is not tied to the direction of the homeownership rate. Instead, Redwood now offers a comprehensive product mix that serves both non-agency consumers and housing investors alike. And it's a big market.

Many have forecasted residential non-agency origination volumes to significantly increase in 2021 from the $435 billion of originations in 2020. And that's only beginning to reflect the potential from a regulatory pullback for nonowner-occupied loans, something that could provide a significant tailwind to our sector going forward.

Our results remained strong in the second quarter despite market conditions that were significantly more challenging than they were in the first quarter. Rising interest rates reemerged in the residential lending space, largely the result of uncertainty and whether the Fed will alter its support for the agency mortgage market. The sharp competitive forces that arose as a result, along with a corresponding decline in refinance activity, triggered a contraction in margins across the industry. Exaggerating the effects of strong competition were signs of procyclical and supply chain inflation with a shifting yield curve driving significant hedging and execution costs for those managing large mortgage pipelines, including for us.

Against this backdrop, in the second quarter, we still locked close to $4 billion of jumbo loans at margins in the high end of our historical target range. The business purpose lending market also became more crowded in the second quarter, with new competitors using the rate sheet to buy their way into the space, particularly for lower balance bridge and rental loan products. The shift out of apartment living and towards single-family detached homes is a trend that has shown no sign of ebbing despite the recent reopening of most major metros. This has led to a shortage of high-quality homes with aggressive demand from both investors and consumers alike.

In many regions, rent growth has been significantly outstripped by home price appreciation, highlighting the scarcity value of quality housing and the multiple constituencies focused on acquiring single-family homes. Leveraging a well-earned reputation as a nimble and reliable life cycle lender, CoreVest, our BPL platform, eclipsed $500 million of fundings for the quarter on a balance of single-family rental and bridge originations. This sustained performance through this challenging backdrop showcased our strategic foundation and is the essence of what makes Redwood unique.

Our mortgage banking businesses offer highly complementary products that drive durable earning streams. And our investment portfolio continues to offer significant upside as the economy recovers. Our credit discipline and ability to create our own assets remain key differentiators. Our strategic foundation is facilitated returns that are significantly outpacing our growing dividends. In the first half of 2021, approximately 70% of Redwood's adjusted revenue was driven by our mortgage banking operations, with the remaining 30% from our investment portfolio. We expect mortgage banking and by extension our taxable subsidiaries to continue to be a strong earnings driver going forward.

The revenue generated through mortgage banking is nearly double the percentage contribution of recent years and highlights the ongoing shift in our business model as we adapt to changing market conditions. It also supports continued expansion of book value over time with retained earnings acting as a zero cost avenue for capital formation that has reduced our marginal need for funding and stands in contrast to others in the space to manage their balance sheets.

By continuing to reinvest in our infrastructure, both organically and through partnerships, our path to realizing transformative scale is clear. Across our enterprise, we've cultivated a talented and inspired workforce, and we have embraced technology to serve our customers more quickly than ever before. One great example of this approach is last quarter's launch of our early-stage investment platform, RWT Horizons. This is something Dash will touch on in more detail.

As we look ahead, we continue to raise our game, invest in our people and infrastructure and attack our markets with a service standard that continues to separate us from our competition. We're excited by recent changes in the regulatory landscape that have made the non-agency mortgage market more relevant than it's been in many years. Our goal is to build a business that serves an important public mission, can scale profitably and generates a very attractive return profile for our shareholders.

And with that, I'll turn the call over to Dash Robinson, Redwood's President, to discuss our operating results.

Thank you, Chris. Our second quarter results reflect continued strategic progress and strong operating momentum. While our comprehensive non-agency market footprint benefited from ongoing strength in the housing and credit markets, we coupled these macro tailwinds with homegrown ingredients, both new and familiar. Our team's usual crisp execution was complemented by meaningful progress with our technology infrastructure, both organic and through new partnerships already bearing fruit. In sum, the final product was another quarter of significant outperformance.

As Chris referenced, benchmark rates remain an area of acute focus for the markets. The uptick in rates during the second quarter has almost fully retraced. However, uncertainty around the level of government support for agency mortgages may very well moderate the amount of borrower refinance activity we typically see in this kind of rally. Against this backdrop, it's important to unpack the key drivers of profitability across our platforms. As Chris noted, the markets we serve continue to grow as the path of home prices, evolution and consumer demand for housing and important regulatory trends are driving an expansion of non-agency's true potential footprint.

And while we're not immune from moves in MBS prices versus benchmark rates, our diverse distribution channels and unique product mix allow us to benefit from different drivers of demand. Case in point, while margins compressed elsewhere in the market during the second quarter, we enjoyed durability in our margins with sustained strength in volume across both residential and business purpose lending.

In fact, an ebb and demand for agency mortgages represents another potential tailwind for our business. Mortgage originators are still ramping up capacity to address the pent-up demand from jumbo borrowers and as home price appreciation has increased nationwide, along with consumer preference for single-family detached rental housing. Our suite of BPL offerings remains in high demand, and our residential business' geographic footprint continues to expand.

Homeowner equity is now at its highest level in at least the decade, pushing more loan demand above the conforming loan limits and into Redwood's addressable market. As we note in our updated investor supplement, there are now 13 states in which we have locked more loans year-to-date than in each of the 2 years prior to the pandemic. Collectively, locks in these states represent 35% of our year-to-date volume, a trend we continue to track with great interest. Overall, market observers now forecast single-family home price appreciation for 2021 to be 14% and 16% for existing and new homes respectively. Even if this is moderates as expected into 2022, we expect the trend to continue of more locations across the country, evolving into non-agency markets.

Another key driver is the regulatory environment. Evolving rules are likely to meaningfully increase the qualified mortgage or QM cohort, a significant boon for high-quality expanded credit borrowers. Furthermore, caps in place since earlier this year on GSE purchases of nonowner-occupied loans could expand the non-agency market by an estimated $25 billion to $35 billion per year. And there is likely more the non-agency market can do to help address broader access to credit and the associated impact on first-time homebuyers and low to moderate-income borrowers overall.

Also critical to the equation is the availability of high-quality rental housing, including single-family detached, an issue solved in part by an increase in custom-built projects. As we discussed on prior calls, housing supply has not kept up with demand and building material costs, though moderating, remain high, contributing to significant price escalation on homes. Single-family homes' rent can meet the demand for expanded space and desirable neighborhoods and a monthly payment that more consumers can afford.

Reflecting these supply-demand dynamics, single-family rental occupancy rates remain at record highs with a weighted average of 95% for all U.S. single-family rental homes and single-family rents have remained meaningfully more buoyant than multifamily rents since early last year. Our second quarter results reinforced this broader backdrop. Operating highlights for the quarter included reaching our second highest level of jumbo locks ever and our highest BPL volume since late 2019. As Brooke will elaborate on, book value increased 6.5%, driven by a mix of asset appreciation through fair value changes and retained earnings from mortgage banking income earned at our taxable REIT subsidiary. Collectively, our platform distributed $3.6 billion of loans through direct loan sales and 4 securitizations.

Following a historic first quarter, our residential business registered $3.9 billion of lock volume in Q2. As anticipated, purchase money loans were key driver and represented a 60% share of the quarter's lock volume. Despite the interest rate backdrop and competitive pressures impacting GSE eligible production, the business delivered margins at the high end of our historical target range of 75 to 100 basis points, reflecting the diversity of our distribution channels and strength of our pipeline management amidst broader market volatility.

During the second quarter, we sold $1.8 billion of loans and completed 3 Sequoia securitizations for $1.5 billion. While we saw moves in rates during the quarter and a dramatic flattening of the yield curve after the June Fed meeting, the end-to-end coordination and efficiency with which our teams function remain a true competitive advantage. The flexibility of our securitization program, coupled with whole loan distribution, facilitates further scale as collectively they allow us to be in the market consistently. During the second quarter, we were once again faster to market than the competition in distributing our pipeline.

Another encouraging metric was the contribution of Redwood Choice, our expanded prime product made to volumes. Choice represented 15% of our locks in the second quarter, up materially from 5% in Q1. Choice represented as much as 40% of our locks pre-pandemic, a reminder of how meaningful this channel can be. In recent public remarks, we continue to emphasize changes to the QM roles that we believe will be a key tailwind to Choice's reemergence. If adopted safely, the new roles focus on mortgage rate, is a determinant of QM status, will allow another sleeve of high-quality borrowers to qualify more easily for competitive rates. An important step that underscores the true potential of the non-agency market to serve a deeper bench of consumers.

We are actively engaging with our seller base to bring this to fruition. These macro trends also reflect meaningful tailwinds for CoreVest, our business purpose lending platform. The second quarter was particularly productive in BPL as we advanced several key initiatives, most notably completing our strategic investment in Churchill Finance. CoreVest originated $527 million overall in the second quarter, up 37% from Q1. Our funding mix consisted of $312 million of single-family rental loans and $215 million of bridge loans. Bridge production was up over 60% from Q1 and increased for the fourth consecutive quarter, driven by increased usage by borrowers on lines of credit and several build-for-rent and multifamily loans coming online for funding.

The origination mix for BPL in the second quarter reflects the strength of our multi-product strategy, which results in high levels of repeat borrowers, including those that utilize more than 1 of our loan products. In all, 67% of total originations in the second quarter were from repeat customers, and the pipeline remains strong with a consistent mix of new loans and refinance opportunities.

SFR production remained strong in the second quarter, with fundings up 23% from Q1. As we discussed on our last call, the pipeline remains robust, and execution has benefited from increasingly constructive securitization markets. We completed our first broadly syndicated CoreVest securitization of the year in April, achieving all-time tights on credit spreads with a deep bench of investors. That record proved short-lived. Last week's follow-on transaction once again priced at all-time tights, including a spread of 57 basis points on the AAA-rated securities.

As we've seen many times before, this type of execution inevitably breaths additional competition, which we view as an opportunity for CoreVest to continue differentiating itself as the BPL markets lender of choice. We have high expectations for our forthcoming refreshed client portal, especially its new user interface, which will make it even easier for our clients to upload documents and track progress of their loans.

Additionally, we continue to press our advantage as a nimble life cycle lender. We're finding a product suite to continue serving the end-to-end needs of a deepening cohort of sophisticated housing investors. Highlighting this progress is our partnership with Churchill, which we expect will diversify our sourcing channels with a particular emphasis on smaller balanced, single-family rental and bridge loans. We have now closed our first purchase of bridge loans and SFR loans from Churchill and see an attractive near-term pipeline to complement our direct lending products.

In periods of increased competition, it's important to reinforce the value of an institutional platform like CoreVest in a market that in many ways is still developing. We have now completed optional calls on 2 CoreVest securitizations, refinancing many of the underlying loans that the platform made 5 or more years ago. Many borrowers have now been with the platform for at least that long as CoreVest continues to support their growth and evolution. That sort of track record matters and has immense intangible value on the field of play.

Our newest initiative, RWT Horizons, is doing its part and keeping pace with our enterprise-wide progress. Since formally launching horizons earlier this year, we have completed 5 investments and are assessing an exciting pipeline of new opportunities. Most recently, our direct investments include liquid mortgage, a platform focused on leveraging blockchain technology to bring efficiencies to the non-agency market and a tech-enabled residential construction management firm. At this early stage, it's exciting to win this tangible progress with our new partners.

Liquid mortgage recently procured a key patent covering the vast majority of its business plan, a big step in our collective efforts to apply blockchain technology to the non-agency ecosystem. Rent room and rent butter also both had productive quarters and are meeting or exceeding their planned product development and rollout initiatives. Most critically, these partnerships reflect the intellectual collaboration that drive true alpha for all parties involved. We are engaging directly with liquid mortgage and developing the work streams required to safely put mortgages on blockchain. And together, are working to engage other key stakeholders across the industry.

For rent room and rent butter, 2 investments sourced through CoreVest borrower network, we are facilitating synergies with our broader client base. We're thrilled to be working shoulder-to- shoulder with those standing on the frontier of innovation in our markets.

With that, I'll turn the call over to Brooke Carillo, Redwood's CFO.

Thank you, Dash. As previously noted, our second quarter 2021 results reflect the durability of our models and continued strength across our entire platform. We reported GAAP book value per share of $11.46 at June 30, a 6.5% increase relative to the prior quarter end. The primary drivers of the $0.70 increase in book value per share for GAAP earnings of $90 million or $0.77 per basic share, partially offset by our quarterly dividend of $0.18 per share. We are pleased to have maintained the strong momentum for the first quarter, generating a total economic return on book value of 19% for the first half of 2021.

Our economic return spotlights not only our growth in book value, but also our growth in our dividend, which we raised by another 13% in the second quarter. We saw particularly strong results this quarter from our business purpose mortgage banking operations, which delivered a 52% after-tax operating return on capital with a net operating contribution of $20 million, which is up 80% from Q1 on a 37% increase in origination volumes.

Income from residential mortgage banking operations decreased from historic first quarter levels while still delivering an after-tax operating return of 17%. Even as loan purchase commitments were down 22%, Q2 still marks our second highest volume on record. To reiterate Dash's point, gross margins remained at the high end of our historical target range despite a challenging macro backdrop that impacted securitization execution and increased hedging costs relative to the first quarter.

Turning to the investment portfolio. We had $49 million of positive investment fair value changes, primarily from our RPL assets, given further spread tightening and improved credit performance this quarter, which I'll expand upon shortly. Net interest income increased approximately 20% or nearly $5 million from the first quarter of 2021 due to higher average balance of loans and inventory at our operating businesses, higher yield maintenance income from SFR securities, growth in our bridge loan portfolio and a decline in interest expense from our investment portfolio.

Shifting to the tax side, we had retaxable income of $0.11 per share versus $0.09 in the first quarter, primarily on higher net interest income. Our taxable REIT subsidiaries earned $0.27 per share in Q2, down from $0.47 in Q1. The decrease was primarily driven by lower mortgage banking income, partially offset by lower operating expenses and resulted in a $5 million lower tax provision for the quarter. On a combined basis, our operating businesses generated an annualized after-tax return of over 28% in Q2, utilizing $483 million of average capital. As a reminder, these earnings can either be reinvested back into our operating businesses or paid as a dividend to the REIT.

This quarter, we continued our focus on higher-margin businesses that produce strategic assets for our investment portfolio. Specifically, we deployed $45 million of capital to bridge loans during the quarter and $15 million to SFR securities and called loans. Year-to-date, we have net reduced the size of our third-party investment portfolio through opportunistic sales. Working capital for our mortgage banking businesses represented less than 30% of our allocated capital, but produced approximately 65% of our adjusted revenue for the second quarter. As Chris mentioned, the proportion of adjusted revenue from our mortgage banking operations has been growing in recent years and has facilitated returns that are significantly outpacing our growing dividend.

Total portfolio returns rose by a combination of improved credit and faster prepayment fees on securities, we hold at a discount to face value. Higher prepayment speeds continue to benefit these portfolios and allow us to accelerate our call options within Sequoia and CoreVest securities. We settled the call rights on 3 Sequoia securitizations and 1 CAFL securitization during the second quarter, acquiring $83 million of seasoned jumbo loans and $45 million of seasoned SFR loans, all at par, which benefited book value by $0.05 per share. We estimate about $250 million to $300 million of expected call activity across CAFL and Sequoia through the remainder of the year, and we estimate at current market conditions, the underlying loans can generally be sold or resecuritized well above their par value, creating further potential upside to earnings and book value of approximately $0.06 to $0.08 per share for 2021.

Furthermore, we project another $2 billion of loans that could become callable by the end of 2024, with the majority of those currently expected to occur by the end of 2022, and that could potentially add another $0.63 to $0.65 per share on average book value depending on execution. Net delinquencies in our portfolio continued to improve with new forbearance surplus near 0. Specifically, Choice and RPL securities experienced improved 90-day delinquencies during the quarter with [select] remaining flat from Q1 at absolute low levels of 80 basis points.

It's worth noting that improved delinquency trends with our RPL securities portfolio experiencing 60-day delinquencies now below pre-COVID levels and voluntary prepayment fees continued to well exceed our original modeled expectations. LTVs in this portfolio are low and continue to improve or hold stable and average coupons are in excess of our current mortgage rate, which should provide options to help cure distress borrowers and keep actual losses low.

At quarter end, our balance sheet and funding profile were in excellent shape following several liability and capital management actions taken during this quarter. We added over $750 million of financing capacity to support growth of our operating platforms, including the refinance of a $242 million bridge loan financing, which contributed to a roughly 100 basis point cost of funds improvement for our overall investment portfolio.

Importantly, the second quarter marked another record for Redwood with combined $3.3 billion of residential whole loan sales and securitization, underscoring our ability to source and distribute in size. Our recourse leverage was marginally higher at 2.2x at the end of the second quarter as we incurred additional warehouse borrowings to finance higher loan inventories. At June 30, our unrestricted cash was $421 million, which is over half the size of our outstanding marginable debt. And at quarter end, our investable capital was $175 million, not including $100 million of incremental capital generated from a secured term financing we closed in early July.

I'll close with an update on our 2021 financial outlook. We continue to see upside potential in our book value from here, both from anticipated call activity in our investment portfolio and through our ability to grow and retain earnings at our taxable REIT subsidiary. We encourage you to review the supplemental quarterly materials we published earlier today, which provide more detailed and refreshed guidance for the remainder of the year to highlight some of the key inputs that support our financial narrative. Confidence in our ability to achieve our guidance is grounded in the sustainable trends were seen across our businesses.

As Chris and Dash have outlined, the key themes that will drive our performance include: increasing our wallet share, using technology to drive efficiency, allocating more capital to our higher ROE operating platforms, continuing to create value through the investment portfolio and using partnerships, M&A and other growth strategies to further our footprint in our target markets.

As we look ahead, we remain on track to keep pace with the robust volumes we've seen through the first half of the year, anticipating another $6 billion to $8 billion of jumbo locks and approximately $1 billion of BPL originations for the second half of the year, which would nearly double the volume of that business year-over-year. For perspective, those second half volumes on the residential front approached our full year volume just a couple of years ago. We've demonstrated our ability to successfully grow not only our origination volumes, but also our market share, and we believe we can continue to do that across our platform and in each of their underlying channels. Small changes in market share can have a meaningful impact to our overall profitability and scale, and that's what we're planning to do over time.

For the remainder of the year, we anticipate generating an adjusted return on allocated capital between 20% to 25% from our mortgage banking operations and 10% to 12% for the investment portfolio. As credit spreads have tightened fairly significantly and fair values have since increased, this forward yield on the investment portfolio, which is in line with our forecast at the beginning of the year, reflects improvements in our financing costs and capital optimization.

And finally, in terms of the potential sources of book value upside, we began the year with $444 million of net accretable discount in our portfolio. And even after growing book value $1.55 per share or roughly $175 million since that time, we have approximately $2.60 per share or $300 million of remaining discount in the portfolio that we have the potential to recognize over time.

With that, I'd like to turn it back to the operator to open the call for Q&A.

(Operator Instructions) Our first question comes from the line of Stephen Laws with Raymond James.

Congratulations on a very nice quarter. You guys did a great job of covering the different opportunities for ROE expansion. And Chris, likely you phrase it a transformative scale that the company is starting to achieve. But maybe Dash, if you could run through these, I think you covered a number in your prepared remarks. But when I look at the opportunities for ROE expansion between Rapid Funding, Churchill, Horizons, you've talked about Choice going 5, 15, historically 40% of volumes there. And then you do financing facility as well as a lower cost financing facility. What are you most excited about? When you think about the ROE expansion opportunities, which 1 or 2 do you think will have the biggest impact in maybe the next 12 or 18 months?

It's a great question, Stephen. Candidly, we are -- in some fashion, we are excited, obviously, about all of them. I think some of these opportunities for ROE expansion are certainly nearer term, I would probably categorize those as the existing businesses we have that are at scale, continuing to realize their operating leverage, both residential and BPL. I think we've seen that over the past several quarters. Obviously, we're seeing durability and expansion of margins in both of those businesses, more efficiency in terms of our cost to originate and cost to produce. So those are all real tangible benefits that we see over the next several quarters from an operating leverage perspective that I think are near term. Medium to long term, things like Horizons and Churchill, which are newer, and we expect will take some time to come online, we think will be meaningful contributors. Churchill is a really nice complement, frankly, to what's already a pretty deep bench of products that we have through CoreVest. It allows us in a pretty cost-efficient way to access parts of the market that we could access directly and are, but through a partnership like that, frankly, allows us to do it a bit more accretively from our perspective. And Horizons, as Chris, I'm sure, can elaborate on, that's really where so much of the alpha really lies as it relates to our enterprise-wide efforts because, at its essence, Horizons is trying to link us up and really penetrate us with entrepreneurs and others in the market trying to advance ideas that can really revolutionize rather than just sort of evolutionize some of our businesses and how we work. So like I said, that will take a bit longer to come online. And ultimately, we expect Horizons to not only produce good investments in their own right, but also really evolve how we -- how efficiently we work within our core businesses today.

Great. And Brooke, maybe on the net interest income. It was a pretty strong quarter. I think I read in either the review or the deck, that a lot of that was due to some high loan balances ahead of transactions. How should we think about that moving sequentially? I know there was a securitization just after the end of the quarter. Will we see NII pull back a little bit because of that securitization or is this $30 million number kind of a good run rate given the lower financing costs that have been put in place?

So there will always be a little bit of noise around quarter end depending on inventories, although I would say, just in terms of net interest income going forward, it was up $5 million over -- quarter-over-quarter. Some of that will be driven by our financing costs, which you correctly point out that we made some good advancements this past quarter and refinancing some of our higher cost facilities and coupled with the securitization execution, which has just continued to be phenomenal that Dash mentioned on the BPL side. I think we continue to see room there to further support NIM going forward even without higher inventories potentially on balance sheet around quarter end. So for instance, the 100 basis points of financing cost improvement that we mentioned on just the investment portfolio that could add about $0.02 a quarter to NIM going forward from that deal alone. So -- and those are the kinds of things that we'll continue to focus on to keep our NIM fairly stable going forward.

Great. Lastly, Chris, business has been extremely strong. Book value is really grown, recovered from post-COVID and the outlook is positive. Whether it's macro or something specific to jumbo or BPL, what are your big -- what do you view as the biggest risk to the business model in your current ROE outlook as you sit here today and look at the landscape?

Good question, Stephen. I think right now, the company is executing at a really high level. And so I don't worry about internally us being able to execute so much as we've got a delta variant with COVID. Rates were quite volatile in the second quarter, and there's a Fed meeting today, and there's talk about tapering. I think we proved that we can manage through those. But nonetheless, they present challenges when you're running a mortgage pipeline, there's a lot of competitors entering the space. The BPL market is a very attractive market. I think we are best-of-breed. But as we mentioned in our prepared remarks, some are attempting to buy their way in via rate sheet. So all of those things are natural evolutions. And when you see us and others performing the way we are, you expect more competition. But overall, I think if the economy continues to recover and our businesses execute, we're in a really good position here. I think it's a good growth story. So Brooke mentioned, we released a refined forecast for the second half of the year to encourage everybody to check out. But right now, we're well positioned.

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

Could you just talk about some of the -- what you're seeing in the residential banking sector and some of the increased competition that you're referring to and how that compares to the competitive framework you're seeing in the BPL segment?

Maybe we can [tag team] this one. In resi, I think it's -- the competitive forces aren't quite the same as in BPL. We got off to a good head start about a year ago post-COVID and right now, we're seeing a lot of competition in the securitization markets. I think issuance activity is as robust as it's been probably since the great financial crisis. Just a lot of issuers, a lot of serial issuers as well as new issuers entering the space. And so you've seen pressure on AAA spreads and especially pass-throughs. But I think that one thing that differentiates us from resi is our whole loan distribution is very, very strong. In fact, I think we sold more whole loans in the second quarter than we may have in the history of the company. So that distribution to us has been very good and durable. And I think on the resi side, it's more a matter of managing the pipeline and managing rate volatility, dealing with tapering and things that impact not only the price of mortgages and rates, but also our hedges. So that's an ongoing battle in the mortgage business, but something we're pretty good at. Dash, do you want to cover BPL?

Sure. Thank you, Chris. On BPL, it's a slightly different landscape. As has always been the case with CoreVest. On every loan we do, we compete. It's just a different group of folks that we compete with, depending on the type of loan that we do. And what we're observing as the market has heated up and from a capital flow perspective, is more and more equity capital has come into the space. We've seen a lot of smaller lenders emerge reemerge and with a focus on products that frankly have a lower operational barrier to entry than a lot of what we focus on. We feel really, really good about the strategic moat, both from a borrower penetration perspective as well as operationally with our core SFR and bridge products.

Interesting to say, we don't compete there. But there's a smaller cohort of lenders that can do that well. I think the smaller balanced products, some of the more traditional bridge loans backed by a single house or single-family rental loans backed by much smaller portfolios. There is a really, really strong bid in the market for those loans, which is obviously a tailwind for us, but also has allowed other people to come online somewhat quickly here this year and get into those products that frankly don't require as much operational expertise or jobs as a lot of the products that we traditionally focus on. So that's the landscape we can manage because at the end of the day, speed to leverage for these borrowers, reliability, product flexibility is going to win the day, and we feel very good about those traits in our business. But the competition is definitely there as you'd expect it to be, given the market dynamics.

And then a follow-up on the rating mortgage side. You laid out a pretty strong argument that the non-agency market should continue to grow. But it seems like the lock volume is going to be a little bit softer in the back half of the year than the first half of the year. Now the first half was obviously very strong. But do you expect that slowdown to be transitory before you start to see a structural growth in the non-agency market going out to 2022 or 2023?

Yes. It's hard to project quarter-to-quarter in resi, as you know. And so we have limited visibility into the direction of rates and things that impact week-to-week or month-to-month, but the macro forces in resi are very strong in non-agency, I should say. There's still a fair amount of resi business to be had. But also with these regulatory changes, you've seen the emergence of the nonowner-occupied strategy, and we started to see non owner-occupied securitizations. That product is in very high demand in the private sector. People really like the convexity profile.

And that has the capability to significantly expand the absolute size of the non-agency space. There's definitely an emphasis in Washington on affordability, which probably means there's a good chance that the rules don't change. And these opportunities remain strong in the private sector. So I think there's a lot of good macros. And certainly, how we're positioned in the market and what we've built over the course of many years and the relationships that our team has built. Like I said, it allowed us to move very quickly when the COVID crisis passed, and I think it continues to be a big advantage.

One thing I'd add, Kevin, to that is if you think about and you've identified the statements we've made about home price trends and what that means for markets across the country evolving in the non-agency markets. That is really a multiyear view about the growth trajectory for the business. Certain ZIP codes or MSAs move to requiring more non-agency product to facilitate home purchasing. That inherently is going to take a period of time. It's not going to happen all at once. Obviously, purchases need to occur in those markets for that to occur. So that's an immediate opportunity for us. But over the long term, it's really a multiyear view and pretty powerful statement we think about how big the footprint can evolve into.

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

Actually, first, can you just talk about the execution difference between whole loan sales and securitizations on the jumbo loans?

Sure. They're pretty close to each other right now, Bose, particularly as the long end of the curve has bounced a bit off of its low in yields. When we were staring at a 150 in 10 year, probably the answer would have been securitization, would have been slightly better just given the total return and total yield challenges for whole loan sales. But now that we've backed off of that, I'd say they're pretty close to parity right now.

Okay. Great. And then actually, just switching to your guidance, but on your BPL guidance in the back half of the year, it looks like it's around $500 million a quarter, which is a little below the $527 million you did this quarter. I mean, should we think about that sort of the longer-term outlook is up, but the guidance in the back half of the year just reflects the fact that 2Q was -- had a bump up relative to 1Q? Or just curious how we should think about that?

Yes. I think that's reflective of the fact we mentioned that BPL originations were up 37% quarter-over-quarter. And so we're coming off of the highest quarter that we've seen since the fourth quarter of 2019 for that business. And as we set up the guidance, we want to make sure that our forecast is grounded in our ability to deliver on those results. And so $2 billion of BPL originations for the year, as we mentioned, would double down volume of the business year-over-year, and there's been additional capital coming to the sector and other competitive dynamics, coupled with the fact that the strategic partnership and sourcing channels that we have are fairly nascent to complement what our business has been able to produce organically, which has been phenomenal.

So I think we're just trying to set ourselves up for the reality of what we're seeing in the market right now, but understanding new products for our others have been products that we've been originating for years. And so our footprint in the bridge market, while growing, we feel really confident in our ability to deliver on that.

Okay. That makes sense. And then actually one regulatory question. Just given the change at the FHFA, curious on your thoughts about whether that 7% cap on the seconds and investment properties, whether there could be any change to that?

Yes, Bose, we don't have any insight info here by any means, but we do sort of subscribe to the notion that, #1, I think the private sector thus far has picked up that business relatively efficiently. So questions about the capacity of the private markets to absorb that supply at least a quarter or 2 in, I think we've met that challenge as an industry.

But I also think the investor products and other facets of the GSE's scope of business that aren't necessarily fully aligned with the mission. I'm not so sure that those necessarily come back quickly. If anything, subsidizing those mortgage rates just continues to impact the affordability of homes for first-time homebuyers or others. So it's not obvious to me that those caps are lifted anytime soon. That said, we are going to go through a transition with a new director of the FHFA and a new regime. So we'll have to just wait and see what happens.

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

I was hoping you could talk about that $2.60 per share of potential book value gains, kind of what is required? Or what type of -- what is needed on the underlying collateral for that to ultimately be recognized? And I guess, how should we think about potential timing for that?

Short answer, I'd say, is more of the same. I think if we point back to the past 4 quarters, we've really seen our investment fair value changes of over $265 million, and that's been driven by the same trends that would be necessitated to continue to realize more of that $300 million, which is just strong credit performance in our deals. We mentioned in our prepared commentary, some of the statistics around our 60, 90-day delinquency trends that we see across our RPL and residential portfolios as well as on the BPL side.

And then elevated prepayment speeds continue to be a real tailwind for us too and I would just note, those fair value changes as a percent of our net accretable discount in the past few quarters have been running kind of 10% to 20%. So we might expect that to moderate, just given how strong the HPA has been, how strong the strength we've seen in terms of elevated prepayments, but it would really just be a continuation of those trends that we've been seeing to continue to capture that net discount to our value. And I think we can point to SLST on our reperforming loan portfolio.

For instance, we've seen voluntary prepayments in the low to mid-teens, which is really well in excess of our modeled expectations. So that has accelerated the timing relative to what we had originally anticipated when we entered some of these trades. And on the residential side, our gross back even on selective, around 4%. So we've made a lot of commentary on our purchase mix this quarter, but there's plenty of room to run, given what's happened in the rates market in terms of a pickup in refis that would continue to -- so I think faster than modeled prepayment speeds and continued credit spread tightening would help accelerate that recognition of the discount through investment fair value changes over time. And we noted in our investor presentation that around 66% of those securities, we actually own the call rights around. So all the things would help us to accelerate those at discount.

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

Lots of capital getting attracted to single-family rental bridge lending and HPAs have, of course, been significant already, like you guys noted. Can you talk about just the ability to target the same credit profile that you've typically been able to see show up at CoreVest? And if you feel like it's getting more challenging to do that, just given the increased competition?

And then one more on the CoreVest side or the business purpose side. Just curious how you guys think about locking in some more durable financing for the bridge portfolio, particularly through securitization, whether there's enough critical mass to become a programmatic issuer there potentially?

Thanks, Eric, it's Dash. I'll take those in sequence. You bring up a great point on overall credit quality. Clearly, whenever competition enters the space and sort of what I was articulating to an earlier question. You clearly are seeing a cohort of lenders focus on the stuff that's easier to do, potentially stretch credit standards. We're working, as we always do really hard to stick to our knitting. And I think what allows us to do that effectively is the overall sophistication of the borrowers that we serve, but also the fact that we've got, in many cases, a multiyear head start versus competitors in terms of the book of business that we have. I referenced in the prepared remarks, the fact that we've now called 2 CoreVest securitizations. We have a lot of borrowers that have been with us for 5-plus years at this point. And that really matters. And obviously, structure and efficiency on any given loan is important.

But for our borrowers, whose portfolios have grown over the years that they've been with us, whose financing needs are becoming more and more eclectic, so to speak, as they get into different strategies. That reliability that we provided over the years ultimately really does win the day. And the fact that not only are we attracting new customers but have an existing book of business, which we've been very effective and continuing to serve, I think is a mitigant to what you're correctly pointing out. Clearly, we're very focused on not only the evolution of credit standards in this space but also structure. What types of loans are being offered, what sorts of term versus our traditional loans. These are all things we focus a lot on. And I think, again, the moat is just the duration of the borrower relationships and the flexibility of our products that we'll continue to lean on to make sure we stick to our knitting.

As it relates to your question on bridge, as we've discussed before, we're always looking at the market for what's out there. I would say the team, as Brooke referenced, did get a lot done over the past couple of months in terms of further optimizing the cost of funds and the structure for how we finance the bridge book. That was a driver behind the 100 bps of blended cost of funds improvement for the investment portfolio. But we look at everything. We're certainly aware of competitors of ours getting deals done, and it's something we're always going to monitor very closely.

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

I'll spend some time looking at your RPL securities today. And it looks like it's about $2 billion that your investment of about just under $500 million, maybe reference is about $200 billion of total loans. Obviously, we know what RPLs are, but can you comment on how you acquired those securities? Was it kind of just open market now and then? Or is there any large, structured transaction that puts some of those subordinate securities on your books?

Thanks, Steve, for the question. It's mostly the latter. We did -- Freddie Mac over the years has had a couple of programs through which they have syndicated the credit risk at least on reperforming loans that they have bought out from their securities onto their balance sheet. SLST is the acronym for the 2 largest RPL investments we have. These are investments we put on the books in late 2018 and '19 respectively. So they've got some seasoning from our perspective and then the underlying loans, as you know, are extremely seasoned, many of them 14, 15-plus at this point.

So the attractive piece of those investments was, to your point, we were able to put really chunky amounts of capital to work in one fell swoop at attractive returns. And as Brooke referenced, the underlying performance there -- here has been better than what we had originally modeled. But also, those come with a very attractive term financing at the top. That's guaranteed by Freddie. So it's essentially term-funded debt at a very attractive rate, which takes a headache or 2 off of our plate as it relates to having to manage how that book is financed over the years. So it's very attractive for a number of reasons.

Got it. Now I recall that your multi-family investments, you had an arrangement with Freddie Mac, but that had slipped my mind. So given that attractive term financing, there's really no -- it doesn't sound like there's any call right angle or play on these RPLs as it is on some of your seasoned SEMT and CFL deals just because of the way you've kind of locked it up?

Yes. Actually, there is some optionality within the structures that we originally entered into. They're -- it's not as immediate as with Sequoia and CoreVest, just because of how the call is structured and some of the lockout and lockout periods and some of the premiums required to call the transactions. But it's a big part of the story. That's probably less immediate for 2021 and more potentially a year or 2 down the road based on how those transactions are structured.

Okay. That's great to know. And my last thing, bank compensation, I could remember, gosh, 3 years ago, 4 years ago, the banks were just first Republic wells, et cetera, we're just going -- JPMorgan crazy over Prime Jumbos. And it was really hard for you guys to compete at some times. How is that today, Dash, in terms of their footprint in the marketplace versus yourself and others?

Bank demand has always been a 2-sided coin for us because obviously, we compete head-to-head with the wells and the chases. Those channels are obviously meaningful competitors to us in the market. But bank demand has also been a significant part of our business from a distribution perspective. Whole loan sales have been a really important part of the equation for years. I think -- year-to-date, I think we've actually sold more whole loans year-to-date 2021 than we have in any other full calendar year. And it speaks to your point. These are obviously very high credit quality products. There's net interest income challenges of depositories. So they're a very real participant in the market and their competitors, but they're also partners in helping us run our business.

Yes, Steve, I'd add to that. We do a lot of rate surveys, and we're very, very aware and conscious of where banks are pricing mortgages and we have enough visibility to understand where liquidity lies. And I'd say the team right now is moving risk so quickly, it's really enabled us to be very competitive, more competitive than we've been in the past. We don't have the advantages of a bank with the deposit base, but we've mitigated that by turning our capital faster, processing loans faster and maintaining that service standard along the way. So I'd say right now, we're more competitive with the banks than we've probably ever been. But as Dash said, we look at that. We look at them as competitors, but we also look to them as clients. So it's kind of somewhat of a symbiotic relationship.

Got it. And we look forward to -- you positioned the company in a fantastic place, and we look forward to the second half of the year.

Thanks, Steve.

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

Congratulations on the great quarter. First question is on the outlook on the resi side. Your guidance at the high end implies a similar run rate in terms of volumes for the back half of the year. How much of that in your view is refi? And then just given -- given where rates are today, would you expect that to be more in the third quarter heavy or fourth quarter? What is your view of that? And finally, within that, HPA has been significant through this point. Any thoughts on the foreclosure moratorium exploration and how that will impact for the balance of the year?

On your first question, Ryan, our second quarter results were about 60% purchased in our locks. Obviously, we're -- it's hard to predict where rates will go. But I think what underscores that is a really solid footing purchase money market. And so we're not -- that forecast is probably based on a consistent mix of what we've seen here over the past few months. It's not a view that with the rally in benchmark rates, refinances will uptick massively versus where they've been. That's probably upside to the forecast, frankly. But the forecast really reflects the current mix that we've been trending towards here in the past few months. As it relates to the foreclosure moratorium, obviously, we're tracking that very, very closely. From our perspective, it's something that differs materially, obviously, from where we were 10 to 12 years ago in terms of just the state of the housing market. Obviously, there is a cohort of borrowers that has been impacted or part of this moratorium. But from our perspective, if you just look at where equity is and housing overall, we remain optimistic that -- however, that ultimately plays out, it will be an orderly situation in terms of supply for the housing market, how borrowers can come back online and begin to reperform again. So it's something we track very, very closely, and we do think the macro trends obviously differ materially from when we were having a conversation like this back in 2008, 2009.

And then real quick, within that, in your deck and on the call several times, you mentioned increasing your wallet share, particularly on both sides of the business. And curious to hear your thoughts on how some of the new investments in Horizons and those initiatives within technology are driving those kinds of synergies going forward and increasing your opportunities within those areas.

Yes, I'm glad you asked about Horizons because internally, we're -- we've been very excited about it, and it's really starting to gain traction in addition to the capital that we've deployed in Horizons, which admittedly hasn't been too significant. The deal flow has been very significant. And with every deal we look at, our network is building. And that's a space that we had kind of been on the outside looking in for a number of years. And just given our proximity to the valley and the network that we have, we're starting to see, especially in the proptech side, a lot of opportunities, Class A -- Series A, Series B, just interesting opportunities. And I think that as that platform grows, we always wanted it to have a strong connection to our business and whether it's technology or something else, something that could be transformative to our BPL business or resi business. And so over time, some of the investments that we've disclosed to the extent these startups turn into stable businesses. There's definitely an opportunity to expand in some really interesting areas of whether it's finance or proptech. So it's -- again, it's early days. And I think Horizon is a medium to long term story, but it's very much a focus here. And like I said, there's a lot going on behind the scenes, a lot more than just the capital that we've been deploying.

And congrats again on a great quarter.

Thank you, Ryan.

Ladies and gentlemen, this concludes today's Q&A session and this does end the call. Thank you, everyone, for your participation. You may disconnect your lines at this time, and have a wonderful day.