Annaly Capital Management, Inc (NLY) Q4 2025 Earnings Call Transcript

Annaly Capital Management, Inc (NYSE: NLY) Q4 2025 Earnings Call dated Jan. 29, 2026

Corporate Participants:

Sean Tencel — Investor Relations

David L. Finkelstein — Chief Executive Officer, Co-Chief Investment Officer

Serena Wolfe — Chief Financial Officer

Ken Adler — Head of Mortgage Servicing Rights and Head of Portfolio Analytics

V.S. Srinivasan — Head of Agency

Analysts:

Bose George — Analyst

Jason Stewart — Analyst

Eric Hagen — Analyst

Douglas Harter — Analyst

Richard Shane — Analyst

Harsh Hemnani — Analyst

Trevor Cranston — Analyst

Presentation:

operator

Good morning and welcome to the fourth quarter 2025 earnings call for Annaly Capital Management. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing STAR then zero on your telephone keypad. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, please press STAR than two. Please note today’s event is being recorded. I would now like to turn the conference over to Shawn Ketzel, Director of Investor Relations. Please go ahead.

Sean Tencel — Investor Relations

Good morning and welcome to the fourth quarter 2025 earnings call for Annaly Capital Management. Any forward looking statements made during today’s call are subject to certain risks and uncertainties which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information.

During this call, we may present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our earnings release. Content referenced in today’s call can be found in our fourth quarter 2025 investor presentation and fourth quarter 2025 financial supplement, both found under the Presentation section of our website. Please also note this event is being recorded. Participants on this morning’s call include David Finkelstein, Chief Executive Officer and co Chief Investment Officer Serena Wolfe, Chief Financial Officer Mike Fannia, Co Chief Investment Officer and Head of Residential Credit VS Srinivasan, Head of Agency and Ken Adler, Head of Mortgage Servicing Rights.

And with that, I’ll turn the call over to David.

David L. Finkelstein — Chief Executive Officer, Co-Chief Investment Officer

Thank you Sean Good morning everyone and thank you all for joining us for our fourth quarter earnings call today. I’ll open with a brief overview of the macro and market environment and then touch on our performance for the quarter and the year following which I’ll provide an update on each of our three investment strategies and conclude with our outlook for 2026. Serena will then discuss our financials before opening up the call to Q and A. Now starting with the macro landscape, the fourth quarter supported the prevailing narrative of a solid US Economy. Although official data flow was disrupted by the government shutdown, reports received thus far suggest that the expansion continues at an above trend pace.

The labor market remains soft however, as hiring slowed further in Q4, but limited layoffs and a reduction in labor force growth have muted the rise in the unemployment rate. Fixed income markets exhibited another strong quarter in turn helping 2025 register the highest total return in the US aggregate bond inde since 2020. The market benefited from continued strong inflows into bond funds and the ongoing decrease in both implied and realized rate volatility to the lowest levels since 2021. This decline in volatility was supported by a more predictable outlook for monetary policy and following 75 basis points of aggregate rate cuts in 2025, markets currently price nearly two additional cuts later this year.

The pace and real projected cuts will be dependent on developments in the labor market stability and inflation and the composition of the FOMC going forward. The yield curve further steepened during the quarter as short term yields fell while long term yields rose modestly. Swap spreads continue to widen, partially driven by a shift on the part of the Fed from quantitative tightening to balance sheet expansion through reserve management purchases and bills which serve to increase the ST and short term funding markets. Amid this constructive environment, our portfolio generated an economic return of 8.6% for the fourth quarter, with all three businesses contributing solid returns for the full year 2025.

We’ve delivered an economic return of just over 20% and a total shareholder return of 40%, underscoring the strength and resilience of our diversified housing finance strategies. And notably we’ve been able to produce results with a conservative leverage profile and our economic leverage decreased modestly to 5.6 turns on the quarter. Our earnings available for distribution rose marginally to 74 cents, again out earning our dividend. And also to note, we remained active in Capital Markets raising 560 million of common equity through our ATM in Q4, bringing total equity raised in 2025 to 2.9 billion inclusive of our Series J preferred stock issuance past summer.

With the capital raised, we were able to accretively grow our portfolio by 30% on the year, with each of our three strategies demonstrating double digit growth. Now turning to our investment businesses and beginning with agency, Our portfolio ended 2025 at 93 billion in market value, an increase of nearly 6 billion on the quarter and 22 billion over the course of the year, with agency ending the year representing 62% of the firm’s capital. In addition to MBS benefiting fundamentally from lower volatility and a steeper yield curve, Sector has exhibited a highly supportive supply and demand picture as well.

In particular strong and consistent bond fund inflows, REIT equity raises and GSE portfolio growth of 50 billion through year end against a backdrop of net MBS supply. Surprising to the downside, helped fuel spread contraction in the second half of 2025. With respect to our portfolio activity, our purchase is centered on adding 5% coupons evenly split between pools and TBAs. Given the range, bound rate environment and steeper curve, we were comfortable taking on current coupon exposure to drive higher returns in light of the anticipated reduced hedging costs. And we also grew our agency CMBS portfolio by roughly 1 billion given the sector’s relative attractiveness compared to lower coupon MBS.

With mortgage rates approaching 6% and recent prepay activity highlighting a more reactive borrower, higher coupons lagged on the coupon stack. However, we have deliberately constructed our specified pool portfolio with enough call protection to withstand a lower rate environment. For example, our 6 and 6.5% coupon pools have prepaid 40% slower than that of generic cheapest to deliver collateral, and we anticipate our holdings in these coupons should provide durable carry for years to come. Now our hedge position remained broadly stable this quarter, consistent with our strategy of maintaining a conservative rate posture with volatility at some of the lowest levels we’ve experienced over the past five years.

Our duration management focused predominantly on hedging new asset purchases using a combination of both treasury futures and swaps. Now shifting to residential credit, our Portfolio ended the fourth quarter at 8 billion in market value up 1.1 billion quarter over quarter representing approximately 19% of the firm’s capital. Non agency residential credit was relatively rangebound throughout the quarter with AAA non QM spreads ending the year marginally tighter at 125 to the curve. Q4 represented another record quarter for our Onslow Bay franchise as we achieved all time highs across lock volume fundings and securitization issuance. During the quarter our correspondent channel locked and funded 6.4 billion and 5 billion respectively.

We settled an additional 800 million of whole loans via bulk acquisitions and we closed 8 securitizations totaling 4.6 billion and this securitization activity resulted in the creation of 570 million of proprietary OBX assets on the quarter with mid teens expected ROEs and throughout the entire year we locked over 23 billion of loans to the correspondent and funded 16.5 billion exclusively through that channel, representing an increase of 30% and 40% year over year respectively. During 2025 we closed 29 securitizations for an aggregate 15.2 billion, generating approximately 1.9 billion of high quality retained assets for Annaly in our joint venture while remaining firmly entrenched as the largest non bank issuer in the residential credit sector and even with the continued growth in the Onslow Bay Channel and securitization program, we remain disciplined on credit with our current locked pipeline representing a 762 weighted average FICO and a 68 original LTV with limited layered risk.

Now the first few weeks of 2026 have been marked by credit spread tightening as both the corporate credit and structured finance asset classes strengthened given the movement in the agency MBS market. Now this is a supportive backdrop for our business as declining cost of funds and stability in capital markets should keep our volumes elevated. Given our market leadership, Annaly remains well positioned to continue to benefit from the growth and liquidity of not only the non QM market but also the broader non agency market which is expected to experience the highest gross securitization issuance since 2007 this year.

Now turning to MSR, our portfolio ended the fourth quarter at 3.8 billion in market value including unsettled commitments representing a nearly 280 million increase quarter over quarter and a 15% increase year over year and MSR ended the year representing 19% of the firm’s capital. During the quarter we committed to purchase 22 billion in principal balance or roughly 330 billion in market value of MSR with a weighted average Note rate of 3.46%. Now these purchases were across five bulk packages in our flow channels, of which $150 million in market value is expected to settle in Q1.

And notably we are the second largest buyer of conventional MSR in 2025 onboarding 59 billion in UPB throughout the year and we ranked as the sixth largest non bank agency servicer. Bulk supply was ample this past year and we expect this pace of activity to continue in 2026 due to increasing origination volumes coupled with compressed gain on sale margins necessitating MSR sales as demonstrated throughout 2025. Now regarding our float business, we’re focused on expanding our footprint and are now active across all GSE platforms providing access to current coupon MSR which we plan to purchase opportun.

Our MSR valuation multiple increased marginally on the quarter driven by a steeper yield curve, modest spread tightening and lower volatility. Fundamental performance within the MSR portfolio continues to be strong and cash flows remain durable. The portfolio paid 4.6 CPR in Q4, unchanged quarter over quarter while serious delinquencies remain muted at 55 basis points and with a weighted average Note rate at 3.28%, our portfolio is still 250 basis points out of the money. As we continue to enhance our subservicing and recapture relationships, we look forward to growing our MSR portfolio in the coming year, taking advantage of the role we’ve created as a preferred partner to the originator and servicer community.

Now, to conclude with our outlook as we look further into 2026, each of our investment strategies is well positioned to continue delivering strong results for our shareholders. The agency spread tightening following the GSE’s recent MBS purchase announcement has been pronounced, but it is important to note that not only are technicals in the market vastly better than at any time since the Fed was actively buying mbs. Also MBS hedging costs should be meaningfully lower given the decline in volatility supporting low to mid teen prospective returns. We anticipate the non agency market to continue to grow as a share of total origination and Onslow Bay is uniquely positioned to maintain its healthy pace of loan acquisitions and securitization issuance.

The non QM market in particular has matured into a more liquid institutional asset class and our early positioning gives us significant competitive advantages in loan selection and execution. And our best in class MSR portfolio remains distinguished with an average note rate that is significantly out of the money and an exceptional credit profile which provides our portfolio with a stable cash flow vehicle supporting our overall yield and returns. Most importantly, we believe our diversified housing model will continue to perform for our shareholders in the year ahead. In an environment where spreads across various asset classes have tightened unevenly, the optionality to invest in the most accretive assets is an important lever to drive returns that monoline peer strategies are not afforded.

And accordingly, while agency will certainly continue to remain the anchor of our portfolio, our non agency strategies will likely see additional capital allocation all else equal. We do however have the earnings power and the liquidity to be both patient and opportunistic, and the scale to maintain our market leadership across housing finance and our diversification enables us to be resilient across different rate cycles and market environments. And now with that, I’ll hand it over to Serena to discuss the financials.

Serena Wolfe — Chief Financial Officer

Thank you David. Today I will provide a brief overview of the financial highlights for the quarter ended December 31, 2025 as well as select full year measures consistent with prior quarters. While our earnings release discloses GAAP and non GAAP earnings metrics, my comments will focus on our non gaap, EAD and related key performance metrics which exclude PAA or Starting with book value as of December 31, 2025, our book value per share increased 5% from 1925 in the prior quarter to 2021. After accounting for our 70 cent dividend, we achieved an economic return of 8.6% in Q4.

This brings our full year 2025 economic return to 20.2%. Strong investment gains drove this quarter’s performance. We benefited from spread tightening driven by lower volatility and favorable technical factors. Gains on our interest rate swaps also supported results. As swap spreads widened. Earnings available for distribution per share increased by a penny to $0.74 and again as David mentioned earlier, exceeded our dividend for the quarter. This increase in EAD was driven by a 30 basis point improvement in our average repo rate to 4.2% and higher average investment balances resulting from growth in our agency and residential loan portfolios.

For the full year, average yields rose 26 basis points year over year from 5.13% in 2024 to 5.39% in 2025. However, these benefits were partially offset by lower levels of swap income due to lower average receive rates. Net interest spread and net interest margin, both excluding Paa, remained strong and comparable to prior quarters at 1.49% and 1.69% respectively. For the full year 2025, net interest spread and net interest margin, both excluding Paa, reached 1.4% and 1.7%, an improvement of 18 basis points and 13 basis points respectively, further demonstrating the returns from our disciplined investing and funding teams.

Turning to financing, we added $6.7 billion of repo principal at attractive spreads while deploying the proceeds from accretive ATM issuances during the quarter. This led to a Q4 reported ending repo rate of 4.02% down 34 basis points. Additionally, our weighted average repo days ended the quarter at 35 days, 14 days lower than the prior quarter. Our economic leverage ratio remained historically low at 5.6 times, down one tick from the third quarter’s end. Meanwhile, total warehouse capacity across our residential credit and msr businesses reached $6.9 billion with 2.7 billion of that committed. We continue to maintain ample capacity in both businesses with utilization rates at 47% for residential credit and 50% for MSR.

As for liquidity, we ended the fourth quarter with $7.8 billion in unencumbered assets, including $6.1 billion in cash and unencumbered agency MBS. We also have about $1.5 billion in fair value of MSR pledge to committed warehouse facilities, but still undrawn, which can be quickly converted to cash subject to market advance rates. As a result, our total assets available for financing are approximately 9.4 billion, up 500 million from the third quarter. This represents about 58% of our total capital base and provides significant liquidity and flexibility. Finally, regarding opex, our efficiency ratios again improved significantly during the quarter, down 10 basis points to 1.31% and brought the full year ratio to 1.42%, illustrating the efficiencies of our size and scale.

That concludes our prepared remarks and we’ll now open the line for questions. Thank you, operator.

Questions and Answers:

operator

Thank you. We will now begin the question and answer session. If you’d like to ask a question, please press star then one on your telephone keypad. If you’re using the speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time we’ll pause for just a moment to assemble our roster. And today’s first question comes from Alyssa distefano with kbw. Please go ahead.

Bose George

Hey everyone, this is Bose at kbw. The first question, can you give us an update on mark to market book values?

David L. Finkelstein

Sure. Boaz. Good morning. So as of Tuesday our book was up 4% inclusive of the dividend accrual. So 3% netting that out after yesterday, maybe a fraction of a percent higher than that.

Bose George

Okay, great, thanks. And then can you just talk about the portfolio returns or the blended roes on the portfolio given the spread tightening since quarter end. And then can you just translate that into the, into comfort level with your dividend in 2023?

David L. Finkelstein

Sure. So overall we could still achieve in upwards of mid teens returns. When we look at the agency market, obviously we’ve gotten a considerable amount of tightening. But versus swaps you still get there. And we’re confident in the durability of the swaps market as a hedge given the fact that the Fed’s obviously, as I mentioned in my prepared remarks, much more considerate of balance sheet availability and we haven’t really tightened that much, rather sorry, widened that much since that announcement. So we feel like the swaps market’s a perfectly good place to hedge and you can get that return in the resi market.

The whole loan channel to securitization is still giving us those returns. MSR is a little bit lighter, but when you consider the Hedging benefits and diversification benefits. We’ll take that. And then when you look at our overall balance sheet where we own assets is very supportive of the dividend yield. So we feel good about it. We outearned in, in Q4, we expect out earn certainly in Q1 and we feel like the dividend is safe here.

Bose George

Okay, great. Thank you.

David L. Finkelstein

Thank you, Bose.

operator

Thank you. And our next question today comes from Jason Stewart at Compass Point. Please go ahead.

Jason Stewart

Hey, good morning. Thanks for taking the question. Obviously on the MSR portfolio, the current portfolio is pretty well insulated from, you. Know, modestly lower interest rates. But could you expand on your comment about being opportunistic for current coupon MSR and how you’re expecting that market to trade as prepays increase?

David L. Finkelstein

Sure, I’ll hand it off to Ken for that.

Ken Adler

Yeah, I mean we’ve now set up the infrastructure to be fully active in that space and the primary way we’ve done that is through the Fannie and Freddie MSR exchange platforms. And we’re now active with close to 100 counterparties today and we provide pricing every day. What’s really interesting about new production pricing is it really doesn’t move that much with interest rates because it’s always set at the current mortgage rate. So really what it is is about the value change after you buy it, I think. And given the improved ability to do recapture for the industry that that’s been much more insulated than it’s been in past regimes.

So we’re there and we don’t see it as valuable to us at this time based on where we can buy the lower note rate stuff. So to the extent relative value changes and that becomes more attractive, you will see us more active in that area.

David L. Finkelstein

Yeah. And I’ll just add Jason, to the extent we’re a financial participant, the low note rate MSR has worked and let the operating platforms, the originators, focus on production coupon and their management of the borrower. But we do expect origination obviously to pick up a lot this year with a 6% mortgage rate. And so as a consequence you’ll see a lot of production coupon MSR hitting the market and we’ve gotten comfortable, very comfortable with our recapture partners at our servicers to where we can manage that quite well. So we’ll see how the market develops. But we’d like to get more into the production MSR space.

Jason Stewart

Okay, that’s helpful. And just one more point on that. How much would you need to see valuations change for the hit return hurdles in terms of current coupon production.

Ken Adler

Yeah, well, what’s going on is when originators sell msr, they want to sell the MSR that’s least valuable to them and that is the lower note rate MSR because there’s a lower chance that that customer is going to become active. So in today’s world, when they originate, and Dave alluded to this in the prepared comments, when they originate alone, the profitability on that origination does not allow MSR retention to retain all the msr. In fact, they have to sell a majority of the MSR to be liquidity neutral. So what we’re seeing is originators prefer to sell the lower note rate msr.

So that’s more valuable to us because that’s what they’re selling, that we expect that flow to dry up and then the relative value shifts to the current coupon. But also as Dave alluded to, we’re well set up based the network of people to buy from and then the network of people to both subservice and perform recapture for us.

Jason Stewart

Okay, all right, thank you.

David L. Finkelstein

Thanks Jason.

operator

Thank you. And our next question today comes from Eric Hagan at btig. Please go ahead.

Eric Hagen

Hey, thanks. Good morning guys. Lots of speculation out there right now for things the administration can do to lower mortgage rates further, including a potential cut to guarantee fees. Can you weigh in on this and how you think a big G fee cut could impact the prepayment environment?

David L. Finkelstein

Sure. So obviously a G fee cut is something that’s been talked about. Our view, and we’ve been communicated with about this to policymakers, is that a G fee cut on purchased loans is perfectly appropriate. We’re concerned that if you, if you do broad G fee cut, you know, and impact existing loans, you’re going to damage the MBS market and widen spreads. And I think that there’s been an awareness of that. And furthermore, if you confine it to purchase loans, you don’t negatively impact the roes of the GSEs. And that’s certainly a consideration. So perhaps they do something like give it a year holiday on purchase loans.

We think that would make sense to help first time homeowners and new buyers get into the housing market. Yep.

Eric Hagen

Okay, that’s great. Thanks for weighing in on that. You mentioned the cost of hedging should be lower as a result of the GSEs being back in the market, spread volatility being lower. I mean, what metric would you use to maybe like compare the cost of hedging over time? And how would you maybe compare the attractiveness of raising capital when Spreads are wide and kind of more attractive versus an environment of tighter spreads and lower spread volatility.

David L. Finkelstein

Yeah. So the first question, in terms of measuring spread volatility, here’s our view as it relates to the GCs and their involvement. We don’t have a lot of clarity. We know there’s a 200 billion mandate, but we don’t know what role the GSEs are going to play. I think it’d be highly productive if they evolved into a spread stabilizing force for the MBS market. And that was somewhat of the role they played pre financial crisis. And it gave investors confidence that mortgage spreads would remain relatively stable. And as a consequence, it incentivized participation in the market.

And then overall, given higher participation, you got a tighter spread as a consequence of others doing the work for the GSEs, because you knew that they would be there when they got too wide and provide support for the market. And they also were economically focused and sold when mortgages were tight. That would be a good outcome. They clearly don’t have the capacity that they did pre financial crisis, but they got a lot of dry powder. So we’d like to see that evolution, but we’ll have to wait to see. In terms of measuring spreads and volatility, spread volume has been very stable for the last six months and it’s been quite comforting.

We haven’t had to spend a lot of money at all hedging, and you see that in our economic return. So we feel quite good about that. And then, Serena, you want to dive in your second question again or second part of your question again, Eric?

Eric Hagen

Sure. Yeah, we’re just looking at how you might compare the attractiveness of raising capital in the different spread environments.

David L. Finkelstein

So look, I’ll jump in there and then Srini can add. When spreads were extraordinarily wide, it was obviously a catalyst to raise capital because there was a tremendous amount of upside. Compare that to today where spreads are meaningfully tighter. Obviously, from a relative value standpoint, it doesn’t look as attractive, but when you consider the fact that the stability of spreads is higher, it gives you some confidence. But candidly, if I had to choose between one environment over the other, I’d rather have wider spreads with a little bit more uncertainty in terms of raising capital. So from that standpoint, I would expect that the pace of capital raising may not be as high as in that environment.

But nonetheless, the amount of support for the agency market, given the fact that you have very strong technicals from obviously the GCs, but also money managers, REITs, raising capital, et cetera, that’s quite comforting. And to the earlier part of the question about volatility where the cycle lows and that’s supported by what we’re seeing day to day in markets. Another point to note is that the Fed’s shoring up balance sheet as I talked about my prepared remarks and in Bose’s question, the fact that the Fed went from QT to adding reserves in the system is a very good sign for balance sheet intensive products.

Whether it’s Treasuries or agency mbs. The ability to finance is key and I think it’s been a little bit underappreciated. So the agency market is a safe place right now. It’s just that spreads are obviously at the tight end of the range. They’re close to QE type levels. The safety of those returns is there, but the abundance of yield is not quite there.

Eric Hagen

Really appreciate your comment. Keep going. Thanks.

V.S. Srinivasan

Going forward, there could be pockets of opportunity. If we get more clarity on what policy changes come about post the GSE announcement, you’ll purchase mbs. Higher coupons really have not tightened that much because there is increased policy uncertainty. So as we get some clarity there, that could be pockets of opportunity.

Eric Hagen

Yep. Thank you guys so much. Really helpful.

David L. Finkelstein

Thank you, Eric.

operator

And our next question today comes from Doug Harder at ubs. Please go ahead.

Douglas Harter

Thanks. David, you were just talking about the lower risk environment that we’re in today. I guess as you look out, how do you handicap the risks that that could change what might be the factors that could cause kind of an end to this low risk environment with more volatility?

David L. Finkelstein

Sure. From a macro standpoint then I’ll drill down a little bit on the mortgage market. But the two biggest risks risks that we see are the global fiscal picture and the amount of debt out there, including that in the United States and a little bit of complacency around it. And you could end up with the volume environment because of the amount of debt in the world. And I think it’s probably under recognized risk of that. And another macro risk is just the euphoria in asset markets and asset pricing. It’s been a pretty remarkable run across markets and there’s real signs out there that people should be investors should be a little bit concerned.

Just look at the price of gold as a safety store of value. It’s doubled since the beginning of last year and up 27, 28% this year. So I think there’s some nervousness out there and it’s a little bit hard to invest and we could get a, we could get a correction broadly in assets now as it relates to the agency market specifically in our markets, valuation as well is a risk. We are at the very tight end of the range on agency mbs. It’s justified given the facts I mentioned earlier, but nonetheless they’re relatively tight.

Another risk is, as Eric discussed, is housing policy uncertainty and what role the GSEs will play and what the administration will do to potentially increase affordability and how that could impact the convexity profile of the agency market. So those are two things we’re watching quite closely in terms of risks in the agency market specifically.

Douglas Harter

Great, I appreciate that, David. Thank you.

David L. Finkelstein

Thank you, Doug.

operator

And our next question today comes from rick Shane at JPMorgan. Please go ahead.

Richard Shane

Hey, good morning everybody and thanks for taking my question. Look, you guys are seeing attractive opportunities buying MSRs, low coupon MSRs. I assume you’re basically seeing that as an attractive. I owe given discounts in MBS for lower coupons. Does it make sense, is it attractive to be buying lower coupon MBS at this point as well? I’m just curious, particularly as sort of on the margin you’re starting to get more questions about prepayment.

David L. Finkelstein

Yeah. You’re just saying as a hedge to our MSR and the runoff.

Richard Shane

Exactly. Give yourself an opportunity to pick up some discount accretion if speeds pick up. And also potentially is an attractive yield.

David L. Finkelstein

Yeah. And look, the first point I’d note is that the valuation on low coupon MBS is quite tight. So there’s better ways, I think to manage that type of risk, whether it be through duration or other factors. There’s a little bit of policy risk in low note rate msr, but we feel it’s, it’s very safe. And I think when it comes to housing policy changes, you could see legislation that reduces capital gains tax so you could get some turnover in low coupon msr, but those are at the margin. Otherwise I think the borrower in a 3 odd percent note rate loan really ascribes the value to that loan and there’s a real reluctance to give it up.

So we do feel like it’s a safe durable asset and we hedge some of that uncertainty through duration. But to couple it with low coupon mbs and we do have some. And that is obviously a consideration, Rick, but the valuations just don’t warrant it.

Richard Shane

Got it. And is there enough liquidity in the lower coupons that if you felt like the bid ask was attractive that you could deploy capital there or is it and that’s a nuance just as equity guys, I don’t think at least I fully appreciate.

David L. Finkelstein

Yeah, yeah. And there is liquidity in low coupons. It’s not as good as production and slightly higher. But if you wanted to compile a bigger position in low coupons, it wouldn’t be hard. I mentioned we added dust to the portfolio agency CMBS in our view relative to lower coupon mbs, that was meaningfully cheaper. And so to get a good convexity profile and longer duration assets, that was sufficient for us last quarter.

Richard Shane

Got it. Okay, that makes sense because that’s got a super low prepayment characteristic because those are.

David L. Finkelstein

Exactly, exactly.

Richard Shane

Thank you so much, guys.

David L. Finkelstein

Thank you, Rick.

operator

And our next question today comes from Harsh Hemnani with Green Street. Please go ahead.

Harsh Hemnani

Thank you. All right, so I think on the prepared remarks you characterized the current environment as spreads have tightened across all housing finance assets, but unevenly. And it feels like credit is starting to look a little bit more attractive on a relative value basis. And we saw that that section of the portfolio grow a little faster than you know, the rest of the businesses this quarter. I guess as you look out over the next year or so, your long term target for equity allocation is like 60 agency MBS and 20 across the other two each.

Can you help us put some bands around that? How much could be see credit exposure or MSR even increase from your over that 20% number?

David L. Finkelstein

Sure. And I did allude to this Harsh. So thank you for the question. So in 2025 we grew the agency portfolio 30% each resi and MSR by 15% through the capital raises that we undertook. And that was the right waiting to go with given how well agency’s done. So we’re perfectly happy with it. But now we’re at a little bit of a different balance when it comes to valuations. And we do from a capital allocation perspective favor RESI credit even though it has tightened and MSR for that matter. And we’d like those percentages if we did add capital to switch.

We’d like to grow resi and MSR 30% and MSR and agency, you know, less than that. So the objective today from a capital allocation standpoint is to increase MSR and resi. It’s episodic in terms of the opportunities notwithstanding the consistency of the pipeline for our whole loan correspondent channel. But we would like to grow those businesses. And we’ve said in the past that the longer term weighting we would like to achieve is 50% agency, not below that. And 30% resi, 20% MSR. You know, we don’t have to get there right away, but that is, that is an objective.

We have to be very considerate with respect to the credit environment. But nonetheless, when you look at the health of the loans we’re acquiring and our portfolio, we’re very comfortable with the credit we’re doing and so we’re hopeful we can grow it. And I don’t expect us to get to those objectives over the near term in terms down to 50% agency, but we’d like to at the margin increase MSR and resi here.

Harsh Hemnani

That’s super helpful. Thank you.

David L. Finkelstein

Thank you. Harsh.

operator

Thank you. And our next question comes from Trevor Cranston @Citizens JMP. Please go ahead.

Trevor Cranston

Thanks. You talked some about the impact of the GSE portfolio buying on the market. I was curious if you could share your views on the likelihood or feasibility of the portfolio caps potentially being increased at some point as they get closer to current cap size. And then also I was just curious if you guys have seen or if you expect to see any impact from their portfolio buying on the swap or funding markets. Thanks.

David L. Finkelstein

Yeah. So as it relates to the caps, it’s hard to say. You know, obviously everybody probably saw that. The post from the FHFA director last Friday, I believe it was talking about they don’t intend to increase the caps, but we just don’t know. But when you look today, they came into the year with I think it’s 178 billion in capacity between the two of them. So we’re a long ways away from hitting those caps and we’ll see how it evolves. But we don’t have a good answer as to whether or not those caps will actually be increased.

Obviously they can do it in conjunction with treasury and it doesn’t require Congress. So we’ll have to wait and see how the year evolves on that front. And sorry, the second part of your question, Trevor. Oh, hedging.

Trevor Cranston

Yeah. Whether you’re seeing any impact from the GOC buying on swaps markets?

David L. Finkelstein

Not as much. You could argue that swap spreads should be wider given the adjustments the Fed has made with respect to their asset purchases. And we didn’t get, as I mentioned earlier, a meaningful amount of widening based on the greater availability of balance sheet. And it could indicate, it could indicate, you know, some involvement from the GSEs. We don’t have information on that. I do know from our experience pre financial crisis and I was on the sell side interacting quite extensively with the GSEs. If passed as prologue in terms of how they behave, they would hedge those purchases and use swaps because that’ll enhance the yield relative to shorting Treasuries, for example, and they can get a decent ROE out of it.

So we would expect that to be the case. Whether they’re actively engaged in the swaps market today, I don’t have a good answer for their involvement. And as it relates to funding markets, the GSEs are active participants in the funding markets with their liquidity and their capital during parts of the month, and their absence might be a factor. However, what I would say is that they’re buying mbs, which is a balance sheet intensive product and is funded in many circumstances. So they’re taking assets out of the market that might otherwise be funded. And so even though they’re not providing as much liquidity in the repo market, that should offset the asset purchases, should offset the lack of funding.

And really what matters, I think in terms of funding markets is reserves in the system. And that’s the key factor we look at. And they’re now back to slightly over a trillion, I guess, or 3 trillion. And we feel like funding markets are still going to be fine without their participation. Oh, and Srini, you got a great point.

V.S. Srinivasan

The one thing I would add is just the size of the GSE book. I mean, if they bought the entire 2,200 billion, it’s about 100 million DVR1. So if you assume they’ve done 5 or 10%, you’re talking about 5,10 million DB01. It’s just not large enough for you to see any impact on swap spreads right away. It’ll take time.

Trevor Cranston

Yeah, okay, that makes sense. Thank you.

David L. Finkelstein

Thank you, Trevor.

operator

Thank you. And that concludes our question and answer session. I’d like to turn the conference back over to David Finkelstein for any closing remarks.

David L. Finkelstein

Thank you, Rocco. And thank you everybody for joining us today. Have a good rest of the winter and we’ll talk to you real soon.

operator

Thank you, sir. That concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.