Capstead Mortgage Corp. (NYSE:CMO) Q2 2020 Earnings Conference Call - Final Transcript

[Operator Instructions] Our first question comes from Jason Stewart at JonesTrading.

Hey, guys. Good morning. Nice work navigating a tough environment. I was hoping you could share your thoughts on mortgage credit availability and how you think it factors into model prepay speeds.

Well, one thing that's become pretty apparent is that the originators aren't having as much trouble closing loans, whether refis or not, during this pandemic like folks were speculating all spring long. So prepays are running pretty hot now with mortgage rates fairly low. At the same time, our underwriting standards are pretty tight, and you do have folks that may be having trouble qualifying given their personal circumstances.

Got it. That makes sense. And did you -- if I missed it early on, please forgive me. Did you share incremental ROE numbers of where you think the market is today?

On purchases at the margin right now, we're looking at kind of 10% type returns on a levered basis, between 7.5 times and 8 times in short-duration products that we're focusing on.

Got it. Thanks for taking the questions. Appreciate it.

Thanks, Jason.

The next question is from Steve Delaney of JMP Securities.

Hey good morning everyone and congrats on a great quarter. On book value, you beat us by about $0.20. You've got much better visibility into ARMs than we do. Just curious, Robert, how you're seeing ARMs trend here as we are almost one month into the third quarter. Have they been stable or trended higher? What are you seeing recently?

They're trading very, very well, Steve. There's a really strong bank fit out there for both new issue and seasoned ARMs. And so they continue to trade well. And if you think about it, I mean, with the fixed rate universe price in aggregate well north of 105, ARMs in the 104s are somewhat compelling to the banks in particular. So they have continued to grind in a touch into the quarter, post quarter end. And I -- supply is picking up, which is a good thing, new issue supply. And I think that's even helping more because ARMs can be kind of funny. That actually increased volume can improve liquidity, and guys can buy paper in size, so still very positive from the standpoint of valuations going forward.

So yes, I'm just curious. You've -- supply, I mean, gosh, given where new rates are, are you -- I think we had fallen down to like 5% to 6% in the market. Are you actually seeing new production volume picking up in ARMs despite the low -- record-low 30 year, 15 year rates?

Yes. I mean there's enough steepness in the curve where production is starting to increase, and actually, second quarter new ARM production doubled from the first. And so new issue seven loans are being originated with gross WAC in the upper 2s as opposed to a lot of refinance rates out there on low-cost basis. They're still around 3.25% for fixed