Good day and welcome to the Two Harbors Investment Corp First Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Margaret Karr. Please go ahead.

Thank you and good morning everyone. Thank you for joining our call to discuss Two Harbors' first quarter 2020 financial results. With me on the call this morning are Tom Siering, our President and CEO; Mary Riskey, our CFO; and Matt Koeppen and Bill Greenberg, our Co-CIOs. On our call today given potential conflicts of interest, any comments about internalization will be delivered by Mary, Bill and Matt. The press release and financial tables associated with today's call were filed yesterday with the SEC. If you do not have a copy, you may find them on our website or on the SEC's website at www.sec.gov. In our earnings release and slides, we have provided a reconciliation of GAAP to non-GAAP financial measures. We urge you to review this information in conjunction with today's call. I would also like to mention that this call is being webcast and may be accessed in the Investor Relations section of our website. I would like to remind you that remarks made by management during this conference call and the supporting slides may include forward-looking statements. Forward-looking statements are based on the current beliefs and expectations of management and actual results may be materially different because of a variety of risks and other factors. We caution investors not to rely unduly on forward-looking statements except as may be required by law Two Harbors does not update forward-looking statements and expressly disclaims any obligation to do so. I will now turn the call over to Tom.

Thank you, Maggie, and good morning everyone. We hope that you had a chance to review our earnings press release and presentation that we issued last night. Coming of the yields of a very strong, the company, we could not have imagined the societal economic conditions, that would result from the global corona virus pandamic. This has been a challenging time for our nation in the world, our thoughts are with those most affected by COVID-19, especially those of lost loved ones. Additionally, we want to express our gratitude and admiration for the Euros, we're on the front lines. We like everyone else are hoping for a return to normalcy. First and foremost, we have been concerned about our most valuable asset. Our people, we have implemented mandatory work from home measures across our three offices, that are utilizing technology to stay well connected. We are all of the adapting to the new reality, and we were able to execute our data they best with very minimal disruption. The first quarter non-spared from the volatility of the markets. Unlike the 2018 financial crisis, the speed with which the market dislocation appeared in the large spread those sort of heard on a daily basis, were unprecedented. Every asset classes are impacted. Spreads especially on liquid assets widened dramatically margin calls were swept. I'm proud of how our team the volatility by actively derisking risk in our portfolio. In order to establish and maintain a very strong defense of liquidity position, throughout this period satisfy all margin calls and do not enter into any forbearance arrangements with our lenders. In the mix of the volatility. We also made the difficult decision just spend on our first quarter preferred stock dividends. In order to ensure we maintain sufficient excess liquidity and preserve stockholder…

Thank you, Tom. Turning to Slide 4, let's review our financial results for the first quarter. Our book value at March 31 was $6.96 per share, representing a decline of 52% from $14.54 at December 31. On the right-hand side of this slide, we have provided a more detailed attribution of our book value decline in the quarter. As expected sale of substantially all of our non-agency securities was the largest contributor, resulting in over 70% of the decline. Our rate strategy also contributed to the decline driven by fair value markdowns and MSR, specified pool underperformance as well as specified pool sales as a result of delivering, our portfolio in March. Matt and Bill will detail this portfolio activity shortly. Moving to Slide 5, let's discuss our core earnings results. Core earnings were $0.25 per share in the first quarter, consistent with the previous quarter. Core earnings was favorably driven by higher net interest income due to purchase of higher coupon agency RMBS early in the quarter and lower amortization. This was offset by increased interest spread cost and swap positions due to LIBOR reset and lower TV roll income. Turning to Slide 6, our portfolio yield in the quarter was 3.52% and our net yield decreased to 1.13% from 1.19%. Besides improvement in repo costs, this was more than offset by higher swap cost as 3-month LIBOR rates declined in the quarter. Expanding rates have come down post-quarter-end, we expect to continue to see improvement in repo costs. On Slide 7, we have summarized our financing profile as of March 31st. As the turmoil in the market unfolded in March, our financing and investment teams worked closely together to preserve liquidity and deliver the portfolio. As a result, we have made all of our margin calls, our liquidity…

Thank you, Mary, and good morning everyone. We'd like to start this morning by spending a few minutes discussing the effects of the Covid-19 pandemic on the residential mortgage market. Then we will discuss our portfolio activity for the quarter, finally, we will talk about our outlook for servicing advances in our portfolio liquidity. Please turn to Slide 9. In March the COVID-19 pandemic had a swift and dramatic effect on valuations leading to extraordinary spreads widening across virtually all asset classes. Left-hand chart shows the 10-year swap rate and the S&P 500 in the first quarter. Although the tenure swap rate trended lower early in the quarter, we move sharply in March, finishing the quarter roughly 120 basis points lower. The S&P 500 performance really emphasizes how quickly events unfolded and the all-time high on the index was realized at February 19th before falling 35% Just a month later. The right-hand chart shows spread widening impacts across various fixed income asset classes from pre-crisis levels in February indicated by the low to be sort of the line, through the crisis indicated by the high point of view vertical line and then ending mid-April indicated by the great circles. No asset classes capes and this affected us and other mortgage REITs significantly. Most spreads remain significantly wider than they weren't February with the exception of agency RMBS, which have retraced all of their widening more due to the direct impact of QE for purchases by the Federal Reserve. Moving to Slide 10, the left-hand chart compares RMBS Treasury spread index in 2008 versus March 2020. While the magnitude of the widening is notable and similar in both cases, the real difference was the speed at which it unfolded. The round-trip was completed in three weeks in March compared to six…

Thank you, Bill, and good morning everyone. Please turn to Slide 12. With the foregoing discussion as a backdrop, let's now discuss the actions we took in March in response to the liquidity crisis caused by the pandemic. The volatility increased and spreads widened on agency RMBS, we reduced risk to raise excess cash. We liquidated around $18 billion specified pools and TBA representing about 50% of our agency portfolio. When liquidity was poor in March, we initially sold lower coupons where there were some sponsorship, but eventually reduced exposure to higher coupons, one, the Fed adjusted its programs focus on purchases in that part of the coupon stack. Timing of most of these portfolio sales occurring as they did before unlimited QE was announced was such that we did not fully benefit from the spread tightening driven by outside spread purchases. With respect to our legacy non-agency portfolio, we have become increasingly concerned about levered portfolio liquidations occurring across the market, acceleration in size, and frequency of margin calls arising from widening spreads, increasing haircuts and the future ability to access ongoing funding in the repo market. As a result, we decided to liquidate substantially all of our non-agency portfolios and to eliminate the aforementioned risks. The chart on the bottom of the slide shows our portfolio composition on December 31st where you can see the effect that the portfolio sales we just described. Please turn to Slide 13. Another large driver of performance during the quarter was the collapse in specified pool pay-ups. The chart on the upper right-hand side of this slide shows 3.5 coupon higher loan balance specified pool pay up levels. This chart is indicative of the price action that impacted all stuff-- as the month unfolded with the risk appetite and balance sheet capacity…

Please turn to Slide 16. We would like to dedicate time today is one of the biggest challenges we are currently facing, increasing mortgage loan forbearances and servicing advances. While the COVID-19 pandemic began as liquidity crisis, these things often go it has transformed into a credit crisis shutting down large parts of the United States has had far-reaching economic impacts. Unemployment has skyrocketed and is expected to continue to climb. With so much of the economy shuttered and people out of work and staying home, the ability of all types of borrowers, renters, and [indiscernible] to pay their obligations, the call to questions. At the end of March, Congress enacted the CARES Act, which besides including relief checks and other supporting measures has an important impact directly on our industry. One provision fee act provides for up to 180 days of forbearance relief from mortgage loan payments with the right to expand up to an additional 180 days for borrowers with really back mortgages who experienced financial hardship related to the pandemic. The act also prohibits foreclosures for 60 days. Through one of our subsidiaries, we own the MSR for over 8 loans guaranteed by Fannie Mae and Freddie Mac and as a result, we are responsible for making advances for certain payments the events they are not made by a borrower. In normal times is not burdensome pre-COVID our 60-day delinquency grade was about 30 basis points and we were able to manage the liquidity needs related to this in the ordinary course of our business. However, with the forbearance programs now in place, as a result of the Cures Act, the situation is different. During the forbearance period, we are responsible for remitting monthly scheduled principal and interest for loans backed by Fannie and monthly scheduled interest…

Please turn to Slide 18. The reality is that this pandemic has reordered everything and we have a lot of work to do before we are in a position to return to business as usual. The advancing obligation is significant and while we feel confident in our ability to manage it, it will take time for events to unfold before we anticipate returning to a steady-state business model there are multiple obstacles double certainly dragged down earnings in the near term. These include higher than normal cash balances, increased servicing costs from our subsurface services that linked the loans, cost to set up, and maintain the servicing advance facilities and uncertainty in MSR pricing. Having said that, we believe that the opportunity set in our target assets is very attractive. We discussed earlier, with such support agency TBAs recovered all of the March widenings and then some, so that returns in that part of the market are similar to what they were pre-crisis. Specified pool pay-ups have recovered much of what they lost in March but are still somewhat lower than they were when the crisis began. As a result, we are seeing returns on rate hedged agency RMBS in the low to mid-teens. In the MSR asset that we're seeing the most interesting opportunities. While it's true that there is much to work through regarding forbearances, advances, and higher cost of service, we still estimate that the forward-looking returns on our existing book of MSR, when paired with MBS, is in the mid-teens based on our Q1 valuation. Earlier we discuss some potential scenarios about the future path of MSR prices, should MSR multiples decline 2.5 times on our existing book from three times, we would estimate that the paired return would be in the very high-teens. The MSR…

[Operator Instructions] We will take our first question today which comes from Doug Harter. Please go ahead.

First, thanks for the additional disclosure around the liquidity just Matt then on your commentary about the attractiveness of new returns, can you just talk about kind of where you are in the flow program. Is that something that you guys are acquiring loans or MSR is through the follow today or what it would take from a liquidity position to feel comfortable acquiring loans through flow?

Yes, this is Bill I'll take that. So as Matt said, we are acquiring, what we call a trickle during the depths of liquidity crisis. We like many of other competitors suspended our acquisitions there. As I said, that market is slowly coming back to life we are back in the market on a limited basis really in a way that does not increase our forbearance and advance risk there is different ways to view that by targeting certain types of collateral and so forth. Then we can talk about later if you'd like, but what we're doing it in a way that minimizes that liquidity burden and we're using the opportunity to see how much assets can be acquired at those levels and how much and obviously at those levels its very interesting. And if we're able to do that we will figure out a way how to make that work.

Great, Tom and then if you could just talk about the capital structure after the book value decline in the quarter the mix of preferred is obviously much higher now and kind of how you think about that mix and kind of what would be the plan to kind of get that back in line with goals you had previously or targets you had previously mentioned?

Well thank you, good morning. Obviously, it's something that we're acutely aware of them and are reviewing. So yes, you're right that it had that effect on the capital structure. And so it's something that we have under review. So people might be curious as to whether or not we would raise common equity and obviously that would be there dependent upon the opportunity. So, but it's something that we're obviously where we have a review and we will attempt to fuel with that the best we can.

Okay. Thank you, Tom.

Thank you.

Our next question today comes from Mark DeVries. Please go ahead. Your line is open.

Yes, thanks. I had a question about the liquidity projection on Slide 17. Is that liquidity number, is that assume is that just based on the - current we have on hand now or does it also assume draw as on these facilities, and during the process of negotiating?

This is Bill. I'll take that. It's a combination of all of that, it's a pretty comprehensive set of assumptions and models that incorporate to the best of our knowledge, all of the potential drags and sources that we will have at our disposal. I mean, we think, where we can, we tried to be fair, but conservative and try to stress the models, as you see like 3 scenarios, so it includes all of those things.

Okay, got it. And just given the high quality nature of the servicing events and all risk around it, are you generally sensing somewhat unlimited capacity to finance that. So God forbid, you had a scenario is even more stressful than your severe stress you would just be able to expand the financing available to you?

Yes I mean we are certainly, and I think you can see this in liquidity projections. We are certainly sizing our needs based on stresses to the base case to this to the severe stress and even a little bit more than that. You can see that in the liquidity projection because we only went to this stress. But it would still be true it would hold up for so much bigger than that. Now, it is true if we see forbearance rates increasing a lot higher than 25% which right I mean I don't see. I think we're already starting to see as staggeringly big as the unemployment statistics are that we're seeing in the market. We are starting to see them leveling off a bit. And so, we feel pretty good about the projections. They won't rise above 20% or 25%, but I am obviously if that does where the negotiations that we have with the banks could allow potentially to be re-negotiated upsize but we're sizing it to be something larger than 25% at the moment.

Okay, great. And could you give us a sense of how your blended returns might be impacted under the different scenarios is kind of forced to reallocate capital got the funding advances and other business scenario?

Well it might be a little bit more. I don't know if I have those numbers at my fingertips. I do know what we said was, including the higher forbearance and increased cost of service and reduced cash flow from loans in forbearance on the servicing asset that in our base case the paired levered return is still in the mid teens. I'd have to check about the other scenario. I don't have them here you can get back.

Okay yes fair it’s helpful. Thank you.

Our next question today comes from Bose George. Please go ahead. Your line is now open.

Good morning, hope everyone staying safe. Actually first can you give us an update on book value since quarter-end?

Good morning, Bose guys this is - I’ll take that - first and then head off to Bill and Matt for further comments. So firstly, I always have to compromise the caveat that five weeks to model quarter make but as Bill and Matt alluded to in their script in April and May, we experienced a notable and favorable repricing of spec pools, which generated a significant amount of P&L. However, there is a couple of things to note, as Bill and Matt discussed. There is some uncertainty with respect to the effects that forbearance and extended servicing advances will have on future MSR remarks and then additionally we plan to record the internalization fees to Pine River in Q2. So there is a couple of the big variable obviously is the forbearance effect. Bill and Matt, please.

Yes, I'll take that one. Thanks, Tom, and good morning, Bose. So to put a little more color around those moving parts. The specified performance has been strong in April and followed on in May. We've seen a multiple point recovery after the big fell-off in March basically things back to closer in line with where we saw them in February. So that component for Q2 is driving an attribution of around up 14%. Tom also mentioned servicing. So we like always are getting our servicing valuations, they are valued by three independent brokers. However, as time passes, right. And we had this in some of our liquidity projections as you can imagine, as forbearance flows through and prepayment fees possibly pick up, we might see some pressure on multiples and so if that sort of pricing were to come through, we could see that sort of in the base case with the 2.5 more leading to a book value change of about that could be $150 million or $175 million. So that could be around an 8% or 9% impact. And the third thing Matt said, Tom noted internalization payment, although it is due to be paid in September. We’re going to record it in Q2, so that's about another 8% offset. So I'd like to give you a more straightforward answer. But there is a lot of moving parts here, and it will depend on how those things play out.

Okay. Actually, thanks. That is very helpful. So actually just leaving aside, that the charge for the management fee, the spec pool up 14, the MSR maybe down 8 or 9. So like a 5% up for the quarter-to-date is probably a reasonable ballpark?

So for a second, so the MSR mark that we're guessing about that, that we don't, we don't know. We have end of circle marks which don't reflect that kind of kind of movement at the moment, given what we think is happening with forbearance rates increasing and how we think the world will think about that, that is a possibility of how we think the world might unfold. All right, but that depends on the path of how the MSR asset performs and what the future remarks end-up being. We highlighted and we flag it just to put it out there that, that is a possibility and could happen, but we don't know, we'll have to wait and see.

Okay. Now, that's really helpful. Obviously, that makes sense for in terms of conservatism on that estimates. So yes, thanks very much, and then just going back to that stress scenario slide, you know that you assume the reimbursement on that, the P&I is after the 15 months. There's been some discussion and some chatted with the GSEs might come out with something to reimburse servicer sooner than that. Do you have any thoughts on how that might play out?

I don't unfortunately. I'm hearing the same thing as you’re. There's lots of proposals and possibilities in flux. These projections are made with the best information and assumptions that we have at the time, we update them every day as we learn new things and incorporate new information. So as of the moment, that's what these things include and should we be able to reimburse it differently or hopefully better then we'll include those and we can update you guys on those when they happen.

Okay, great, thanks very much.

Thanks Bose.

Our next question comes from Trevor Cranston. Please go ahead.

Hey, thanks. One more question on the liquidity projections in the forbearance scenarios. First, I just wanted to clarify that, that does include the buyout of the management contract and then two, I was curious if there's any assumption in that projection around the dividend level changing from what was paid for the first quarter? Thanks.

Hi Trevor, thanks for the question. So the answers to those first question is, yes it explicitly includes that payment. Also point out by the way, what's not included in here is any liquidity or cash raising from any portfolio adjustments that we could make if necessary. All right, this is all keeping the portfolio casting of what it is, it does not include any dividend payments, but it doesn't, it doesn't in a way, but the idea here is that, that the portfolio is going to earn what It's going to earn right. And that's going to be paid out right. So we're not building into these liquidity projections, a growth in the liquidity from not paying the dividend. All right. It assumes all be paid out, so that included or not included. I'm not sure. But we're not taking that money and hoarding it to make the liquidity look better, it's assumed to be paid out to the dividend.

Okay. Got you.

It sounds good, Trevor.

Yes, thank you for that. And then in areas you were discussing for MSR valuations. I was curious if there's any way for you to sort of provide some context around kind of what you think the rough approximate sort of multiple on the MSR book would be in the scenario with if your stress case in terms of forbearance combined with like a significant compression in the primary, secondary, mortgage credit spread?

Look, it's very. Thanks for the question. That's a very hard question. It's very hard to know, you're asking about what I think the future prices of something might be as the world unfolds. All right. That said and we've talked about this a little bit earlier in the quarter. The MSR market is hard to value especially today because there is not very many trades taking place. All right. And so the brokers are in a situation where they say, well, how do I put numbers on something when I don't see any observable trades in an illiquid and stressed markets without willing buyers among sellers. All right. And so in the absence of that, the brokers have taken the approach that let's keep for the moments risk premiums constant to what they were, don't know whether that's true or not, the speed with which the markets have been evolving and moving has been astonishing as Matt just told you, specified pool pay-ups and you saw on the chart in the presentation. They went from four points down to one point or below, right in some cases back up to four points. They're all back to where they were all right now, there will be increased costs from servicing delinquent assets from the forbearances, there will be reduced cash flows as the non-paying borrowers pay their service fees. So there is what I would call a technical cash flow effect, right from the servicing cash flows, but depending on the curing scenario that you think might exist in the world, whether it's a deferral option or something. How long that persists for… you think might exist in the world, whether it's a deferral option or something. How long that persists for is unknown, maybe it's even short maybe after one year people start paying the mortgages again if some of these deferral options come to fruition, and there's not that much of an interruption. So it's hard to know right. I think we do you think generally - that the low 2 multiple is very hard to achieve on any long-term basis for these assets with willing buyers and willing sellers just the nature of the cash flows in the timing and what they're worth and the interest rate and convexity characteristics and so forth. As I said in the previous comment, I think it could go to 2.5 million depending on some of these things depending on lots of factors. I don't see it going much below that below 2, I guess if we had some very high-stress scenario 25% that no one is expecting including us. I guess, it's very hard to know - as things normalize as trade start to occur. The market started to heal we'll get more visibility and we'll be able to speak with –more clarity on what we think those scenarios are.

Trevor I would add in our liquidity projections, we did and have like Bill said there's all kinds of uncertainty, but we did and do include scenarios that do take us down to 2 multiple even though we think that maybe that's severe, we'll have to see what happen, but we do include those numbers - in our projection.

Okay got you, that's helpful. And then on the advanced facilities, you guys are working on I know they are not closed yet. But are you able to say anything about kind of –what the cost of those facilities are likely to be when they're utilized and assuming that you closed?

Not really I'd say, we're still working on. I mean they're not closed. And we're seeing still negotiating I mean they're very market tops I would say - yes with the FERC prepared to discuss that today.

Thank you, guys.

Thanks Trevor.

Our next question today comes from Rick Shane. Please go ahead.

Hey guys, thanks for taking my questions this morning and I hope everybody is doing well. I wanted to touch on servicing advance facilities briefly historically and I think Mark pointed this out, servicing advances our AAA type assets and get very favorable financing. I am curious in this environment if pricing remains as attractive as it has historically and does access to servicing advance borrowing represent another barrier to entry in terms of that business?

Sure, thanks for the question. So servicing advancing as an asset class does typically enjoy the financing you could sponsor and so forth. That would be an asset though that I think what you're thinking of is, if we were to create the advancing securities and then sell them to the marketplace. What it would look like AA, AAA securities for the investor that would buy those notes right. That's on the end user side to what we're making here right. So we may to do that.

No actually I misspoke and you’re over complicating my question, I apologize. I just meant from a collateral perspective the servicing advance is considered to be AAA collateral. Then it gets - that it gets that it is because of where it stands in the waterfall you typically get very favorable borrowing cost and very high advance rates?

Yes that's true because the counterparty risk is generally considered to be, do you see risk instead of the servicer risk. Yes the advance rates are typically, but I think how you rate market advance rates on advanced facilities depending on P&Is and P&Is corporate advances typically range in the 85% to 95% range right. Those are just market terms for those kinds of things.

Yes.

And you’re reflective of what you just said.

Yes and are you seeing any change in pricing given the current market conditions related to those facilities?

Yes I'd say it's probably a little bit wider than what it was and what it would have been in February but it's still, it’s very low I consider still very low compared to other things in the world at the moment.

Got it, okay. Yes you made the classic mistake of assuming my question with smarter than it really was. I wanted to on a very simple level make sure I understood that. Second thing look you’ve exited the non-agency business we understand given market conditions, why you did that. I am curious if you think that that is a permanent exit or that will be a business that you will and an opportunity that you'll revisit when markets normalize?

Well, obviously,

I will take.

Good morning, Rick it's Tom. Obviously it’s something that we have deep expertise and but we'll just have to see how things unfold.

Great thanks, Tom.

You bet.

Our next question today comes from Stephen Laws.

Hi, good morning. Effectively no credit risk now, so I want to focus one question on prepayments into our servicing if I can. First on repayments and refinance activity really more at the higher level, how do you see the recent environment impacting processing times and repayment speeds? A lot of informing applications borrowers that would have maybe done a clean rate driven refi will now have an employment gap, unemployment possibly other things that I would have to take slow that approval pipeline. But how do you guys see that impacting refinance activity. I know the Mortgage Bankers is pretty optimistic that the mortgage treasury spread tightens pretty quickly back to pre-COVID levels, but would love to get your thoughts. And then how to think about that from a lag on the refi index is it going to extend where that sort of 6 weeks it’s more of 8 or 10 or 12 or more so comments around that would be great?

Sure, I'll start with that one. Stephen that’s a great and interesting question these days there is definitely a lot of uncertainty and speculation going on out there. I think one interesting thing that we've observed very recently just yesterday actually speeds were released for the April period. And broadly I think they surprise, most of the market on the high side. So the April closings would have reflected the very high - NBA refi rate and the rate environment sort of back in the end of February and early March before we really came under any stress. And I think most market participants would have thought that there would have been a very big impact on the ability of people to sort of go through closings just about social distancing right and the country being shutdown as it was I think the speeds that came through in April showed that there probably was a pretty high pull through rates. They actually increased by about 25% which I think is what people might have thought they would have increased in typical times in normal times given the prevailing interest rates and conditions. So I think that was, it's only one month and it was a bit surprising and we’ll have to see. This is unlike anything anyone's ever really observed. So we're monitoring that and we're obviously going to watch the data as it comes in and see where that goes.

Yes, I'll also add a few words to that. I think there are forces on both side obviously rates are at low levels right. So that in ordinary should be creating very high refinance volumes. 47 states now permit some sort of remote modernization right. By our counter I think that we read some two-thirds of recording offices allow electronic filings today. Verification employment requirements have been relaxed across the country and so forth. So but the world has made these adjustments to allow for the refinancing machines to continue and I think this month speed has been or collection of that said, which was a surprise to many people. That said, I think I think various Wall Street analysts are projecting speeds to slowdown as much as, as much as 15% or maybe more next month. This, we are seeing some signs and the refi index and so forth, but I think it's slowing down from a high level and from. And so I think the speeds will probably remain more elevated than people might think given a more naïve thought about what the pandemic is doing and the social distancing measures.

Great appreciate the comments. And I guess before asking to predict the future again, I'll ask about the servicing portfolio. And just how the advance obligations are structured, but can you provide any kind of mix of your obligations. How much of it is scheduled versus actual for both interests from principal. I know it's different across Fannie and Freddie and certainly Ginnie I believe is scheduled, but I don't think you guys have any exposure there. Can you give us any breakdown there and maybe will quantify the difference. I mean how much of an average payment is principal and so if its actual principal advances instead of scheduled. How much is that a savings on the total advance obligation to you guys its 5% or 15% or what is that number on the delinquent payments?

Okay. So the short answer to your last question is, I don't know, I don't have those numbers handy. On the breakdown of the portfolio 20% of our portfolio is Fannie Mae actual/actual I want to say around 30% is Freddie Mac and therefore scheduled actual, right. And the balance is Fannie Mae schedule/schedule. Even the actual/actual though, which has no principal and interest advancing obligation does have D&I advancing obligation.

Yes.

And in most yes and most ways the way the model works and I think the modeling the way the world works, is that the bigger part of your obligation anyway.

Okay. But still, I mean if I heard correctly 20% is schedule excuse me is actual/actual which means you're not advancing any schedule and unreceived interest for principal in that 20%?

That's correct.

Great, I appreciate you clarifying that - I was looking for that information. Back to predicting the future [WF recovery or WF] event outlook is certainly concerned. People are talking about and one aspect of the 120 day rule is if you get one good payment, they go into forbearance, again the clock reset. So I don't want to ask you to run a scenario for every possible situation, but in that event where you're may be forced to cover, seven of the next 10 mortgage payments, how does that look from a liquidity standpoint. I would imagine the government would have to step in and that type of situation with some facility because it's certainly not Two Harbors specific problem, it would be everyone. But do you have any thoughts around that with the clock resetting if you get one payment in?

Not very deep ones. I would say that the advanced facilities are built to cover that, right. So I think these things that there would be scalable in order to accommodate that. But the size is large enough. As you know, especially with the P&I advancing, the principal and interest custodial accounts can be used to offset that and so look while low rates and fast prepayments for premium mortgage portfolio are generally not great. In this instance, it would go a long way towards covering those sorts of obligations. As I said the P&I part of the advancing is generally, we look at it as being the easier to accommodate because of that. And so I think all of those thoughts would be true, if that were to take place.

I would add too, like we said earlier if scenario like that worse to happen. We of course will then have time right there. We do have, I have an unlimited amount of time, but as time passes. That allows us to sort of be reactive and work on either additional facilities for upsizing of facilities, which I think we would be able to do if we needed to in that scenario.

That's a great point because it's not a margin call one-day issue, it's something you'll see playing out over months and you'll see that as you call your delinquency numbers. So I appreciate the comments today. And thank you very much.

Thank you.

Thanks Stephen.

Our next question comes from Kenneth Lee. Please go ahead.

Hi, thanks for taking my question. Just wondering on a broader level, how would you characterize your current appetite for making investments in over the near-term, just given the potentially attractive opportunities you see weighed against the uncertainty that's not environment? Thanks.

I’m sorry, could you repeat that question, I don't think I caught it.

Yes, certainly. Just on a broader level. Just wondering, how would you characterize your current appetite for making investments in the near-term given the potentially attractive investment opportunities you're seeing weighed against the uncertainty you're seeing around environments and relatedly how leverage and the portfolio further could evolve over the near-term?

Yes, I'll start. This is Matt. I mean in one word, we’re quite cautious here. I think we have to get a little bit of time passage and a little bit more visibility into what our advancing obligations are going to be and see how forbearance unfolds and sort of look at its impact on all mortgage assets and we're looking forward to doing that, I think we're not quite there. We do need some passage of time. But like I said earlier, there is indications that there is interesting opportunity out there. Once we feel like we're in a comfortable position to take advantage of things but we're still pretty cautious today.

And I would add one thing that I think is sort of self-evident in the way like one signal for that would be when the forbearance upgrades start turning over like seen in other context, once you see that, then you can sort of project really what the future is going to look like and so forth and so I think that's one of the main things that we're looking for.

Okay, very helpful. Thanks again and hope everyone stays safe.

Likewise, thank you very much.

Likewise, yes.

Our final question comes from Matthew Howlett. Please go ahead.

Hey guys, thanks for taking my questions. Just a few quick ones. First, how are you monitoring sort of counterparty risk with the non-bank sub-servicers or the guys you buy from them. Just curious on what's it like out there?

I'm sorry, from people who we’re buying from or?

Well, kind of both, I mean mainly sub-servicers or some of the capital rules coming out, what could come out of liquidity also issues. How does that sort of not being monitored. I guess the question is, if you are there could be a need to servicing at some point?

Right. So the answer is, no I mean we have three sub-servicers, as you know, all right and we've been public about who they are, it's Flagstar Bank to the Bank. All right, there is bill renewal, which is a pure subset for sure they don't own any servicing, they don’t have particularly any capital stress here and then we have Mr. Cooper. And we have ongoing diligence reviews with them and we're checking with them about these sorts of things regularly and periodically. So we don't have concerns at the moment about that.

Okay. And so there's no need to go back up servicing or anything of that nature runs into any one of them into liquidity issues?

I’m sorry, can you say it one more time, I'm sorry.

I'm just saying back up servicing, things like that and there is no, is there anything in place to move servicing if you have to?

We do not have like a hot back up in place. No, we don't have that. I mean one of the advantages, I think of our model is it's diversified nature of the thing that we have, it's spread out among different sub-servicers. So as you know, our portfolio is roughly split 40:30:30 all right to the extent that we would be able to potentially see through our regular reviews, any stress or maybe on a forward-looking basis, try to anticipate such things we can of course entrance the process to move servicing from one to the other, that we do that not regularly. But we do it. We're very experienced in that, that could be accommodated in some number of some amount of time, obviously requires coordination and approval from the GSEs. So we could do that but we do not have a hot backup in place.

Yes, okay. Thanks and then on just from a modeling question that sort of net interest spread, did you guys get that 113. I mean there's been a lot of moving parts obviously with the sale of the Non-Agency book, repo costs coming down, how do we think about trending, how that is going to trend. How should we think about modeling that going forward?

So I can take that question, this is Mary. So I think we expect on the asset side, the yields to be in the low to mid-threes in the near-term. I would note that as we de-lever the portfolio, we correspondingly needed to reduce our net swap book at a time when three-month LIBOR was extremely elevated and stressed and long-term rates were low. So we do expect that this will impact build in Q2. But as swap and repos reset, we expect the net yield to return to more recently observed levels.

Got it and then there will be an impact from lower yields because the non-agency, higher yearly non-agency book is out?

Yes, that will have a slight impact.

Got it. Great, thank you.

Ladies and gentlemen, that concludes today's question-and-answer session. I would like to turn the call back over to Margaret Karr for any additional or closing remarks.

Thank you, Claire. And thank you all for joining our conference call today. We look forward to speaking with you again soon. Have a wonderful day.

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation.