Hidden Mortgage Market Shifts Are Creating Opportunities | Matt Jozoff of Trevally Capital
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People are aware of the GMA market in general, but I think people haven't really focused on the size and the growth that we've seen. So what was a $500 billion market in 2009 or so is now a $2.5 trillion market. When you look at the composition of GMEs, they are roughly 700 FICO, half or above, half or below. That lower half is considered either all day or subprime, depending on what label. There's no official label or definition of what those are, but you're talking about very low credit borrowers, right?

They are receiving rates that they probably would not be able to get in the private sector. And so they experience delinquencies and defaults that are higher than a lot of the better underwritten mortgages. We've also seen a major shift in the lender composition in that space. So it's gone from 80% banks who are doing the lending to 80% non-banks.

Before we get started, I just want to do a quick disclaimer that nothing we say here is investment advice as well. Nothing we say is marketing or advertising for Trevely Capital or any of their funds. Everything is meant to be informative about the fund management industry. Hello, everyone. Welcome to another edition of Other People's Money. I am joined today by Matt Jozoff, Portfolio Manager,

Co-Chief Executive Officer and Head of Macro Research at Trivalli Capital. They're a newly launched mortgage securities focused hedge fund manager. Matt, thank you so much for joining me today. Thanks for having me, Max.

Well, prior to your role at Trivali, you were also the head of fixed income research at J.P. Morgan. Given everything that is going on in the fixed income market, I just wanted to start out there. What do you make of the recent move in treasuries after the Trump administration implemented the tariffs?

Yeah, it's been quite a move in both down and up in terms of yields. I think when you start seeing turbulence in markets in general, treasuries are always a fight to quality. And we saw a big rally in response to the uncertainty and the perceived risk in the markets. And that's pretty typical. And then you start running into questions about, well, what would these tariffs do?

due to inflation and what are some of the fundamental effects that could spill over. And you've got differing forces affecting that. So you've got on the inflation front, I think there's clearly a near-term inflationary impact there.

On the other hand, there's concern that it could trigger a recession in the near term or at least slower economic growth, which would drive yields the other direction. So I think it's been extremely volatile and where we settle in right now is it's an interesting spot. I think when you back away from treasuries and just kind of look at the overall fixed income market, I think

We've seen a little bit of a shakeout in some of the credit related sectors. So, you know, corporate credit has been very expensive. Bond yields, whether you look at high grade, high yield rates and more risky sectors within fixed income have been very expensive. Spreads have been near some of the tightest we've ever seen versus treasuries.

I'd say mortgages had been on the cheaper end of the fixed income spectrum on a relative basis. What this has done, I think, has shaken out some of that richness in corporates, but they're still quite rich historically. So going from extremely rich to, you know, fairly rich, I would say, is probably where the corporate sector has ended up. And I still think there's a lot of uncertainty there. The one thing I would say, though, is that I think

It changes a lot of investors' perspectives about how they're allocated and what

What is the transparency of the assets that they own and what's the liquidity? So I think there's been a big move towards private credit in the last decade. It's a sector that's brought in trillions of dollars of investment. The thesis was that the banks are going to be disintermediated. And this is a new way to get money to corporate borrowers and others. And

generate outsized returns along the way. I think with this kind of volatility that we're seeing and questions around the fundamental strength of some of those borrowers, I think it's making investors potentially question

you know, what is their exposure there? Um, and when you look at some of the news around universities and their endowments and such and how they're allocated, they are facing a lot of pressure now in a variety of ways. Uh, and it's raising the question of, you know, maybe they need more liquidity and other investors need more liquidity than they had thought they needed. Uh, and so I just think it's making people question, uh, private equity, private credit, uh,

And some of these less liquid alternatives. So there's just a I just say, broadly speaking, there's a reassessment of the market right now that's going on and we need to see where where everything's going to settle out. Now, specifically mortgages. What have you been seeing over these past few weeks?

I mean, mortgages have cheapened too. They are a risky asset relative to treasuries. Pretty much everything is. They also don't really like volatility. So, you know, implied volatility going up is generally bad for mortgages because you're short an option implicitly. They also don't like realized volatility because they're negatively convex. And so when the interest rate markets move around,

They're just going to underperform treasuries from that perspective. But, but overall, I think mortgages have done fine. You know, I think that they are, and when I'm talking mortgages, I'm talking about the agency MBS sector. They are basically government guaranteed or government sponsored. And so, you know, while they may have underperformed treasuries a bit, they they,

they still don't have that credit exposure that a lot of the other sectors have and are on the, on the margin, a, um, relatively safe asset, you know, within the, in the, uh, investment universe out there. Um, so that's kind of how I'd summarize, you know, how they've done. Um, and I think, um,

You know, we we think they offer relative value within the fixed income world right now. Still, let's zoom out from these these past few weeks and look at the mortgage market maybe over the last few years. What are the developments that you all are seeing that has led to you launching Trivalli? Yeah.

I mean, I think we started in the wake of COVID at some of the richest levels of fixed income that we've ever seen. So interest rates in the short end were basically zero.

In the long end, 10-year yields dropped to historic lows. And so there really wasn't any value in fixed income, let's say, right in the wake of COVID as the Fed basically tried to stimulate the economy and tried to generate growth in the wake of a pandemic. And so when you think about

trying to generate alpha in that kind of environment, it's extremely difficult. But what's happened is as we've moved away from COVID, we've seen a massive sell-off, you know, four to 500 basis points sell-off in interest rates, which has caused a huge change in the landscape of the mortgage market in general and the fixed income market. So if you think about it, you know, we've gone from

a market that was in the mortgage space that was almost entirely refinanceable to one that is not refinanceable. You know, 90 plus percent of the market can't refinance economically at today's levels. Um, and so you've got a lot of borrowers who were at discount rates that has a lot of, um, impact. We can get into this later, but that, that has a lot of impacts on prepayments, both voluntary and involuntary. Um,

And, but I think at this point, first of all, I think they're the real rates that are offered in fixed income are actually attractive. They've been attractive for the last couple of years. And when you look at, you know, fixed income versus equities, for instance, the real rates you can generate in fixed income are quite attractive relative to the earnings yields you can generate in equity. So the inverse of the PE ratio, for instance, I think is,

makes, you know, a fundamental level makes fixed income start to look more attractive. But I think at the same time, we've seen, if you back up even more over the last 15 years or so, 15, 20 years since the financial crisis, we've seen just a huge change in the mortgage landscape. And I think that the thing that we saw at Trivalli among our partners was that the

Ginnie Mae market, which people are aware of the Ginnie Mae market in general, but I think people haven't really focused on the size and the growth that we've seen. So what was a $500 billion market in 2009 or so is now a $2.5 trillion market. So it's grown fivefold. And we've also seen a major shift in the lender market.

composition in that space. So it's gone from 80% banks who are doing the lending to 80% non-banks. And I think, you know, that ultimately...

what really started to drive this team kind of together and to start talking about, wow, it looks like there might be some opportunities here that people haven't really focused on. And there could be interesting ways to generate alpha. So that was kind of some of the bigger picture changes that we saw that I think

From there, the team decided to kind of explore this more, build the tools that we needed to do that, and build the infrastructure to try to extract that alpha. What does a typical mortgage look like that GDMA is going to have their hands on? If you look at the universe today...

Pretty much every mortgage is generated or originated at a 97-ish LTV. So there's very, very little equity in those mortgages. And when you look at the composition of Ginnies, they are...

uh roughly 700 fico half or above half or below um and so you've got a you know that lower half is considered either all day or subprime depending on what label there's no official label or definition of what those are but you're talking about very low credit borrowers um

They are receiving rates that they probably would not be able to get in the private sector. And so they experience delinquencies and defaults that are higher than a lot of the better underwritten mortgages, whether it's in the Fannie Freddie world or in the private sector world. But that's the composition. For FHA, it's lower credit borrowers in general with very little equity.

The VA is the other program, which is a veterans program. I'm hearing...

Non-bank issuers, lower credit borrowers, higher delinquency rates, inability to refinance. You don't seem to be running around like like a chicken with their head cut off like this is going to be 2008 again. So how do you characterize, you know, the level of delinquency compared to, say, you know, the crisis period that I think everybody kind of benchmarks mortgage market stress to?

There have been a couple of crises. You know, there's the big crisis, and that was maybe a separate, unique kind of standalone case. The most recent crisis was COVID, and you saw FHA delinquencies spike up to, you know, 14% or so for the 60-day delinquencies. But since then, you know, they dropped out and now...

Now they've been creeping up again over the last several years, and they're at rates that are higher than where they were pre-COVID. So you're starting to see that delinquency pattern pick up again. We're not, by the way, just to be clear, we're not calling for a financial crisis or any major event like that. I think that there are ways to extract alpha from those types of situations.

But that's not our central call. But in general, our strategies are to extract alpha from prepayment observations that we see. And so we look at these types of indicators for prepayment.

clues as to where that alpha could be generated. Well, before we get into prepayments, I want to talk about refinancing. You said 90% of people can't afford to refinance in this market. Obviously, people were maybe expecting the Trump administration clearly said they want rates to go lower. They haven't quite gotten their wish just yet. And this policy has potential to be inflationary. The Fed certainly is not budging, giving them exactly what they want. But

Do you see any reprieve coming for

for borrowers who are hoping to refinance? On the 90%, by the way, I'm being conservative here. I don't know the exact percentage, but it's almost 100, depending on how you want to define refi incentive, because they have to have more than just one basis point of incentive to refinance because they're fixed costs. But yes, the vast, vast majority of homeowners cannot refi right now. By the way, we're not...

calling interest rates. That's not really what we do. We're a mortgage specialist firm. But I would say that is there going to be a reprieve? I mean, I won't predict where the 10-year note is going or where mortgage rates are going. But I would say that overall, the administration is taking a look at a lot of non-core lending that's going on that's government-sponsored.

And, you know, borrowers have been getting subsidies that are through the form of government grants.

guarantees, either implicit or explicit. So when you look at the lending through Fannie and Freddie and Ginny, they're often getting rates that they would not get in the private sector. So I think, you know, from that perspective, I think there's a question as to will the administration continue to provide those subsidies at the same level that they have been? Or

or will they start reducing those? And we've seen some headlines recently. There's a veterans program that helped modifications that they're looking to eliminate next month. Uh, there's some reevaluation, reevaluation of FHA, uh, subsidies and borrower assistance that might also be, uh, modified or revoked. Um, and similarly in the Fannie Freddie world, there are all kinds of questions around the fees that borrowers are being charged, um,

There's a question of will Fannie and Freddie come out of conservatorship? And to do that, part of it is they need to build up enough capital. And to build up capital, you may need to charge higher fees. So again, it doesn't really seem like there's going to be a reprieve on the policy front that I'm aware of. I think if anything, it's going to get a little tougher for borrowers where things will change at the very least. But I think it's

We don't really know exactly what the administration is going to do, but I would say that I would imagine housing is a very central theme for the administration, but trying to balance that against...

the capital formation of Fannie and Freddie, as well as some of the ideological goals of subsidizing certain sectors at the expense of other sectors. I think generally speaking, the administration would prefer not to do that. So in a short answer, I would just say, I think it's going to be a difficult decision.

for a while for borrowers to see any kind of reprieve, whether it's in interest rates or in policy. I like to call the Fannie Fannie recap and release the widowmaker because I think everybody who gets into the business hears about there's these there's these preferred securities and they're trading so cheap and, you know, they have all this capital built up. And, you know, I don't know how many times I've been I've been hearing that it's going to happen. So do you have a house view at Trivalli on recap and release?

We don't. I think that's a good term, the widowmaker. I mean, I've been in the mortgage market for my whole career for 30 years, basically. And this topic has come up a number of times, particularly in 08 and thereafter. I think it's a very, very complicated thing to pull off.

Some people have described it as trying to change the wings of the plane while the plane is in the air. You're talking about a many trillion dollar market that has 250 billion that trades a day that depends on the credit worthiness of that underlying security in order to have the liquidity that it affords. So there's a lot at stake here.

for borrowers, for investors. And so I think you have to move slowly and very carefully. I think it's interesting that in the first Trump administration, you had Steven Mnuchin as Treasury Secretary, who is a mortgage guy. I actually sat next to him at Goldman Sachs when I worked there. And even then, they didn't... I mean, they made changes to the PSPAs, which are the agreements with Fannie and Freddie, but they didn't actually...

pull off any kind of recap and release, though there was a lot of discussion of it. So this time around, you know, there's more discussion of it. The markets have certainly rallied in the preferreds with the expectation that something could happen in that area. You know, that's just really not our central forecast, though. I think where we tend to focus is

things that are going to affect prepayments. And that kind of goes back to a theme I mentioned earlier, which is, does the administration want to support non-core, as the administration might call it, sectors that might get scrutinized? And so I think there are strategies that one can pursue that

take advantage of the potential for those types of changes. Even if the recap and release takes place, you know, there are different scenarios within that. It could go smoothly. It could go poorly. If it goes poorly, you could start to see big, big movements in the mortgage market around the financial crisis. We saw big moves in the Ginny Fannie spreads. So I think there are ways to take advantage of a recap and release scenario without actually

trying to, you know, put on a position that's explicitly targeting that. So there are ways of effectively, you could call it hedging, that kind of scenario. There are ways of accounting for it and studying it and protecting against it. But that's not really the kind of thing that we're trying to predict. We're not trying to predict politics and such, but we're really looking at the impacts of potential outcomes.

Well, let's turn to prepayments then. I think it might help to just first outline like the structure of a mortgage. You alluded to it earlier that mortgage are implicitly short and option. So why don't we start there and then we can get into the trends in prepayments that you've seen and that you expect moving forward. I think most people know that, you know, when in the U.S., it's sort of unique. You take out typically a 30-year mortgage and you

you have the ability, but not the obligation to prepay that mortgage at any point. And you can do that through refinancing. So take out a new mortgage and pay off the whole thing. You could curtail it, meaning you pay a little more in principle than you have to pay that month. And so your balance goes down. You could move and that's called turnover, housing turnover. And that is,

would typically involve prepaying your mortgage as well. Although in GMAs, you can assume the mortgage theoretically, it's relatively rare. And you can default, which means that ultimately there's a foreclosure, which will

probably result in a prepayment to the investor as well. So these are the types of things. You're sort of short an option because the refinancing part is usually the biggest part of this thing, and that's correlated with interest rates. When interest rates go down, the mortgage is prepaid, and the investor now has all this cash that they have to reinvest at lower interest rates. And if interest rates go up, the

homeowner doesn't prepay, they continue to just pay their agreed upon mortgage. And so the investor now is

stuck, you know, having invested in that mortgage. And those are at lower rates that they contracted with versus prevailing rates at the time. So you get paid a nice spread over treasuries as an investor to take on this prepayment risk. It's not a credit risk. It's a prepayment risk. And that's why people buy MBS. They're very liquid. They have no credit risk to speak of, you know, implicit guarantee, but effectively, you know, very, very low credit risk.

And you get paid a spread over treasuries for taking that prepayment risk. So I think that's generally the appeal of mortgages. So.

Looking forward, I think right now it's kind of a unique time in the mortgage space because, again, as we mentioned earlier, so much of the market is at a big discount. And so you've got borrowers out there who've got 3%, 30-year fixed rate mortgages. They don't want to move. And it's very expensive to move.

sell your home and move across the street to a slightly bigger home because now your new mortgage rate is going to be higher than what you're currently paying by the tune of hundreds of basis points. So that has trapped a lot of borrowers in their homes. And, you know, I think from a policy perspective, we've heard from the Biden administration and the current administration that

that they are concerned about this because it does have an impact on economic activity in the country. If people don't want to move from one state to another or one region to another, you know, that dampens economic activity in general. And, you know, it's not clear how to fix that if you're a policymaker because, you

It's a very complicated thing to try to pass that value of the mortgage that borrower A has and give it to the next person, borrower B. And so keeping that tied to the home, if the next person buys that home, I think it's a very hard thing to engineer. And we've had trouble as a country figuring that out. It's just a complicated thing. There has been a growth in home equity loans as a way to extract equity.

So at the same time, you've had all these high interest rates and borrowers now sitting on very attractive mortgages on average. You've got home prices having risen massively. And as a result,

People are sitting on a huge amount of equity. There are different estimates out there, but there's at least $10 trillion of tappable equity right now easily that borrowers could tap into and use to stimulate economic activity, make purchases, et cetera. And so there has been a growth in that kind of market to try to help.

these borrowers. But at the end of the day, when we look at generic mortgages, the good old 30-year fixed rates, you know, the refinancing portion of the equation is no longer relevant. Well, it's far less relevant than it was because there's so many of these borrowers that are not in the money. And instead, you're dealing with turnover that's voluntary or involuntary prepayments coming from defaults. And so that's really where the focus is on

Right now, I think in a lot of these different sectors of the mortgage market. So you have the prepayments coming from defaults and then you have the lack of prepayments. Would you say that those are the two areas that you're most focused on? I mean, for the vast majority of the market, yeah. So there are just all kinds of factors that come into play. And these factors get more and more common.

and meaningful when the mortgages move farther away from par. So, you know, so at a par dollar price, if somebody, you know, prepays or defaults or whatever, it's less impactful for the investor because you're, you know, you're at the prevailing interest rate. If that dollar price is 70 or 80 cents, it's a very different story. And, um, so a prepay can be very, uh,

uh, very impactful in that case. So anyway, that's, those are the kinds of things that we're looking at. So why would a mortgage right now be trading for 70 or 80 cents? It's just purely interest rate discounting. So, you know, because we had interest rates basically near zero, you know, for, for treasury rates back in 2000, 2001, um, or I'm sorry, 2020, uh, you know what I mean? Um,

that you had a lot of mortgage regiation at that time. And then since then, interest rates have sold off. And so what was originated at par then may be worth 75 cents, 80 cents now. So you've got a lot of mortgages that are way below market in terms of interest rate and interest

They're going to be around for a while. It's, you know, they have negative incentive to move or to prepay. And so that's a big chunk of the market these days. But if you can find the ones that are at that price that are going to prepay, that is an opportunity. So is that something that is one of the strategies you're looking for? And how do you determine which of those mortgages that are trading so far below par are going to be the prepayers?

Let me back up a bit and just talk about how we, you know, kind of put the firm together to kind of answer that question. Because at the end of the day, if you're trying to extract alpha, you know, you need the right tools and you need to have a lens and the skills to find where those opportunities are and quantify them and actually follow through. So, you know, we...

formed the firm a year ago. We have backing from the Raptor Group and Seaport Global Securities.

And that gave us the working capital to basically go out and acquire the data sets that we needed. You know, some of the systems we needed, trading systems, research systems. We brought in several more people. We have a system to look at the composition of the market and slice it and dice it in various different ways at a very granular loan level and find out which securities tie into those.

We have a research team dedicated to...

looking through and building models to answer the very questions you're talking about. So, yeah, we think that focusing on the prepayment aspect is everything, especially when you're talking about Ginny, Fanny, Freddie as your core strategy. Generating that alpha is really important as the core of ultimately what we do. So we need to build a firm that will be able to deliver that

and build an industrial strength platform that will have stability and be ready to invest when that capital is there. So we've got

Chief operating officer, chief legal officer, technology officer, investment officer, a research team, the data, the analysts. So we've really gone to build this out with the data room for investors, all the documents. So that's really been our approach. I've seen other startups do

try to do it in reverse order and go out and try to talk to investors. And, you know, if there's interest, then they go back and try to build stuff. That's really not been our approach. We were, we really wanted to put the package together first and then be able to go out and present to investors, you know, this is our thesis. This is our structure. These are our people. And, you know, on that front,

On the people front, each one of the senior partners has 25 to 30 years at least of experience in the mortgage market. And so I think that is a real differentiating factor for our firm because while we do have this quantitative approach to look at prepayments, to model those prepayments, look at the defaults, the voluntary speeds, etc.,

Having been in the mortgage market for a long time, I know that you can't just rely on models. You really have to use those models as informative. And then from there, humans have to make judgment about, okay, this, yes, this is relevant or no, the models aren't really taking this into account or this policy could change, which makes that recommendation less relevant, let's just say. So,

So anyway, that's kind of a long-winded answer of how we look at the market and how we look at the firm. You alluded to your backgrounds. I talked about yours earlier coming from J.P. Morgan, but pretty much all the senior partners and the staff below come from strong institutional backgrounds where you've gotten to see how much infrastructure, how big the teams are that are looking at these markets. How much did that strong background impact

you know, inform this decision that you needed to have all the infrastructure, all the team in place on day one, because that's when everybody else who's in this, you know, multi, multi trillion dollar market are are playing with. I mean, I don't think there is a, you know, necessarily wrong way to do things. But I think in the mortgage market, we we

to really have an edge, you need to have the data and the modeling to, to explore themes and extract that alpha. So,

We felt it was very important to do things the right way here. When I say there's not a wrong way to do things, I mean, it depends on the market you're in. So, you know, long, short equity strategies, for instance, perhaps people can go out and just use certain algorithms and not really need to build a team or a lot of data the way we did.

I'm not familiar with those strategies, perhaps long only loan portfolios or stuff would not need these types of strategies either. But we wanted to build a firm that has lasting potential with differentiated depth of analysis and a good group of people too that work together.

that bring, even though we're all 25, 30 years in this market, we come from different perspectives. So, you know, our co-CEO ran a public REIT. You know, I was a research head on the sell side. Our CIO has done trading and structuring at a few different sell side firms. We have, you know, legal who's done also mortgage finance. We have capital markets. We have modeling and quatch. Yeah, so...

We all bring different perspectives, which I think generates really interesting conversation, interesting challenges internally as we, you know, people propose an idea and you see the different perspectives playing on that saying, well, but have you considered this or that? And so there's a lot of really insightful work that's going on here, which I think helps generate

you know, some of the best ideas and the most well thought out and researched ideas as well. We'll turn back to Trivali in a moment, but we talked about why a mortgage trading below par, the prepayment would be attractive. You can find the mortgages that are going to do that. What about the flip side? What are the types of mortgages that are attractive because they're not going to prepay? There are structural answers to that and there are collateral answers. So

In general, the securities that benefit from a lack of prepayments are going to be the interest-only types of securities. So Wall Street will take a mortgage pass-through

and split it into principal and interest and sell those separately. So if you are investing in the interest side, you will benefit if there are no prepayments because you'll continue to get that interest. On the flip side, if you were to get prepayments, the whole thing were to prepay, you know, you would get nothing, right? So interest only strips are very sensitive to the prepays and they benefit from, you

from a lack of prepayments or slower prepayments. Principal-only or stripped-out securities are the opposite, and they benefit from faster prepayments. You know, on the collateral side, you're going to find all kinds of stories within the mortgage market. You know, it's a $9 trillion market, so there are all kinds of different

dimensions to look at. Geographical, FICO, LTV, loan size, weighted average coupon, age, program, etc. And there's so many different components. And so it's really...

The way to really try to extract that alpha is to say, okay, what are the collateral types that make sense here? Which collateral types are going to prepay slowly? And once we identify those, how is it best to extract that? Can we focus on interest-only strips or interest-only securities in that space? And for the ones that are going to prepay a little faster, can we own principal-only securities or principal-heavy securities, at least, strip-downs?

that are going to benefit from faster prepays. And, you know, trying to match up these two components is a way to create mortgages that are, you know, better expected returns with, you know, hopefully better risk characteristics than a generic sort of what's called a TBA mortgage.

And then you can, with that synthetic mortgage, you can then hedge out with the more standard TBA mortgage and that's where you have the pure alpha. There are a number of different ways of expressing that. You know, one can also do long-only portfolios and...

Rather than selling or hedging anything, you can outperform an index. Those are SMA-type products. But, you know, there are long-holding strategies. There are hedged strategies. So, yeah, there are different ways to approach it. But, yeah, what you said is...

is spot on. The market has some view on what prepayment risk is. So to take like that, that interest only derivative, there's the amount of interest payments are going to go if it if it goes all 30 years or however long that, you know, the tenor of the mortgage that is left is there. And it's traded at some sort of discount to that based off of what the street sees as the prepayment likelihood. It's a combination of, you know, what's the coupon and

you know, how discounted or premium is that to prevailing rates? That's the biggest driver is just pure interest rate discounting. But then within that, the mortgage market is very sophisticated. And if people look at, you know, is it going to pay at 4% per year or 5% per year or four and a half percent? Like each of these things becomes very, very important and becomes magnified when you start looking at it through the interest only lens or the principal only lens. So yeah,

That's how we take some of the strategies and think about generating alpha from it.

Let's talk about the team that you built. I mean, it's truly an incredible team and infrastructure in terms of its scale arguably wouldn't be possible without the great partners that you have in Raptor and Seaport. I'm sure just about every fund manager looking to start out wishes they could have partners like that, but not everybody can. So can you speak to me a little bit about the process of reaching out to partners, talking to them about your strategies, and eventually, hopefully, bringing them on board?

Right. Well, I can't speak for them and what they saw, but I think that if one can get the backing of a sponsor like Raptor and Seaport, I think it's very, very helpful, both from

stability financially and the resources that they provide that allow us to build out the industrial strength platform that we've been building. It's also helpful in terms of the sponsorship and kind of what that does to your brand as you're out there because you have a great endorsement from reputable sponsors. So I think that's great. How do you get that? I think it's helpful to...

to go out there with a fully formed thesis of ultimately what you're trying to do. I think it's helpful to have the right team in place. I know this sounds generic, but it's critical because when you've got a sponsor who's investing in you in some way, you know, they're investing in the people.

And they need to have the confidence that these people can execute a strategy and stay with it and deliver. I think in our case, I'd like to say that we have a very experienced team. I think that's a separate thing. And I think the strategy also has to resonate. I mean, we view ourselves as an asset manager, maybe an alternative asset manager, that's really capable of expanding into a variety of different ways.

You mentioned a hedge fund, but there's the potential to do all kinds of things, whether it's a loan fund or a REIT or a servicing portfolio, anything that's really related to the mortgage space. I think these are potentials down the road in ways of generating ROE. And when you've got, you know, back to the partners, people with

different backgrounds, you know, whether it was at a REIT or on the sell side or on the buy side or in legal or in finance or capital markets, it really does allow you the ability to, you know, expand into these different dimensions. So, um, again, we're, we're very fortunate to have our partners. I think they also provide, in addition to everything I just said, I think they provide great, um,

Well, and I think a lot of managers, they come in, they maybe don't take the almost venture capital like perspective that a backer like that might have that, you know, the mortgage market, as we've alluded to, is just absolutely massive. Right.

So to even stay nimble and be one of the smaller players, you can take on billions and billions of dollars. And so if you are looking to invest in an asset manager, the ability to scale and grow business lines and offer lots of different opportunities for the end investor, and

And so if you're out there shopping around a strategy and you're like, well, we're going to cap it at 500 million because we're going to focus on the returns. It might be harder to get that backing because you've essentially told the told the partner that the TAM is sub a billion. That's a great point, Max. You know, I it's just amazing how big this market is, you know, at nine trillion or so.

you know, one could be several billion and be practically invisible in this space. So yeah, this is not like, um, investing in some kind of niche, small little product. Um, you know, the $9 trillion market with 250 billion trading a day, there's just a ton to do there. And it's just such a, um,

It's such a diverse market that we have in the mortgage space with all the different loan characteristics that we talked about that there are lots of ways to generate alpha because of that. So I think that that's got to be appealing as well as the potential, you know, like you're saying, Max, to grow this into a much bigger platform with a variety of different strategies.

We've alluded to the size of the market now, how big you guys might get. I mean, what are your peers, your competitors? How big are they? And how do you view yourself in comparison to them in terms of, you know, where you fit into the ecosystem? Yeah, that's a great question. I think when people talk about mortgage investing,

funds or mortgage platforms, I think they're typically talking about some of the famous ones that started up in the wake of the financial crisis. You know, Libra Max, I think, is kind of one that people typically talk about.

But there are a number, most of them are kind of in that vein that basically took advantage of cheap mortgage credit, meaning non-agency mortgages that had been trading at massive discounts to fair value right in the wake of the crisis. And so it was a big beta trade in 2009, 2010, in those years when these funds started and basically started buying non-agency securities.

and benefiting from the healing that took place over the subsequent decade. Our strategies are more agency focused at the moment. And so it's not really about a beta trade of credit. We have nothing to do with credit right now in terms of non-agency credit in that sense. But

We are more of a trying to generate alpha through longs and shorts within the space. And there are fewer that are really focused on this space, very few that are focused on agency mortgages, mortgages.

And so I think that kind of really sets us apart. So the fast, just to answer your question, I think the vast majority of the mortgage players that we all have heard of tend to be in the credit space. And I think it's kind of hard to know where to go from there or from here because there's

a lot of that healing has taken place. I, you know, credit, we would argue it is pretty expensive. You know, we were talking about at the very beginning, corporate credit is still quite expensive. You know, mortgage credit is also expensive. Um,

But agency mortgages are a different animal where they have a built-in short that you can short TDAs. The liquidity allows you strategies to be long and short at the same time, whereas that's much harder to do in some of the essentially long-only sectors of the non-agency space. So that's a differentiating factor now. I think there's a lot more to do in agency MBS than there has been in a long, long time. And...

The sell-off in interest rates that we've seen in the last five years has been violent and has created a lot of securities that are trading away from par, which creates interesting opportunities and interesting sort of pretty unprecedented conditions. So we're pretty excited about the mortgage market right now.

All right. Well, let's look forward a little bit. Talk about timelines. I know you were founded about a year ago and you've been getting everything built out, the infrastructure, the team, the partners. What does the timeline look like for you guys over the next year or so? I mean, we continue with the strategies that we just discussed. We have a major research focus here.

and building out the analytics, continuing to build those out, hiring additional data people to prepare that data so the models can be trained on it. All of that is one major effort that we're going to continue to work on. We continue to talk to potential investors, and that's separately a very major focus as well. And so I'd say those are like the two areas

things that we're doing right now. It's an internally focused effort of continuing to build out the modeling, which, by the way, will never end. There is there is no it's interesting. You know, there are people have built interest rate models on the street for decades, but you don't really see a lot of real effort being put into this on the part of Wall Street or anything, because

Interest rate models have been more or less, I would say, kind of solved. There's not a lot more that you can add to them and generate a lot more advantage. Whereas on the prepayment side in mortgages, you know, you could almost, I used to joke, a prepayment modeler has a job for life if they're doing a reasonable job because conditions keep changing. It's an imperfect, imprecise, macroeconomic, but data-driven model.

Um, approach. And so I think, uh, you know, we're going to always be focused on, on that aspect. And as new opportunities come up, we'll be focused on that. Uh, you know, on the, on the external side, um,

You know, we have A.J. Thomas is our business development head. And so we've been really excited sharing some of the progress that we've made with investors and continuing to do that and having those conversations. So it's it's really an exciting time to be building this firm and watching it grow and building out the capabilities. Yeah. A.J. is certainly a real road warrior for you guys. Yeah. He's a great guy, too.

I just want to say one thing, Max. Before we had this interview, we found out that we each have a pretty common background. We're both physics people from Cincinnati. What are the odds of the two of us getting together like this?

I know it was it was certainly special. I was just talking to somebody as I was like, oh, you look good in the suit today. I'm like, well, I always try and match the energy. And I know that you came from a bank background and and bond guys, they tend to dress sharp. And so I was like, I got to put on the suit today. I'm like, I know I'm going to match his energy because he's a physics guy from Cincinnati. There's no way that we're not going to we're not going to vibe and be simpatico here. So I'm

It was, you know, truly, truly special and always good to meet people from the great Cincinnati diaspora. Absolutely, Max. Well, Matt, thank you so much. All right. Thank you.