Dynex Co-CEO Smriti Popenoe on Mortgage REITs, the Fed and Risk Management in Housing Finance

Today on After earnings, Dynex Capital, an internally managed mortgage REIT that seeks to turn residential real estate assets into creating long-term yields for shareholders. I'm joined by Smitty, Popo Dynex co CEO, president and Chief Investment Officer to discuss the company's latest quarter, its portfolio strategy and proposed regulation that caps institutional ownership of residential real estate, that plus what might be coming from the Fed. Let's get into it. I'm very excited to dig into your business at Dynex because I have a little confession. In 2008 when I first moved to New York, one of the first assignments I had was actually to look at securitizations of mortgage backed security. So when I was reading about your business model, some of it sort of brought me back. Would you mind just to level set for our discussion, SSIR laying out in a way that most people who perhaps aren't as familiar with your business can understand the core of the products that Dynex offers and how you put them to market?

Absolutely. Yeah. It's a real pleasure to be here this morning coming off a fantastic year for Dynex, and I'm happy to talk you through just what it is we offer. The number one thing I always tell my shareholders that we offer is actually trust the ability for shareholders to trust us to take care of their capital. And I think of Dynex as really being at the intersection of two things. One is housing finance, so where houses get bought, sold, financed, and capital markets, which is where we raise the capital that we can then invest in those housing assets. Everybody, most people know what a mortgage is, right? Most people have taken out a mortgage or they know what that is. Dynex makes a living out of raising capital in the public markets and really investing in those mortgage assets to earn interest income off of those assets and turn that into a dividend that we pay monthly to our shareholders in the form of income.

So talk to us, if you don't mind, Smithy, about where you source those mortgages from you going to the banks and buying it off their balance sheets, so you're getting them someplace else. Talk to us about where the underlying mortgages are actually sourced.

Yeah. The US Housing finance system is actually one of the most sophisticated and well developed in the world. And we have two entities within the US housing system. They're called government sponsored enterprises called Freddie Mac and Fannie Mae. And those entities actually buy mortgages from banks and originators and then they securitize them. So going back to your 2008 experience, what securitization does is it pulls all these mortgages into packages with similar characteristics and it allows investors like us to buy standardized packages of mortgages. So we invest in these mortgages and what the Freddie Mac and Fannie Mae, the GSEs, that's what they're called, that what they do is their transformational attribute is they take away the credit risk in the mortgages by guaranteeing them to investors like us. So we don't have to worry about whether we're going to get paid back, we just worry about when we're going to get paid back. So taking that credit risk away allows us to invest in these mortgages with confidence that we are going to get our money back. And then we focus on managing other risks within the instruments like prepayment risk and interest rate risk.

So let's talk a bit more about the government sponsored entities, hy, because there is change afoot. We think what you've described is essentially the government backstopping your cashflow by de-risking. As you've described now, Fannie Mae and Freddie Mac are rumored to be possibly merging and then possibly going public. And what would, if it happens, be one of the biggest IPOs in US history, do you think that changes the bar and raises the standard for credit underwriting over at those entities? And do you think that as a public company potentially their appetite for absorbing credit risk might be reduced?

So let's take the last part first, which is I believe that the current administration and even future administrations and many, many past administrations have understood the importance of housing in terms of being a very, very integral part of the US economy. So that's thing number one. And the ability to have credit flowing to this very important part of the economy is critical to many, many aspects of managing the overall economy, wealth creation, managing income inequality, access to credit for all affordability issues. So this is an instrument, this is a tool that has been around for some time, right? So I don't believe the idea that they're going to reduce their appetite for credit risk jives with the idea of having housing affordable for all and access for all.

But if they become public companies smear, do not think that some of their mandate has to be less welfare oriented and has to be more bottom line oriented.

Well, I'll tell you, when I worked at Freddie Mac back in the day, I was there from 1994 to 2003, we were a public company. Warren Buffett was one of our biggest shareholders. We still had a mandate to do affordable housing. So those things are not mutually exclusive, right? It's all about the price, the price that shareholders are willing to pay for the credit risk that you're taking. So all of these things are entirely possible. I think the structure of the GSCs as being public entities with stocks trading in one of the exchanges as well as having a powerful government mandate, those things are not mutually exclusive and they can do both things.

And in terms of going back to your business model at Dynex smo, could you just talk to us about how, given that you are buying basically packaged assets from the GSEs, how much more work does your team do to actually look at the underlying mortgages themselves? How much do you look through to your own independent diligence?

We do a ton of work on that, and I think this is where some of the technology tools come into place, like the AI tools that you currently have, data science tools. What's really important to us when we buy these package mortgages is the ability to create a durable yield, right? We are a dividend paying stock, we're a dividend paying company, we're creating income for shareholders. So the durability of that income matters a lot. And we tend to look for mortgage mortgages, underlying mortgages which have very good prepayment characteristics, meaning that yes, given a certain level of refinancing that these investments will actually last longer than the average mortgage that's out there. So we do a tremendous amount of work and we have a term in the industry, it's called specified pools. These specified pools are actually packages of mortgages that we believe have the ability to create more durable yield for our shareholders, which then drive sort of the sustainability of the dividend.

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If

You could just lay out for us the coupons that your mortgages or your mortgage package assets are tending to yield and how that fluctuates or doesn't fluctuate as interest rates as the fed rate moves.

Yeah, so this is really an interesting dynamic. One of the key things I'll tell you right now is, so investors should look at Dynex stock, and you should see that we're trading at a dividend yield of about 13.5 to 14%. So that's the dividend yield that our stock is paying shareholders today, which comes out once a month. Behind that are investments that are yielding somewhere between four point a five and 5%. And we use financial leverage to turn that four point a half or 5% into that 13 point a half to 14% dividend. So the first aspect of this is leverage. The second aspect of this is financing those assets and the financing of those assets is actually what's sensitive to the feds changes in interest rates. So as the Fed reduces rates, our financing costs go down. As the Fed raises rates, our financing costs go up.

(09:40)
The other thing that happens is the Fed can change rates in the front end of the yield curve, but the yield on our assets doesn't necessarily change because to drive a change in the yield on our assets, the mortgage rate has to come down. And typically those two things don't always correlate. So when the mortgage rates come down, our assets could potentially be refinanced and then you have to reinvest at a lower yield. But that's why we're out there looking for these more durable yields and making sure that we're invested in assets that are less sensitive to refinancing in the mortgage rate. So we do have the ability to protect ourselves from refinancing risk by playing in the specified pool area. And then you do get a benefit to the extent that the Fed continues to lower rates or even if they lower what's already priced in our financing costs do go down.

And I think you had, as of your latest earnings reports, hy about seven times leverage. Is that correct? And could you just talk about what to you feels as though the acceptable level of leverage, the appropriate level of leverage to have? Is seven your target? Are you targeting more? Are you targeting less?

Yeah, leverage is a very interesting beast, if you will. Our company has made us bread and butter managing leverage and managing it through really, really tough times. In the last six years using leverage, we've generated a return of almost 70% for our shareholders, about 9% a year. So managing leverage is really important. And in the past we've actually been super flexible about how low we take leverage and how high we take leverage. And right now our leverage is being driven by the idea that the GSEs could potentially be buyers of mortgage-backed securities. You've probably heard the Trump administration has directed the GSEs to buy 200 billion in agency MBS. That is a very big driver of risk in the markets right now. So in the past, let's rewind to 2008, when you first came and looked at securitization, the biggest balance sheet in the market at that point buying agency MBS was the fed.

(11:56)
And since 2008 that those GSE balance sheets have been absent from the market and the Fed doing QE is where all these agency MBS ended up going between 2022 and 2025. Neither the fed nor the GSCs were in this market and that created what we called a generational opportunity, and it was based off this generational dislocation of there being no government balance sheet supporting this asset class. Fast forward to today, the Trump administration is saying that they now are supporting this market with the GSE balance sheets. That has changed the risk return profile of how cheap these assets can really get. So for our existing portfolio, it limits downside risk. For our new capital, our ability to take incremental risk is actually higher. And so we think the risk environment is actually supportive of not only taking seven times leverage, maybe risk up a little bit higher.

(13:00)
We think of leverage more in the eight times range here. But then again, I've run this portfolio for a long time. We've been as high as 10 or 12 when the market's really demanded in terms of our ability to take risk. We've been down as low as three when we feel like the risk isn't there. But this is an environment where at least in terms of this backstop bid from the GSCs does give you more confidence to take what we call spread risk or the risk of owning agency MBS versus interest rate swaps or other hedges that we have on.

Given what you've described Smithy, I'm surprised that your dividend yield is as high as it is. And so could you talk about other players and how competitive your space is becoming? Who are you competing against to get a hold of the agency RMBS pools?

Yeah, and I think, so the idea that dividend yields are high in the agency mortgage REIT space, I always look at that and say yes, when you see a double digit yield, that does seem like an eye popping number. However, when you think about the assets that I just described, you have 5% yielding assets, you're financing them around 4% and you're applying seven times leverage on those. Those are the types of mid-teen returns that we're getting. And that's the return that you see on Dyne stock, right? So if you just simply take our assets minus financing, multiply by the leverage, and you get that mid-teens return, that's how the returns are where they are. The agency MBS market is an enormous market. So mortgage reads, other players like ourselves, we're all competing in a space where if you think about dynex, our portfolio is about $20 billion today collectively in the agency REIT space, I would say maybe we are about a 400 billion ish balance versus a market that's like 9 trillion, right?

(15:08)
And each year you have probably close to one and a half trillion of these mortgages being originated, packaged, securitized, and sold by Freddie and Fannie. So it's a huge market. It's probably the second most liquid market in the world after US treasuries. So yes, there's competition, we're competing with the other people in the space. We're competing with money managers like the PIMCOs, the BlackRocks, and it all depends on price. At the end of the day, we find today that the risk adjusted return on agency MBS is actually really still compelling. So we're able to put our capital to work relative to the cost of the capital that we're raising. And so that actually is what drives the decision versus competing for the asset per se.

So talk to us Hy about your vision for growing Dynex. Where do you go from here? Do you stay in the specific area of residential real estate that the company's built its reputation, or are you thinking of diversifying?

I think the first thing I would say is we have competed number one, first and foremost on the concept of performance. So the first thing we've done is we've performed Dynex has is producing industry leading returns. We're focused on that performance against that performance. With the backdrop of that performance, we've grown our company, we want to still continue to perform in this space in the residential real estate space, commercial real estate space, again focused on housing. So we are at the intersection of housing finance. So even our commercial investments when we do do them are multifamily assets or things like that. So we are focused on housing and I believe that is the correct long-term, demographically supported place to invest our shareholders capital. And we can earn a great return from just being in that space. In the past, Dynex has diversified into up and down the credit stack in commercial residential space.

(17:14)
Our investment thought process there tends to be very opportunistic. And right now the liquidity of agency MBS, our ability to earn a very good return from them. That's why we're still sitting in that space. How we're thinking about growth. We continue to believe that there's two big factors to drive Dynex ass reason to grow. One is this idea that larger companies, liquid companies actually get rewarded more by the market in terms of valuation than smaller companies that don't deliver scale. And one of the dirty little secrets of passive investing is that capital actually goes to the largest companies, not the best performing companies. And we are an absolute poster child for that. So what we find is that when we're actually garnishing a much higher price to book ratio, much higher valuation being larger. And that makes sense because you're a more resilient company, you can withstand more shocks.

(18:15)
So pursuing growth just for the purpose of creating shareholder value because of this passive investment tailwind makes a lot of sense to us. And the consequences of that create all the virtuous factors that we think makes Dionex a more sustainable company. So you grow your valuation, increases, your ability to sustain yourself increases, your resilience increases. So those are all the things we're thinking about in terms of why to grow. The other thing it does is once you get to scale, and this is what I always say, why did I start talking about performance? To start, you need performance because if I gave you a choice between two stocks where one gave you 5% a year, but they only charged you 1%, but the other gave you 7% of a year, but they charged you 2%, at the end of the day, performance is what drives returns. And that's why we are laser focused on that first, because scale can come once you build the performance. And that's exactly the trajectory we're on. So our shareholders can benefit from us growing and continuing to perform.

Would you mind commenting SMU on some of the changes that have been floated to the residential real estate market, one of which is a perspective in the White House, that institutional ownership of residential real estate is counter to the mission that you articulated that you experienced when you were at the GSEs, which is trying to make sure that home ownership does become possible for a broader sway of the American population. What are your thoughts on the proposed regulations to cap institutional ownership of residential real estate?

I think I would point you to an article by my very good friend, Satish Ani in Barron's, where he talks about the fact that institutional ownership of US housing is actually a really, really, really, really small percentage of overall housing. So in situations where there is crowding out, I believe we need to make a change, but in the large scheme of things, pushing institutional buyers out isn't going to make the homes more affordable. Where really what we're doing is right now we're suffering from a supply problem. Housing stock in the US is probably the oldest that I've seen since I've been in this business for 30 years. So we haven't replenished our housing stock from the perspective of not just refurbishing the homes but creating new homes.

(21:00)
And I am sure you guys see all the press about this is really not in my backyard type of thing. There's been zoning regulations, all of that. And not to mention right now there's the huge headwind of tariffs that have made it really more expensive to create new homes. So we are going through a really incredible shift here where the demographic demand for housing in the US is growing while the amount of supply of existing and new homes is not growing at that same rate. And this is just an economics problem. Demand is higher than supply, and those two things need to balance out in the large scheme of things. Would institutional home ownership limitation create net new supply or more supply? Yes, but it's not the real reason we're in this situation. There's lots of other levers I think that can be pulled before you pull that lever. Or even if you do pull it, pull lots of other things as well.

And just to put that in perspective, smu, when we look at the portfolio details, specifically your RMBS portfolio, what is sort of the weighted average life of the underlying mortgages in that portfolio? So if we were to try to think about if there are changes in regulations to this industry, how much would they impact you or not? Depending on the maturity of the profile you've got.

And this is one thing that's very important to remember, is that what I tell you, the weighted average life is today could change tomorrow, should interest rates go down or go up. So it's very sensitive to the mortgage rate, but on average, I would say right now it's somewhere between four and five years. And we try to make that in those investments with the idea that we're trying to create durable yields for as long a period as we can. And one of the reasons actually we really, when Dynex was active in the multifamily space, that was a place where we could really find durable yields. The pricing in that sector isn't there for us quite just yet, but that's a place where you can get it. And then really we're thinking about this four to five years durable yield profile, and that's what we're always trying to put on the balance sheet.

So just to switch gears to wrap up Hy, let's talk about your role at Dynex. You're the co-chief executive officer at Dynex. Having co-CEOs are still a fairly unusual reporting or organizational structure to see what was the rationale for having a co CEO role at dyax?

One word team. So most co CEO structures don't work because there isn't this concept of team. And for Byron and myself, we've worked together since 1998, I want to say. So it's been a long time since we've been working together in different phases of our career. And one of the nicest things about our relationship is this idea that we're a team. And when you look at what we want to do with Dynex, what we've done with Dynex up to now, how we've managed Dynex from 2008 to 2025 and into 2026, growing it now into a resilient, vibrant, sustainable company, our thought process was really there's no need for us to make these decisions with just one brain that's working on things. Two brains together are definitely better than one and these two brains in this particular seat. Given our combined experience, I believe we are the longest running management team in the mortgage REIT space that has managed a reit.

(24:57)
So we've been doing this for 22 years together. And that I think is a huge aspect of this as well. The amount of experience that we both have. So using this idea of two brains are better than one, two heads are better than one, he has a perspective that looks at things a particular way. I look at it a different way. I tend to be the more operational CEO. He tends to be the more board focused strategic CEO. We're constantly communicating with each other and there's this wonderful overlap of our skills and our complimentary ways of looking at the world. And that's really contributed in my view to the returns that we've been able to create. So we've always operated as a team. We think the team structure works really well. We are both really strong risk managers and our ability and our willingness to challenge each other's blind spots, I think is what makes this structure really good for dynex and the returns to show it.

Lemme just push you on this a little bit more smu, because you'd already been working together, as you say, for as long as you had, it was already working. If the reporting structure wasn't broken, why change it? That's sort of the outside in perspective. Is this a succession issue? Is it a succession? And as you said, most times, this doesn't work as a structure. You already had the two brains in the organization. The criticism of this kind of structure is it makes it unclear for others who is deciding. It's not practical that every decision's a joint decision. So just if you wouldn't mind, just help the cynics understand, again, given you already were working together, you already had that benefit, help the cynics understand a bit more. Why change the titles?

There is a big difference between not being the CEO and being the CEO in terms of the CEO. The buck stops here. The buck stops here. So even when I was the president of the company, that was great. I could go anywhere I could do things. Being the CEO actually takes, there's another level of responsibility. There's another level of what I think of like the buck stops here that doesn't exist when you've got the presidency versus the ceo. And this idea that it's not practical for every decision to be a joint decision. That's not it. So we don't think about that. Every decision has to be something that we make together, but every decision is something we can and will do frequently. Check off each other so that there's more than one perspective at play when you're making those decisions. And we have this concept at Dynes, it says, let's be right together. And the inverse of that is don't be wrong alone, don't be wrong alone. And doing that extra pass has resulted in us making better decisions. So I would say the conventional wisdom is that you think you need one person to make the decision, and we're basically saying no. We think actually having two people make the decision is better and it has worked better for us.

Smu. Papa Ano, thank you very much for joining. Appreciate your time and teaching our audience so much about an industry that perhaps isn't as well understood as it deserves to be. Thanks for taking the time.

Thank you so much. Absolutely.

I'm Ann Berry, and thank you for tuning into After earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learn something today, don't forget to like, subscribe, and share with your friends our upcoming episodes. We've got some great ones. We'll feature CEOs and CFOs from Coursera, unity, Zita Global, and so much more. We'll see you then.