Good day, ladies and gentlemen, and welcome to the Chimera Investment conference call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Head of Capital Markets, Victor Falvo. Sir, the floor is yours.
Thank you, operator, and thank you everyone for participating in Chimera's second quarter 2022 earnings conference call. Before we begin, I'd like to review the safe harbor statements. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the forward-looking statement disclaimer in our earnings release in addition to our quarterly and annual filings. During the call today, we may also discuss non-GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliation of the most comparable GAAP measures.
Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information. I will now turn the conference over to our CEO and Chief Investment Officer, Mohit Marria.
Thank you, Vic. Good morning and welcome to the second quarter 2022 earnings call for Chimera Investment Corporation. Joining me on the call today are Choudhary Yarlagadda, our President and Chief Operating Officer, Subra Viswanathan, our Chief Financial Officer, and Vic Falvo, our Head of Capital Markets. After my remarks, Subra will review the financial results, and then we will open the call up for questions. This quarter, inflation, as measured by the Consumer Price Index, continued its climb, reaching 9.1% on a year-over-year basis. This was the highest level recorded in the last 40 years. The persistence of high inflation has forced the Federal Reserve to alter its outlook on the economy and its open market policies. They increased their federal funds rate by 125 basis points during the second quarter and again by another 75 basis points last week.
The velocity of these policy moves has been faster than previously communicated by its governors. While many believe that the Fed is still in catch-up mode, lenders have become more cautious and the rate of thirty-year fixed-rate mortgages ended the quarter at 5.83%, an increase of 327 basis points since the start of the year and the highest in over a decade. Higher interest rates and increased volatility caused spreads on all fixed income products to widen substantially during the quarter. Specific to mortgage credit, newly originated prime jumbo loans and non-qualified mortgages all performed poorly, which put added pressure on the new issue securitization market. Wider spreads on these assets spilled over to other mortgage products, including reperforming loans.
We believe higher primary mortgage rates will severely impact new mortgage origination volumes and consequently improve spreads in the securitization market in the second half of 2022. Given this market backdrop of higher rates and increased volatility, Chimera maintained its commitment to optimize its liability and capital structure with the objective to maximize our net interest spread for the benefit of our shareholders over the long run. Securitization remains the primary source of long-term funding for our portfolio. Over the quarter, we completed two securitizations with $727 million of loans from our existing warehouse facilities. In May, we sponsored CIM 2022-R2, collateralized by seasoned reperforming residential mortgage loans with a principal balance of $508 million. These loans had a weighted average coupon of 4.48% and are 162 months seasoned.
Securities with an aggregate balance of approximately $380 million were sold in a private placement to institutional investors. The senior securities were rated AAA by Fitch and DBRS and represented approximately 75% of the capital structure. These securities had a 3.75% fixed rate coupon and an average cost of debt of 4.4%. We retained subordinate notes and interest-only securities for investment with an aggregate balance of approximately $128 million. Chimera has the option to call the securitized mortgage loans at any time beginning in May 2027. In June, we completed a private label investor loan securitization, CIM 2022-I1, with a principal balance of approximately $219 million. The loans had an average coupon of 4.73% and 5 months weighted average loan age.
Securities with an aggregate balance of approximately $123 million were sold in a private placement to institutional investors. These securities were rated double A by S&P and represent approximately 55% of the capital structure. Chimera retained an option to call the securitized mortgage loans at any time beginning June 2024. Our average cost of debt for this securitization was 5.13%. In total, Chimera's two securitizations this quarter created long-term non-recourse financing for $727 million of loans. Moving loans from warehouse to securitization helped reduce our recourse financing for the second quarter by $278 million. We continue to favor long-term secured financing for our retained investments. This quarter, we refinanced a $206 million non-mark-to-market secured facility on our balance sheet.
We established in its place a larger $307 million 12-month evergreen secured financing facility. The new facility provides a mark-to-market holiday on the underlying assets and provides this benefit for the duration of its term. Separately, we negotiated an 18-month extension for an existing $511 million non-mark-to-market secured facility. The new facility has a maturity date of March 2024, and the underlying assets are not subject to mark-to-market price movements. On our balance sheet, the combination of $7.7 billion of securitized debt and $818 million of new high quality secured financing arrangements represents 78% of our total liabilities and provides stable financing for Chimera's credit assets during periods of high interest rates and volatility and adverse market conditions.
Considering the challenging market environment and hawkish commentary from the Federal Reserve officials, this quarter we entered a swap option contract for $1 billion notional value one year forward at a fixed rate of 3.26%. This swap option is fully exercisable at the sole discretion of Chimera in May 2023 and provides a partial hedge for our full repo financing should interest rates continue to rise. Last quarter, we discussed our company share repurchase plan, which allowed us to repurchase up to $226 million of common shares. This quarter, we repurchased 5.4 million shares of our common stock in the open market. Our weighted average purchase price was $9.10 for a total cost of approximately $49 million.
We believe our stock price currently represents good value relative to other assets available in the market, and the reduction of the number of shares outstanding is accretive to our earnings available for distribution. As of June thirtieth, we have $177 million remaining purchase authority, and we will continue to evaluate the merits of share repurchases relative to our book value and other assets available in the market. Lastly, we continue to acquire business purpose loans for our portfolio. The credit characteristics of these loans, along with their high yield and short duration, match well with Chimera's risk profile and capital structure. This quarter, we purchased and settled on $120 million of business purpose loans.
While market conditions in 2022 have presented many challenges, we believe our strategy of buying and securitizing residential mortgage loans will continue to generate the best risk-adjusted returns for our shareholders over the long run. Our team of professionals are experienced and have a demonstrated history of being responsible stewards of capital. We believe our capital structure is best in class, and our portfolio is well-positioned for the future. We acquired nearly $1 billion of loans so far in 2022 at much higher yields than have been available in recent years. We repurchased 5.4 million shares of our common stock this quarter and have authorization to purchase an additional $177 million. Our recourse leverage remains low, liquidity strong, and we continue to look for opportunities to generate the best risk-adjusted return for our shareholders.
I will now turn the call over to Subra to review the financial results.
Thank you, Mohit. I will review Chimera's financial highlights for the second quarter 2022. GAAP book value at the end of second quarter was $8.82 per share, and our economic return on GAAP book value was -9.9% based on the quarterly change in book value and the second quarter dividend per common share. GAAP net loss for the second quarter was $180 million or $0.76 per share. On earnings available for distribution basis, net income for the second quarter was $74 million or $0.31 per share. Our economic net interest income for the second quarter was $117 million. For the second quarter, the yield on average interest earning assets was 5.6%. Our average cost of funds was 2.7%, and our net interest spread was 2.9%.
Total leverage for the second quarter was 3.7 to 1, while recourse leverage ended the quarter at 1.1 to 1. For the quarter, our annualized economic net interest return on average equity was 14.8%, and our annualized GAAP return on average equity was -20.4%. Lastly, our second quarter expenses, excluding servicing fees and transaction expenses, were $15 million, down slightly from the previous quarter. That concludes our remarks. We will now open the call for questions.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. If you're using a speakerphone, we ask that while posing your question, you pick up your handset to provide favorable sound quality. Once again, ladies and gentlemen, if you do have a question, please press star one on your telephone keypad at this time. Please hold as we poll for questions. Our first question comes from Bose George from KBW. Please go ahead.
Hey, guys. This is actually Mike Smyth on for Bose. Quick one. Just what are the expected returns on the retained pieces of your securitizations at the moment right now?
Hey, good morning, Mike. This is Mohit. The expected returns on the retained pieces from the 2 securitizations we completed in Q2 are probably mid high single digits. The reason that's a little bit lower is the cost of acquiring the loans, which was earlier this year. As the markets backed up and the execution we obtained on the seniors produced slightly lower returns than on new acquisitions we would make today.
Gotcha. Do you have an expectation for where new returns would be today?
Yeah. I mean, acquiring loans in relation to securitization, as I'm sure you've heard multiple times already, isn't that attractive.
Senior parts of the capital structure are trading at historically wide levels. I think returns today would be in the high teens, but I don't think you will be able to acquire many loans to generate that arb at the moment. Actually buying securities is a more attractive investment opportunity, especially at the top of the capital structure.
Gotcha. That's good color. Could you ever look to, you know, if you're able to acquire loans, could you look to eliminate or reduce that extra turn of repo leverage just as a way to kind of control the risk in the current environment?
Yeah. That's exactly what we did in Q2. As we came into the quarter, we had a little bit over $1.1 billion of loans on our warehouse line. By completing two securitizations totaling $727 million, we termed them out, even in a challenging, you know, new issue environment, locking in, you know, term financing on a non-mark-to-market basis to manage the recourse risk that we've had on the warehouse line. As the opening remarks state, that remains, you know, our focus on a go-forward basis as well.
Great. That's good color. Just a couple quick ones on book value. How much of the decline, if any, has the potential for recovery? Just as a follow-up, can you provide a quarter to date update on book value?
Sure. I mean, any change in fair values is unrealized. We haven't sold any of the assets that we hold. From a recoverability standpoint, theoretically all of that is recoverable if rates rally and spreads tighten. As we sit here four weeks after quarter end, the market has rallied. Spreads are a little bit firmer. I would say book value is probably improved to the tune of 1%-2%. Again, it's early in the quarter, you know, and still a lot of rate volatility, spread volatility but again up 1%-2% to start the quarter.
Great. Thanks a lot for taking the questions.
Thanks, Mike.
Thank you. We'll go next to Trevor Cranston from JMP Securities. Please go ahead.
Great. Thanks. Can you guys ta lk about how you're thinking about, you know, the housing market, with mortgage rates having moved so much higher this year, kind of, and what your outlook for home price appreciation is, maybe over the next couple of years? Thanks.
Sure. Hey, Trevor. I mean, with increasing, you know, mortgage rates, we think the housing market will slow down, as it's already starting to do. But like from a supply, from a technical standpoint, it still remains pretty favorable. Supply is still somewhat limited. You know, we had double-digit home price appreciation last year. We're about 8%-9% HPA so far this year and projected to be maybe double digits, low double digits for this year. I think if you look at sort of forecasts into 2023, 2024, again, HPA is expected to slow with higher mortgage rates, but still be, you know, 4%-6% on an annualized basis going forward.
Got it. Okay. You mentioned that you added a swaption hedge to the portfolio this quarter. I think I missed the details you gave of that. Can you just say those again so I can get them down?
Yeah. We added $1 billion on our swaption with a strike rate of 3.26%. Given the variability and the outlook of what the Fed may do and where the terminal rate may end up, we thought it was prudent to add some protection to the portfolio and buy some insurance. We added that, and that swaption is exercisable in 2023 in May.
Okay. What's the term of the underlying swap?
It's a one-year swaption for one year. You'll have one year protection. It'll run through 2024 if exercised.
Okay. Got it. Thank you.
Our next question comes from Doug Harter from Credit Suisse. Please go ahead.
Thanks. Could you talk about the decline in the investment portfolio in the quarter? What drove that?
Sure, Doug. This is Mohit. I mean, we didn't sell anything, so it's just natural pay downs are the primary reason for the decline in the portfolio. Our prepayments we received in prior quarters was much more limited, so that didn't cause it. It's just the natural pay downs that were experienced that are the cause for a reduction.
The markdowns.
The other adjustment is the fair value adjustment.
Yeah.
on the portfolio as well.
Got it. I mean, I guess as you go forward, you know, kind of in the third quarter, you know, kind of, in the coming quarters, you know, I guess how are you thinking about reinvestment of pay downs and, kind of the size of the total portfolio?
Sure. I mean, just to sort of reflect on that question, looking back for the first half of the year, we've actually had a pretty active from an investment standpoint. You know, as I highlighted in the opening remarks, we bought just under $1 billion of new loans to the portfolio, between reperforming BPLs, investor loans. So that's been accretive. We've completed three securitizations to mitigate some of the warehouse risk, that was asked earlier. We've purchased $50 million of stock back in the second quarter. So from an investment and deployment of capital, all of those transactions are accretive. You know, as, again, you've heard Doug, the mortgage ecosystem still is very attractive.
You know, right now, loans where we've been primarily focused for the last several years, the RPL from a securitization standpoint doesn't make economic sense, doesn't mean the credit quality or the returns or credit quality has deteriorated, just the returns are not attractive. But looking at where top of the capital structure is AAA , non-QM, AAA prime jumbo loans, even senior parts of the non-rated securitizations are yielding or producing levered returns of, you know, mid high, low mid-teens, between 12%-15%, depending on where you're playing. Although we've been defensive in sort of keeping leverage and liquidity high, we've had a busy first half, and we expect, given where we are in the rate cycle, to be adding more assets in Q3 and Q4.
Great. Thank you.
Thanks, Doug.
Once again, that's star one if you do have a question. Our next question comes from Kenneth Lee from RBC Capital. Please go ahead.
Hi, good morning. Thanks for taking my question. Just wondering whether you could further flesh out your prepared comments about the securitization markets. You mentioned you could see some improvement in the second half, as the mortgage supply declines and spreads improve. Just wanted to see if you can just further flesh that out. Thanks.
Yeah, sure, Ken. You know, as we came into this year, some of the asset types that we play in, whether it be prime jumbo, you know, rated RPLs, non-rated seniors, which are the spaces we've historically played in, the spreads have widened quite significantly just due to an onslaught of issuance and supply that's hit the market from the origination side. So just to put that in perspective, non-QM AAA to start the year were trading around 85-90 to swaps. That today is probably ranging anywhere from 210-250 to swaps. So it's about 135 basis points of spread widening on the AAA execution.
If you go back to where loans were, loans were probably trading mid-100s to swaps back at the start of the year, and those are probably trading between low- to mid-200s to swaps today. The loan widening in relation to the senior widening doesn't match, which has put a lot of pressure on the securitization arm, if you will. As that supply has been flushed to the market and continues to flush to the market, and there's limited supply in the back half of the year, we think spreads should tighten on the top of the capital structure. You know, somewhere inside of 200 would be ideal, you know, even if it was 150, to sort of match up with where you could acquire loans today.
That is why we are more optimistic on the securitization market in the second half. If that does not change, you know, the company has shown that in the past, it could buy third-party securities, leverage those up and still provide very attractive risk-adjusted returns for shareholders. We're not just pigeonholed to buying loans. We can pivot and buy securities that look a lot more attractive than loans at any point in time.
Gotcha. That's a very helpful color there. Just one quick follow-up, if I may. Wondering if you could just share your thoughts on dividend coverage, you know, especially relative to your views on economic earnings power over the near term? Thanks.
Yeah. I mean, we're paying out a $0.33 dividend for Q2. You know, the Fed has been a lot more aggressive in sort of raising rates up and front-loading them. They've gone 75 basis points twice in the last two meetings. The expectations for the remaining three meetings of the year are for potentially another 100 basis points with a combination of 50, 25 or 50. You know, given how aggressive the Fed's been, you know, we'll evaluate what the dividend policy is. We'll reflect to the board our assumptions and outlook for, you know, what the portfolio can earn. Like I said, we are sitting at 1.1 turnover recourse leverage with $1.4 billion of cash in unencumbered assets. So ample liquidity to deploy more accretively.
I said that in our prior remarks, but again, we had north of 125 basis points of Fed hike. Maintaining the liquidity and the spread volatility experience was prudent, but I think we'd be more aggressive with adding assets in the back half of the year to drive some more spread income.
Gotcha. Very helpful there. Thanks again.
Thanks, Ken.
Once again, that's star one if you do have a question or comment. Okay, there appear to be no further questions at this time. I'd like to turn the floor back over to Mohit for closing remarks.
Thanks, Karen. Thanks everyone for joining us on the call today. We look forward to speaking to you in November.
Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.