How Two Harbors handled the fourth quarter's rate volatility

Two, a mortgage real-estate investment trust, reported net income far exceeded consensus in the fourth quarter, when it used hedges to manage interest-rate risk.

The rebranded Two Harbors Investment Corp. recovered from losses in comparable periods and reported $264.95 million in net income or $2.37 in diluted earnings per share. That outpaced consensus estimates of $60.14 million or 58 cents, respectively, according to Standard & Poor's Capital IQ. For the full year, the company also generated $2.37 in diluted EPS compared to a consensus estimate of 42 cents.

With one-time gains removed, Two generated 55 cents in quarterly, normalized EPS, below an 82 cent estimate for the full year. Two also reported a comprehensive net loss of $1.62 million and $21.18 million in earnings available for distribution for the quarter. Both measures are key REIT metrics. The company had reported $19.3 million in comprehensive net income and almost $13.19 million in EAD the previous quarter.

Effective hedging and a portfolio of mortgage servicing rights with interest rates below current market levels contributed to strong net income during a quarter with election-related volatility, according to Two President and CEO Bill Greenberg.

"With two-thirds of our capital allocated to low coupon MSR, our portfolio generated stable and positive cashflows, despite large fluctuations in short-term interest rates," he said in a press release.

Volatility has since subsided with executives currently anticipating that monetary policy will remain on a more predictable path, albeit one that will be data dependent and could shift each quarter.

"It's our expectation that mortgage rates are likely to remain above 6% in the intermediate term," William Dellal, vice president and interim chief financial officer, said during the call.

Higher rates and lower projected prepayments bolstered mortgage servicing rights values during the quarter. The company finances its MSRs through five lenders, said Dellal, who stepped in for former CFO Mary Riskey after she retired last year.

In its earnings documents, the company also reported that it settled an unpaid principal balance of $2.5 billion in servicing rights through flow or bulk acquisitions and recapture that its recently added origination unit facilitates during the quarter. Two has been moving further into the second lien market as part of its origination efforts, executives said during the call.

For the full year, Two settled $9.2 billion in MSRs through acquisitions or recapture. Bulk bid opportunities were down 25% in 2025 compared to the previous year, according to the REIT, which has a $212 billion servicing portfolio. 

When asked about how government-sponsored enterprise reform could affect the REIT, which invests in assets that include agency mortgage-backed securities, Dellal said it'll depend on the extent to which privatization of Fannie Mae and Freddie Mac proceeds and how it affects the guarantee on new and existing mortgage bonds.

"Once we have more detail about potential plans, we can look at the implications," he said, noting that he didn't want to speculate further.

During the earnings call, executives also mourned the passing of one of its board members, Reid Sanders. The president and founders of Sanders Properties had been with the company since its inception in October 2009.