Two Harbors Investment Corp. is expanding further
The real estate investment trust, which reported reduced profitability but stronger earnings available for distribution, is building on its establishment of a recapture unit and moving into other products, President and CEO Bill Greenberg said. It's also been selling some servicing opportunistically even though it ultimately wants to expand its portfolio.
These moves come as equity analysts increasingly focus on the possibility of lower rates in assessing the outlook for the net asset value of mortgage investment companies.
"Material exposure we see for both NAV and valuation remains geared around a plunge," BTIG analysts said in a research note issued prior to the earnings call and an announcement on monetary policy set for Wednesday afternoon.
The danger of a sharp drop in rates for Two Harbors would be the possibility that it "sparks a prepayment wave and potentially costly rebalancing of hedges," Eric Hagen and Jake Katsikas said in the BTIG note.
However, because rates already incorporate Fed cuts, the odds of that occurring are lower than the likelihood it won't, the analysts added.
Greenberg said during the call — in which the company reported $44.55 million in net income under generally-accepted accounting principles, $479,000 on a comprehensive basis and nearly $17.52 million in EAD — that he also thinks the mortgage rate reaction to a Fed cut will be mild.
"My own view is that even if the Fed cuts rates right, that doesn't necessarily mean that long-term rates are going to go down very much at all," he said.
Only around 5% or so of the portfolio has mortgage rates in the money, Greenberg and Chief Investment Officer Nick Letica said.
The company was comfortable taking on some rate risk during the quarter, executives said, noting that some market developments made higher coupons look more attractive.
"Our leverage increased to 6.8 times as we migrated up in coupon in agency RMBS, shifted from specified pools to TBAs and increased our notional mortgage exposure," said Letica. "Despite a pickup this quarter, volatility has been trending down as the variability of Fed outcomes have diminished, which we believe warrants a slightly more aggressive stance."
However, to the degree that there is rate risk, the company's recapture platform "should be able to generate larger returns in a refinance environment and to act as a hedge to faster than expected prepayment speeds," the company's president and CEO said.
As of July 25, the new direct-to-consumer recapture platform had accepted locks on $25 million in mortgages, according to Greenberg.
"We also intend to begin offering ancillary and home equity products to our customers, including second lien loans, later this year," he said.
The company's results compared to the previous quarter's $192.45 million in GAAP and $89.37 million in comprehensive income. A year earlier, it reported $187.78 million in GAAP income and nearly $31.48 million in comprehensive income.
Also a year ago, Two Harbors reported a
The company's latest results included net interest expense of $38 million, which was favorable compared to the first quarter due to lower average borrowing balances and rates, said Chief Financial Officer Mary Riskey.
This was partially offset by lower residential mortgage-backed security interest income from net sales, she added.
Former Caliber executive William Dellal will be Riskey's interim successor when she retires next month, executives said during the call.
During the quarter, Two Harbors also generated servicing income of $172 million, Riskey said. This included $139 million of service fee and $37 million of float and ancillary income. That was offset by $4 million of third-party subservicing fees and other servicing rights-related costs.
Net servicing income improved by $12 million compared to the first quarter because of the higher servicing fee collections and float income. The company also saw lower third party subservicing costs as the company finished a transfer to its
The REIT, which has a servicing portfolio with an unpaid principal balance of $225 billion, settled a bulk acquisition of mortgage servicing rights with a $1.6 billion UPB during the quarter, and committed to purchase another $1 billion.
Two Harbors also committed to sell mortgage servicing rights with a $6.4 billion UPB.
"Although our goal is to grow our MSR portfolio over time, we'll continue to actively manage our assets including MSR and allocate capital based on where we see opportunity," said Letica.
A few nonbank originators bidding on a lower amount of supply boosted MSR performance during the quarter, the CIO said.
"Given the strong bids in the market, certain large buyers turned into sellers, including ourselves," said Letica.
Rate, amortization or spread-related developments during the quarter resulted in a $48 million improvement in other comprehensive income compared to the previous fiscal period, asset losses were $23 million less favorable. Net swap and derivative gains were $125 million lower.
