Two Harbors takes net loss, adding origination for retention

Two Harbors Investment Corp. announced it's starting an origination unit to balance out its new role as a servicer after suffering a rough fourth quarter due interest rate and spread volatility.

The real estate investment trust reported a $444.69 million net loss and $38.9 million in comprehensive income during the period. Its fourth quarter results compare to a $194.1 million in net income and $56.9 million comprehensive loss the previous quarter. 

The company's results and strategic moves highlight a potential need for companies more reliant on servicing to reposition themselves in response to Federal Reserve officials' recent pivot away from raising short-term rates toward plans to potentially lower them this year

Long-term mortgage rates dropped a full percentage point during the quarter in response to signals from monetary policymakers, with the Freddie Mac average rising as high as 7.79% in 4Q and ending the year at 6.61%. It was 6.69% in the most recent Freddie Mac survey.

Generally speaking, falling rates tend to weaken the value of mortgage servicing rights as they can cause borrowers to refinance away from the existing holder.

That could be a challenge for Two Harbors given that executives said during an earnings call that the company's acquisition of Roundpoint Mortgage makes it the eight largest conventional servicer. The company said in a release it was able to move substantially all of its servicing to the newly-acquired platform during the fiscal period with full resolution expected by June.

One thing that mitigates the interest rate concern for Two Harbors and the market at large is that a large portion of outstanding loans were made at extremely low rates and so relatively few have refi incentive.

The weighted average coupon of Two Harbors servicing portfolio was 3.45%, according to a company's press release.

Also, by establishing a direct-to-consumer origination unit, Two Harbors could potentially recapture some existing borrowers in its servicing portfolio refinancing loans by getting them to stay with the company when they do. The unit will offer first liens and home equity products.

In response to an analyst's question related to how aggressive the investment in developing an  origination unit would be, CEO Bill Greenberg emphasized that its main role would be to protect the servicing operation from runoff.

"We're really focused on portfolio defense," he said.

The company's stock opened Tuesday 31 cents lower after the release of its earnings Monday night at $13.34, with analysts from Keefe, Bruyette & Woods characterizing the shares as "weak" but noting that "downside could be limited." It was just above $13 mid-morning Tuesday.