Two Harbors Investment, which is now leaning heavily into the mortgage servicing business, missed analyst consensus estimates for comprehensive net income by 26 cents per share in the third quarter.
Starting immediately, the company has undertaken a rebranding and will now simply be known as Two, "reflective of our evolution as a company into a MSR focused REIT," Bill Greenberg, president and CEO, said on the earnings call.
The company is a real estate investment trust and reported comprehensive net income of $19.3 million for the period, versus
This equated to 18 cents per share for the third quarter. Keefe, Bruyette & Woods expected Two Harbors to earn 47 cents per share while the consensus was for 44 cents.
However, because of a $269.6 unrealized loss on available for sale securities, the GAAP net loss was $260.3 million, compared with net income of $44.6 million in the second quarter and $194.1 million for the third quarter of 2023.
Going forward, Two Harbors and its peer group's future earnings will be dependent on how the yield curve moves, in one analyst's opinion.
"We think a bull steepener remains the ideal rate curve scenario for Two Harbors and the mortgage REITs broadly to strengthen earnings, although we're also holding out for some outperformance in a bear steepener where long rates continue moving sharply wider," Eric Hagen, an analyst for BTIG wrote. "It's conditioned on the movement in spreads, though, and in most cases we've seen current coupon spreads leak wider when extension risk is the focus."
However, BTIG views the more material exposure at Two Harbors is that its net asset value along with its valuation "still remains geared around a plunge in long-term rates, which sparks a prepayment wave and potentially costly rebalancing of hedges," Hagen said.
During the quarter, Two Harbors, which completed the acquisition of
It also sold $6.2 billion of higher coupon MSRs during the period.
After the third quarter ended, it agreed to buy $2.1 billion of MSRs in a bulk transaction.
"MSR valuations remain well supported with strong demand as the supply of bulk sales continues to normalize from the record levels of the past few years, said Nick Letica, chief investment officer in the earnings release. "Nevertheless, we believe there will continue to be opportunities to add MSR at attractive levels, enhanced by our deep expertise coupled with the benefits of our in-house servicing and recapture operations."
Two Harbors is "on-track to achieve the cost savings that we initially set up and improving the economics for the investors in our MSR assets," Greenberg said.
The third quarter was also the
Greenberg noted that just 1% of its MSR portfolio was in the money at current interest rates to refinance.
"Once at scale, we imagine this effort to provide significant hedge benefits to our MSR portfolio and to protect our assets from significantly faster than expected prepayment speeds," Greenberg said.
Although the volume numbers were small, they showed "proof of concept" for the origination business, he continued. The production was achieved by a team of three-to-five loan officers. By the end of this year, Two Harbors expects to have 30 loan officers on staff.
