Two Harbors to begin originating DTC mortgages in Q2

Two Harbors Investment Corp., riding a first quarter profit, is close to locking mortgage loans through a direct-to-consumer channel. 

The effort, an attempt to hedge against faster-than-expected prepayment speeds when there's a refinance environment, will begin operating in the second quarter, executives said Tuesday in an earnings conference call. 

"Though [a refi environment] may seem distant, we intend to offer ancillary products, including second lien loans to our customers in the meantime," said William Greenberg, president and CEO of the firm. 

The announcement follows a first-quarter result of $192.4 million in net income over the prior quarter's $444.7 million net loss. Two Harbors' comprehensive income of $89.4 million was also a quarterly improvement from the prior period's $38.9 million. 

Company leaders cited mortgage servicing rights values increasing on higher mortgage rates and spreads tightening. A decline in residential mortgage-backed securities values meanwhile was offset, the firm said, by gains in swaps and futures. Two Harbors' $14.7 billion portfolio included $3.1 billion in MSR holdings and $8.2 billion in RMBS at the end of the quarter. 

The company added a new subservicing client in the first quarter, which will onboard around 17,000 loans to its newly acquired RoundPoint platform. That acquisition is nearly complete, with approximately 52,000 loans set to transfer in June in a final "clean up," Greenberg said.

New participants and low supply are driving a brisk pace of activity in MSR markets, executives said. The $160 billion in unpaid principal balance up for bid in the first quarter was lower than years past because of slow originations and much low-coupon servicing already trading hands, said Nicholas Letica, vice president and chief investment officer. 

"This lower supply combined with a growing investor base should keep MSR values well supported," he said. 

Although prepayments are expected to rise, Two Harbors said it is insulated given that over 80% of its balances have loans 250 basis points below current mortgage rates. The firm's MSRs have a weighted average coupon of 3.47%, nearly unchanged from the end of 2023.

Two Harbors' share price opened the day 9 cents higher after its earnings release Monday evening, when it closed at $12.61. The stock hovered around that price at mid-morning Tuesday.