Two Harbors Investment Corp. Q2 FY2024 earnings call

• Retirement of CFO Mary Riskey announced, with William Dellal joining as interim CFO effective August 1.
• Book value at June 30 was $15.19 per share, with total economic return flat for the quarter.
• Market volatility driven by conflicting economic data, Fed rate decisions. 10-year treasury yield finished the quarter about 20 basis points higher at 4.40%, 2-year treasury yield up 13 basis points to 4.75%.
• RoundPoint completed transfer of all servicing to its platform in June, services over 900,000 loans or about $225 billion of UPB. Launched direct-to-consumer originations platform, took locks on more than $25 million worth of loans in first few weeks, intends to offer ancillary and home equity products later this year. Added approximately 17,000 loans from one subservicing client in the quarter.

Book value at June 30 was $15.19 per share, down from $15.64 at March 31. Total economic return was flat for the quarter. Net servicing income was $172 million, including $139 million of service fee income and $37 million of float and ancillary income, offset by $4 million of third-party subservicing fees and other MSR-related servicing costs. Net interest expense of $38 million was favorable to the first quarter on lower average borrowing balances and rates, partially offset by lower RMBS interest income from net sales. Investment securities loss and change in OCI was favorable to Q1 by about $48 million. Servicing asset losses were $23 million in the quarter, unfavorable to the first quarter due to amortization. Net swap and other derivative gains were lower in the second quarter by $125 million. RMBS funding markets remained stable and liquid with $1.9 billion of outstanding borrowings under bilateral facilities for MSR activities.

• Expect volatility to decrease as the Fed embarks on an easing cycle, benefiting RMBS and MSR valuations.
• Optimistic about return potential of investments with nominal spreads for Agency RMBS still wide on a historical basis and tightening potential in lower interest rate volatility environment.
• MSR portfolio remains deeply out of the money with less than 1% of mortgage loans likely to refinance at current rates, keeping prepayment risk low.

• Volatility in economic data and Fed policy decisions can impact market conditions. - Uncertainty regarding the timing and extent of Fed rate cuts and their effect on mortgage spreads and valuations. - Market volatility can affect the valuations of RMBS and MSR portfolios.

Q: How would you describe your leverage position today?

A: Nick Letica said leverage is at 6.75, slightly above the middle of the 5 to 8 times range, slightly more aggressive but spread sensitivity of the portfolio hasn't changed much, moved up in coupon for various reasons but not full bore on mortgage spread tightening.

Q: Can you talk a little bit about sort of the time frame you guys see for when we could actually see a meaningful decline in volatility?

A: William Greenberg said it's hard to time exactly, but probability of Fed cutting cycle and lower volatility environment is better now, market is pricing in cuts, but not expecting immediate drop, more likely gradual over balance of year and into 2025.

Q: How do you guys think that the yield or the total return outlook looks for TBAs versus pools right now?

A: Nick Letica said there isn't tremendous variation, pools generally have wider spreads than specified pools, movement driven by MSR hedging needs, migration up into production coupons, and combination of liquidity, stack position, and ability to move around as market moves.

Q: How do you expect conditions in the bulk MSR market to potentially respond to prepayments pick up more materially?

A: William Greenberg said supply dynamics in MSR market have been unique, low WACC servicing likely mostly traded, if rates fall, originators not equipped to hold MSR may sell, expect some increase in at-the-money MSR supply but with lags.