Two Harbors enters flow sales agreement for MSR portfolio

Falls in line with investment hedging trend

Real estate investment trust Two Harbors Investment Corp.’s (TWO) wholly owned subsidiary, Matrix Financial Services Corporation, announced it entered into an agreement with PHH Mortgage Corporation for the purchase and sale of mortgage servicing rights.

The flow sale agreement stipulates that PHH Mortgage may sell to Matrix the MSRs on 50% or more of PHH Mortgage's newly-originated residential mortgage loans that are eligible for sale.

“We are pleased to announce this MSR flow sale agreement with PHH Mortgage, an industry-leading mortgage lender," stated Thomas Siering, Two Harbors' president and CEO. "This agreement represents significant progress related to our MSR investment initiative."

The deal is subject to the parties' mutual agreement on quarterly pricing for the MSRs and has an initial term of two years.

In addition, the two companies entered into a subservicing agreement pursuant to which PHH Mortgage will act as the subservicer of the mortgage loans underlying the MSRs sold under the flow sale agreement.

“There has been talk about acquiring an MSR portfolio for awhile. This is a manifold strategic plan in part of being the best mortgage REIT that they can be and focus on total return for shareholders,” Dan Altscher, vice president, research analyst with FBR Capital Markets, said.  

“It has been a bit of a waiting game, but we are clearly there now.” However, it won’t be until 2014, 2015 until a type of return can be seen, Altscher noted.

Two Harbors is not alone in this mindset, with companies like American Capital Mortgage Investment (MTGE) acquiring specialty servicer Residential Credit Solutions, as HousingWire recently reported.

In a rising interest rate environment, fixed mortgage investments loss value. Purchasing mortgage servicing rights, which rise in value in the same enviroment, helps hedge against this loss.

And with coming regualtions under Basel III, MSRs are no longer eligible to count as tier one capital and so many larger financial institutions will be bringing more of these types of portfolio to market.

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