Real estate investment trust Two Harbors (TWO) still intends to acquire jumbo mortgages for a future private-label deal despite regulatory concerns and a shortage of originations.
The REIT targets a $250 million deal as its first securitization, though it hasn't set aside the platform as a separate business segment. As of Dec. 31, it purchased $5.8 million in mortgage assets, borrowing from a credit facility set up with Barclays Capital (BCS).
The company warned in a recent letter to investors that sound home loans would be hard to come by and lenders who could originate them may not want to part with such assets.
"The success of our securitization program will depend upon sourcing a large volume of desirable prime nonconforming residential loans. We may be unable to do so for many reasons," Two Harbors said. "We may be unable to locate originators that are able to originate mortgage loans that meet our standards, and those originators may decline to sell us those mortgage loans. Competition for the loans may drive down supply or drive up prices, making it uneconomical to purchase the loans."
Estimates show mortgage originations overall will drop in 2012 as the housing recovery continues to limp along. Two Harbors said upcoming Dodd-Frank rules and new leverage requirements could short-circuit such a deal, too, but those appeared to be secondary risks compared to potential supply problems.
"If we cannot source an adequate volume of desirable loans, our securitization program may be unprofitable, and we may hold individual loans for long periods, increasing our exposure to the credit of the borrowers and requiring capital that might be better used elsewhere in our business," according to the letter.
A spokesperson for Two Harbors could not give an updated amount of assets acquired since the end of the year, but the REIT will disclose new numbers when it reports earnings in May.