“We have this opportunity, given where our portfolio is and where interest rates are, to build something from scratch, and we can make it entirely custom fit to our business,” Greenberg said. “We don’t have to buy something that other people have made that doesn’t fit very well and that’s upside-down on costs.”

Two Harbors’ origination business will hedge its servicing portfolio of $216 billion in unpaid principal balance (UPB) as of Dec. 31, 2023. That’s how things work at other companies in the mortgage space, such as Mr. Cooper, Rithm Capital and Pennymac. Two Harbors’ primary strategy, however, isn’t to compete with large players for new customers.

“A lot of those guys spend a lot of money on advertising and outreach to people to try to find borrowers that they can refinance or make second liens,” Greenberg said. “We have borrowers we know very well that we can just call. The so-called lead generation is captive to our ecosystem already.”

For now, most of the company’s borrowers have no incentive to refinance. The weighted average coupon rate for its servicing portfolio was at 3.45% in the fourth quarter, signaling a low risk of prepayments. Meanwhile, the 30-year fixed mortgage rate was 6.9% as of Thursday afternoon, according to HousingWire’s Mortgage Rates Center.

While rates are still high, Two Harbors will work with second liens and home equity products through its origination business.

Journey to originating loans

Two Harbors was created in 2009, in the wake of the Great Recession, as prices for most assets, including mortgage-backed securities (MBS), started to fall and became an investment opportunity.

The company began investing in agency and legacy subprime MBS. Over time, it got involved in other asset classes, such as single-family rental properties and commercial real estate lending. (The latter division was subsequently spun off into a REIT).

Mortgage servicing rights (MSR) became a target in 2013, and by 2020, the company had chosen to focus on agency MSR and agency MBS. According to Greenberg, the premise was that “diversification sounds good only in theory” since “investors wanted to diversify themselves, but they didn’t want the investment vehicles themselves to diversify” for them.

Between 2017 and 2018, the company crossed the mark of 500,000 servicing units. At this level, conventional wisdom says it’s most cost-effective to bring servicing in-house, Greenberg said. At that time, Two Harbors sought a platform to acquire. It debuted in the servicing business in October 2023 by acquiring RoundPoint Mortgage Servicing LLC.

“One of the most interesting characteristics about Roundpoint was that it was agency [MSR] only. It had no government servicing, no Ginnie Mae exposure, which has different regulatory risks and different economics,” Greenberg said.

“It also didn’t have a lot of servicing on the platform — it was servicing some assets from its parent company, which was going to move back up to the parent before it transferred to us,” he added. “So, it just had a small amount of true third-party subservicing. It was sort of an empty shell waiting for someone to come and put all their servicing on the platform.”

Two Harbors also wanted to ensure that whatever vehicle it purchased had its licenses to originate loans. It had become clear to executives that in the valuation of MSRs, the recapture economics should be included.

“This one has been known for a long time, but it had never been explicitly included in the cash flows of mortgage servicing until the last couple of years,” Greenberg said. “And so we knew that in order to get the most value out of our servicing asset, some amount of recapture capabilities was going to be very important to our efforts.”

After integrating with Roundpoint, Two Harbors is expected to have 500 employees in four offices in New York, Minnesota, South Carolina and Texas.