Two Harbors Investment Corp., a New York-based real estate investment trust, announced Tuesday its plan to launch a mortgage origination unit in the second quarter of 2024, less than a year after the company debuted in the servicing business by acquiring RoundPoint Mortgage Servicing Corp. in October 2023.
But don’t expect the firm to compete with big players or grow extensively in originations. The step is part of a defensive strategy to retain customers when mortgage rates drop. Declining rates tend to increase prepayments as borrowers refinance their loans, often away from the existing servicer. This risk reduces the value of mortgage servicing rights (MSR).
Two Harbors’ announcement came on the heels of a reported $444.7 million net loss in the fourth quarter of 2023, compared to a loss of $294 million in the previous quarter, according to filings with the Securities and Exchange Commission (SEC).
The firm’s CEO, Bill Greenberg, told analysts that the company’s focus is to “develop a best-in-class direct-to-consumer originations channel to provide recapture” on the company’s servicing portfolio, which totaled a fair value of $3 billion as of Dec. 31.
Company executives believe that the weighted average coupon rate of the company’s servicing portfolio — 3.45% in the fourth quarter — signals a low risk of prepayments for now. It gives the company some time to build the origination channel from scratch.
“Despite the decline in mortgage rates over the quarter, our MSR portfolio … still has less than 1% of its balances with 50 basis points or more of rate incentive to refinance, which should keep prepayment rates low,” Two Harbors chief investment officer Nick Letica said in a statement.
“We are long away from serious refinancing activity unless interest rates fall precipitously,” Greenberg stated, which makes the executives believe they “have the time to build the platform that we want.” He says the company did not consider an acquisition because other potential structures were built for different environments or have legacy risks.
Two Harbors has already started to hire managers and team members for the new origination platform, which is expected to begin making loans in the second quarter.
Greenberg explained that with the direct-to-consumer platform, Two Harbors can also offer borrowers second-lien home equity loans and other ancillary products.
“We are not going to be a retail originator,” he said. “We are not going to be someone who’s going to compete with the largest guys out in the world. The point of this thing is really to protect our servicing portfolio, to defend our portfolio, to perform recapture on our portfolio.”
Two Harbors executives also told analysts that the capital investment for the mortgage origination unit will be low, as the intent is not to hold the loans. The company will likely sell them directly to agencies, keep the servicing rights and replace the servicing tasks that otherwise would have evaporated due to lower rates.
In October, the company completed its acquisition of RoundPoint. It has already completed nine of 10 scheduled subservicing transfers. The remaining transaction is expected to occur on Feb. 1, with the final “clear up” transfer of loans planned for early June.
Following the acquisition, according to Two Harbors executives, the company became the eighth largest conventional servicer in the country.