Two Harbors Investment Q1 2025 Earnings Report

Two Harbors Investment EPS Results

• Actual EPS: $0.24
• Consensus EPS: $0.28
• Beat/Miss: Missed by -$0.04
• One Year Ago EPS: N/A

Two Harbors Investment Revenue Results

• Actual Revenue: ($20.33) million
• Expected Revenue: ($28.53) million
• Beat/Miss: Beat by +$8.20 million
• YoY Revenue Growth: N/A

Two Harbors Investment Announcement Details

• Quarter: Q1 2025
• Date: 4/28/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, April 29, 2025
• Conference Call Time: 9:00AM ET

Two Harbors Investment (NYSE:TWO) is an externally managed REIT focused on the US residential mortgage market. The company strives to produce risk-adjusted returns by managing a portfolio of RMBS and other loans paired with a mortgage servicing business. The company delivers returns in the form of dividends primarily with a secondary goal of capital growth. The firm was incorporated in 2009 and is headquartered in Minnesota.

Two Harbors Investment Corp. is in business to invest in, finance, and manage a portfolio of residential mortgage-backed securities. These may include non-agency securities and mortgage servicing rights as well as other financial assets (about 5% to 10% of the portfolio). However, the bulk of the portfolio is in agency-backed RMBS. The fund's strategy of pairing a mortgage servicing business with an RMBS portfolio is unique in the industry and provides many advantages for investors that include reducing exposure to interest rate fluctuations and their impact on mortgage spread.

The company’s focus on agency-backed RMBS provides a level of safety because the principal and interest are backed by Fannie Mae, Freddie Mac, or other government agencies.

The company’s portfolio of mortgage servicing rights allows the company to capitalize on its experience in mitigating credit risk and is supported by a robust pipeline of new business. Originators provide new business on a continual basis as new loans are created. The company may also buy bundled loans from originators or other mortgage loan owners in order to earn fees for services.

Two Harbors Investment Corp. chooses to be taxed as a REIT. As such, the company distributes at least 90% of its taxable income in the form of dividends. Two Harbors Investment Corp. was externally managed until 2020. The switch to internal management better aligns the company’s goals with those of shareholders and improves the transparency of operations. Investors who wish to enroll in a share purchase or DRIP, dividend reinvestment program, should contact the company’s plan administrator, Equiniti Trust Company. Investors must be shareholders of record to participate in the plan.

 

Two Harbors Investment Q1 2025 Earnings Call Transcript

Key Takeaways

• We generated a total economic return of 4.4% in Q1 2025, increased book value per share to $14.66 (from $14.47) and reported comprehensive income of $64.9 million (≈$0.62/share) while declaring a $0.45 dividend.
• Throughout a changing macro environment, we kept risk exposures low, actively managing our portfolio to capitalize on spread and rate dislocations as spreads widened in Q2.
• Our funding remained stable with agency RMBS repo spreads tightening to SOFR+~20 bps, and we ended the quarter with $950 million in unused MSR financing capacity and no liquidity disruptions.
• We maintain a portfolio core around MSR servicing (≈65% of capital) targeting a 12–14% static return and agency RMBS securities aiming for 10–15%, driving a levered common equity return potential of 9.1–14.7%.
• The Roundpoint platform will scale direct-to-consumer originations, expand second liens, explore Ginnie Mae and non-agency markets, grow third-party subservicing, and pursue servicing cost efficiencies with technology and AI.

Presentation

[Operator]

Morning. My name is Cynthia, and I will be your conference facilitator. At this time, I would like to welcome everyone to TU's First Quarter twenty twenty five Earnings Call. All participants will be in a listen only mode. After the speakers' remarks, there will be a question and answer period.

[Operator]

I would now like to turn over the call to Maggie Carr. Please go ahead.

[Margaret Karr, Head of IR & Communication at Two Harbors Investment]

Good morning, everyone, and welcome to our call to discuss TU's first quarter twenty twenty five financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer Nick Ledica, our Chief Investment Officer and William Delal, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website as well as the Investor Relations page of our website at 2inv.com. In our earnings release and presentation, we have provided reconciliations of GAAP to non GAAP financial measures, We urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.

[Margaret Karr, Head of IR & Communication at Two Harbors Investment]

These are described on Page two of the presentation and in our Form 10 ks and subsequent reports filed with the SEC. Except as may be required by law, Q does not update forward looking statements and disclaims any obligations to do so. I will now turn the call over to Bill.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Thank you, Maggie. Good morning, everyone, and welcome to our first quarter earnings call. Please turn to Slide three. We generated a total economic return of 4.4% for the first quarter with both RMBS and MSR contributing positively to the results. Throughout the changing macroeconomic environment of the first quarter, we kept our risk exposures low, which proved to be prudent.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

While overall, spreads have widened in the second quarter, they have been variable day to day, and we have actively managed the portfolio and our risk to take advantage of any market dislocations and attractive return opportunities. Please turn to slide four. Interest rates across the US treasury yield curve ended the first quarter lower than at 2024 year end with two year and ten year notes both decreasing by 36 basis points to finish at 3.884.21% respectively as seen in figure one. The Fed once again held rates unchanged at their March 19 meeting but revised lower real GDP growth expectations for this year from 2.1% to 1.7, while core PCE was revised up from 2.5% to 2.8%, changes which Chairman Powell acknowledged were related to potential changes in trade policies. At the March, the market's expectations for cuts for the remainder of 2025 moved from 50 to 75 basis points as you can see in figure two.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

However, subsequent data on employment, inflation, and most everything else has largely been overshadowed by growing economic uncertainty driven by proposals from the administration on tariffs, trade policy, and the composition of the Fed and its reaction function. The instability of US policy has, for the first time, raised questions about the status of the dollar as the world's reserve currency, and we are carefully watching developments unfold. Please turn to slide five. Our focus at Roundpoint this year is fivefold. First, to bring our direct to consumer originations platform fully to scale with widespread brand recognition.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Second, to increase the velocity and depth of our offerings of second liens to our borrowers, producing additional revenue. Third, to evaluate opportunities and adapt as the mortgage finance landscape evolves. This includes diversifying our portfolio by potentially participating in the Ginnie Mae market as well as exploring possibilities in the nonagency sectors. Fourth, as a full service mortgage servicer and originator to grow our presence in third party subservicing. And fifth and finally, to continue to generate additional cost efficiencies in servicing primarily through the use of technology and AI applications.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

As I just described, we view the Roundpoint platform as an expansion of our opportunity set, providing additional benefits for our shareholders by allowing us to impact our results through our own actions in ways that portfolios without operating platforms cannot. At two, we have thoughtfully and intentionally built an investment portfolio with MSR at its core that is designed to deliver attractive risk adjusted returns across a variety of market environments. The investment in Two allows our shareholders to benefit from our team's deep expertise and experience in managing and hedging portfolios of MSR and mortgage backed securities. I'm very excited about the opportunities ahead for TU. And with that, I'd like to hand the call over to William to discuss our financial results.

[William Dellal, VP & CFO at Two Harbors Investment]

Thank you, Bill. Please turn to Slide six. Our book value increased to $14.66 per share at March 31 compared to $14.47 at December 31. Including the $0.45 common stock dividend, this resulted in a positive 4.4% quarterly economic return. Please turn to Slide seven.

[William Dellal, VP & CFO at Two Harbors Investment]

The company generated comprehensive income of $64,900,000 or $0.62 per weighted average common share in the first quarter. We slightly amended the chart on this slide to better reflect how we think about changes in values for the assets and the hedges together rather than in isolation. Net interest and servicing income, which is a sum of GAAP net interest expense and net servicing income before operating costs, was higher in the first quarter by $5,200,000 driven by portfolio shifts into higher coupon agency RMBS and lower borrowing rates, slightly offset by lower float income due to seasonality and lower rates and lower servicing fee income from MSR portfolio runoff. The next column, mark to market gains and losses, represents the sum of investment securities gain and change in OCI, net swap and other derivative losses and servicing asset losses. The duration of our RMBS and MSR assets was hedged by net long TBA positions in the case of MSR and by net short futures and payer swaps in the case of RMBS.

[William Dellal, VP & CFO at Two Harbors Investment]

The $38,400,000 difference quarter over quarter was driven primarily by unrealized gains on RMBS and TBA positions, offset by MSR portfolio runoff and mark to market losses on swaps and futures. Finally, operating expenses increased due primarily to higher noncash equity compensation expenses, which typically occur in the first quarter of the year. You can see the individual components of net interest and servicing income and mark to market gains and losses on appendix Slide 21. Please turn to Slide eight. Our MBS funding markets remained stable and available throughout the quarter, with repurchase spreads normalizing into a tighter historical context at SOFR plus around 20 basis points.

[William Dellal, VP & CFO at Two Harbors Investment]

At quarter end, our weighted average days to maturity for agency RMBS repo was sixty eight days. To date, in the second quarter, repo liquidity remains normal, and we've observed no disruptions to our financing. We finance our MSR, including the MSR asset and related servicing advance obligations across five lenders with $1,700,000,000 of outstanding borrowings under bilateral facility. We ended the quarter with a total of $950,000,000 in unused MSR asset financing capacity and $47,000,000 in unused capacity for service and advances. I will now turn the call over to Nick.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Thank you, William. Our portfolio performed well in the first quarter with both components of our strategy contributing to the positive return. At year end, we commented that mortgage spread volatility would decline, and that indeed was the case in q one, helping to drive our positive hedged RMBS return. Our MSR performance was bolstered not only by slower than expected speeds, but also a slight tightening of spreads indicative of the demand for the asset. Jumping back into the deck, please turn to slide nine.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Our portfolio at March 31 was $14,600,000,000 including $11,600,000,000 in settled positions and $3,000,000,000 in TBAs. Our economic debt to equity decreased to 6.2 times. We manage our exposure to rates across the curve very closely. In the first quarter, we lowered our risk to mortgage spreads and interest rates, as you can see in figures two and three. By quarter end, we had substantially less risk than when we started the quarter.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Overall, we decreased our mortgage exposure by 30% and reduced our leverage. You can see more detail on our risk exposures on appendix slide 18. Please turn to slide 10. The performance of Agency RMBS securities was net positive over the quarter. RMBS outperformed interest rate hedges in January and February, but underperformed in March as equities and fixed income spread products weakened.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Performance across the RMBS coupon stack was uneven with higher coupons both in TBAs and specified pools outperforming longer duration lower coupons. As you can see in figure one, our preferred implied volatility gauge, two year options on ten year rates, decreased modestly from a hundred and one to 98 basis points on an annualized basis. Both nominal spread and OAS tightened slightly, and these metrics as well as the two year ten year implied volatility finished the quarter close to their six and twelve month averages. As has been the case, nominal spreads and volatility remain well above longer term averages, but option adjusted spreads are close to their long term average. For this reason, we continue to believe that volatility will need to decline for RMBS spreads to materially tighten the treasuries.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Of course, we have seen the opposite as implied and realized volatility has increased in the second quarter given the uncertainty around the macroeconomic outlook. Spreads for Agency RMBS have widened, and spread volatility itself has increased at pre election levels. Please turn to slide 11 to review our Agency RMBS portfolio. Figure one shows the performance of TBAs compared to the specified pools we own throughout this quarter. The bull steepening of the swap curve plus strong levels of CMO issuance led to the outperformance of higher coupon RMBS.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

In terms of coupon stack activity, we started the quarter with an up in coupon bias while progressively lowering our risk throughout the quarter. We reduced our exposure in 3% to 4.5% season specified pools by approximately seven thirty million and simultaneously added about 1,700,000,000 of six and a half percent specified pools while correspondingly reducing our net TBA position. To maintain our MSR current coupon hedging, we moved our MSR duration related TBA position down in coupon by selling sixes and buying fives. Primary mortgage rates hovered around 7% for most of the quarter. With winter seasonals at play, premium prepayment activity was muted.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Overall, prepayment rates for the thirty year agency RMBS universe decreased by 1.4 percentage points quarter over quarter to 5.6% CPR. Figure two on the bottom right shows our specified pool prepayments fees by coupon. Most of the decline in speeds quarter over quarter came from higher coupons slowing down. Please turn to slide 12 as we discuss the market for investing in MSR. The MSR market remains well supported given the high demand for the asset class opportunities.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

As you can see in figure one, transfer volume appears to have normalized to pre COVID levels. Borrowers remain as locked in as ever, happy with their low rates. With a current mortgage rate around 6.75%, less than 1% of the UPB of our portfolio has 50 basis points or more of a rate incentive to refinance. As you can see in figure two, prepays have remained low and steady and below our projections for the majority of our portfolio with only fives and above slightly increasing. The slow and steady nature of realized prepayment speeds, however, belies a very interesting characteristic of the structure of the market and of the nature of lock in.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

In particular, looking at the blue line, we do not see prepayment speeds asymptotically approaching some base turnover level of payoffs. Historical twelve month prepayment rates for two and a halves are faster than for twos by about 1.2 CPR and faster for threes than for two and a halves by about point five CPR. This shows that even for mortgages that are very deeply out of the money, there is still rate sensitivity to the prepayment function. This has pricing implications for low coupon MSR and explains why the lowest note rate MSR has been able to trade at historically high multiples. Please turn to slide 13 where we will discuss our MSR portfolio.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Figure one is an overview of the portfolio at quarter end, further details of which can be found on appendix slide 24. In April, we committed to purchase 1,700,000,000.0 UPB of MSR through two bulk purchases, which are expected to settle in the second quarter. Price multiple of our MSR was unchanged quarter over quarter at 5.9 times, and 60 delinquencies remained low at under 1%. Figure two compares CPRs across those implied security coupons in our portfolio of MSR versus TBAs. The prepayment speed of our MSR portfolio was 4.2 CPR for the first quarter, down point 7% quarter over quarter.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Please turn to slide 14, our return potential and outlook slide. As you can see on this slide, the top half of this table is meant to show what returns we believe are available on the assets in our portfolio. We estimate that about 65% of our capital is allocated to servicing, with a static return potential of 12% to 14%. The remaining capital is allocated to securities with a static return estimate of 10 to 15%. With our portfolio allocation shown in the top half of the table and after expenses, the static return estimate for our portfolio is between 8.7 to 12.3% before applying any capital structure leverage to the portfolio.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

After giving effect to our outstanding convertible notes and preferred stock, we believe that the potential static return on common equity falls in the range of 9.1 to 14.7% or prospective quarterly static return per share of 33% to 54%. Remember, these numbers reflect our portfolio and spreads at quarter end and would be higher today given that spreads are wider. We made a small update to this table this quarter by expanding the factors that we vary in determining the range of prospective static returns for basic common share. Previously, we had determined the range by varying prepayment rates and funding rates. Today, in addition, we have chosen to vary portfolio leverage rather than only using the spot value, keeping in mind that this slide is meant to be a medium term estimate of return potential.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Post quarter end, dramatic shifts on tariff policies have triggered speculation on broad global asset allocation shifts away from dollar based assets and heightened concerns about the effects of stagflation on Fed policy. Predictably, equity and fixed income volatility have spiked. Since April 2, the ten year treasury yield has traded in a whopping 70 basis point range, and the yield curve between two and ten year treasuries has steepened by about 20 basis points. Swap spreads also fell precipitously to all time tights before widening back. While recent talk of tariff walk box have, to some degree, calmed the market, there still remains a large amount of economic uncertainty, all but guaranteeing a continued bumpy road ahead.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

But from dislocation, there is also opportunity. Volatility will continue to be a headwind, but we manage our portfolio for the long term. Being mindful of the current environment, we are keeping our portfolio leverage and risk at muted levels until there is more clarity on the economic path forward. However, we continue to see attractive levered returns on Agency RMBS, and our portfolio of low weighted average mortgage rate MSR should continue to generate stable cash flows over a wide range of interest rate scenarios. Thank you very much for joining us today.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

And now we will be happy to take any questions you might have.

[Operator]

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take our first question from Doug Harter with UBS.

[Douglas Harter, Equity Research Analyst at UBS Group]

Thanks. Just given the volatility, can you give us an update on book value through April? Then also know, any changes you might have made in the portfolio to, you know, to to sort of adjust for for the current environment?

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Yeah. Sure. Good morning, Doug. Thanks for the question. As as you know, it's been quite a volatile, April with all the activity that's that's happened.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Nick mentioned some of those in his prepared remarks, rate volatility, spread volatility, and so forth. But I think we've been able to to manage that, pretty well. And so that through, last Friday, we were down about 3.5%. I'll let Nick take the question of the the changes to the portfolio that we've made.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Hey, Doug. Thank you for the question. We have modulated the portfolio since the April. As again in my prepared remarks, we did take our risk down by the end of the first quarter and we actually lowered it even further into early April just with some of the news coming out. It seemed to us that we were in for a bout of greater amounts of volatility and some weakness in assets.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

But since we have actually raised it a little bit from where we were, we ended the quarter around 6.2 percent debt to equity. We got as low as some of the low fives and we're now back up approaching 6% again. That's really been a function of seeing the developments in some of the actions coming out of DC and around the markets. There has been a little bit of a de escalation our opinion in terms of the rhetoric and a clear recognition that some of the actions that have been proposed have had a dysregulatory effect on the markets, especially the bond market. And we take it to heart that some of that has calmed the markets down.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

And spreads have widened, particularly in terms of mortgages versus swaps where the majority of our hedges. And while they certainly don't look as wide as they did at some of the really peak wide periods of this interest rate cycle, like in late twenty twenty two or late twenty twenty three, for example, they have widened out to a decent degree and present a better opportunity than they were at the end of the quarter. But there's still a lot of unknown things ahead. And even with all of this, know, when and if all of this tariff and trade policy gets settled, you know, there's clearly still some effects that are gonna happen in terms of the Fed and how they're gonna react to either a slowdown in the economy or a pickup in inflation. And we do feel like, again, there's good reasons to believe that volatility is not going to be going down in any real material way for the foreseeable future.

[Douglas Harter, Equity Research Analyst at UBS Group]

Great. And then Nick, if

[Douglas Harter, Equity Research Analyst at UBS Group]

I could just clarify, I believe you said in your prepared remarks that the return potential would be higher today because of wider spreads. Just wanted to make sure I heard that correct.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Yes. That's correct. I mean, we estimate that, where spreads were, I think we did this as of Friday, that it would be about $03 on the return potential, just with spreads being wider.

[Operator]

We

[Operator]

will take our next question from Trevor Cranston with Citizens JMP.

[Trevor Cranston, Managing Director at JMP Securities LLC]

Hey. Hi, Trevor. Good morning. Can you guys talk a little bit about, you know, the the big merger or acquisition between Rocket and Mr. Cooper and how you think that sort of impacts the competitive landscape in the in the servicing market and and potentially, the bulk MSR purchase market as well?

[Trevor Cranston, Managing Director at JMP Securities LLC]

Thanks.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Yeah. Sure. Certainly, an exciting development in the market. In terms of its its real life impacts, though, I think they they may be more muted than than, the headlines might might appear. I mean, both those guys were were active buyers of of MSR.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

So I think that, you know, as a combined entity, I think that demand will, stay the same as being, as being equal to the the what the individual the the sum of the individual demands. I think the bid is probably a little bit better than it was because now you have the maximum of the two individual bids. Right? So I think it will be a little bit more more competitive, than it was. On the margins, though, I don't think it's it's a wholesale change.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

You know, the securities markets has has reacted somewhat with regards to to to prepayment speeds, in terms of, you know, pools that were serviced by Cooper being being, modulated to the forward prepayment speeds being in line with more rocket speeds. So we've seen an impact there. So I think the the the the impact generally are are nonzero, but it's not it's not market change. The dynamics in in in the servicing market are are largely the same as what it was. There's still as we as we said in the prepared remarks, the supply of MSR is is is is back to pre COVID levels, and and that's not gonna change that.

[Trevor Cranston, Managing Director at JMP Securities LLC]

Got it. Okay. That's helpful. And then, can you guys maybe provide a little color around the, change you had to the previously announced CFO, transition? Thanks.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Yeah. Well, glad well, as we announced, you know, we you know, William Delal has has has been appointed, chief financial officer instead of interim chief financial officer. We're we're thrilled to have him here. William has added so much value, and and he's been terrific. And we're and we're happy to have him.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

And and, you know, we continue to benefit from all of William's experience, and we're happy to have him. So and that that's all I'm I'm really gonna say about that.

[Trevor Cranston, Managing Director at JMP Securities LLC]

Okay. Appreciate the color. Thank you.

[Operator]

We will take our next question from Bose George with KBW.

[Bose George, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey, guys. Good morning. A quick follow-up to Doug's question just on the impact on spreads. So you said up $03 Is that both the high end and the low end? Or does volatility do anything just in terms of what happens to that range?

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Hey, Bose. It's Nick. Yes. It's very high end and low end. And it's a little bit of a rough estimate.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

But yes, it's $03 on both sides.

[Bose George, Managing Director at Keefe, Bruyette & Woods (KBW)]

Okay. Great. And then just with the new target range, etcetera, can you just talk about the comfort level with the dividend?

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Yes. I mean, you can see what the what we're projecting. We are comfortable with the dividend with spreads where they are and our composition of our portfolio. With spreads having widened this quarter and again, bringing our risk back up now that we feel like it's a little bit of a safer passage, we feel confident about supporting the dividend here with our portfolio.

[Operator]

We will take our next question from Eric Hagen with BTIG.

[Eric Hagen, Managing Director at BTIG]

We're just looking at the book value sensitivity for the change in a tightening in spreads, I realize that in April, maybe it's changed a little bit. But for a 25 basis point move, we may have maybe expected the sensitivity to be a little bit higher. Is there a way to flush out kind of like what's going on with the sensitivity in the MBS portfolio versus the MSRs?

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

I'm sorry. You you think that this so so spreads up 25 basis points in the deck. We showed minus minus 4.9%. And

[Eric Hagen, Managing Director at BTIG]

Yeah. I'm actually looking at a tightening in spreads. Yeah. Yeah. So, like, a like, the the up move 4%.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

The tight

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

up 4.1%. You think you think that should be higher?

[Eric Hagen, Managing Director at BTIG]

Maybe a little bit. I mean, just for a 25 basis point move in spreads. That's pretty meaningful. Right?

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Yeah. Well so

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

yeah. Well, you know, I mean, as as you know, you know, if if if you go back down to slide 14, right, we say that, you know, 65% of our capital is allocated to to the hedge servicing strategy part of the portfolio, and only 35% is allocated to hedge securities. So so when MBS spreads, do something, the MSR part of the portfolio doesn't react really at all because that is incorporated quickly and immediately into the MSR values. Right? That's where the MSR market prices itself and works.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

And so and so by definition, right, our all else being equal, you would think that that our portfolio would have 35% of the spread sensitivity exposure to a portfolio without MSR. Now there's now there's somewhat differences between capital structures and so forth, so there's there's slight differences. But as a base case, that's where I would start. Just say whatever spreads do, we would be 35% of what portfolios without MSR would be. And and and that's true when spreads tighten, and that's true when spreads widen.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Nick, would you

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

add anything to that?

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Yes, Eric. So I would just I would point you to the fact that if you look at our net mortgage exposure as in comments and if you look at it quarter over quarter, our net mortgage exposure, which is on Page 17 of the deck, I think was down to about $5,500,000,000 when you take out the effect of the MSR, which was down significantly. And we talked about this before. The amount of duration the amount of spread duration you have in a mortgage with a mortgage portfolio, it does depend on where you are in the coupon stack too, right? If we had all of that $5,000,000,000 in 2.5 or three's as opposed to having the majority of it more up in the stack, you would have more spread exposure there.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

It's the notional amount and where it's located on the coupon stack that determine that sensitivity. And I think that if you distill down that the net mortgage exposure is lower, number one. And two, we did have a little bit more of a shift up in coupon. Both of those things will decline the amount of spread sensitivity. But again, that was something that we very intentionally did by the end of the quarter because we were sort of hunkering down getting into second quarter with all of these changes flowing through the macroeconomic world.

[Eric Hagen, Managing Director at BTIG]

Yes. Okay. That's helpful. I think that prompts a follow-up question. I mean, you feel like the like MBS spreads have essentially kind of reset wider as a result of tariffs in this new range for volatility?

[Eric Hagen, Managing Director at BTIG]

And how do you feel like spreads would maybe respond if the Fed looks more likely to cut rates from this point?

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

I mean, have reset a little bit. I mean, they haven't gone nuts in terms of spreads like by our, if that's a technical term. But they actually, if you look at like treasury spreads, they are pretty close to where they were at the beginning of the year. Swap spreads, mortgages to swaps are wider, but like I said earlier, they are not like at all time. They're good and we like them here.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

And that's why we're getting a little bit we're putting back on some risk and being opportunistic in adding some assets here and there that we think look really good. But they're far from where they were at sort of the peak points in time. The way we look at the world, everyone looks at the world differently. As you know, we really look at our securities across the whole yield curve with partial durations. We tend not to use sort of spot numbers, and that's the way we hedge our book and run our book.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

But to answer your last question, if the Fed cuts, I think that's going be good for mortgages. Mean, yield curves are typically good for mortgages. It brings more investors into fixed income in general. And I think that would be stimulative to mortgage spreads.

[Eric Hagen, Managing Director at BTIG]

Got it. That's helpful. Thank you, guys.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Thanks, Eric.

[Operator]

We will take our next question from Harsh Himany with Green Street.

[Harsh Hemnani, Equity Research Analyst at Green Street Advisors, LLC]

Thank you. So it sounds like you think that volatility, at least in the near term, will continue to remain elevated, especially on the realized side perhaps. And given maybe the more deeper negative convexity in the portfolio, has there sort of been more hedging activity that could impact the static return estimates that we should be thinking about?

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Hey, Harsh. How are doing? Yeah. I mean, look, the we know that a lot of realized volatility is never good for, you know, a hedge mortgage portfolio. So we clearly, ourselves and I'm sure other REITs have been experiencing more convexity costs than they would under other circumstances.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

But we have been, as you know, and we've been keeping our risk pretty tight through this whole time period. I think this is a time period where you have to be very cautious about taking on any sort of excess risk in the portfolio. But the there is compensation for it, of course, and the fact that spreads have widened, right? So I mean, it's it is there are pluses and minuses to it. Yes, convexity costs are going be higher when you have more realized volatility.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

But thankfully, spreads have widened in concert with that, which should mitigate some of that convexity cost.

[Harsh Hemnani, Equity Research Analyst at Green Street Advisors, LLC]

Okay. That's helpful. And then maybe as you've been stepping back into getting more spread exposure maybe towards the April, is it fair to assume that the up in coupon bias still remains,

[Harsh Hemnani, Equity Research Analyst at Green Street Advisors, LLC]

or where do you see relative value across the coupons after this?

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Yeah. That is fair to assume. You know, we we really do you know, I'm what the the issue with lower coupons for me is I think they trade in such such a technical way that, you know, the the value across the curve is on an OAS basis, at least, is fairly evenly distributed. But like everything else, there are trade offs. But the lower part of the stack continues to be extraordinarily technical in the way it trades, and I think can trade in ways that are not necessarily intuitive.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

So at the moment, we do like being more up in coupon than down in coupon.

[Harsh Hemnani, Equity Research Analyst at Green Street Advisors, LLC]

Got it. Thank you.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Thanks, Harsh.

[Operator]

We will take our next question from Rick Shane with JPMorgan.

[Ajene Oden, Global Investment Strategist at JP Morgan]

Hey, Rick. This is AJ on for Rick.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Hey, AJ. Hey, AJ.

[Ajene Oden, Global Investment Strategist at JP Morgan]

Your static return estimate on Slide 14 appears to have widened a bit.

[Ajene Oden, Global Investment Strategist at JP Morgan]

Can you talk about what drove that? And how has varying your leverage impacted this measure compared to last quarter?

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Yeah. Sure. Thanks for the question.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

As Nick said in in his prepared remarks, we we added this other dimension, of of changing the portfolio leverage, a little bit to the lower and upper end of those ranges. And really, that was a reflection of, you know, when we're when we're when we're dynamically and actively managing the portfolio, especially as we have been this quarter, It's important we felt it was important to to show the range of expected static returns projected static returns that are available over the medium term in a in a sort of equilibrium style leverage portfolio. As Nick said, you know, we closed the quarter with leverage at six two. We got down as as low as low fives, and we're back up towards, you know, the high fives right around six now. So it it it seems like it would be not as as informative to be you know, to show these static return estimates moving around so much as we actively manage the portfolio in order to take advantage of dislocations and opportunities in the market.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

And so and so we've made the the higher and lower end of the range. There also include, some leverage ranges, basically, at the low end of the range, something like six, at the high end of the range, something like seven, right, in addition to the changes in the funding spreads and prepayment rates that that we've been doing for some time. And so that's the source of of of why that's widened out a little bit, but we think it gives a more reflective view as to what the portfolio really is.

[Ajene Oden, Global Investment Strategist at JP Morgan]

Okay. Super helpful.

[Ajene Oden, Global Investment Strategist at JP Morgan]

Thank you. That's all for me.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Yep. Thank you.

[Operator]

Will take our next question from Merrill Ross with Compass Point Research.

[Merrill Ross, REIT research at Compass Point Research & Trading LLC]

Good morning.

[Nicholas Letica, VP & Chief Investment Officer at Two Harbors Investment]

Good morning, Merrill.

[Merrill Ross, REIT research at Compass Point Research & Trading LLC]

I just have, three questions, at the or three things I'd like to hear you, hear hear from you about. One is liquidity. You you say you maintain high liquidity. If you could just put some rough numbers around that, that would help.

[William Dellal, VP & CFO at Two Harbors Investment]

Good morning, Merrill. It's we maintained our liquidity at very high levels from the end of the year, and we're maintaining a lot a lot of cash and capacity in our borrowing.

[Merrill Ross, REIT research at Compass Point Research & Trading LLC]

And on the recaptured, you you referred to the whatever, the hundred and 79,000,000 of of loans that were slow and recaptured. 174. What's the nature of that? How much of it was recapture versus slow? Did that meet your expectations relative to the market runoff?

[Merrill Ross, REIT research at Compass Point Research & Trading LLC]

Because the portfolio is ever so slightly larger. I'm just wondering if you're holding your own against the runoff with the recapture effort.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Yeah. Thanks for that question, Merrill. The the the organic recapture coming from our direct to consumer, channel is is still very low. It's still in its nascent stages. You know, as as Nick said, in his remarks, I could put a finer point on it, only about 0.5% of our portfolio is refinanceable from a rate and term perspective right now.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

Right? And so, there's very little ability to to recapture some of those loans. However, we are seeing, you know, within that 0.5%, we are seeing, you know, some increased activity in in in our direct to consumer channel there. And so I'm very optimistic about what we'll be able to do when we bring the platform fully to scale. Right?

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

We are and and and I think, we'll be able to to achieve some really good numbers there, once we get there. We we we have been active in the in the bulk market in small size, right, and able to to replenish the portfolio, somewhat, as well as being being participating in the flow market. And so, you know, we're we're we're confident that we're gonna be able to maintain our our our servicing portfolio or even grow it, over time. And and we think, you know, we're gonna be using all of the tools that are available to us, in in both the bulk and flow markets and and eventually the DTC once that gets more more up to scale and and fully formed.

[Merrill Ross, REIT research at Compass Point Research & Trading LLC]

Great. Thank you. And the last one is is quite small, but you threw out a mention to being interested in the Ginnie Mae market. Do you see price dislocations there? Or is that just sort of a safe harbor for, you know, return generation when the GSEs are being recapped and released?

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

You know what? You know, I think it's I think it's it's it's it's many factors. I mean, we're we're we're taking the beginning stages, in order to to get involved in that market. You know? But the rationales are are are, number one, just to have the ability to to to participate in in the the the broader aspect of the servicing market rather than just conventional, the ability to be able to service and subservice for Ginnie Mae's.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

It is, slightly cheaper. It's a little bit, more opportunity there. And I think being able to to be a a more full service, mortgage originator slash servicer sort of requires us to be involved in the GMAT market. So we're taking the beginning steps in order in order to do that.

[Merrill Ross, REIT research at Compass Point Research & Trading LLC]

Thank you.

[Operator]

There are no further questions at this I will turn the conference back to Bill Greenberg for any additional or closing remarks.

[William Greenberg, President and Chief Executive Officer at Two Harbors Investment]

I want to thank everyone for joining us today. Thank you as always to our shareholders for your interest, and I look forward to talking to you again next quarter.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Margaret Karr, Head of IR & Communication
• William Greenberg, President and Chief Executive Officer
• William Dellal, VP & CFO
• Nicholas Letica, VP & Chief Investment Officer

Analysts

• Douglas Harter, Equity Research Analyst at UBS Group
• Trevor Cranston, Managing Director at JMP Securities LLC
• Bose George, Managing Director at Keefe, Bruyette & Woods (KBW)
• Eric Hagen, Managing Director at BTIG
• Harsh Hemnani, Equity Research Analyst at Green Street Advisors, LLC
• Ajene Oden, Global Investment Strategist at JP Morgan
• Merrill Ross, REIT research at Compass Point Research & Trading LLC