Two Harbors Investments NYSE: TWO reported a first-quarter 2026 economic return of negative 2.0% as mortgage markets shifted from a strong start to weaker performance later in the period amid rising volatility and geopolitical uncertainty. Management also spent significant time discussing an amended merger agreement under which CrossCountry Mortgage (CCM) would acquire the company for $11.30 per share in cash.
Merger update: CrossCountry offer raised to $11.30 per share
In opening remarks, President and CEO Bill Greenberg addressed the company’s change in merger plans from the transaction announced in December. He said Two Harbors received an unsolicited all-cash proposal from CrossCountry Mortgage in March and that the board “unanimously determined that the CrossCountry proposal was superior and in the best interest of shareholders.”
Greenberg said Two Harbors executed a new merger agreement with CCM on March 27, 2026, under which CCM agreed to acquire Two Harbors for $10.80 per share in cash, and Two Harbors terminated its prior merger agreement with UWM. He added that the company announced an amendment to the CCM agreement that increases the consideration to $11.30 per share, following the board’s review of an unsolicited competing proposal received April 20, 2026 from UWMC.
After evaluating “terms, proposed financing, regulatory path, deal certainty and other factors,” Greenberg said the board determined the CCM transaction, as amended, “continues to be in the best interests” of stockholders. He said the combination would pair “the country’s leading retail originator with RoundPoint’s best-in-class servicing platform.”
The transaction is expected to close in the second half of 2026 and “is not subject to any financing condition,” according to Greenberg. He said Two Harbors intends to continue paying regular quarterly dividends prior to closing “but not stub dividends, consistent with past practice.”
A special shareholder meeting to approve the CCM merger is scheduled for May 19 at 10:00 a.m. Eastern Time. Greenberg said votes already cast in favor of the CCM merger remain valid and urged shareholders who have not voted to do so. He said the board unanimously recommends shareholders vote in favor of the CCM transaction.
Quarterly results: book value down; comprehensive loss reported
Chief Financial Officer William Dellal said book value declined to $10.57 per share as of March 31, from $11.13 per share at December 31. Including a $0.34 common dividend, Dellal said the company generated a negative 2% quarterly economic return.
Dellal reported a comprehensive loss of $24.7 million, or $0.24 per share. He said net interest and servicing income declined due to “lower float earnings rates and lower balances due to MSR sales and seasonals,” and lower servicing fee collections on lower unpaid principal balance (UPB), partially offset by lower financing rates.
On portfolio marks, Dellal said the company recorded mark-to-market losses on agency RMBS and TBAs in the first quarter, attributing the change from fourth-quarter gains to “higher interest rates and wider spreads.” He said mark-to-market losses on mortgage servicing rights (MSR) decreased, driven by “a slight favorable change in valuation inputs and assumptions” compared with an unfavorable change in the prior quarter, as well as lower portfolio runoff on lower MSR balances due to sales and lower experienced prepayment speeds.
Dellal also said hedging and rate-exposure derivatives—including swaps, futures, and inverse interest-only securities—produced net mark-to-market gains in the quarter versus net losses in the fourth quarter.
Market backdrop: rates rose and uncertainty increased
Greenberg described a quarter that began with supportive technicals for RMBS, citing a decline in implied volatility and an FHFA directive announced Jan. 8 instructing the GSEs to purchase $200 billion of agency MBS to tighten mortgage spreads as part of efforts to lower mortgage rates. He said performance deteriorated later in the quarter, “mostly as a result of the outbreak of the Middle East conflict.”
He added that inflation and growth forecasts became more uncertain and the Federal Reserve left rates unchanged at its February and March meetings. Greenberg said market expectations for the Fed’s effective rate at year-end 2026 rose to 3.57% at quarter end from 3.06% on Dec. 31, “essentially wiping away any prospects of Fed cuts in 2026.” He noted the yield curve “bear flattens,” with two-year yields rising 32 basis points to 3.79% and 10-year yields increasing 15 basis points to 4.32%.
Portfolio positioning: spread widening improved return potential, management said
Chief Investment Officer Nick Letica said mortgage spreads widened in late February as risk sentiment shifted with the onset of hostilities in the Middle East. Even with wider spreads, Letica said the sector “outperformed the increase in volatility” due to favorable supply-demand technicals and “explicit support of the mortgage basis.” He said the widening of spreads by quarter end “made performance outcomes more balanced and improved the return potential of our portfolio.”
Letica said the portfolio totaled $11.9 billion as of March 31, including $8.9 billion in settled positions and $3.0 billion in TBAs. Economic debt-to-equity was 6.4x, and portfolio sensitivity to a 25 basis point spread tightening declined to 3.2% from 3.7% in the prior quarter. He said the company kept interest rate risks low “given the elevated level of macro volatility.”
He described January as strong for mortgages, noting the Bloomberg US MBS Index delivered 52 basis points of excess return. With spreads historically tight early in the quarter, Letica said Two Harbors reduced mortgage exposure, “mostly by selling 4.5% specified pools and 5% TBAs.” He said that later, as spreads cheapened, the company “reversed course” and raised spread exposure by quarter end while adding some 5.5% specified pools.
Letica also discussed prepayments, saying 30-year mortgage rates ended the quarter around 6.5% and refinanceable loan prepayments rose in March when rates touched multiyear lows earlier in the quarter. He said specified pools provided call protection versus TBAs in higher coupons, and aggregate pool speeds increased to 9.8% CPR from 8.6% CPR.
MSR and direct-to-consumer origination efforts
On the MSR market, Letica said activity and demand remained high, with servicing transfers topping 93 billion UPB in the first quarter. He said the company continued to see supply from non-bank originators and a broader range of buyers, including other non-bank originators, banks, and REITs.
Within Two Harbors’ MSR portfolio, Letica said the company added $152 million UPB of MSR through flow sale and recapture channels. He said the MSR price multiple increased slightly to 5.9x and that 60+ day delinquencies remained under 1%. Portfolio prepayment rates fell to 5.6% CPR, which he attributed to lower seasonal housing turnover, and he said prepayments remained below projections for most of the portfolio.
Greenberg also highlighted progress in the company’s direct-to-consumer (DTC) platform, saying Two Harbors funded $92 million in first and second liens during the quarter—about the same as the fourth quarter—despite rising rates. The company also brokered $38 million in second liens and ended the quarter with $57 million in the pipeline. He said the combination with CrossCountry should “bring the origination efforts to a new level” and improve recapture efforts for servicing customers.
In the Q&A, Letica said the company’s “hedged MSR strategy” performed “extremely well” during the quarter, while the hedged securities portfolio offset those gains amid higher realized and implied volatility and increased convexity hedging costs. He also said book value quarter-to-date was up about 2%.
About Two Harbors Investments NYSE: TWO
Two Harbors Investments Corp. is a mortgage real estate investment trust (mREIT) that primarily invests in residential mortgage-backed securities (RMBS) issued or guaranteed by government-sponsored enterprises, as well as non-agency residential mortgage loans, mortgage servicing rights and credit risk transfer securities. The company seeks to generate attractive risk-adjusted returns for its shareholders by employing leverage to enhance net interest income derived from its portfolio of high-quality fixed-income assets.
Headquartered in Minneapolis, Minnesota, Two Harbors operates through a self-managed platform that combines portfolio management, risk-management and securitization expertise.
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