TWO-PA — Two Harbors Investment Corp.

Summary of Two Harbors Investment Corp. Q4 2025 Earnings Call

1. Key Financial Results and Metrics

• Book Value: Increased to $11.13 per share from $11.04 in Q3 2025.
• Economic Return: Generated a quarterly economic return of 3.9%. For the full year, the total economic return on book value was -12.6%, but adjusted for a litigation settlement, it was a positive 12.1%.
• Comprehensive Income: Reported at $50.4 million or 48 cents per share.
• Cash Position: Ended the quarter with over $800 million in cash and $1.1 billion in unused MSR asset financing capacity.

2. Strategic Updates and Business Highlights

• Merger Announcement: Two Harbors announced a merger with United Wholesale Mortgage (UWM), which is expected to double the size of its MSR portfolio to a pro forma $400 billion. The merger aims to enhance scale and competitive positioning in the mortgage market.
• MSR Performance: Settled $400 million in UPB of MSR and sold $9.6 billion in a servicing retained basis. The price multiple for MSR remained stable at 5.8 times.
• Direct-to-Consumer Platform: Achieved a record quarter with $94 million in first and second lien funding, marking a 90% increase from Q3 2025.
• Market Positioning: The company is focused on maintaining a paired portfolio of MSR and Agency RMBS to optimize risk-adjusted returns.

3. Forward Guidance and Outlook

• Economic Environment: Anticipated increased mortgage origination activity in 2026 due to government support for lower mortgage rates.
• Return Potential: Estimated static returns for the portfolio between 6.9% to 10.2%, with potential returns on common equity projected at 5.8% to 11.1%.
• Dividend Considerations: The board will evaluate dividend levels later in the quarter, with potential marginal adjustments expected due to tighter spreads.

4. Bad News, Challenges, or Points of Concern

• Full-Year Performance: The full-year economic return was negative, reflecting challenges faced in the mortgage market.
• Interest Rate Volatility: Concerns about potential increases in volatility due to upcoming Federal Reserve changes and macroeconomic factors.
• Market Dynamics: While demand for MSRs remains strong, the company noted that the MSR market's overall volume is lower than in previous years, indicating a tightening market environment.
• Leverage and Risk Management: The company has been defensive regarding leverage and mortgage risk due to current market conditions.

5. Notable Q&A Insights

• Portfolio Construction: Management confirmed they are managing the portfolio independently despite the merger, focusing on risk and reward assessments.
• GSE Activity: There is speculation about potential changes in GSE policies, including LLPA reductions, which could impact spreads, but no significant changes have been observed yet.
• Market Conditions: The company remains cautious about the potential for increased volatility in the funding markets and is monitoring the impact of government actions on mortgage spreads.
• Coupon Exposure: Management indicated no significant changes in coupon exposures, though they noted a trend of lower coupon trades being more favorable in the current environment.

Overall, Two Harbors Investment Corp. is navigating a complex mortgage market landscape while positioning itself for growth through its strategic merger with UWM and maintaining a focus on risk management and portfolio optimization.