Two Harbors Highlights UWM Merger Amid Mixed Q4

Two Harbors Investment Corp. ((TWO)) has held its Q4 earnings call. Read on for the main highlights of the call.

The earnings call reflected a cautiously optimistic tone, balancing a solid fourth-quarter economic return and enhanced liquidity with lingering questions about spread volatility, dividend sustainability, and mark-to-market headwinds. Management emphasized the strategic upside of merging with United Wholesale Mortgage while acknowledging the drag from a negative full-year economic return (pre-adjustment) and elevated exposure to spread movements.

Strategic Merger with UWM and MSR Scale Expansion

Two Harbors spotlighted the planned merger with United Wholesale Mortgage as the central strategic catalyst, projecting a pro forma $400 billion MSR portfolio that pairs RoundPoint’s servicing platform with UWM’s origination reach. Executives framed the tie-up as a growth flywheel: greater origination throughput, enhanced recapture, and better servicing economics meant to offset the capital intensity and volatility of the legacy hybrid model.

Strong Quarterly Economic Return

Fourth-quarter economic return landed at 3.9%, anchored by book value rising to $11.13 per share from $11.04 despite paying a $0.34 common dividend. Comprehensive income of $50.4 million, or $0.48 per share, underscored the payoff from disciplined securitization spreads and asset selection even as the broader market ended the year on a less forgiving footing.

Portfolio Performance — Mortgage Assets Outperformed

Mortgage holdings outpaced hedges in Q4, with the $13.2 billion portfolio benefiting from roughly 30 basis points of tightening in current-coupon spreads and a 23-basis-point improvement in option-adjusted spreads. That rally lifted RMBS valuations, though management cautioned that spreads now sit near historically tight levels, limiting incremental book-value upside.

Record Growth in Direct-to-Consumer Lending

The direct-to-consumer channel delivered a 90% sequential jump, funding $94 million in first and second liens, plus $38 million in pipeline loans and $58.5 million of brokered second liens. Management framed DTC as a nimble engine to source higher-margin loans and bolster MSR recapture even as traditional correspondent flows moderate.

Improved Liquidity and Capital Actions

Liquidity surged to more than $800 million in cash, aided by repayment of $261.9 million in convertible senior notes on January 15, 2026, while repo markets remained steady at roughly SOFR plus 23 basis points and an average 54-day tenor. The balance-sheet cleanup gives Two Harbors flexibility to navigate higher funding costs or seize opportunities tied to the merger integration.

MSR Portfolio Health Metrics

Servicing assets remained resilient, with the 5.8x MSR price multiple intact, 60-plus-day delinquencies below 1%, and MSR CPR at 6.4%. Roughly $400 million UPB of flow and recapture MSRs settled in Q4, signaling ongoing discipline in organic replenishment even as the company trims overall servicing exposure.

Risk Management and Defensive Positioning

Economic debt-to-equity slipped to about 7x as management reduced leverage and maintained its paired MSR-RMBS construction to hedge spread volatility. The team stressed that defensive positioning is critical given tight spreads, underscoring the elevated sensitivity to further spread moves after the year-end rally.

Full-Year 2025 Negative Economic Return (Pre-Adjustment)

Despite the strong quarter, full-year 2025 economic return on book value was negative 12.6%, reflecting mark-to-market losses, MSR sales, and a $3.50-per-share litigation charge; excluding that charge, the year would have delivered a positive 12.1%. The juxtaposition highlights how non-recurring items and high volatility can swing headline returns even with steady quarterly execution.

Reduction in Owned Servicing and Sales Activity

Two Harbors sold another $10 billion of MSRs, lifting third-party subservicing to $40 billion and trimming owned servicing to about $162 billion from $176 billion. The shift frees capital and reduces operational risk but also lowers net servicing income, reinforcing the rationale for scaling through the UWM partnership.

Reduced Net Interest and Servicing Income and Mark-to-Market Impact

Net interest and servicing income slid due to MSR dispositions, softer float income, and lower balances, while mark-to-market gains shrank by $15.5 million as the yield curve steepened and MSR runoff accelerated. Management framed these pressures as transitory but acknowledged they complicate near-term dividend math.

Tighter RMBS Spreads Reduce Upside Potential

The sharp tightening in RMBS spreads and the exit of inverse IO positions compress prospective returns, leaving little room for further book-value expansion from spread compression. Executives hinted that they may wait for better entry points before re-risking, preferring to conserve dry powder amid stretched valuations.

Higher Prepayment and Increased Spread Sensitivity

MSR CPR ticked up 0.4 points to 6.4% and specified-pool CPR rose to 8.6%, nudging spread sensitivity higher; a 25-basis-point spread tightening now moves equity by 3.7% versus 2.3% previously. The modest uptick in prepayments underscores the importance of careful hedge calibration as rate volatility remains subdued but poised for a potential spike.

Dividend and Return Outlook Uncertainty

Prospective static returns narrowed to 6.9%–10.2% at the portfolio level and 5.8%–11.1% for common equity, with quarterly static return per share guided to $0.16–$0.31. Management said dividend decisions will come later in the quarter once the spread backdrop is clearer, highlighting investor uncertainty around income durability.

Macro and Volatility Risks

The team flagged an unusually calm rate-volatility regime—one-month realized vol on 10-year swaps sits in the bottom fifth percentile—warning that any policy surprise or leadership transition at the Fed could quickly widen spreads and test funding markets. With sensitivity metrics rising, the company remains wary of overextending before volatility normalizes.

Forward-Looking Guidance

Guidance envisions roughly 65% of capital deployed into servicing (target static return 10–13%) and the rest into securities (10–14%), yielding a blended 6.9%–10.2% static portfolio return and 5.8%–11.1% on common equity. Management reiterated a post-merger MSR scale of $400 billion, stable MSR pricing, sub-1% delinquencies, ample liquidity (over $800 million cash, $1.1 billion unused MSR financing capacity), and a 7x economic leverage goal, while acknowledging higher spread sensitivity and the need to reassess dividends as market conditions evolve.

The call closed on a measured note: Two Harbors celebrated tactical wins in Q4 and the transformational merger path ahead, yet remained vigilant about tight spreads, modestly rising prepayments, and the uncertainty clouding return and dividend prospects. Investors are left weighing a more muscular MSR platform and fortified liquidity against the reality that 2025 still carries significant spread and earnings volatility risk.