Two Harbors Investment Corp.
07/29/2025 | Press release | Distributed by Public on 07/29/2025 07:03
Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2024.
General
We are a Maryland corporation that invests in, finances and manages MSR and Agency RMBS, and, through our operational platform, RoundPoint Mortgage Servicing LLC, or RoundPoint, we are one of the largest servicers of conventional loans in the country. We are structured as an internally-managed REIT and our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol "TWO." We seek to leverage our core competencies of understanding and managing interest rate and prepayment risk to invest in our portfolio of MSR and Agency RMBS. Our objective is to deliver more stable performance, relative to RMBS portfolios without MSR, across changing market environments, and we are acutely focused on creating sustainable stockholder value over the long term.
One of our wholly owned subsidiaries, TH MSR Holdings LLC, holds the requisite approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent a contractual right to control the servicing of a mortgage loan, the obligation to service the loan in accordance with applicable laws and requirements and the right to collect a fee for the performance of servicing activities, such as collecting principal and interest from a borrower and distributing those payments to the owner of the loan. TH MSR Holdings acquires MSR from third-party originators through flow and bulk purchases, as well as through the recapture of MSR on loans in its MSR portfolio that refinance. Beginning in 2024, TH MSR Holdings also acquires MSR on loans originated by its subsidiary, RoundPoint, through purchases and recapture of MSR. TH MSR Holdings does not directly service mortgage loans; instead, it engages its wholly owned subsidiary, RoundPoint, to handle substantially all servicing functions for the mortgage loans underlying our MSR. Our MSR business leverages our core competencies in prepayment and interest rate risk analytics, and the MSR assets may provide offsetting risks to our Agency RMBS, hedging both interest rate and mortgage spread risk.
RoundPoint has approvals from Fannie Mae and Freddie Mac to service residential mortgage loans, and services mortgage loans underlying TH MSR Holdings' MSR as well as MSR owned by third parties. Late in the second quarter of 2024, RoundPoint began operating its in-house, direct-to-consumer originations platform, which was established primarily to benefit our MSR portfolio through the retention or recapture of existing borrowers by providing them with competitive refinance and purchase mortgage options. The originations platform also originates loans for new borrowers that do not currently have a mortgage loan serviced by RoundPoint and originates and brokers second lien loans to our borrowers. For our own MSR portfolio, adding new or recaptured MSR through our origination platform is intended to hedge faster than expected MSR prepayment speeds in a refinance environment, and requires less capital relative to acquiring MSR through flow and bulk purchases from third-party originators. In addition, origination activities are generally counter-cyclical to MSR; MSR fair value tends to move opposite to origination volume. For example, the value of MSR typically increases in periods marked by low origination activity and vice versa. Thus, origination activities provide supplementary sources of profitability to our stockholders while also hedging our MSR.
Our Agency RMBS portfolio is comprised primarily of fixed rate mortgage-backed securities backed by single-family and multi-family mortgage loans. All of our principal and interest Agency RMBS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government. The majority of our Agency RMBS portfolio is comprised of whole pool certificates.
We seek to deploy moderate leverage as part of our investment strategy. We generally finance our Agency RMBS through short- and long-term borrowings structured as repurchase agreements. We also finance our MSR through revolving credit facilities and repurchase agreements. Additionally, we finance our origination of mortgage loans through repurchase agreements and warehouse lines of credit. We have also issued unsecured debt, namely senior notes and convertible senior notes, the funds from which have been and may be used to purchase our target assets and/or for other general corporate purposes.
We have elected to be treated as a REIT for U.S. federal income tax purposes. To qualify as a REIT we are required to meet certain investment and operating tests and annual distribution requirements. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders, do not participate in prohibited transactions and maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Internal Revenue Code, to engage in such activities. We also operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act. Certain of our subsidiaries have obtained the requisite licenses and approvals to own and manage MSR and to originate and directly service residential mortgage loans.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains, or incorporates by reference, not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, and that are subject to the safe harbors created by such sections. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "anticipate," "estimate," "will," "should," "expect," "target," "believe," "intend," "seek," "plan," "goals," "future," "likely," "may," "optimistic" and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2024, under the caption "Risk Factors." Other risks, uncertainties and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission, or the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise.
Important factors, among others, that may affect our actual results include:
•changes in interest rates and the market value of our target assets;
•changes in prepayment rates of mortgages underlying our target assets;
•the state of the credit markets and other general economic conditions, particularly as they affect the price of earning assets, the credit status of borrowers and home prices;
•legislative and regulatory actions, including executive orders, affecting our business;
•the availability and cost of our target assets;
•the availability and cost of financing for our target assets, including repurchase agreement financing, warehouse lines of credit, revolving credit facilities, senior notes and convertible senior notes;
•the impact of any increases in payment delinquencies and defaults on the mortgages comprising and underlying our target assets, including additional servicing costs and servicing advance obligations on the MSR assets we own;
•changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, inaccurate ratings of securities by rating agencies, rating agency downgrades of securities, and increases in the supply of real estate securities available-for-sale;
•changes in the values of securities we own and the impact of adjustments reflecting those changes on our consolidated statements of comprehensive income (loss) and balance sheets, including our stockholders' equity;
•our ability to generate cash flow from our target assets;
•our ability to effectively execute and realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue;
•our decision to terminate our Management Agreement with PRCM Advisers LLC and the ongoing litigation related to such termination;
•changes in the competitive landscape within our industry, including changes that may affect our ability to attract and retain personnel;
•our exposure to legal and regulatory claims, penalties or enforcement activities, including those arising from our ownership and management of MSR and prior securitization transactions;
•our exposure to counterparties involved in our MSR business and prior securitization transactions and our ability to enforce representations and warranties made by them;
•our ability to acquire MSR and successfully operate our seller-servicer subsidiaries;
•our ability to manage various operational and regulatory risks associated with our business, including the risks associated with operating a mortgage loan servicer and originator;
•interruptions in or impairments to our communications and information technology systems;
•our ability to maintain appropriate internal controls over financial reporting;
•our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio;
•our ability to maintain our REIT qualification for U.S. federal income tax purposes; and
•limitations imposed on our business due to our REIT status and our status as exempt from registration under the 1940 Act.
Factors Affecting our Operating Results
Our net interest income includes income from our securities portfolio, including the amortization of purchase premiums and accretion of purchase discounts, and mortgage loans held-for-sale. Net interest income, as well as our servicing income, net of servicing costs, will fluctuate primarily as a result of changes in market interest rates, our financing costs and prepayment speeds on our assets. Interest rates, financing costs and prepayment rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.
Fair Value Measurement
A significant portion of our assets and liabilities are reported at fair value and, therefore, our consolidated balance sheets and statements of comprehensive (loss) income are significantly affected by fluctuations in market prices. At June 30, 2025, approximately 88.2% of our total assets, or $11.4 billion, consisted of financial instruments recorded at fair value. See Note 12 - Fair Valueto the consolidated financial statements, included in this Quarterly Report on Form 10-Q, for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized. Although we execute various hedging strategies to mitigate our exposure to changes in fair value, we cannot fully eliminate our exposure to volatility caused by fluctuations in market prices.
Any temporary change in the fair value of our AFS securities, excluding certain AFS securities for which we have elected the fair value option, is recorded as a component of accumulated other comprehensive loss and does not impact our reported income (loss) for U.S. GAAP purposes, or GAAP net income (loss). However, changes in the provision for credit losses on AFS securities are recognized immediately in GAAP net income (loss). Our GAAP net income (loss) is also affected by fluctuations in market prices on the remainder of our financial assets and liabilities recorded at fair value, including interest rate swap and swaption agreements and certain other derivative instruments (i.e., Agency to-be-announced securities, or TBAs, options on TBAs, futures, options on futures, inverse interest-only securities, interest rate lock commitments and forward loan sale commitments), which are accounted for as derivative trading instruments under U.S. GAAP, fair value option elected AFS securities, MSR and mortgage loans held-for-sale.
We have numerous internal controls in place to help ensure the appropriateness of fair value measurements. Significant fair value measures are subject to detailed analytics and management review and approval.
Our entire Agency RMBS investment portfolio reported at fair value is priced by third-party brokers and/or by independent pricing vendors. We generally receive three or more broker and vendor quotes on pass-through Agency P&I RMBS, and generally receive multiple broker or vendor quotes on all other securities, including interest-only and inverse interest-only Agency RMBS. For Agency RMBS, the third-party pricing vendors and brokers use pricing models that commonly incorporate such factors as coupons, primary and secondary mortgage rates, rate reset periods, issuer, prepayment speeds, credit enhancements and expected life of the security.
We evaluate the prices we receive from both third-party brokers and pricing vendors by comparing those prices to actual purchase and sale transactions, our internally modeled prices calculated based on market observable rates and credit spreads, and to each other both in current and prior periods. We review and may challenge valuations from third-party brokers and pricing vendors to ensure that such quotes and valuations are indicative of fair value as a result of this analysis. We then estimate the fair value of each security based upon the median of the final broker quotes received, subject to internally-established hierarchy and override procedures.
We utilize "bid side" pricing for our Agency RMBS and, as a result, certain assets, especially the most recent purchases, may realize a markdown due to the "bid-offer" spread. To the extent that this occurs on available-for-sale securities not accounted for under the fair value option, any economic effect of this would be reflected in accumulated other comprehensive loss.
We estimate the fair value of our MSR using a discounted cash flow model, which incorporates both observable and unobservable market data, including principal balance, note rate, geographical location, loan-to-value (LTV) ratios, FICO and other loan characteristics, along with servicing fee, ancillary income, earnings rates on escrow balances and recapture rates. Significant unobservable inputs include prepayment speeds; option adjusted spread, or OAS, which represents the incremental spread added to the risk-free rate to reflect the effects of any embedded options and other risk inherent in MSR; and cost to service. We obtain third-party valuations, industry surveys and other available market data quarterly to assess the reasonableness of the significant unobservable inputs used in the cash flow model, as well as fair value calculated by the cash flow model, subject to internally-established hierarchy and override procedures.
Considerable judgment is used in forming conclusions and estimating inputs to our Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayments speeds, credit losses and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, there is no assurance that our estimates of fair value are indicative of the amounts that would be realized on the ultimate sale or exchange of these assets. At June 30, 2025, 23.3% of our total assets were classified as Level 3 fair value assets.
Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in preparation of the statements. Accounting estimates are considered critical if the estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates reasonably could have been used in the reporting period or changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on our financial condition, results of operations or cash flows. Our significant accounting policies are described in Note 2 to the consolidated financial statements, included under Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2024. Our most critical accounting policies involve our fair valuation of AFS securities, MSR and derivative instruments.
The methods used by us to estimate fair value for AFS securities, MSR and derivative instruments may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair value. Furthermore, while we believe that our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We use prices obtained from third-party pricing vendors or broker quotes deemed indicative of market activity and current as of the measurement date, which in periods of market dislocation, may have reduced transparency. For more information on our fair value measurements, see Note 12 - Fair Valueto the consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q. Additionally, the key economic assumptions and sensitivity of the fair value of MSR to immediate adverse changes in these assumptions are presented in Note 6 - Servicing Activitiesto the consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q.
Market Conditions and Outlook
Fixed-income and equity markets proved resilient in the second quarter, rebounding from poor performance early in the quarter as the uncertainty of fluctuating tariff and trade policies unsettled markets, spiking the Chicago Board Options Exchange's Volatility Index to a multi-year high. As the quarter progressed, tariff tensions eased and the macro environment recovered steadily, leading the S&P 500 to a record high, returning 10.6% over the quarter. Similarly, yields for U.S. Treasuries initially increased, with the 10-year Treasury yield rising by about 60 basis points but finished the quarter with a net increase of only 2 basis points at 4.23%. The yield curve for U.S. Treasuries steepened, with the 2-year Treasury yield falling from 3.88% to 3.72%, or 16 basis points.
The Federal Reserve, or the Fed, left interest rates unchanged at both their May and June meetings, as benign readings on employment and inflation did not justify any immediate action and the potential inflationary impact of tariffs provided further justification to not lower rates prematurely. By quarter-end, Federal Funds futures implied over a 90% chance of an interest rate cut by the Fed in September, with the median forecast in the Fed's own projections remaining unchanged at two cuts for 2025.
The performance of Agency RMBS tracked the pattern of the equity markets over the quarter, with spreads to interest rate swaps materially widening in April, then recovering over the next two months. An implied volatility gauge, 2-year options on 10-year swap rates, also followed suit, hitting a quarterly high of 104 basis points of annualized volatility in mid April only to close the quarter 4 basis points lower, falling from 98 to 94 basis points. Hedged performance across the coupon stack was uneven, with higher coupons generally outperforming longer duration lower coupons. During the quarter, the nominal spread for current coupon RMBS widened by 3 basis points to 171 basis points to the swap curve, while option-adjusted spreads finished 12 basis points wider at 81 basis points, reflecting the drop in implied volatility by quarter-end. Nominal spreads ended the quarter right on top of the year-to-date average, whereas option-adjusted spreads were about 5 basis points wider than average with swaption volatility about 5 basis points below average.
Primary mortgage rates were in the high 6% area for most of the quarter, dipped lower in March into early April which, together with stronger seasonal factors, drove an increase in prepayment rates in the second quarter. Increasingly fast closing times led to a notable bump up in refinance speeds and borrowers displayed a similar refinancing sensitivity to what we observed last fall. Overall prepayment rates for 30-year Agency RMBS increased by 1.8 percentage points quarter-over-quarter to 7.3% conditional prepayment rate, or CPR, in the second quarter. Nationally, existing home sales continue to run at a historically low volumes and are flat on a year-over-year basis. Inventory has begun to climb in the weakest markets and there have been some home price declines in select metropolitan areas.
The MSR market remains very well supported, with bank and non-bank servicers aggressively bidding for a declining amount of supply. The volume of MSR available in the bulk market has continued to trend lower from the peak years of 2022 and 2023, with supply about 30% lower year-over-year. Quarter-over-quarter, our MSR portfolio experienced a 1.6 percentage point pickup in prepayments rate to 5.8%. The increase was anticipated due to stronger seasonal factors, though the speed was slower than model expectations. Overall, prepayment rates on our low mortgage rate MSR are expected to remain very slow on a historical basis, which will remain a tailwind for the portfolio.
RMBS funding markets remained stable and available during throughout the quarter, with repurchase spreads normalizing into a tighter historical context at SOFR plus around 17 to 20 basis points.
Looking ahead, we will continue to be mindful of the many sources of volatility that can impact markets, and believe that it is premature to expect volatility to fall meaningfully. That said, the resilience that markets demonstrated in the second quarter is a reminder of the global demand for investments, be it in equities or fixed-income spread products like corporate bonds or mortgage-backed securities. Spreads for Agency RMBS, particularly when hedged with interest rate swaps, remain historically wide. Our core strategy of low mortgage rate MSR paired with Agency RMBS benefits not only from wide Agency spreads but also slow and stable prepayment rates, and RoundPoint's direct-to-consumer platform provides us with the recapture to protect the return of the MSR in fast prepayment environments. Taken together, we are optimistic that our portfolio construction should generate attractive risk-adjusted returns over a wide range of market scenarios.
The following table provides the carrying value of our investment portfolio by asset type:
| (dollars in thousands) | June 30, 2025 | December 31, 2024 | |||||||||||||||||||||
| Agency RMBS | $ | 8,387,068 | 73.5 | % | $ | 7,376,965 | 71.1 | % | |||||||||||||||
| Mortgage servicing rights | 3,015,643 | 26.5 | % | 2,994,271 | 28.9 | % | |||||||||||||||||
| Other | 3,449 | - | % | 3,734 | - | % | |||||||||||||||||
| Total | $ | 11,406,160 | $ | 10,374,970 | |||||||||||||||||||
Prepayment speeds and volatility due to interest rates
Our portfolio is subject to market risks, primarily interest rate risk and prepayment risk. We pair our MSR and interest-only Agency RMBS portfolio with a portion of our Agency pool portfolio to offset risk. During periods of decreasing interest rates with rising prepayment speeds, the market value of our Agency pools generally increases and the market value of our interest-only securities and MSR generally decreases. The inverse relationship occurs when interest rates rise and prepayments fall. Prepayment rates for the MSR portfolio increased to 5.8% over the three months ended June 30, 2025, which is consistent with the universe of mortgage loans with similar coupon rates, primarily due to stronger seasonal factors. In addition to changes in interest rates, changes in home price performance, key employment metrics and government programs, among other macroeconomic factors, can affect prepayment speeds. We believe our active portfolio management approach, including our asset selection process, positions us to respond to a variety of market scenarios. Although we are unable to predict future interest rate movements, our strategy of pairing MSR with Agency RMBS, with a focus on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and financing risk, is intended to generate stable performance, relative to RMBS portfolios without MSR, with a low level of sensitivity to changes in the yield curve, prepayments and interest rate cycles.
The following table provides the three-month average CPR experienced by our Agency RMBS and MSR during the three months ended June 30, 2025, and the four immediately preceding quarters:
| Three Months Ended | ||||||||||||||||||||||||||||||||
|
June 30, 2025 |
March 31, 2025 |
December 31, 2024 |
September 30, 2024 |
June 30, 2024 |
||||||||||||||||||||||||||||
| Agency RMBS | 8.4 | % | 7.0 | % | 7.5 | % | 7.2 | % | 7.3 | % | ||||||||||||||||||||||
| Mortgage servicing rights | 5.8 | % | 4.2 | % | 4.9 | % | 5.3 | % | 5.3 | % | ||||||||||||||||||||||
Our Agency RMBS are primarily collateralized by pools of fixed-rate mortgage loans. Our Agency portfolio also includes securities with implicit prepayment protection, including lower loan balances (securities collateralized by loans of less than $300,000 in initial principal balance), higher LTVs (securities collateralized by loans with LTVs greater than or equal to 80%), certain geographic concentrations, loans secured by investor-owned properties and lower FICO scores. Our overall allocation of Agency RMBS and holdings of pools with specific characteristics are viewed in the context of our aggregate portfolio strategy, including MSR and related derivative hedging instruments. Additionally, the selection of securities with certain attributes is driven by the perceived relative value of the securities, which factors in the opportunities in the marketplace, the cost of financing and the cost of hedging interest rate, prepayment, credit and other portfolio risks. Accordingly, our Agency RMBS capital allocation reflects management's flexible approach to investing in the marketplace.
The following tables provide the carrying value of our Agency RMBS portfolio by underlying mortgage loan rate type:
| June 30, 2025 | |||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Principal/ Current Face | Carrying Value |
Weighted Average CPR (1)
|
% Prepayment Protected | Gross Weighted Average Coupon Rate | Amortized Cost | Allowance for Credit Losses | Weighted Average Loan Age (months) | |||||||||||||||||||||||||||||||||||||||
| Agency RMBS AFS: | |||||||||||||||||||||||||||||||||||||||||||||||
| 30-Year Fixed: | |||||||||||||||||||||||||||||||||||||||||||||||
| 3.0% | $ | - | $ | - | - | % | - | % | - | % | $ | - | $ | - | - | ||||||||||||||||||||||||||||||||
| 3.5% | - | - | - | % | - | % | - | % | - | - | - | ||||||||||||||||||||||||||||||||||||
| 4.0% | 193,317 | 182,284 | 8.6 | % | 100.0 | % | 4.5 | % | 200,289 | - | 104 | ||||||||||||||||||||||||||||||||||||
| 4.5% | 1,720,795 | 1,662,477 | 8.3 | % | 85.7 | % | 5.1 | % | 1,722,471 | - | 46 | ||||||||||||||||||||||||||||||||||||
| 5.0% | 1,601,163 | 1,584,002 | 13.6 | % | 100.0 | % | 5.7 | % | 1,629,102 | - | 39 | ||||||||||||||||||||||||||||||||||||
| 5.5% | 1,292,700 | 1,302,231 | 9.5 | % | 99.8 | % | 6.4 | % | 1,302,482 | - | 31 | ||||||||||||||||||||||||||||||||||||
| 6.0% | 2,468,457 | 2,519,481 | 7.0 | % | 87.1 | % | 6.9 | % | 2,508,960 | - | 4 | ||||||||||||||||||||||||||||||||||||
| ≥ 6.5% | 408,429 | 424,017 | 4.8 | % | 89.2 | % | 7.3 | % | 422,043 | - | 6 | ||||||||||||||||||||||||||||||||||||
| 7,684,861 | 7,674,492 | 9.0 | % | 92.1 | % | 6.2 | % | 7,785,347 | - | 27 | |||||||||||||||||||||||||||||||||||||
| Other P&I | 694,064 | 621,310 | 5.6 | % | - | % | 5.7 | % | 622,275 | - | 17 | ||||||||||||||||||||||||||||||||||||
| Interest-only | 390,314 | 21,506 | 9.0 | % | - | % | 5.4 | % | 25,111 | (1,894) | 180 | ||||||||||||||||||||||||||||||||||||
| Agency Derivatives | 1,259,132 | 69,760 | 11.3 | % | - | % | 7.1 | % | 70,322 | - | 38 | ||||||||||||||||||||||||||||||||||||
| Total Agency RMBS | $ | 10,028,371 | $ | 8,387,068 | 84.2 | % | $ | 8,503,055 | $ | (1,894) | |||||||||||||||||||||||||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Principal/ Current Face | Carrying Value |
Weighted Average CPR (1)
|
% Prepayment Protected | Gross Weighted Average Coupon Rate | Amortized Cost | Allowance for Credit Losses | Weighted Average Loan Age (months) | |||||||||||||||||||||||||||||||||||||||
| Agency RMBS AFS: | |||||||||||||||||||||||||||||||||||||||||||||||
| 30-Year Fixed: | |||||||||||||||||||||||||||||||||||||||||||||||
| 3.0% | $ | 220,041 | $ | 188,239 | 4.9 | % | 85.7 | % | 3.7 | % | $ | 195,717 | $ | - | 38 | ||||||||||||||||||||||||||||||||
| 3.5% | 109,474 | 97,261 | 3.1 | % | 84.3 | % | 4.1 | % | 97,831 | - | 51 | ||||||||||||||||||||||||||||||||||||
| 4.0% | 585,683 | 537,910 | 9.4 | % | 100.0 | % | 4.6 | % | 577,462 | - | 55 | ||||||||||||||||||||||||||||||||||||
| 4.5% | 2,076,840 | 1,972,162 | 7.5 | % | 100.0 | % | 5.1 | % | 2,123,706 | - | 52 | ||||||||||||||||||||||||||||||||||||
| 5.0% | 1,759,213 | 1,713,538 | 6.9 | % | 100.0 | % | 5.8 | % | 1,791,565 | - | 33 | ||||||||||||||||||||||||||||||||||||
| 5.5% | 1,411,225 | 1,401,684 | 6.7 | % | 99.8 | % | 6.4 | % | 1,422,048 | - | 25 | ||||||||||||||||||||||||||||||||||||
| 6.0% | 499,542 | 505,297 | 13.0 | % | 91.5 | % | 6.9 | % | 509,491 | - | 25 | ||||||||||||||||||||||||||||||||||||
| ≥ 6.5% | 377,197 | 388,924 | 9.7 | % | 100.0 | % | 7.5 | % | 389,382 | - | 12 | ||||||||||||||||||||||||||||||||||||
| 7,039,215 | 6,805,015 | 7.7 | % | 98.7 | % | 5.7 | % | 7,107,202 | - | 37 | |||||||||||||||||||||||||||||||||||||
| Other P&I | 561,159 | 540,946 | 0.1 | % | - | % | 5.4 | % | 557,799 | - | 15 | ||||||||||||||||||||||||||||||||||||
| Interest-only | 462,886 | 22,016 | 10.1 | % | - | % | 5.4 | % | 27,747 | (2,386) | 172 | ||||||||||||||||||||||||||||||||||||
| Agency Derivatives | 135,310 | 8,988 | 9.9 | % | - | % | 6.6 | % | 14,731 | - | 235 | ||||||||||||||||||||||||||||||||||||
| Total Agency RMBS | $ | 8,198,570 | $ | 7,376,965 | 91.1 | % | $ | 7,707,479 | $ | (2,386) | |||||||||||||||||||||||||||||||||||||
____________________
(1)Weighted average actual one-month CPR released at the beginning of the following month based on RMBS held as of the preceding month-end.
Our MSR portfolio offers attractive spreads and has many risk reducing characteristics when paired with our Agency RMBS portfolio. The following table summarizes activity related to the UPB of loans underlying our MSR portfolio for the three months ended June 30, 2025, and the four immediately preceding quarters:
| Three Months Ended | ||||||||||||||||||||||||||||||||
| (in thousands) |
June 30, 2025 |
March 31, 2025 |
December 31, 2024 |
September 30 2024 |
June 30, 2024 |
|||||||||||||||||||||||||||
| UPB at beginning of period | $ | 196,773,345 | $ | 200,317,009 | $ | 202,052,184 | $ | 209,389,409 | $ | 213,596,880 | ||||||||||||||||||||||
|
Purchases of mortgage servicing rights
|
6,554,362 | 154,724 | 2,439,058 | 3,287,735 | 327,750 | |||||||||||||||||||||||||||
| Origination and recapture of mortgage servicing rights | 34,054 | 20,225 | 43,132 | 17,359 | - | |||||||||||||||||||||||||||
|
Sales of mortgage servicing rights
|
- | - | 2,828 | (6,247,585) | - | |||||||||||||||||||||||||||
| Scheduled payments | (1,637,296) | (1,623,566) | (1,647,137) | (1,640,591) | (1,639,278) | |||||||||||||||||||||||||||
| Prepaid | (2,913,721) | (2,110,028) | (2,545,452) | (2,779,533) | (2,872,850) | |||||||||||||||||||||||||||
| Other changes | 11,867 | 14,981 | (27,604) | 25,390 | (23,093) | |||||||||||||||||||||||||||
| UPB at end of period | $ | 198,822,611 | $ | 196,773,345 | $ | 200,317,009 | $ | 202,052,184 | $ | 209,389,409 | ||||||||||||||||||||||
Counterparty exposure and leverage ratio
We monitor counterparty exposure amongst our broker, banking and lending counterparties on a daily basis. We believe our broker and banking counterparties are well-capitalized organizations, and we attempt to manage our cash balances across these organizations to reduce our exposure to any single counterparty.
As of June 30, 2025, we had entered into repurchase agreements with 34 counterparties, 19 of which had outstanding balances. In addition, we held short- and long-term borrowings under revolving credit facilities, warehouse lines of credit, and unsecured borrowings under senior notes and convertible senior notes. As of June 30, 2025, the debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and related servicing advances and mortgage loans held-for-sale, which includes unsecured borrowings under senior notes and convertible senior notes, was 5.4:1.0.
As of June 30, 2025, we held $657.8 million in cash and cash equivalents, approximately $5.3 million of unpledged Agency RMBS and $3.1 million of unpledged non-Agency securities. As a result, we had an overall estimated unused borrowing capacity on our unpledged securities of approximately $6.3 million. As of June 30, 2025, we held approximately $81.3 million of unpledged MSR and $2.0 million of unpledged servicing advances. Overall, on June 30, 2025, we had $77.1 million unused committed and $760.0 million unused uncommitted borrowing capacity on MSR financing facilities, and $61.0 million in unused committed borrowing capacity on servicing advance financing facilities. As of June 30, 2025, we held approximately $0.4 million of unpledged mortgage loans and had $25.7 million unused committed borrowing capacity on our warehouse line of credit and $50.0 million unused uncommitted borrowing capacity on our loan repurchase agreement. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided, insufficient collateral or the inability to meet lenders' eligibility requirements for specific types of asset classes.
We also monitor exposure to our MSR counterparties. We may be required to make representations and warranties to investors in the loans underlying the MSR we own; however, some of our MSR were purchased on a bifurcated basis, meaning the representation and warranty obligations remain with the seller. If the representations and warranties we make prove to be inaccurate, we may be obligated to repurchase certain mortgage loans, which may impact the profitability of our portfolio. Although we obtain similar representations and warranties from the counterparty from which we acquired the relevant asset, if those representations and warranties do not directly mirror those we make to the investor, or if we are unable to enforce the representations and warranties against the counterparty for a variety of reasons, including the financial condition or insolvency of the counterparty, we may not be able to seek indemnification from our counterparties for any losses attributable to the breach.
Summary of Results of Operations and Financial Condition
Our book value per common share for U.S. GAAP purposes was $12.14 at June 30, 2025, a decrease from $14.66 per common share at March 31, 2025, and a decrease from $14.47 per common share at December 31, 2024. The decline in book value for both the three and six months ended June 30, 2025 was primarily driven by the loss contingency accrual of $199.9 million that was recorded in connection with our ongoing litigation with PRCM Advisers, net mark-to-market losses on MSR and derivative instruments and dividends declared, partially offset by net interest and servicing income and net mark-to-market gains recognized on investment securities. For further details regarding the loss contingency accrual recognized, refer to Note 14 - Commitments and Contingenciesto the consolidated financial statements, included in this Quarterly Report on Form 10-Q. Our comprehensive loss attributable to common stockholders was $221.8 million and $156.9 million for the three and six months ended June 30, 2025, respectively, as compared to comprehensive income attributable to common stockholders of $0.5 million and $89.8 million for the three and six months ended June 30, 2024, respectively.
The following table presents the components of our comprehensive (loss) income for the three and six months ended June 30, 2025 and 2024:
|
(in thousands, except per share amounts)
|
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||
| Income Statement Data: | June 30, | June 30, | ||||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||||
|
Net interest expense:
|
||||||||||||||||||||||||||
| Interest income | $ | 117,082 | $ | 115,953 | $ | 228,464 | $ | 233,736 | ||||||||||||||||||
| Interest expense | 136,701 | 154,207 | 268,415 | 314,207 | ||||||||||||||||||||||
|
Net interest expense
|
(19,619) | (38,254) | (39,951) | (80,471) | ||||||||||||||||||||||
|
Net servicing income:
|
||||||||||||||||||||||||||
|
Servicing income
|
158,354 | 176,015 | 315,213 | 342,348 | ||||||||||||||||||||||
| Servicing costs | 2,386 | 4,475 | 5,583 | 11,594 | ||||||||||||||||||||||
| Net servicing income | 155,968 | 171,540 | 309,630 | 330,754 | ||||||||||||||||||||||
|
Other (loss) income:
|
||||||||||||||||||||||||||
|
Loss on investment securities
|
(32,830) | (22,437) | (65,559) | (33,412) | ||||||||||||||||||||||
|
Loss on servicing asset
|
(35,902) | (22,857) | (72,123) | (11,845) | ||||||||||||||||||||||
|
(Loss) gain on interest rate swap and swaption agreements
|
(52,950) | 22,012 | (151,738) | 120,522 | ||||||||||||||||||||||
|
(Loss) gain on other derivative instruments
|
(31,257) | (750) | (29,809) | 46,849 | ||||||||||||||||||||||
|
Gain (loss) on mortgage loans held-for-sale
|
883 | - | 1,552 | (3) | ||||||||||||||||||||||
| Other income | 1,038 | 226 | 1,799 | 226 | ||||||||||||||||||||||
| Total other (loss) income | (151,018) | (23,806) | (315,878) | 122,337 | ||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Compensation and benefits | 21,469 | 21,244 | 48,058 | 47,773 | ||||||||||||||||||||||
| Other operating expenses | 21,307 | 17,699 | 41,812 | 38,751 | ||||||||||||||||||||||
|
Loss contingency accrual
|
199,935 | - | 199,935 | - | ||||||||||||||||||||||
| Total expenses | 242,711 | 38,943 | 289,805 | 86,524 | ||||||||||||||||||||||
|
(Loss) income before income taxes
|
(257,380) | 70,537 | (336,004) | 286,096 | ||||||||||||||||||||||
| Provision for income taxes | 1,661 | 14,201 | 2,092 | 26,172 | ||||||||||||||||||||||
|
Net (loss) income
|
(259,041) | 56,336 | (338,096) | 259,924 | ||||||||||||||||||||||
| Dividends on preferred stock | (13,239) | (11,784) | (26,425) | (23,568) | ||||||||||||||||||||||
| Gain on repurchase and retirement of preferred stock | - | - | - | 644 | ||||||||||||||||||||||
|
Net (loss) income attributable to common stockholders
|
$ | (272,280) | $ | 44,552 | $ | (364,521) | $ | 237,000 | ||||||||||||||||||
|
Basic (loss) earnings per weighted average common share
|
$ | (2.62) | $ | 0.43 | $ | (3.51) | $ | 2.27 | ||||||||||||||||||
|
Diluted (loss) earnings per weighted average common share
|
$ | (2.62) | $ | 0.43 | $ | (3.51) | $ | 2.16 | ||||||||||||||||||
| Dividends declared per common share | $ | 0.39 | $ | 0.45 | $ | 0.84 | $ | 0.90 | ||||||||||||||||||
|
Comprehensive (loss) income:
|
||||||||||||||||||||||||||
| Net (loss) income | $ | (259,041) | $ | 56,336 | $ | (338,096) | $ | 259,924 | ||||||||||||||||||
|
Other comprehensive income (loss):
|
||||||||||||||||||||||||||
|
Unrealized gain (loss) on available-for-sale securities
|
50,473 | (44,073) | 207,645 | (147,151) | ||||||||||||||||||||||
|
Other comprehensive income (loss)
|
50,473 | (44,073) | 207,645 | (147,151) | ||||||||||||||||||||||
|
Comprehensive (loss) income
|
(208,568) | 12,263 | (130,451) | 112,773 | ||||||||||||||||||||||
| Dividends on preferred stock | (13,239) | (11,784) | (26,425) | (23,568) | ||||||||||||||||||||||
| Gain on repurchase and retirement of preferred stock | - | - | - | 644 | ||||||||||||||||||||||
|
Comprehensive (loss) income attributable to common stockholders
|
$ | (221,807) | $ | 479 | $ | (156,876) | $ | 89,849 | ||||||||||||||||||
Results of Operations
Interest Income
Interest income increased slightly to $117.1 million for the three months ended June 30, 2025 from $116.0 million for the same period in 2024, primarily due to an increase in Agency RMBS portfolio size and related yields, partially offset by lower average cash and reverse repurchase agreement balances held throughout the period. Interest income decreased slightly to $228.5 million for the six months ended June 30, 2025 from $233.7 million for the same period in 2024, primarily due to lower average cash and reverse repurchase agreement balances held throughout the period, partially offset by an increase in Agency RMBS portfolio size and related yields.
Interest Expense
Interest expense decreased to $136.7 million and $268.4 million for the three and six months ended 2025, respectively, from $154.2 million and $314.2 million for the same periods in 2024, primarily due to a decrease in interest rates towards the end of the third quarter and throughout the fourth quarter of 2024, partially offset by an increase in average borrowings outstanding on the higher Agency RMBS portfolio.
Net Interest Income
The following tables present the components of interest income and average net asset yield earned by asset type, the components of interest expense and average cost of funds on borrowings incurred by collateral type, and net interest income and average net interest spread for the three and six months ended June 30, 2025 and 2024:
| Three Months Ended June 30, 2025 | Six Months Ended June 30, 2025 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) |
Average Balance (1)
|
Interest Income/Expense | Net Yield/Cost of Funds |
Average Balance (1)
|
Interest Income/Expense | Net Yield/Cost of Funds | |||||||||||||||||||||||||||||
|
Interest-earning assets:
|
|||||||||||||||||||||||||||||||||||
| Available-for-sale securities | $ | 8,662,943 | $ | 108,842 | 5.0 | % | $ | 8,491,953 | $ | 209,260 | 4.9 | % | |||||||||||||||||||||||
| Mortgage loans held-for-sale | 7,957 | 145 | 7.3 | % | 5,664 | 198 | 7.0 | % | |||||||||||||||||||||||||||
| Reverse repurchase agreements | 128,120 | 1,401 | 4.4 | % | 235,055 | 5,108 | 4.3 | % | |||||||||||||||||||||||||||
|
Other
|
6,694 | 13,898 | |||||||||||||||||||||||||||||||||
|
Total interest income/net asset yield
|
$ | 8,799,020 | $ | 117,082 | 5.3 | % | $ | 8,732,672 | $ | 228,464 | 5.2 | % | |||||||||||||||||||||||
|
Interest-bearing liabilities:
|
|||||||||||||||||||||||||||||||||||
|
Borrowings collateralized by:
|
|||||||||||||||||||||||||||||||||||
| Available-for-sale securities | $ | 8,262,110 | $ | 93,702 | 4.5 | % | $ | 8,072,935 | $ | 184,836 | 4.6 | % | |||||||||||||||||||||||
|
Agency Derivatives (2)
|
26,948 | 329 | 4.9 | % | 16,002 | 391 | 4.9 | % | |||||||||||||||||||||||||||
|
Mortgage servicing rights and advances (3)
|
1,861,010 | 36,600 | 7.9 | % | 1,852,201 | 72,608 | 7.8 | % | |||||||||||||||||||||||||||
|
Mortgage loans held-for-sale
|
7,651 | 129 | 6.7 | % | 5,398 | 184 | 6.8 | % | |||||||||||||||||||||||||||
|
Unsecured borrowings:
|
|||||||||||||||||||||||||||||||||||
|
Senior notes
|
58,467 | 1,496 | 10.2 | % | 29,234 | 1,496 | 10.2 | % | |||||||||||||||||||||||||||
|
Convertible senior notes
|
260,827 | 4,445 | 6.8 | % | 260,651 | 8,900 | 6.8 | % | |||||||||||||||||||||||||||
|
Total interest expense/cost of funds
|
$ | 10,477,013 | $ | 136,701 | 5.2 | % | $ | 10,236,421 | $ | 268,415 | 5.2 | % | |||||||||||||||||||||||
|
Net interest expense/spread
|
$ | (19,619) | 0.1 | % | $ | (39,951) | - | % | |||||||||||||||||||||||||||
| Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) |
Average Balance (1)
|
Interest Income/Expense | Net Yield/Cost of Funds |
Average Balance (1)
|
Interest Income/Expense | Net Yield/Cost of Funds | |||||||||||||||||||||||||||||
|
Interest-earning assets:
|
|||||||||||||||||||||||||||||||||||
| Available-for-sale securities | $ | 8,300,435 | $ | 99,211 | 4.8 | % | $ | 8,434,340 | $ | 199,816 | 4.7 | % | |||||||||||||||||||||||
| Mortgage loans held-for-sale | 279 | 3 | 4.3 | % | 292 | 4 | 2.7 | % | |||||||||||||||||||||||||||
| Reverse repurchase agreements | 349,962 | 4,700 | 5.4 | % | 347,980 | 9,359 | 5.4 | % | |||||||||||||||||||||||||||
|
Other
|
12,039 | 24,557 | |||||||||||||||||||||||||||||||||
|
Total interest income/net asset yield
|
$ | 8,650,676 | $ | 115,953 | 5.4 | % | $ | 8,782,612 | $ | 233,736 | 5.3 | % | |||||||||||||||||||||||
|
Interest-bearing liabilities:
|
|||||||||||||||||||||||||||||||||||
|
Borrowings collateralized by:
|
|||||||||||||||||||||||||||||||||||
| Available-for-sale securities | $ | 7,734,155 | $ | 107,110 | 5.5 | % | $ | 7,860,547 | $ | 219,463 | 5.6 | % | |||||||||||||||||||||||
|
Agency Derivatives (2)
|
5,961 | 91 | 6.1 | % | 7,177 | 221 | 6.2 | % | |||||||||||||||||||||||||||
|
Mortgage servicing rights and advances (3)
|
1,887,241 | 42,421 | 9.0 | % | 1,888,176 | 85,313 | 9.0 | % | |||||||||||||||||||||||||||
|
Unsecured borrowings:
|
|||||||||||||||||||||||||||||||||||
|
Convertible senior notes
|
265,930 | 4,579 | 6.9 | % | 267,381 | 9,198 | 6.9 | % | |||||||||||||||||||||||||||
|
Other
|
6 | 12 | |||||||||||||||||||||||||||||||||
|
Total interest expense/cost of funds
|
$ | 9,893,287 | $ | 154,207 | 6.2 | % | $ | 10,023,281 | $ | 314,207 | 6.3 | % | |||||||||||||||||||||||
|
Net interest income/spread
|
$ | (38,254) | (0.8) | % | $ | (80,471) | (1.0) | % | |||||||||||||||||||||||||||
____________________
(1)Average asset balance represents average amortized cost on AFS securities and average unpaid principal balance on mortgage loans held-for-sale and reverse repurchase agreements.
(2)Yields on Agency Derivatives not shown as interest income is included in (loss) gain on other derivative instruments in the consolidated statements of comprehensive (loss) income.
(3)Yields on mortgage servicing rights and advances not shown as these assets do not earn interest.
The increase in yields on AFS securities for the three and six months ended June 30, 2025, as compared to the same periods in 2024 was driven by net purchases of higher coupon AFS securities with ratably lower unamortized premiums. The decrease in cost of funds associated with the financing of AFS securities for the three and six months ended June 30, 2025, as compared to the same periods in 2024, was due to the lower interest rate environment.
The decrease in yields on reverse repurchase agreements for the three and six months ended June 30, 2025, as compared to the same periods in 2024, was due to the lower interest rate environment.
The decrease in cost of funds associated with the financing of MSR assets and related servicing advance obligations for the three and six months ended June 30, 2025, as compared to the same periods in 2024, was primarily due to the lower interest rate environment. We have one revolving credit facility in place to finance our servicing advance obligations, which are included in other assets on our consolidated balance sheets.
Late in the second quarter of 2024, RoundPoint began operating its in-house, direct-to-consumer originations platform. Prior to the launch of originations, our mortgage loans held-for-sale consisted of a small number of loans purchased from the collateral underlying our MSR, which were not pledged for any form of financing.
In May 2025, we issued $115.0 million of unsecured senior notes due in 2030, which pay interest quarterly at rate of 9.375% per annum. The cost of funds associated with our senior notes also includes amortization of deferred debt issuance costs.
The cost of funds associated with our convertible senior notes for the three and six months ended June 30, 2025, as compared to the same periods in 2024, was slightly lower due to the repurchase of $10.0 million principal amount late in the second quarter of 2024.
The following table presents the components of the yield earned on our AFS securities portfolio as a percentage of our average amortized cost of securities for the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| Gross yield/stated coupon | 5.3 | % | 4.9 | % | 5.1 | % | 4.9 | % | |||||||||||||||
|
Net (premium amortization) discount accretion
|
(0.3) | % | (0.1) | % | (0.2) | % | (0.2) | % | |||||||||||||||
| Net yield | 5.0 | % | 4.8 | % | 4.9 | % | 4.7 | % | |||||||||||||||
Net Servicing Income
The following table presents the components of net servicing income for the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
| Servicing fee income | $ | 124,409 | $ | 139,361 | $ | 250,580 | $ | 273,681 | |||||||||||||||
| Ancillary and other fee income | 5,201 | 4,435 | 10,295 | 8,292 | |||||||||||||||||||
| Float income | 28,744 | 32,219 | 54,338 | 60,375 | |||||||||||||||||||
| Total servicing income | 158,354 | 176,015 | 315,213 | 342,348 | |||||||||||||||||||
| Total servicing costs | 2,386 | 4,475 | 5,583 | 11,594 | |||||||||||||||||||
| Net servicing income | $ | 155,968 | $ | 171,540 | $ | 309,630 | $ | 330,754 | |||||||||||||||
The decrease in total servicing income for the three and six months ended June 30, 2025, as compared to the same periods in 2024, was primarily due to lower servicing fee income on a smaller MSR portfolio as a result of run-off and sales as well as lower float income due to the lower interest rate environment, partially offset by higher ancillary and other fee income from subservicing.
As previously discussed, RoundPoint handles substantially all servicing functions for the mortgage loans underlying our MSR. For the remaining portion of our serviced mortgage assets, we contract with appropriately licensed third-party subservicers to handle the servicing functions in the name of the subservicer. All third-party subservicing costs and other servicing expenses directly related to our MSR portfolio are included within the servicing costs line item on our consolidated statements of comprehensive (loss) income. All servicing-related general and administrative expenses incurred by RoundPoint are included within the compensation and benefits and other operating expenses line items on our consolidated statements of comprehensive (loss) income. The decrease in servicing costs during the three and six months ended June 30, 2025, as compared to the same periods in 2024, was the result of lower third-party deboarding and subservicing fees incurred.
Loss On Investment Securities
The following table presents the components of loss on investment securities for the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
| Proceeds from sales | $ | 3,771,764 | $ | 472,323 | $ | 5,101,348 | $ | 805,405 | |||||||||||||||
| Amortized cost of securities sold | (3,804,924) | (494,316) | (5,167,984) | (837,561) | |||||||||||||||||||
| Total realized losses on sales | (33,160) | (21,993) | (66,636) | (32,156) | |||||||||||||||||||
| Reversal of (provision for) credit losses | 116 | (171) | 22 | (251) | |||||||||||||||||||
| Other | 214 | (273) | 1,055 | (1,005) | |||||||||||||||||||
|
Loss on investment securities
|
$ | (32,830) | $ | (22,437) | $ | (65,559) | $ | (33,412) | |||||||||||||||
In the ordinary course of our business, we make investment decisions and allocate capital in accordance with our views on the changing risk/reward dynamics in the market and in our portfolio. We do not expect to sell assets on a frequent basis, but may sell assets to reallocate capital into new assets that we believe have higher risk-adjusted returns.
We use a discounted cash flow method to estimate and recognize an allowance for credit losses on AFS securities. Subsequent adverse or favorable changes in expected cash flows are recognized immediately in earnings as a provision for or reversal of provision for credit losses (within loss on investment securities).
The majority of the "other" component of loss on investment securities is related to changes in unrealized gains (losses) on certain AFS securities for which we have elected the fair value option. Fluctuations in this line item are primarily driven by the reclassification of unrealized gains and losses to realized gains and losses upon sale, as well as changes in fair value assumptions.
Loss On Servicing Asset
The following table presents the components of loss on servicing asset for the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
|
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model
|
$ | 27,357 | $ | 40,173 | $ | 43,373 | $ | 99,953 | |||||||||||||||
|
Changes in fair value due to realization of cash flows (runoff)
|
(63,251) | (62,990) | (115,488) | (111,758) | |||||||||||||||||||
|
Losses on sales
|
(8) | (40) | (8) | (40) | |||||||||||||||||||
|
Loss on servicing asset
|
$ | (35,902) | $ | (22,857) | $ | (72,123) | $ | (11,845) | |||||||||||||||
The increase in loss on servicing asset for the three and six months ended June 30, 2025, as compared to the same periods in 2024, was driven by lower favorable change in valuation assumptions used in the fair valuation of MSR, primarily due to a lower average portfolio balance, and slightly higher portfolio run-off as a result of the lower interest rate environment.
(Loss) Gain On Interest Rate Swap And Swaption Agreements
The following table summarizes the net interest spread and gains and losses associated with our interest rate swap and swaption positions recognized during the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
| Net interest spread | $ | 6,382 | $ | 15,015 | $ | 12,357 | $ | 29,310 | |||||||||||||||
|
Early termination, agreement maturation and option expiration (losses) gains
|
(30,298) | 2,388 | (3,712) | 16,278 | |||||||||||||||||||
|
Change in unrealized (loss) gain on interest rate swap and swaption agreements
|
(29,034) | 4,609 | (160,383) | 74,934 | |||||||||||||||||||
|
(Loss) gain on interest rate swap and swaption agreements
|
$ | (52,950) | $ | 22,012 | $ | (151,738) | $ | 120,522 | |||||||||||||||
Net interest spread recognized for the accrual and/or settlement of the net interest income associated with our interest rate swaps results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or a floating interest rate (OIS or SOFR) on positions held to economically hedge/mitigate portfolio interest rate exposure (or duration) risk. We may elect to terminate certain swaps and swaptions to align with our investment portfolio, agreements may mature or options may expire resulting in full settlement of our net interest spread asset/liability and the recognition of realized gains and losses, including early termination penalties. The change in fair value of interest rate swaps and swaptions during the three and six months ended June 30, 2025 and 2024 was a result of changes to floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates. Swaps and swaptions are used for purposes of hedging our interest rate exposure, and therefore, their unrealized valuation gains and losses (excluding the reversal of unrealized gains and losses to realized gains and losses upon termination, maturation or option expiration) generally offset a portion of the unrealized losses and gains recognized on our Agency RMBS AFS portfolio, which are recorded either directly to stockholders' equity through other comprehensive income (loss) or to loss on investment securities, in the case of certain AFS securities for which we have elected the fair value option.
(Loss) Gain On Other Derivative Instruments
The following table provides a summary of the total net gains (losses) recognized on other derivative instruments we hold for purposes of both hedging and non-hedging activities, principally TBAs, futures, options on futures, and inverse interest-only securities during the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
|
TBAs
|
$ | (10,757) | $ | (27,331) | $ | 18,721 | $ | (86,511) | |||||||||||||||
|
Futures
|
(25,152) | 26,678 | (54,915) | 135,614 | |||||||||||||||||||
|
Options on futures
|
(105) | - | (124) | (127) | |||||||||||||||||||
|
Inverse interest-only securities
|
4,757 | (97) | 6,509 | (2,127) | |||||||||||||||||||
|
(Loss) gain on other derivative instruments
|
$ | (31,257) | $ | (750) | $ | (29,809) | $ | 46,849 | |||||||||||||||
For further details regarding our use of derivative instruments and related activity, refer to Note 9 - Derivative Instruments and Hedging Activitiesto the consolidated financial statements, included in this Quarterly Report on Form 10-Q.
Gain (Loss) On Mortgage Loans Held-For-Sale
The following table provides a summary of the total net realized and unrealized gains (losses) recognized on mortgage loans held-for-sale and the related derivative instruments used to manage exposure to market risks primarily associated with fluctuations in interest rate risks related to our origination pipeline during the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
|
Mortgage loans held-for-sale
|
$ | 769 | $ | - | $ | 1,294 | $ | (3) | |||||||||||||||
|
TBAs
|
(82) | - | (82) | - | |||||||||||||||||||
|
Interest rate lock commitments
|
171 | - | 483 | - | |||||||||||||||||||
|
Forward mortgage loan sale commitments
|
25 | - | (143) | - | |||||||||||||||||||
|
Gain (loss) on mortgage loans held-for-sale
|
$ | 883 | $ | - | $ | 1,552 | $ | (3) | |||||||||||||||
Late in the second quarter of 2024, RoundPoint began operating its in-house, direct-to-consumer originations platform. Prior to the launch of originations, our mortgage loans held-for-sale consisted of a small number of loans purchased from the collateral underlying our MSR.
Operating Expenses
The following table presents the components of operating expenses for the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (dollars in thousands) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
| Compensation and benefits: | |||||||||||||||||||||||
|
Non-cash equity compensation expenses
|
$ | 1,932 | $ | 1,643 | $ | 8,455 | $ | 7,726 | |||||||||||||||
|
All other compensation and benefits
|
19,537 | 19,601 | 39,603 | 40,047 | |||||||||||||||||||
|
Total compensation and benefits
|
$ | 21,469 | $ | 21,244 | $ | 48,058 | $ | 47,773 | |||||||||||||||
| Other operating expenses: | |||||||||||||||||||||||
|
Certain operating expenses (1)
|
$ | 2,754 | $ | (624) | $ | 2,860 | $ | 574 | |||||||||||||||
|
All other operating expenses
|
18,553 | 18,323 | 38,952 | 38,177 | |||||||||||||||||||
| Total other operating expenses | $ | 21,307 | $ | 17,699 | $ | 41,812 | $ | 38,751 | |||||||||||||||
|
Annualized operating expense ratio
|
8.5 | % | 7.0 | % | 8.6 | % | 7.8 | % | |||||||||||||||
|
Annualized operating expense ratio, excluding non-cash equity compensation and certain operating expenses (1)
|
7.6 | % | 6.8 | % | 7.5 | % | 7.0 | % | |||||||||||||||
____________________
(1)Certain operating expenses predominantly consists of expenses incurred in connection with the Company's ongoing litigation with PRCM Advisers, as discussed within Note 14 to the consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q.
The increase in total operating expenses during the three and six months ended June 30, 2025, as compared to the same periods in 2024, was primarily driven by higher expenses incurred in connection with the Company's ongoing litigation with PRCM Advisers, as well as slightly higher compensation and benefits and other operating expenses. The increase in our annualized operating expense ratios was primarily driven by the lower average equity balances in the denominator as a result of comprehensive losses incurred and dividends declared during the three and six months ended June 30, 2025.
Loss Contingency Accrual
As discussed within Note 14 to the consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q, we recorded a loss contingency accrual of $199.9 million for both the three and six months ended June 30, 2025 in connection with our ongoing litigation with PRCM Advisers. This amount is reflective of the $139.8 million termination fee that the Company believes would have been payable to PRCM Advisers for termination on the basis of unfair compensation pursuant to the Management Agreement, plus applicable pre-judgment interest on such termination fee that has accrued through June 30, 2025.
Income Taxes
During the three and six months ended June 30, 2025, we recognized a provision for income taxes of $1.7 million and $2.1 million, respectively, which was primarily due to net income from MSR servicing and mortgage loan origination activities, partially offset by net losses recognized on MSR and operating expenses incurred in our TRSs. During the three and six months ended June 30, 2024, we recognized a provision for income taxes of $14.2 million and $26.2 million, respectively, which was primarily due to net income from MSR servicing activities and net gains recognized on MSR, partially offset by operating expenses incurred in our TRSs.
Other Comprehensive Income (Loss)
The following table provides a summary of the components of other comprehensive income (loss) during the three and six months ended June 30, 2025 and 2024:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (in thousands) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
|
Unrealized gains (losses) on available-for-sale securities
|
$ | 33,113 | $ | (53,466) | $ | 143,333 | $ | (163,124) | |||||||||||||||
|
Realized losses on sales of available-for-sale securities reclassified to loss on investment securities
|
17,360 | 9,393 | 64,312 | 15,973 | |||||||||||||||||||
|
Other comprehensive income (loss)
|
$ | 50,473 | $ | (44,073) | $ | 207,645 | $ | (147,151) | |||||||||||||||
With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option and securities with an allowance for credit losses, are recorded directly to stockholders' equity through other comprehensive income (loss). Additionally, we reclassify unrealized gains and losses on AFS securities in accumulated other comprehensive loss to net (loss) income upon the recognition of any realized gains and losses on sales as individual securities are sold. Fluctuations in other comprehensive income (loss) are driven by changes in fair value assumptions and the reclassification of unrealized gains and losses to realized gains and losses upon sale.
Financial Condition
The following table presents significant components of our balance sheet as of June 30, 2025 and December 31, 2024:
| (in thousands) |
June 30, 2025 |
December 31, 2024 |
||||||||||||
| Balance Sheet Data: | ||||||||||||||
| Available-for-sale securities | $ | 8,320,757 | $ | 7,371,711 | ||||||||||
| Mortgage servicing rights | $ | 3,015,643 | $ | 2,994,271 | ||||||||||
| Total assets | $ | 12,959,138 | $ | 12,204,319 | ||||||||||
| Repurchase agreements | $ | 8,782,622 | $ | 7,805,057 | ||||||||||
| Revolving credit facilities | $ | 1,011,871 | $ | 1,020,171 | ||||||||||
|
Senior notes
|
$ | 110,867 | $ | - | ||||||||||
| Convertible senior notes | $ | 260,944 | $ | 260,229 | ||||||||||
| Total stockholders' equity | $ | 1,886,026 | $ | 2,122,509 | ||||||||||
Available-for-Sale Securities, at Fair Value
The majority of our AFS investment securities portfolio is comprised of fixed rate Agency mortgage-backed securities backed by single-family and multi-family mortgage loans. We also hold $3.4 million in tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency securities. All of our P&I Agency RMBS AFS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government. The majority of our Agency RMBS portfolio is comprised of whole pool certificates.
The table below summarizes certain characteristics of our Agency RMBS AFS at June 30, 2025:
| June 30, 2025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands, except purchase price) | Principal/ Current Face | Net (Discount) Premium | Amortized Cost | Allowance for Credit Losses | Unrealized Gain | Unrealized Loss | Carrying Value | Weighted Average Coupon Rate | Weighted Average Purchase Price | ||||||||||||||||||||||||||||||||||||||||||||
| P&I securities | $ | 8,378,925 | $ | 28,697 | $ | 8,407,622 | $ | - | $ | 28,749 | $ | (140,569) | $ | 8,295,802 | 5.30 | % | $ | 101.24 | |||||||||||||||||||||||||||||||||||
| Interest-only securities | 390,314 | 25,111 | 25,111 | (1,894) | 528 | (2,239) | 21,506 | 2.05 | % | $ | 27.18 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 8,769,239 | $ | 53,808 | $ | 8,432,733 | $ | (1,894) | $ | 29,277 | $ | (142,808) | $ | 8,317,308 | |||||||||||||||||||||||||||||||||||||||
Mortgage Servicing Rights, at Fair Value
One of our wholly owned subsidiaries, TH MSR Holdings, has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of residential mortgage loans. TH MSR Holdings acquires MSR from third-party originators through flow and bulk purchases, as well as through the recapture of MSR on loans in its MSR portfolio that refinance. Beginning in 2024, TH MSR Holdings also acquires MSR on loans originated by its subsidiary, RoundPoint, through purchases and recapture of MSR. As of both June 30, 2025 and December 31, 2024, our MSR had a fair market value of $3.0 billion.
As of June 30, 2025, our MSR portfolio included MSR on 805,261 loans with an unpaid principal balance of approximately $198.8 billion. The following table summarizes certain characteristics of the loans underlying our MSR by gross weighted average coupon rate types and ranges at June 30, 2025:
| June 30, 2025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Number of Loans | Unpaid Principal Balance | Weighted Average Gross Coupon Rate | Weighted Average Current Loan Size | Weighted Average Loan Age (months) | Weighted Average Original FICO | Weighted Average Original LTV | 60+ Day Delinquencies | 3-Month CPR | Net Servicing Fee (bps) | |||||||||||||||||||||||||||||||||||||||||||||||||
| 30-Year Fixed: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ≤ 3.25% | 287,813 | $ | 86,951,024 | 2.8 | % | $ | 358 | 53 | 768 | 71.0 | % | 0.4 | % | 4.7 | % | 25.1 | |||||||||||||||||||||||||||||||||||||||||||
| > 3.25 - 3.75% | 141,331 | 35,098,164 | 3.4 | % | 316 | 65 | 753 | 74.1 | % | 0.9 | % | 5.8 | % | 25.2 | |||||||||||||||||||||||||||||||||||||||||||||
| > 3.75 - 4.25% | 98,433 | 19,641,329 | 3.9 | % | 264 | 87 | 751 | 75.8 | % | 1.1 | % | 6.3 | % | 25.5 | |||||||||||||||||||||||||||||||||||||||||||||
| > 4.25 - 4.75% | 54,721 | 9,745,229 | 4.4 | % | 256 | 86 | 739 | 77.3 | % | 1.7 | % | 6.6 | % | 25.3 | |||||||||||||||||||||||||||||||||||||||||||||
| > 4.75 - 5.25% | 38,463 | 8,889,936 | 5.0 | % | 349 | 55 | 747 | 78.9 | % | 1.7 | % | 6.7 | % | 25.2 | |||||||||||||||||||||||||||||||||||||||||||||
| > 5.25% | 63,532 | 19,870,185 | 6.2 | % | 417 | 27 | 751 | 79.7 | % | 1.6 | % | 9.3 | % | 27.1 | |||||||||||||||||||||||||||||||||||||||||||||
| 684,293 | 180,195,867 | 3.6 | % | 340 | 58 | 759 | 73.8 | % | 0.9 | % | 5.7 | % | 25.4 | ||||||||||||||||||||||||||||||||||||||||||||||
| 15-Year Fixed: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ≤ 2.25% | 21,638 | 4,957,310 | 2.0 | % | 272 | 50 | 777 | 59.1 | % | 0.2 | % | 4.4 | % | 25.0 | |||||||||||||||||||||||||||||||||||||||||||||
| > 2.25 - 2.75% | 36,452 | 6,672,905 | 2.4 | % | 228 | 53 | 772 | 58.9 | % | 0.3 | % | 5.6 | % | 25.0 | |||||||||||||||||||||||||||||||||||||||||||||
| > 2.75 - 3.25% | 30,529 | 3,518,484 | 2.9 | % | 170 | 76 | 765 | 61.4 | % | 0.3 | % | 7.8 | % | 25.3 | |||||||||||||||||||||||||||||||||||||||||||||
| > 3.25 - 3.75% | 16,408 | 1,359,595 | 3.4 | % | 132 | 89 | 755 | 64.0 | % | 0.4 | % | 9.8 | % | 25.4 | |||||||||||||||||||||||||||||||||||||||||||||
| > 3.75 - 4.25% | 7,653 | 554,567 | 3.9 | % | 127 | 84 | 740 | 65.4 | % | 0.9 | % | 9.9 | % | 25.3 | |||||||||||||||||||||||||||||||||||||||||||||
| > 4.25% | 6,449 | 931,979 | 5.2 | % | 295 | 33 | 749 | 64.2 | % | 1.1 | % | 11.7 | % | 27.5 | |||||||||||||||||||||||||||||||||||||||||||||
| 119,129 | 17,994,840 | 2.7 | % | 222 | 59 | 769 | 60.3 | % | 0.3 | % | 6.4 | % | 25.2 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total ARMs | 1,839 | 631,904 | 5.1 | % | 454 | 39 | 766 | 71.3 | % | 0.5 | % | 12.1 | % | 25.3 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | 805,261 | $ | 198,822,611 | 3.5 | % | $ | 330 | 58 | 760 | 72.6 | % | 0.8 | % | 5.8 | % | 25.4 | |||||||||||||||||||||||||||||||||||||||||||
Financing
Our borrowings consist primarily of repurchase agreements, revolving credit facilities, warehouse lines of credit, senior notes and convertible senior notes. Repurchase agreements and revolving credit facilities are collateralized by our pledge of AFS securities, derivative instruments, MSR, mortgage loans held-for-sale, servicing advances and certain cash balances. Substantially all of our Agency RMBS are currently pledged as collateral for repurchase agreements. Additionally, a substantial portion of our MSR is currently pledged as collateral for repurchase agreements and revolving credit facilities, and a portion of our servicing advances have been pledged as collateral for revolving credit facilities. Warehouse lines of credit are collateralized by our pledge of mortgage loans for a period of up to 90 days or until they are sold to the GSEs or other third-party investors in the secondary market, typically within 60 days of origination. Substantially all of our funded mortgage loans held-for-sale are currently pledged as collateral for warehouse lines of credit. We have three repurchase facilities in place that are secured by VFNs issued in connection with our securitization of MSR, which are collateralized by portions of our MSR portfolio. Additionally, in May 2025, we issued senior notes due in 2030, which are unsecured and pay interest quarterly at a rate of 9.375% per annum. Finally, our convertible senior notes due January 2026 are unsecured and pay interest semiannually at a rate of 6.25% per annum.
At June 30, 2025, borrowings under repurchase agreements, revolving credit facilities, warehouse lines of credit, senior notes and convertible senior notes had the following characteristics:
| (dollars in thousands) | June 30, 2025 | |||||||||||||||||||
| Borrowing Type | Amount Outstanding | Weighted Average Borrowing Rate | Weighted Average Years to Maturity | |||||||||||||||||
| Repurchase agreements | $ | 8,782,622 | 4.74 | % | 0.2 | |||||||||||||||
| Revolving credit facilities | 1,011,871 | 7.36 | % | 1.7 | ||||||||||||||||
|
Warehouse lines of credit
|
9,275 | 6.31 | % | 0.2 | ||||||||||||||||
|
Senior notes
|
110,867 | 9.38 | % | 5.1 | ||||||||||||||||
|
Convertible senior notes
|
260,944 | 6.25 | % | 0.5 | ||||||||||||||||
| Total | $ | 10,175,579 | 5.09 | % | 0.4 | |||||||||||||||
| (dollars in thousands) | June 30, 2025 | |||||||||||||||||||
| Collateral Type | Amount Outstanding | Weighted Average Borrowing Rate | Weighted Average Haircut on Collateral Value | |||||||||||||||||
| Agency RMBS | $ | 7,938,891 | 4.48 | % | 3.6 | % | ||||||||||||||
| Non-Agency securities | 195 | 5.01 | % | 44.2 | % | |||||||||||||||
| Agency Derivatives | 53,536 | 4.84 | % | 16.3 | % | |||||||||||||||
|
Mortgage servicing rights
|
1,712,871 | 7.40 | % | 30.5 | % | |||||||||||||||
| Mortgage servicing advances | 89,000 | 6.99 | % | 13.2 | % | |||||||||||||||
|
Mortgage loans held-for-sale
|
9,275 | 6.31 | % | - | % | |||||||||||||||
|
Other (1)
|
371,811 | 7.18 | % | N/A | ||||||||||||||||
| Total | $ | 10,175,579 | 5.09 | % | 8.1 | % | ||||||||||||||
____________________
(1)Includes unsecured borrowings under senior notes and convertible senior notes. The senior notes are due August 2030, paying interest quarterly at a rate of 9.375% per annum on the aggregate principal amount, which was $115.0 million on June 30, 2025. The convertible senior notes are due January 2026 paying interest semiannually at a rate of 6.25% per annum on the aggregate principal amount, which was $261.9 million on June 30, 2025.
As of June 30, 2025, the debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and related servicing advances and mortgage loans held-for-sale, which includes unsecured borrowings under senior notes and convertible senior notes, was 5.4:1.0. Our Agency RMBS, given their liquidity and high credit quality, are eligible for higher levels of leverage, while MSR, with less liquidity and/or more exposure to prepayment risk, utilize lower levels of leverage. Generally, our debt-to-equity ratio is directly correlated to the composition of our portfolio; typically, the higher the percentage of Agency RMBS we hold, the higher our debt-to-equity ratio will be. However, in addition to portfolio mix, our debt-to-equity ratio is a function of many other factors, including the liquidity of our portfolio, the availability and price of our financing, the diversification of our counterparties and their available capacity to finance our assets, and anticipated regulatory developments. We may alter the percentage allocation of our portfolio among our target assets depending on the relative value of the assets that are available to purchase from time to time, including at times when we are deploying proceeds from offerings we conduct. We believe the current degree of leverage within our portfolio helps ensure that we have access to unused borrowing capacity, thus supporting our liquidity and the strength of our balance sheet.
The following table provides a summary of our borrowings under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, warehouse lines of credit, term notes payable, senior notes and convertible senior notes and our debt-to-equity ratios for the three months ended June 30, 2025, and the four immediately preceding quarters:
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| For the Three Months Ended | Quarterly Average | End of Period Balance | Maximum Balance of Any Month-End | End of Period Total Borrowings to Equity Ratio | End of Period Net Long (Short) TBA Cost Basis | End of Period Net Payable (Receivable) for Unsettled RMBS |
End of Period Economic Debt-to-Equity Ratio (1)
|
|||||||||||||||||||||||||||||||||||||
| June 30, 2025 | $ | 10,477,013 | $ | 10,175,579 | $ | 10,737,324 | 5.4:1.0 | $ | 3,009,819 | $ | 108,474 | 7.0:1.0 | ||||||||||||||||||||||||||||||||
| March 31, 2025 | $ | 9,995,726 | $ | 10,942,563 | $ | 10,942,563 | 5.1:1.0 | $ | 3,001,672 | $ | (643,896) | 6.2:1.0 | ||||||||||||||||||||||||||||||||
| December 31, 2024 | $ | 9,566,487 | $ | 9,087,489 | $ | 10,293,529 | 4.3:1.0 | $ | 4,493,055 | $ | 269,370 | 6.5:1.0 | ||||||||||||||||||||||||||||||||
| September 30, 2024 | $ | 10,028,325 | $ | 10,025,403 | $ | 10,061,801 | 4.6:1.0 | $ | 5,060,417 | $ | 85,366 | 7.0:1.0 | ||||||||||||||||||||||||||||||||
| June 30, 2024 | $ | 9,893,287 | $ | 9,973,593 | $ | 9,973,593 | 4.5:1.0 | $ | 4,950,762 | $ | - | 6.8:1.0 | ||||||||||||||||||||||||||||||||
____________________
(1)Defined as total borrowings under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, warehouse lines of credit, term notes payable, senior notes and convertible senior notes, plus implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity.
Equity
The following table provides details of changes in our stockholders' equity from March 31, 2025 to June 30, 2025:
| (in millions, except per share amounts) | Book Value | Common Shares Outstanding | Common Book Value Per Share | ||||||||||||||
|
Common stockholders' equity at March 31, 2025
|
$ | 1,525.0 | 104.0 | $ | 14.66 | ||||||||||||
| Net loss | (259.1) | ||||||||||||||||
| Other comprehensive income | 50.5 | ||||||||||||||||
| Comprehensive loss | (208.6) | ||||||||||||||||
| Dividends on preferred stock | (13.2) | ||||||||||||||||
| Comprehensive loss attributable to common stockholders | (221.8) | ||||||||||||||||
|
Dividends on common stock
|
(41.0) | ||||||||||||||||
| Other | 1.9 | 0.1 | |||||||||||||||
| Balance before capital transactions | 1,264.1 | 104.1 | |||||||||||||||
| Issuance of common stock, net of offering costs | 0.1 | - | |||||||||||||||
|
Common stockholders' equity at June 30, 2025
|
$ | 1,264.2 | 104.1 | $ | 12.14 | ||||||||||||
| Total preferred stock liquidation preference | 621.8 | ||||||||||||||||
|
Total stockholders' equity at June 30, 2025
|
$ | 1,886.0 | |||||||||||||||
Liquidity and Capital Resources
Our liquidity and capital resources are managed and forecasted on a daily basis. We believe this helps ensure that we have sufficient liquidity to absorb market events that could negatively impact collateral valuations and result in margin calls. We also believe that it gives us the flexibility to manage our portfolio to take advantage of market opportunities.
Our principal sources of cash consist of borrowings under repurchase agreements, revolving credit facilities, warehouse lines of credit, senior notes, convertible senior notes, payments of principal and interest we receive on our target assets, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our borrowings, to purchase our target assets, to make dividend payments on our capital stock, and to fund our operations. To the extent that we raise additional equity capital through capital market transactions, we anticipate using cash proceeds from such transactions to purchase our target assets and for other general corporate purposes. Such general corporate purposes may include the refinancing or repayment of debt, the repurchase or redemption of common and preferred equity securities, and other capital expenditures.
As of June 30, 2025, we held $657.8 million in cash and cash equivalents available to support our operations; $11.4 billion of AFS securities, MSR, mortgage loans held-for-sale and derivative assets held at fair value; and $10.2 billion of outstanding debt in the form of repurchase agreements, borrowings under revolving credit facilities, warehouse lines of credit, senior notes and convertible senior notes. During the three and six months ended June 30, 2025, the debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and related servicing advances and mortgage loans held-for-sale, which includes unsecured borrowings under senior notes and convertible senior notes, increased from 5.1:1.0 to 5.4:1.0 and from 4.3:1.0 to 5.4:1.0, respectively, which was predominantly driven by a decrease in total stockholders' equity as a result of comprehensive losses incurred and dividends declared during the three and six months ended June 30, 2025. During the three and six months ended June 30, 2025, our economic debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and related servicing advances and mortgage loans held-for-sale, which includes unsecured borrowings under senior notes and convertible senior notes, implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, increased from 6.2:1.0 to 7.0:1.0 and from 6.5:1.0 to 7.0:1.0, respectively.
As of June 30, 2025, we held approximately $5.3 million of unpledged Agency RMBS and $3.1 million of unpledged non-Agency securities. As a result, we had an overall estimated unused borrowing capacity on unpledged securities of approximately $6.3 million. As of June 30, 2025, we held approximately $81.3 million of unpledged MSR and $2.0 million of unpledged servicing advances. Overall, on June 30, 2025, we had $77.1 million unused committed and $760.0 million unused uncommitted borrowing capacity on MSR financing facilities, and $61.0 million in unused committed borrowing capacity on servicing advance financing facilities. As of June 30, 2025, we held approximately $0.4 million of unpledged mortgage loans and had $25.7 million unused committed borrowing capacity on our warehouse lines of credit and $50.0 million unused uncommitted borrowing capacity on our loan repurchase agreement. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided, insufficient collateral or the inability to meet lenders' eligibility requirements for specific types of asset classes. On a daily basis, we monitor and forecast our available, or excess, liquidity. Additionally, we frequently perform shock analyses against various market events to monitor the adequacy of our excess liquidity.
During the six months ended June 30, 2025, we did not experience any material issues accessing our funding sources. We expect ongoing sources of financing to be primarily repurchase agreements, revolving credit facilities, warehouse lines of credit, senior notes, convertible senior notes and similar financing arrangements. We plan to finance our assets with a moderate amount of leverage, the level of which may vary based upon the particular characteristics of our portfolio and market conditions.
As of June 30, 2025, we had master repurchase agreements in place with 34 counterparties (lenders), the majority of which are U.S. domiciled financial institutions, and we continue to evaluate additional counterparties to manage and optimize counterparty risk. Under our repurchase agreements, we are required to pledge additional assets as collateral to our lenders when the estimated fair value of the existing pledged collateral under such agreements declines and such lenders, through a margin call, demand additional collateral. Lenders generally make margin calls because of a perceived decline in the value of our assets collateralizing the repurchase agreements. This may occur following the monthly principal reduction of assets due to scheduled amortization and prepayments on the underlying mortgages, or may be caused by changes in market interest rates, a perceived decline in the market value of the investments and other market factors. To cover a margin call, we may pledge additional assets or cash. At maturity, any cash on deposit as collateral is generally applied against the repurchase agreement balance, thereby reducing the amount borrowed. Should the value of our assets suddenly decrease, significant margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.
In addition to our master repurchase agreements that fund our Agency and non-Agency securities, we have three repurchase facilities and two revolving credit facilities that provide short- and long-term financing for our MSR portfolio. We also have one revolving credit facility that provides long-term financing for our servicing advances, and one master repurchase agreement and one warehouse line of credit that provide short-term financing for our mortgage loans held-for-sale. A summary of our MSR, servicing advance and mortgage loan financing facilities is provided in the table below:
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(in thousands)
|
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| June 30, 2025 | ||||||||||||||||||||||||||||||||
|
Expiration Date (1)
|
Amount Outstanding |
Unused Committed Capacity (2)
|
Unused Uncommitted Capacity | Total Capacity | Eligible Collateral | |||||||||||||||||||||||||||
| March 31, 2027 | $ | 642,731 | $ | 7,269 | $ | 250,000 | $ | 900,000 | Mortgage servicing rights | |||||||||||||||||||||||
| March 8, 2027 | $ | 280,140 | $ | 69,860 | $ | 150,000 | $ | 500,000 |
Mortgage servicing rights (3)
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| May 22, 2026 | $ | 450,000 | $ | - | $ | 100,000 | $ | 550,000 |
Mortgage servicing rights (4)
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| October 26, 2026 | $ | 170,000 | $ | - | $ | 130,000 | $ | 300,000 |
Mortgage servicing rights (4)
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| November 21, 2025 | $ | 170,000 | $ | - | $ | 130,000 | $ | 300,000 |
Mortgage servicing rights (4)
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| June 14, 2026 | $ | 89,000 | $ | 61,000 | $ | - | $ | 150,000 | Mortgage servicing advances | |||||||||||||||||||||||
| August 19, 2025 | $ | 9,275 | $ | 25,725 | $ | - | $ | 35,000 | Mortgage loans held-for-sale | |||||||||||||||||||||||
| June 25, 2026 | $ | - | $ | - | $ | 50,000 | $ | 50,000 | Mortgage loans held-for-sale | |||||||||||||||||||||||
____________________
(1)The facilities are set to mature on the stated expiration date, unless extended pursuant to their terms.
(2)Represents unused capacity amounts to which commitment fees are charged.
(3)The revolving period of this facility ceases on March 8, 2026, at which time the facility starts a 12-month amortization period.
(4)These repurchase facilities are secured by the related VFNs issued by TH MSR Issuer Trust and collateralized by portions of our MSR portfolio.
We are subject to a variety of financial covenants under our lending agreements. The following represent the most restrictive financial covenants across our lending agreements as of June 30, 2025:
•Total indebtedness to tangible net worth must be less than 8.0:1.0. As of June 30, 2025, our total indebtedness to tangible net worth, as defined, was 5.7:1.0.
•Cash liquidity must be greater than $200.0 million. As of June 30, 2025, our liquidity, as defined, was $657.8 million.
•Net worth must be greater than the higher of $1.5 billion or 50% of the highest net worth during the 24 calendar months prior. As of June 30, 2025, 50% of the highest net worth during the 24 calendar months prior, as defined, was $1.1 billion and our net worth, as defined, was $1.9 billion.
We are also subject to additional financial covenants in connection with various other agreements we enter into in the normal course of our business. We intend to continue to operate in a manner which complies with all of our financial covenants.
The following table summarizes assets at carrying values that were pledged or restricted as collateral for the future payment obligations of repurchase agreements, revolving credit facilities and warehouse lines of credit at June 30, 2025 and December 31, 2024:
| (in thousands) |
June 30, 2025 |
December 31, 2024 |
|||||||||
| Available-for-sale securities, at fair value | $ | 8,207,842 | $ | 7,097,561 | |||||||
| Mortgage servicing rights, at fair value | 2,934,340 | 2,989,106 | |||||||||
| Mortgage loans held-for-sale, at fair value | 9,493 | 2,059 | |||||||||
| Restricted cash | 44,569 | 218,715 | |||||||||
| Due from counterparties | 38,221 | 25,231 | |||||||||
| Derivative assets, at fair value | 65,676 | 5,031 | |||||||||
| Other assets | 92,043 | 118,686 | |||||||||
| Total | $ | 11,392,184 | $ | 10,456,389 | |||||||
Although we generally intend to hold our target assets as long-term investments, we may sell certain of our assets in order to manage our interest rate risk and liquidity needs, to meet other operating objectives and to adapt to market conditions. Our Agency RMBS are generally actively traded and thus, in most circumstances, readily liquid. However, certain of our assets, including MSR and mortgage loans held-for-sale, are subject to longer trade timelines, and, as a result, market conditions could significantly and adversely affect the liquidity of our assets. Any illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises. Our ability to quickly sell certain assets, such as MSR and mortgage loans, may be limited by delays encountered while obtaining certain Agency approvals required for such dispositions and may be further limited by delays due to the time period needed for negotiating transaction documents, conducting diligence, and complying with Agency requirements regarding the transfer of such assets before settlement may occur. Consequently, even if we identify a buyer for our MSR and mortgage loans, there is no assurance that we would be able to quickly sell such assets if the need or desire arises.
In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we previously recorded our assets. Assets that are illiquid are more difficult to finance, and to the extent that we use leverage to finance assets that become illiquid, we may lose that leverage or have it reduced. Assets tend to become less liquid during times of financial stress, which is often the time that liquidity is most needed. As a result, our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidity constraints, which could adversely affect our results of operations and financial condition.
We cannot predict the timing and impact of future sales of our assets, if any. Because many of our assets are financed with repurchase agreements, revolving credit facilities and warehouse lines of credit, a significant portion of the proceeds from sales of our assets (if any), prepayments and scheduled amortization are used to repay balances under these financing sources.
The following table provides the maturities of our repurchase agreements, revolving credit facilities, warehouse lines of credit, senior notes and convertible senior notes as of June 30, 2025 and December 31, 2024:
| (in thousands) |
June 30, 2025 |
December 31, 2024 |
|||||||||
| Within 30 days | $ | 2,359,326 | $ | 2,377,824 | |||||||
| 30 to 59 days | 2,358,124 | 2,316,237 | |||||||||
| 60 to 89 days | 2,160,573 | 1,307,145 | |||||||||
| 90 to 119 days | 789,250 | 759,177 | |||||||||
| 120 to 364 days | 1,304,568 | 366,706 | |||||||||
| One to three years | 1,092,871 | 1,960,400 | |||||||||
| Three to five years | - | - | |||||||||
| Five to ten years | 110,867 | - | |||||||||
| Total | $ | 10,175,579 | $ | 9,087,489 | |||||||
For the three months ended June 30, 2025, our restricted and unrestricted cash balance increased approximately $100.6 million to $798.3 million at June 30, 2025. The cash movements can be summarized by the following:
•Cash flows from operating activities. For the three months ended June 30, 2025, operating activities increased our cash balances by approximately $99.1 million, primarily driven by our financial results for the quarter.
•Cash flows from investing activities. For the three months ended June 30, 2025, investing activities increased our cash balances by approximately $829.2 million, driven by net sales of and principal payments received on AFS securities and an increase in amounts due to counterparties, partially offset by purchases of MSR and net payments for derivative instruments and reverse repurchase agreements.
•Cash flows from financing activities. For the three months ended June 30, 2025, financing activities decreased our cash balance by approximately $827.8 million, primarily driven by net paydowns on our revolving credit facilities and the payment of dividends, partially offset by proceeds from the issuance of senior notes and net increases in revolving credit facility and warehouse line of credit financing.
Inflation
Our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors impact our performance far more than does inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Our financial statements are prepared in accordance with U.S. GAAP and dividends are based upon net ordinary income and capital gains as calculated for tax purposes; in each case, our results of operations and reported assets, liabilities and equity are measured with reference to historical cost or fair value without considering inflation.
Two Harbors Investment Corp. published this content on July 29, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on July 29, 2025 at 13:03 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]