Two Harbors' Q4 2024 Earnings Call: Contradictions in Leverage, MBS Spreads, and MSR Strategy

These are the key contradictions discussed in Two Harbors Investment Corp.'s latest 2024Q4 earnings call, specifically including: Leverage Impact on Earnings Power, Agency MBS Spreads Outlook, and MSR Allocation Strategy:



Book Value and Economic Returns:
- Two Harbors' book value at December 31 was $14.47 per common share, with a 0.0% quarterly economic return. For the full year of 2024, they generated a 7.0% total economic return on book value.
- The flat quarterly return is due to a fourth quarter common stock dividend of $0.45 per share, while the full-year return reflects the company's focus on hedged MSR, which provides stable cash flows regardless of short-term interest rate fluctuations.

Interest Rate and Mortgage Rate Environment:
- The 10-year treasury yield went up by 79 basis points to finish at 4.57%, while the two-year increased by 60 basis points to 4.24%, deepening the yield curve by 19 basis points.
- The Fed's data-dependent policy and possible short-term rate declines do not necessarily correlate to declines in longer-term treasury or mortgage rates, which are expected to remain above 6%, benefiting MSR portfolios.

MSR and Securitization Activity:
- At year-end, Two Harbors serviced $212 billion UPB of MSR across 861,000 loans, with $11.2 billion UPB serviced for third-party clients.
- The company benefited from integrating RoundPoint, improving economics due to lower costs and increased revenue streams from servicing their own MSR portfolio.

RMBS and Spread Dynamics:
- RMBS spreads remained wide on a nominal basis, with the nominal spread on TBA current coupon finishing 117 basis points wider, while the option-adjusted spread ended 23 basis points wider.
- The widening reflects the shift from approximately a 5% current coupon at the start of the quarter to between 5.5s and 6s by quarter end, indicating lower demand for lower-coupon securities.