As they put it in their recent second-quarter earnings call, if you are going to participate in the mortgage market as a real estate investment trust, you want to have all the options available you can within your core competencies.
As recent history has shown, when it comes to agency mortgage-backed securities, asset values in the sector can be volatile, particularly with the Federal Reserve in the market. So diversification can help.
And given the not inconsiderable time, resources and commitment needed for many industry endeavors—particularly in today’s regulatory environment—one has to show some foresight in this area in order to have multiple options on hand when they are needed.
Thus, Two Harbors Investment Corp.’s jumbo securitization effort is just one strategy the hybrid real estate investment trust, which invests in both agency and nonagency mortgage-backed securities, has been pursuing.
That is not to say jumbo securitization is not a key strategy for Two Harbors Investment Corp.
Thomas Siering, Two Harbors Investment Corp.’s president and chief executive officer, said it could be quite fruitful as the government reduces its footprint.
And the company has been working toward it for some time.
It earlier participated in a deal with Credit Suisse and just recently put one together under its own auspices, with more planned for the future as market conditions allow.
“We believe the private sector is necessary to support the U.S. housing market going forward,” said Siering, noting that he sees progress being made on this count in Freddie Mac’s recent sale of credit risk.
However, Two Harbors Investment Corp. is not putting all of its eggs in this basket.
The company also has been working toward other efforts its executives said draw on its core competencies in managing prepayment, credit and interest rate risk.
It has been moving toward possibly securitizing credit sensitive assets, and also recently purchased Matrix Financial along with a small servicing portfolio, with the aim of becoming an acquirer of mortgage servicing rights.
Siering said at the time of the earnings call the company had made at least two small bulk mortgage servicing rights purchases in July and has been engaged in negotiations for other bulk/flow arrangements.
There could be “significant deal flow” in this area, primarily in terms of mini-bulk/flow arrangements, said Two Harbors’ chief investment officer Bill Roth.
Credit sensitive loan investments also are potentially attractive, he said, because they could be an alternative to legacy residential mortgage-backed securities investments.
When asked when the company might be able to execute on its credit-sensitive loan strategy, executives noted that while there have been deals getting done in this market, they said it is not something they would describe as imminent and noted that it requires substantially more effort than a jumbo securitization.
Two Harbors Investment Corp. chief financial officer Brad Farrell said the company in addition to pursuing these strategies is keeping close tabs on their potential risks.
It does this by keeping an eye out for risks such as potential repo market concerns, as well as keeping tracking credit default swap spreads and geographic exposures that can be indicators of risk.