Two, an investor and originator/servicer, recorded anticipated expenses from a dispute with a former external manager that weighed down second-quarter earnings as it navigated secondary market disruption.
The real estate investment trust and owner of Roundpoint Mortgage Servicing reported a more than $270 million net loss to common shareholders (over $257 million including preferred and $228 million on a comprehensive basis) due largely to
Chief Financial Officer William Dellal focused on the comprehensive figure in the company's earnings call, noting it would have been considerably lower at $21.9 million without the loss contingency accrual related to the legal costs. Two is focused on resolving that dispute, which could free it up to funnel more investment in housing finance business lines it revealed interest in during the call.
"No other potential losses are probable or estimable at this time, we are waiting for a trial date to be set to resolve certain claims related to intellectual property and on the issues of potential damages for the contract termination," Dellal said. "The parties have also agreed to participate in voluntary mediation."
The company previously known as Two Harbors Investment Corp. prior to
But executives at the company, which reported a mix of earnings under standard accounting principals and other measures, advised taking EAD results with a grain of salt given they aren't forward-looking. (Two also revised some past numbers for comparability with current ones.)
"The EAD calculations are asynchronous among assets in the portfolio because it depends on the yield on which it was on the day that it was purchased," Greenberg said.
The company's stock was trading 1 to 2 percentage points lower on the day after the Tuesday morning call at around $10 per share
Analysts at Keefe, Bruyette & Woods had said they expected a "neutral reaction" to the earnings result despite the legal costs, given an "attractive" stock price and some comparable metrics relative to peers.
Challenges and opportunities in market disruption
Tariff policy uncertainty that had an impact on markets for servicing rights and agency residential mortgage-backed securities assets the company invests in also had a role in shaping results, its outlook and business strategies.
"We utilized leverage judiciously and preserved ample liquidity, which allowed us to navigate these periods of heightened market volatility not seen since last October," President and CEO Bill Greenberg said during the call.
While the company exercised some caution around the degree of risk it took on, it did also identify opportunities during the quarter related to the steepening of the yield curve that "continues to support attractive opportunities for RMBS and MSR portfolios," he said.
"Spreads for agency RMBS remain historically wide, and offer good relative value," Chief Investment Officer Nick Letica said in the company's earnings release.
The sum of GAAP net interest expense and net servicing income before operating costs was higher in the second quarter by $3.1 million driven by an increase in the agency RMBS portfolio and higher float income on MSR, Dellal said.
"This was partially offset by lower servicing fee income from MSR, portfolio runoff and slightly higher financing costs," he added.
The company also reported that it settled purchases of servicing rights with an unpaid principal balance of $6.6 billion during the quarter through bulk and flow acquisitions.
Expansion in originations and other business lines
Two funded $48.6 million UPB in primary mortgages, up from $29 million the previous quarter and expanded its product mix and options.
"Although starting from a low base, this increase of 68% outpaced the overall trend in mortgage originations, which saw funded loans rising nationwide 16% quarter over quarter," Greenberg said. "We are encouraged by the growth in our first-lien originations, despite the fact that most of our portfolio does not have an economic incentive to move or refinance"
The company also brokered $44 million in second liens during the period, and began funding the home equity products in its own name. It may hold, sell or securitize the loans it holds, Greenberg said.
In response to questions from analysts about derivative investments mentioned in the context of earnings, Letica noted that this stems from the addition of a team member earlier in the year to focus on this sector and has primarily involved growth in inverse interest-only securities.
"I think we may have allocated about $50 million invested in that sector, but it's still under 5% of the securities capital. So it's still a small component of the book," he said.
