Two Harbors misses estimates as UWM deal nears

As Two Harbors Investment moves toward its sale to UWM Holdings, the mortgage REIT posted another quarterly GAAP loss and fell short of Wall Street's earnings expectations, even as results improved sharply from a settlement-driven stumble earlier in the year.  

The net loss of $1.3 million was much improved from the third quarter loss of $141.2 million; the prior period loss included the costs of a $375 million settlement with former manager Pine River. But for the fourth quarter of 2024, Two, the brand the company operates under, made $265 million.

For the full year, Two lost $507.1 million versus net income of $251.7 million during 2024. As of 12:30 on Tuesday, Two was trading at $12.10 per share, up $0.24 on the day; its range was $11.94 to $12.67. Meanwhile UWM was at $5.22 per share, up $0.09, with a range between $5.17 and $5.49

Both were above the price when the deal was announced, $10.84 for Two and $4.81 for UWM.

"Given the pending merger, we expect shares of Two will largely trade in line with shares of UWM given the all-stock nature of the deal," Keefe, Bruyette & Woods analyst Bose George said in a wrap on the results.

As measured by earnings available for distribution, a metric used by real estate investment trusts, at $0.26 per share, it was below the KBW expectations of $0.32 per share and consensus estimates of $0.37, George's initial post-earnings note commented.

"We note that the company's earnings metrics do not always tie very well with our model," George said in a flash note. It did generate an economic return of 3.9% for the fourth quarter.

"Two meaningfully lowered its operating EPS target range given the smaller capital base, and adjusted its [return on equity] potential to $0.16-0.31 a quarter (5.8-11.1% ROE) from an ROE potential of 9.5-15.2% ($0.26-0.42 a quarter)," George said.

Management comments on the UWM transaction

During the earnings call, Bill Greenberg, president and CEO gave some additional color for Two's reasons for agreeing to be acquired. The company brought the servicing function in-house through its acquisition of Roundpoint in August 2022 from Freedom. Post-Covid, the need for servicing defense through recapture has become more apparent, which is why Two started a direct-to-consumer platform in 2024.

"However, in 2025, the mortgage finance landscape shifted again with scale becoming more important than ever," Greenberg said. "It became clear to us that in order to succeed and compete effectively, our origination effort needed to be much, much bigger."

This is where UWM, the wholesaler that is currently the largest originator in the country, came in. The deal doubles the size of its MSR portfolio to a pro forma $400 billion, Greenberg said.

"UWM in turn, also benefits from our expertise in capital markets and asset management, and they can leverage Roundpoint's best-in-class and low-cost servicing capabilities," he continued. "In many ways, this transaction is the culmination of the business plan that we've been aiming at for some time."

How GSE securities purchases help Two

For the first quarter, Greenberg noted that Two's mortgage assets continued to outperform, driven by increased purchases of securities from the government-sponsored enterprises, which were boosted by announcements of additional buys from the Trump Administration.  

"In situations like this, we take the administration's clear desire for lower mortgage rates at face value, and we recognize the possibility that they will ultimately succeed and create increased mortgage and origination activity in 2026," he said.

Greenberg then addressed a question he says he gets from the company's investors on whether it will liquidate its own MSR portfolio after the merger.

"In the short term, the answer is that we intend to manage our business in the ordinary course," he said. "Looking further out, I would say that while no decisions have been made yet, we will be thoughtful about how we proceed."

Greenberg could see the company selling some or all of these assets over time, while at the same time, it has "other paths" where the combined UWM-Two could have more than its existing TBA and specified pool positions.

Roundpoint's originations and servicing activity

The direct-to-consumer origination business funded $94 million in first and second lien loans, 90% increase over the third quarter; it also brokered $58.5 million in second liens during the fourth quarter, Greenberg said.

For the full year, it produced $221.1 million and brokered $198.7 million.

On the servicing side, Two added $399.1 million in unpaid principal balance through flow-sale acquisitions and recapture during the fourth quarter. It also sold $9.6 billion of MSRs on a subservicing-retained basis.

As of Dec. 31, it serviced $162.4 billion, down from $175.8 billion three months prior. This total does not include $40.5 billion of subservicing, which is up from $30.2 billion during the same time frame.

Two had a fair value loss on its MSRs of $65.2 million, compared with $104.9 million in the third quarter.

"Roughly 3% of Two's MSR UPB remains in the money to refinance with rates at roughly 6.25%," George commented. "Prepayment speeds within its agency RMBS portfolio increased to 8.6% from 8.3% in 3Q."