Two Harbors sells nonagency MBS, refocuses on agency market

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Two Harbors Investment Corp, a real estate investment trust, sold the bulk of its nonagency mortgage-backed securities portfolio to eliminate the risk of “significant” margin calls in a particularly volatile market.

"In these unprecedented times, we remain acutely focused on managing our portfolio and risk positioning to benefit our stockholders over the long-term," Thomas Siering, Two Harbors' president and CEO, said in a press release issued Wednesday afternoon. "The sale of substantially all of our nonagencies demonstrates how we can actively respond to changing economic conditions to reduce risk in our portfolio."

Two Harbors would consider re-entering the private market for securitized single-family home loans in the future, Siering added.

"We have the expertise in place in mortgage credit should the opportunity come about to again be active in that market," he said.

Two Harbors will focus on agency MBS and mortgage servicing rights for the time being. The Federal Reserve is supporting agency MBS, and its escalating efforts to do so appears to have soothed investor worries this week. (On Thursday the Fed also announced new support for the agency commercial mortgage-backed securities market that could also help some REITs struggling with illiquidity in that market.)

The bulk of Two Harbors' portfolio as of year-end 2019 was in agency MBS, followed by net long TBA positions — a form of derivative contract that benefits if prices in the MBS market rise. Nonagencies made up nearly 9% of its portfolio at that time and MSRs represented just under 5% of its holdings.

The REIT's stock price improved in early trading Thursday, opening the day at $5.10 per share. On Wednesday, its closing stock price was $4.68.

Some commercial funders serving the mortgage business have been pulling back from the nonagency market due to market volatility stemming from the spread of the coronavirus.

A division of Flagstar Bank that lends to other mortgage companies, for example, largely ceased funding new private loans made outside the qualified-mortgage definition that limits ability-to-repay liability. Flagstar also slightly curtailed some funding it provides to the Federal Housing Administration market.

Several mortgage REITs struggled with margin calls as a result of market volatility.

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