Company: TWO-PC
Filing Date: 2025-10-28
Form Type: 10-Q
Source: 0001465740-25-000152
Chunk: 77

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-10-28
Form: 10-Q
Item: Item 1
Chunk 77
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 in the third quarter. While spreads contracted, on a levered basis and hedged with interest rate swaps, we believe returns remain attractive and supportive of our core strategy of low mortgage rate MSR paired with Agency RMBS. Furthermore, the expectation that the Fed will continue to cut rates has increased investor confidence that the downside risk has diminished, which in turn has dampened spread volatility. The MSR market continues to benefit from historically high levels of interest and participation from bank and non-bank originators and investors. Though mortgage rates have dropped, our low gross coupon rate MSR portfolio remains hundreds of basis points out of the money. The exposure that the portfolio has to higher rate, newer production servicing has grown very modestly, primarily through flow channel purchases. We intend to increase such exposure, given RoundPoint’s capability to refinance and recapture these loans. We continue to be optimistic that our portfolio construction of MSR paired with Agency RMBS should generate attractive risk-adjusted returns over a wide range of market scenarios.

The following table provides the carrying value of our investment portfolio by asset type:

(dollars in thousands)September 30, 2025December 31, 2024Agency RMBS$6,477,694 71.1 %$7,376,965 71.1 %Mortgage servicing rights2,626,706 28.9 %2,994,271 28.9 %Other3,284 — %3,734 — %Total$9,107,684 $10,374,970 

Prepayment speeds and volatility due to interest rates 

Our portfolio is subject to market risks, primarily interest rate risk and prepayment risk. We pair our MSR and interest-only Agency RMBS portfolio with a portion of our Agency pool portfolio to offset risk. During periods of decreasing interest rates with rising prepayment speeds, the market value of our Agency pools generally increases and the market value of our interest-only securities and MSR generally decreases. The inverse relationship occurs when interest rates rise and prepayments fall. Prepayment rates for the MSR portfolio increased to 6.0% over the three months ended September 30, 2025, which is consistent with the universe of mortgage loans with similar coupon rates, primarily due to stronger seasonal factors. In addition to changes in interest rates, changes in home price performance, key employment metrics and government programs, among other macroeconomic factors, can affect prepayment speeds. We believe our active portfolio management approach, including our asset selection process