Company: TWO-PC
Filing Date: 2025-10-28
Form Type: 10-Q
Source: 0001465740-25-000152
Chunk: 76

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-10-28
Form: 10-Q
Item: Item 1
Chunk 76
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 by 10 basis points and back to just about its average level over the past 10 years. RMBS spreads responded very positively to the expectation of further Fed rate cuts and the decline in volatility. During the third quarter, the nominal spread for current coupon RMBS tightened by 26 basis points to 144 basis points to the swap curve, while option-adjusted spreads finished 14 basis points tighter at 67 basis points. Nominal and option-adjusted spreads ended the quarter 22 and 8 basis points tighter than year-to-date averages, respectively. Hedged RMBS performance was positive across the 30-year coupon stack, with the best performance concentrated in the “belly” coupons, such as 4.5% and 5.0%. The excess return of the Bloomberg U.S. Mortgage Backed Securities Index was a positive 82 basis points, the best since the fourth quarter of 2023.

During the three months ended September 30, 2025, primary mortgage rates dropped to their lowest levels of 2025, finishing the quarter at around 6.25%, aided by the drop in U.S. Treasury rates as well as the strong performance of current coupon RMBS spreads and firm primary-secondary mortgage spreads. Interest rates for adjustable-rate mortgage loans have also become more appealing as the swap curve has steepened. Additionally, advances in technology have allowed for faster mortgage loan closings. As a result, refinancing speeds for higher coupon cohorts increased in September, in some cases by as much as 45% on a month/month basis. We expect that if mortgage rates remain at about this level, speeds for refinanceable mortgages will continue to pick up.

 Our MSR portfolio prepaid at an overall speed of 6.0% in the third quarter, up just 0.2 percentage points compared to the second quarter, reflecting the low aggregate mortgage rate of the portfolio. At this level of mortgage rates, prepayment speeds for our MSR portfolio are driven overwhelmingly by housing turnover rates rather than refinancings. Though the housing market is showing a moderate degree of improvement as a result of the three-year low in primary mortgage rates (home sales have increased approximately 10% on a year-over-year basis and sellers have been cutting prices), turnover rates continue to run at historically low levels. 

RMBS funding markets remained stable and available during throughout the quarter, with repurchase spreads at SOFR plus around 16 to 23 basis points.

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The normalization of implied volatility resulted in strong performance in the REIT sector