Company: TWO-PC
Filing Date: 2025-10-28
Form Type: 10-Q
Source: 0001465740-25-000152
Chunk: 249

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-10-28
Form: 10-Q
Item: Item 8
Chunk 249
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 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 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