CEO of Two Harbors talks about strategic origin business

CEO of Two Harbors talks about strategic origin business

New York-based real estate investment trust Two Ports has hired industry veteran Kyle Kilpatrick to lead its newly created mortgage origination division, which is part of the company’s strategy to keep borrowers from its servicing portfolio when interest rates fall.

“He has experience building direct-to-consumer channel products and businesses from the ground up,” Bill Greenberg, president and CEO of Two Harbors, said in an interview. “We’re building the team to fill all those functions to be able to lend and, as we said, we’re hoping to start getting lockups in the second quarter sometime.”

A 30-year veteran of the mortgage industry, Kilpatrick started as executive vice president of origination at Two Harbors in November. Prior to that, he spent nearly a year as EVP of direct lending at Go to the mortgage and served for eight years as president of consumer direct at Credit.comor America’s finances the company.

“We have this opportunity, given where our portfolio is and where interest rates are, to build something from scratch and we can make it completely aligned with our business,” Greenberg said. “We don’t have to buy something that other people have made that doesn’t fit very well and is upside down in cost.”

The Two Harbors origination business will protect its servicing portfolio of $216 billion in outstanding principal balance (UPB) as of December 31, 2023. That’s how things work at other companies in the mortgage space, such as Mr. Cooper, Rhythm Capital AND Pennymac. However, Two Harbors’ main strategy is not to compete with big players for new customers.

“A lot of those guys spend a lot of money on advertising and contacting people to try to find borrowers that they can refinance or second lien on,” Greenberg said. “We have borrowers that we know very well that we can call. The so-called lead generation is now a captive of our ecosystem.”

Right now, most of the company’s borrowers have no incentive to refinance. The weighted average coupon rate for its servicing portfolio was 3.45% in the fourth quarter, signaling low prepayment risk. Meanwhile, the 30-year fixed mortgage rate was 6.9% Thursday afternoon, according to HousingWire’s Mortgage Pricing Center.

While rates are still high, Two Harbors will work with second liens and home equity products through its origination business.

Journey to origination loans

Two Harbors was created in 2009, in the wake of the Great Recession, as prices for most assets, including mortgage-backed securities (MBS), began to fall and became an investment opportunity.

The company began investing in agency and legacy subprime MBS. Over time, it branched out into other asset classes, such as single-family rental properties and commercial real estate lending. (The latter division was subsequently spun off into a REIT).

Mortgage servicing rights (MSR) became a target in 2013, and by 2020, the company had chosen to focus on agency MSR and agency MBS. According to Greenberg, the premise was that “diversification only sounds good in theory” since “investors wanted to diversify, but they didn’t want the investment vehicles themselves to diversify” for them.

Between 2017 and 2018, the company crossed the 500,000 service unit mark. At this level, conventional wisdom says it’s more cost-effective to bring services in-house, Greenberg said. At that time, Two Harbors looked for a platform to buy. She debuted in the service business in October 2023 by purchasing RoundPoint Mortgage Servicing LLC.

“One of the most interesting features of Roundpoint was that it was an agency [MSR] alone. There was no government service, no Ginny Mae exposure, which has different regulatory risks and different economics,” Greenberg said.

“It also didn’t have a lot of services on the platform – it was servicing some assets from its parent company, which would go back to the parent company before being transferred to us,” he added. “So there was just a small amount of real third-party subservience. It was like an empty shell waiting for someone to come along and put all their services on the platform.”

Two Harbors also wanted to ensure that each vehicle it purchased had its own licenses to obtain credit. It became clear to managers that in the evaluation of MSRs, recovery economics had to be included.

“This has been known for a long time, but it was never explicitly included in mortgage servicing cash flows until the last couple of years,” Greenberg said. “And so we knew that in order to get the most value out of our service asset, some amount of recapture capabilities would be critical to our efforts.”

After the integration with Roundpoint, Two Harbors is expected to have 500 employees in four offices in New York, Minnesota, South Carolina and Texas.

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