Two Harbors signals $40B subservicing milestone and cost-saving focus following $375M litigation settlement

Earnings Call Insights: Two Harbors Investment Corp. (TWO) Q3 2025

MANAGEMENT VIEW

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William Greenberg, President & CEO, announced the settlement of litigation with the company’s former external manager, stating, “we agreed to make a onetime payment of $375 million in exchange for a release of all claims, including ownership claims related to our intellectual property.” Greenberg detailed that this was funded through portfolio sales, cash on hand, and borrowing capacity. He emphasized, “we continue to have ample liquidity following the payments, and our risk metrics are in line with how we have managed the portfolio historically.”

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Greenberg highlighted meaningful portfolio adjustments: “We sold some agency securities, bringing the RMBS portfolio to $10.9 billion from $11.4 billion. We also sold $19.1 billion UPB of MSR and another approximately $10 billion of UPB that will settle at the end of this month, in both cases slightly above our marks.” He noted a new subservicing client relationship and projected, “with those additions, we will have roughly $40 billion of true third-party clients using RoundPoint as a subservicer.”

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The company intends to redeem the full $262 million UPB of outstanding convertible notes maturing in January 2026, aiming to “reduce our structural leverage to be in line with historical levels.”

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Cost controls are a focus: “We have already undertaken efforts to reduce our cost structure in light of the settlement payment, and we have line of sight into significant amounts of savings already,” Greenberg said.

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William Dellal, VP & Chief Financial Officer, reported, “in connection with the settlement agreement with our former external manager, we recorded $175.1 million litigation settlement expense, or $1.68 per weighted average common share.”

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Nicholas Letica, VP & Chief Investment Officer, observed, “though spreads have contracted, they still look attractive on a levered basis versus swaps, especially in the context of diminished interest rate and spread volatility.”

OUTLOOK

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Greenberg stated, “we now have a clean slate to capitalize on opportunities in our MSR and MBS portfolio and to drive growth in servicing and originations.” He added, “we are very optimistic about the additional value that RoundPoint can bring to shareholders.”

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Letica described return potential: “We estimate that about 68% of our capital is allocated to servicing, with a static return projection of 11% to 14%. The remaining capital is allocated to securities with a static return estimate of 15% to 19%.” After expenses, “the static return estimate for our portfolio would be between 9.1% to 12.6% before applying any capital structure leverage.”

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The company indicated it intends to maintain its MSR and agency RMBS allocation, citing the quality and stability of MSR cash flows.

FINANCIAL RESULTS

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Dellal reported, “including the litigation settlement expense, the company incurred a comprehensive loss of $80.2 million, or $0.77 per share. Excluding the expense, we would have generated comprehensive income of $94.9 million, or $0.91 per share.”

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Net interest and servicing income increased by $2.8 million, attributed to higher float and servicing fee income and lower financing costs, offset by lower interest income on agency RMBS.

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The company ended the quarter with cash on balance sheet of $770.5 million after the settlement payment and MSR sale.

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Economic debt to equity increased to 7.2 times, with leverage described as “comfortable at this current leverage level.”

Q&A

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Bose George, KBW: Asked about key drivers of EAD increase. Dellal replied, “if we look at the cost of our financing securities, that's what has come down to allow the EAD to go up.”

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Douglas Harter, UBS: Inquired about risk metrics post-settlement. Letica explained, “we look at a lot of risk metrics in managing the portfolio. This quarter our economic debt-to-equity did go up while we… had taken down our overall spread risk.” Greenberg added, “both of those things are important as we look at the overall leverage, the overall liquidity, overall what I will call drawdown risk.”

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Harter pressed on cost saves and return potential slide. Greenberg confirmed, “No, that's where they are today.” Upon further questioning: “there would be potential upside to that number as those cost saves are realized? Yes, I think so.”

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Trevor Cranston, Citizens JMP: Asked about subservicing business growth. Greenberg responded, “growing a subservicing business typically takes a long time… we've been doing the hard work of maintaining and developing relationships and explaining to the world why we are an ideal partner.”

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Merrill Ross, Compass Point: Queried MSR sale characteristics. Greenberg confirmed, “These were low-coupon sales, yes. Our entire portfolio is really centered around the low coupon.”

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Eric Hagen, BTIG: Asked about MSR valuations and financing. Greenberg said, “with our gross WACC of our portfolio at 3.60%, that is still almost 300 basis points out of the money… MSR prices will go down [if rates fall], and we all know that.” Dellal noted MSR repo maturities “are roughly in the range from 1 to 2 years.”

SENTIMENT ANALYSIS

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Analysts’ tone was neutral to slightly positive, focused on drivers of EAD, risk metrics, subservicing growth, MSR sale characteristics, and cost control, with some probing for upside potential in cost saves and return targets.

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Management maintained a confident and forward-looking tone, emphasizing portfolio repositioning, liquidity, and growth in subservicing, and repeatedly expressed optimism about future performance and opportunities—"We are confident that after all of our portfolio adjustments, we will continue to be well positioned."

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Compared to the previous quarter, management was more detailed and optimistic about cost controls, subservicing growth, and post-settlement clarity, while analysts continued their focus on leverage and risk but shifted more toward growth opportunities and cost efficiencies.

QUARTER-OVER-QUARTER COMPARISON

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The current quarter reveals a significant strategic shift: resolution of the $375 million litigation with the former manager and a focus on cost-saving measures, compared to the previous quarter where the litigation was unresolved and a $199.9 million loss contingency accrual was recorded.

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Subservicing business growth became a prominent theme, with $40 billion UPB in third-party clients now highlighted, compared to less emphasis on this in Q2.

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Leverage increased slightly to 7.2x from 7x, but risk exposure was reduced.

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Expense ratio concerns and cost-saving measures were more prominent, with management providing more transparency on actions underway.

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There is a stronger focus on redeploying capital and portfolio rotation, notably through MSR sales and agency RMBS adjustments.

RISKS AND CONCERNS

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Management acknowledged that the reduction in capital base has led to an increased expense ratio, but said, “we are always intently focused on improving efficiencies and lowering costs. We have already undertaken efforts to reduce our cost structure.”

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There remains some risk related to leverage, but management described risk metrics as in line with historical levels and highlighted ample liquidity.

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MSR valuations are sensitive to interest rate declines, but Greenberg indicated the portfolio remains “almost 300 basis points out of the money.”

FINAL TAKEAWAY

Two Harbors concluded the quarter with the litigation settlement behind them, a reinforced focus on cost discipline, and strategic expansion in subservicing. Management highlighted substantial liquidity, increased cash balances, and opportunities to grow core MSR and origination activities through RoundPoint, aiming to deliver long-term shareholder value while managing leverage and seeking new efficiencies.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/two/earnings/transcripts]

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