Form 10-Q for the Quarterly Period Ended September 30, 2025
TWO HARBORS INVESTMENT CORP. reported its financial results for the three and nine months ended September 30, 2025. The company’s consolidated net loss was $14.1 million and $34.4 million for the three and nine months ended September 30, 2025, respectively. Total assets were $1.4 billion and total liabilities were $1.1 billion as of September 30, 2025. The company’s common stock, par value $0.01 per share, was listed on the New York Stock Exchange under the ticker symbol “TWO”. The company’s 8.125% Series A Cumulative Redeemable Preferred Stock, 7.625% Series B Cumulative Redeemable Preferred Stock, and 7.25% Series C Cumulative Redeemable Preferred Stock were also listed on the New York Stock Exchange under the ticker symbols “TWO PRA”, “TWO PRB”, and “TWO PRC”, respectively. The company’s 9.375% Senior Notes Due 2030 were listed on the New York Stock Exchange under the ticker symbol “TWOD”.
Overview of Two Harbors Investment Corp.
Two Harbors Investment Corp. is a Maryland-based real estate investment trust (REIT) that invests in and manages mortgage servicing rights (MSR) and agency residential mortgage-backed securities (Agency RMBS). The company is structured as an internally-managed REIT and its common stock is listed on the New York Stock Exchange under the symbol “TWO.”
Two Harbors’ main objective is to deliver more stable performance across changing market environments by leveraging its expertise in managing interest rate and prepayment risk. The company seeks to achieve this by pairing its MSR portfolio with its Agency RMBS portfolio.
One of Two Harbors’ subsidiaries, TH MSR Holdings LLC, holds the necessary approvals from Fannie Mae and Freddie Mac to own and manage MSR. TH MSR Holdings acquires MSR through flow and bulk purchases from third-party originators, as well as through the recapture of MSR on loans in its portfolio that are refinanced. Beginning in 2024, TH MSR Holdings also started acquiring MSR on loans originated by its subsidiary, RoundPoint Mortgage Servicing LLC.
Two Harbors’ Agency RMBS portfolio is primarily comprised of fixed-rate mortgage-backed securities backed by single-family and multi-family mortgage loans that are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The company finances its Agency RMBS and MSR through short-term and long-term borrowings, including repurchase agreements, revolving credit facilities, warehouse lines of credit, senior notes and convertible senior notes.
Financial Performance
For the three months ended September 30, 2025, Two Harbors reported a net loss of $127.9 million, compared to a net loss of $238.5 million for the same period in 2024. The company’s comprehensive loss attributable to common stockholders was $80.2 million for the third quarter of 2025, compared to comprehensive income of $19.4 million in the third quarter of 2024.
The decline in financial performance was primarily driven by a $175.1 million litigation settlement expense recorded in the third quarter of 2025 related to the resolution of the company’s litigation with PRCM Advisers LLC. This was partially offset by net mark-to-market gains recognized on the company’s investment securities, as well as servicing income from its MSR portfolio.
For the nine months ended September 30, 2025, Two Harbors reported a net loss of $466.0 million, compared to net income of $21.4 million for the same period in 2024. The company’s comprehensive loss attributable to common stockholders was $237.1 million for the first nine months of 2025, compared to comprehensive income of $109.2 million in the same period of 2024.
The significant decline in financial performance for the nine-month period was also primarily due to the $375.0 million litigation settlement expense, as well as net mark-to-market losses on the company’s MSR portfolio and dividends declared, partially offset by net mark-to-market gains on its investment securities.
Revenue and Profit Trends
Two Harbors’ net interest income decreased to $93.6 million for the third quarter of 2025, down from $112.6 million in the same period of 2024. This was primarily due to a decrease in the size of the company’s Agency RMBS portfolio. For the first nine months of 2025, net interest income decreased to $322.1 million, down from $346.4 million in the same period of 2024, driven by lower overall interest rates earned on the company’s bank and margin account balances, as well as the smaller Agency RMBS portfolio.
The company’s net servicing income remained relatively stable, decreasing slightly to $162.7 million in the third quarter of 2025 from $167.8 million in the third quarter of 2024. For the first nine months of 2025, net servicing income decreased to $472.3 million from $498.6 million in the same period of 2024, primarily due to lower float income resulting from the lower interest rate environment, partially offset by higher ancillary and other fee income from subservicing.
Two Harbors reported a loss on its servicing asset of $104.9 million in the third quarter of 2025, compared to a loss of $133.3 million in the third quarter of 2024. For the first nine months of 2025, the loss on servicing asset was $177.0 million, up from $145.2 million in the same period of 2024. These losses were driven by unfavorable changes in the fair value of the company’s MSR portfolio due to a lower average portfolio balance and higher portfolio run-off as a result of the lower interest rate environment.
Strengths and Weaknesses
One of Two Harbors’ key strengths is its expertise in managing interest rate and prepayment risk through its paired MSR and Agency RMBS portfolio strategy. This approach is intended to generate more stable performance across changing market environments. The company’s MSR portfolio also provides offsetting risks to its Agency RMBS, helping to hedge both interest rate and mortgage spread risk.
Another strength is the company’s operational platform through its subsidiary RoundPoint Mortgage Servicing. RoundPoint has the necessary approvals from Fannie Mae, Freddie Mac and Ginnie Mae to service residential mortgage loans, which allows Two Harbors to vertically integrate its MSR business. RoundPoint also operates an in-house, direct-to-consumer mortgage origination platform, which helps the company retain or recapture existing borrowers and hedge faster-than-expected prepayment speeds in its MSR portfolio.
A potential weakness for Two Harbors is its exposure to litigation risk, as evidenced by the significant litigation settlement expense recorded in 2025 related to its dispute with PRCM Advisers. This settlement had a material negative impact on the company’s financial performance for the year.
Additionally, Two Harbors’ reliance on short-term financing through repurchase agreements, revolving credit facilities and warehouse lines of credit exposes the company to liquidity risk. A sudden decrease in the value of its assets could trigger margin calls from lenders, forcing the company to quickly raise additional capital or sell assets at unfavorable prices.
Outlook and Conclusion
The outlook for Two Harbors appears cautiously optimistic. The company’s paired MSR and Agency RMBS strategy has demonstrated its ability to generate relatively stable performance across different interest rate environments. However, the lingering impact of the PRCM Advisers litigation settlement and the potential for future market volatility and liquidity challenges remain risks to the company’s financial performance.
Two Harbors’ management team will need to continue to actively manage the company’s interest rate, prepayment and liquidity risks to navigate the evolving market conditions. Successful execution of its origination platform strategy to hedge MSR prepayment risk will also be crucial. Overall, while Two Harbors faces some near-term headwinds, the company’s core business model and risk management approach suggest it is well-positioned to deliver sustainable value to shareholders over the long term.
