Two Harbors Investment Corp., one of the few regular sponsors of private-label mortgage securitization post-financial crisis, is pulling out of the market.
The real estate investment trust said Thursday that its board of directors has approved a plan to discontinue the mortgage loan conduit and securitization business. In a press release, the company cited the “challenging market environment,” and a desire to “reduce operating complexity and costs,” in order to put its capital to work more efficiently.
The wind down process is expected to be substantially completed by the end of 2016.
Since the financial crisis, residential mortgage securitization has been dominated by Fannie Mae, Freddie Mac, which buy loans and bundle them into securities guaranteed against credit losses. Private-label securitization has been largely confined to high-quality loans that are too large to be insured by the government-sponsored enterprises, and, to a lesser-extent, loans made pre-crisis that were once delinquent but are now making timely payments.
But it’s difficult for sponsors to acquire jumbo mortgages for collateral; with both short-term and long-term interest rates so low, banks (and other investors) are eager to hold these loans on-balance sheet. They simply don’t have many other attractive places to put their money to work.
Another challenge: a large number of loans made since October fail, at least initially, to comply with "Know Before You Owe" consumer disclosure rules, and investors have been unwilling to take on exposure without further guidance from the Consumer Financial Protection Bureau.
So far this year, there have been just six securitizations of prime, jumbo mortgages totaling $3.7 billion, according to Fitch Ratings. Two Harbors accounted for two of those, totaling $600 million. By comparison, issuance reached $11.9 billion in 2015, the busiest year since the financial crisis. Two Harbors accounted for 11 of the 35 deals.
“I am extremely proud of the efforts of our team since embarking on this initiative in 2011, as the company was able to build out a best-in-class infrastructure, develop a high quality network of mortgage loan originators and establish Agate Bay Mortgage Trust as a well-respected securitization platform,” Thomas Siering, Two Harbors’ president and chief executive, said in the press release.
“However, we believe that current and expected mortgage market conditions and competitive pressures will prevent us from growing this business to a scale that meets our long-term goals and financial expectations.”
Shuttering the loan and securitization business will result in a reduction in force impacting certain positions that provide services to Two Harbors under its external management agreement with PRCM Advisers. The REIT expects to incur one-time charges of approximately $3 million in the second half of 2016 in connection with the closure. It also expects that the cessation of its conduit and securitization activities will reduce ongoing operating expenses by approximately $10 to $11 million on an annual basis.
Two Harbors plans to release its second quarter financial results on Aug. 4.