– Two Harbors has hired industry veteran Kyle Kilpatrick to lead its newly created mortgage originations division.
– The division is part of the company’s strategy to retain borrowers from its servicing portfolio when interest rates drop.
– Two Harbors’ origination business will hedge its servicing portfolio of $216 billion in unpaid principal balance.
– The company’s primary strategy is not to compete with large players for new customers, but to leverage its existing borrower relationships.
– For now, most of the company’s borrowers have no incentive to refinance due to low interest rates.
– Two Harbors will work with second liens and home equity products through its origination business.
– The company was created in 2009 and has diversified its investments over time, including agency and legacy subprime MBS, single-family rental properties, and commercial real estate lending.
– In 2020, Two Harbors focused on agency MSR and agency MBS.
– In October 2023, the company entered the servicing business by acquiring RoundPoint Mortgage Servicing LLC.
– Two Harbors also wanted to ensure the vehicle it purchased had licenses to originate loans.
– After integrating with Roundpoint, Two Harbors will have 500 employees in four offices.
New York-based real estate investment trust Two Harbors has hired industry veteran Kyle Kilpatrick to lead its newly created mortgage originations division, which is part of the company’s strategy to retain borrowers from its servicing portfolio when interest rates drop.
“He has experience building direct-to-consumer channel products and businesses from scratch,” Bill Greenberg, president and CEO of Two Harbors, said in an interview. “We are building out the team to fill all those functions to be able to make loans and, as we said, hopefully beginning to take locks in the second quarter sometime.”
A 30-year mortgage industry veteran, Kilpatrick started as executive vice president of originations at Two Harbors in November. Before that, he spent nearly a year as EVP of direct lending at Go Mortgage and served for eight years as president of consumer direct at Lending.com, a Finance of America 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 entirely custom fit to our business,” Greenberg said. “We don’t have to buy something that other people have made that doesn’t fit very well and that’s upside-down on costs.”
Two Harbors’ origination business will hedge its servicing portfolio of $216 billion in unpaid principal balance (UPB) as of Dec. 31, 2023. That’s how things work at other companies in the mortgage space, such as Mr. Cooper, Rithm Capital and Pennymac. Two Harbors’ primary strategy, however, isn’t to compete with large players for new customers.
“A lot of those guys spend a lot of money on advertising and outreach to people to try to find borrowers that they can refinance or make second liens,” Greenberg said. “We have borrowers we know very well that we can just call. The so-called lead generation is captive to our ecosystem already.”
For now, most of the company’s borrowers have no incentive to refinance. The weighted average coupon rate for its servicing portfolio was at 3.45% in the fourth quarter, signaling a low risk of prepayments. Meanwhile, the 30-year fixed mortgage rate was 6.9% as of Thursday afternoon, according to HousingWire’s Mortgage Rates Center.
While rates are still high, Two Harbors will work with second liens and home equity products through its origination business.
Journey to originating loans
Two Harbors was created in 2009, in the wake of the Great Recession, as prices for most assets, including mortgage-backed securities (MBS), started to fall and became an investment opportunity.
The company began investing in agency and legacy subprime MBS. Over time, it got involved in 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 sounds good only in theory” since “investors wanted to diversify themselves, but they didn’t want the investment vehicles themselves to diversify” for them.
Between 2017 and 2018, the company crossed the mark of 500,000 servicing units. At this level, conventional wisdom says it’s most cost-effective to bring servicing in-house, Greenberg said. At that time, Two Harbors sought a platform to acquire. It debuted in the servicing business in October 2023 by acquiring RoundPoint Mortgage Servicing LLC.
“One of the most interesting characteristics about Roundpoint was that it was agency [MSR] only. It had no government servicing, no Ginnie Mae exposure, which has different regulatory risks and different economics,” Greenberg said.
“It also didn’t have a lot of servicing on the platform — it was servicing some assets from its parent company, which was going to move back up to the parent before it transferred to us,” he added. “So, it just had a small amount of true third-party subservicing. It was sort of an empty shell waiting for someone to come and put all their servicing on the platform.”
Two Harbors also wanted to ensure that whatever vehicle it purchased had its licenses to originate loans. It had become clear to executives that in the valuation of MSRs, the recapture economics should be included.
“This one has been known for a long time, but it had never been explicitly included in the cash flows of mortgage servicing until the last couple of years,” Greenberg said. “And so we knew that in order to get the most value out of our servicing asset, some amount of recapture capabilities was going to be very important to our efforts.”
After integrating with Roundpoint, Two Harbors is expected to have 500 employees in four offices in New York, Minnesota, South Carolina and Texas.
Property Chomp’s Take:
New York-based real estate investment trust Two Harbors recently made headlines by hiring industry veteran Kyle Kilpatrick to lead its newly created mortgage originations division. This move is part of the company’s strategy to retain borrowers from its servicing portfolio when interest rates drop.
Bill Greenberg, the president and CEO of Two Harbors, expressed confidence in Kilpatrick’s ability to build direct-to-consumer channel products and businesses from scratch. The company aims to build a team capable of making loans and potentially taking locks in the second quarter of this year.
Kilpatrick brings with him 30 years of experience in the mortgage industry. Before joining Two Harbors, he served as the executive vice president of originations at Go Mortgage and spent eight years as the president of consumer direct at Lending.com, a Finance of America company.
Two Harbors’ decision to create an origination business aligns with its goal of hedging its servicing portfolio, which currently stands at $216 billion in unpaid principal balance. Other companies in the mortgage space, such as Mr. Cooper, Rithm Capital, and Pennymac, have adopted similar strategies. However, Two Harbors aims to leverage its existing ecosystem and customer base instead of competing for new customers through extensive advertising and outreach efforts.
With interest rates still relatively high, Two Harbors intends to focus on second liens and home equity products through its origination business. The company is well-positioned to take advantage of this opportunity, given its extensive portfolio and familiarity with its existing borrowers.
Two Harbors has an interesting journey in originating loans. Established in 2009 during the aftermath of the Great Recession, the company initially focused on investing in mortgage-backed securities (MBS). Over time, it expanded into other asset classes such as single-family rental properties and commercial real estate lending. In 2020, Two Harbors decided to concentrate on agency MSR and agency MBS. This strategic shift allowed the company to capitalize on the value of diversification while mitigating risks.
To strengthen its servicing business, Two Harbors acquired RoundPoint Mortgage Servicing LLC in October 2023. One of the attractive aspects of this acquisition was that RoundPoint exclusively handled agency MSR, eliminating exposure to government servicing and its associated regulatory risks. Additionally, RoundPoint had the necessary licenses to originate loans, a crucial factor in maximizing the value of mortgage servicing assets.
With the integration of RoundPoint, Two Harbors expects to have 500 employees across four offices in New York, Minnesota, South Carolina, and Texas. This expansion is a testament to the company’s commitment to providing comprehensive mortgage services.
In conclusion, the